SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
--- 1934
For the fiscal year ended May 31, 1997 or
--- Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from___________________to__________________
Commission File Number: 0-15304
AVESIS INCORPORATED
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(Name of small business issuer in its charter)
Delaware 86-0349350
- ------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) No.)
100 West Clarendon, Suite 2300
Phoenix, Arizona 850l3
- -------------------------- ----------------
(Address of principal executive (Zip Code)
offices)
Issuer's telephone number: (602) 241-3400
---------------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock &
$l0 Class A Nonvoting Cumulative Convertible Preferred Stock, Series 2
----------------------------------------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
<PAGE>
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $5,645,276.
The aggregate market value of the voting common stock held by
non-affiliates of the registrant, based upon the average of the last bid and
asked prices of the registrant's Common Stock in the over-the-counter market
reported by the Electronic Bulletin Board of the National Association of
Securities Dealers, Inc. ("NASD") on August 25, 1997 was $552,648. Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily conclusive.
The number of outstanding shares of the registrant's Common Stock on
August 25, 1997 was 4,100,420.
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
<PAGE>
AVESIS INCORPORATED
FORM l0-KSB ANNUAL REPORT
YEAR ENDED MAY 31, 1997
TABLE OF CONTENTS
PART I
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Page
ITEM l. Description of Business ..........................................1
ITEM 2. Description of Properties ........................................6
ITEM 3. Legal Proceedings ................................................7
ITEM 4. Submission of Matters to a Vote of
Security Holders .................................................7
PART II
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ITEM 5. Market for Common Equity and
Related Stockholder Matters ......................................7
ITEM 6. Management's Discussion and Analysis or Plan
of Operation.....................................................10
ITEM 7. Financial Statements ............................................14
ITEM 8. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure ..........................15
PART III
--------
ITEM 9. Directors, Executive Officers, Promoters,
and Control Persons; Compliance with Section 16(a)
of the Exchange Act ............................................15
ITEM 10. Executive Compensation ..........................................18
ITEM 11. Security Ownership of Certain Beneficial
Owners and Management ...........................................20
ITEM 12. Certain Relationships and Related Transactions...................23
ITEM 13. Exhibits and Reports on Form 8-K ................................27
SIGNATURES ...................................................................28
<PAGE>
PART I
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Item l. Description of Business
General
Avesis Incorporated, a Delaware corporation (together with its
subsidiary, the "Company"), incorporated in June 1978, markets and administers
dental, chiropractic, vision and hearing managed care and discount programs
("Programs") nationally which are designed to enable participants ("Members"),
who are enrolled through various Sponsoring organizations such as insurance
carriers, Blue Cross and Blue Shield organizations, corporations, unions and
various associations ("Sponsors"), to realize savings on purchases of products
and services through networks of providers such as dentists, chiropractors,
opticians, optometrists, ophthalmologists and hearing specialists ("Providers").
The Company formerly operated a pharmaceutical discount program, which was sold
in December 1992.
Administration fee and provider fee revenue has been derived from the
product lines in the following proportions:
Fiscal Years Ended May 31,
--------------------------
1997 1996
---- ----
Vision and Hearing Programs 69% 68%
Dental Program 31% 31%
Chiropractic Program 0% 0%
Pharmaceutical Program(1) 0% 1%
- --------------------------
(1) The pharmaceutical line was sold in December 1992. The Company
provided services related to the pharmaceutical program through July
1995.
Vision Program
The Company offers provider networks and administrative
services for group vision programs. Its Vision Program is designed to provide
savings by reducing the cost of eye examinations and materials (frames, eyeglass
lenses and contact lenses).
Under the Company's Vision Program, a Member is entitled to
discounted pricing that Providers offer for eye examinations and the purchase of
eyewear at network Provider locations. The Member is fully responsible for
paying the Provider unless the Sponsor (a self-funding employer or insurer) is
obligated to pay the Provider, or reimburse the Member. In some cases, the
Company may act as a third party administrator for the Sponsor and pay such
claims from funds provided by the Sponsor for that purpose.
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Under some Programs, each Member pays an annual enrollment fee to the
Company for the right to utilize network Providers and receive discounts. In
other cases, typically involving Sponsors who pay benefits, the Sponsors pay an
enrollment fee for each Member.
If the Program has insured or self-funded benefits, the Sponsor
determines the products and services which will be covered, how frequently the
benefit is available and, subject to local law, whether reimbursement for
non-network Provider purchases will be made.
The Company principally derives revenues from fees paid by or on
behalf of Members for enrollment, plan administration and services, and claims
administration, and in certain cases also derives revenues from fees paid by
Providers when Members purchase eyewear and services.
The table below sets forth the approximate numbers of Providers and
Members enrolled in the Vision Program at the dates indicated:
Date Number of Number of Number of
---- --------- --------- ---------
Providers States Members
--------- ------ -------
May 31, 1997 3,220 48 385,000
May 31, 1996 3,332 48 396,000
Substantially all of the Providers indicated above are optometrists. The numbers
of Members indicated in the above table are as reported to the Company by
Sponsors and generally do not include eligible spouses and children of Members.
The Company has entered into arrangements with certain frame
manufacturers which enable Providers to obtain frames at prices below wholesale.
The Company has formed a formal buying group for Providers to seek larger
discounts on frames. The Company is billed directly by the frame manufacturers
and is responsible for the billing and collection of amounts due from the
Providers. The Company receives a discount, above the amount given to the
Providers, by the frame manufacturers to pay for the cost of administering the
buying group program. Providers are not obligated to purchase from designated
suppliers.
Hearing Program
The Company's hearing program (the "Hearing Program") has been
marketed principally as an adjunct to the Vision Program. Revenues from the
Hearing Program have not been significant. A Hearing Program Member may obtain a
hearing evaluation by a Provider for a reduced fee. In addition, the Member may
purchase a hearing aid from a Provider at wholesale cost plus a professional fee
or at a discount from
2
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the Provider's usual charge, depending on the options selected by the Plan
Sponsor. Such benefits are also available to the Member's spouse, children,
parents and grandparents.
Dental Program
The Company establishes and maintains dental Provider networks which
it also makes available to Sponsors. Fees charged to Members by Providers are
based upon panel fee schedules which the Providers have agreed to accept. Like
the Vision Program, the Company's dental program (the "Dental Program") is
offered both for Members who are themselves responsible for paying 100% of the
costs of their care to their Providers, and for Programs under which the Sponsor
assumes the obligation of paying Providers (or reimbursing Members) for the
agreed-upon costs of specified care. Revenues from the Dental Program
principally are derived in the same manner as in the case of the Vision Program.
The table below sets forth the approximate number of Providers and
Members enrolled in the Dental Program at the dates indicated, as reported to
the Company by Sponsors:
Date Number of Number of Number of
---- Providers States Members
--------- ------ -------
May 31, 1997 11,082 43 118,000
May 31, 1996 3,776 41 95,000
Included in the number of providers in the table above as of May 31, 1997 are
6,180 providers who participate in a third party's Provider network. The Company
has a network rental agreement which allows Members to utilize the services of
the third party's Provider network.
See Item 6 - "Management's Discussion and Analysis or Plan of Operation."
Chiropractic Program
The Company has developed a program for cost-effective and budgetable
delivery of chiropractic services. Members pay reduced fees to the Provider for
history and physical examinations, spinal manipulation, non-manual procedures,
physiotherapy, acupuncture and additional care. The Company derived its first
revenues from the chiropractic program in the first quarter of fiscal 1997.
Although the Company has not generated significant revenues from the
Chiropractic Program, the Program is important as it enables the Company to
offer to Sponsors a complete line of ancillary benefits.
3
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Provider Networks
The Company usually contracts with Providers to provide services
simultaneously with the plan Sponsor's development of a membership base in a
geographic area; however, some Providers are enlisted in expansion areas where
there is little or no membership base. The Programs supplement the practices of
Providers by enabling them to obtain additional patients who are Members while
allowing Providers to retain their existing practices. Although Members
generally pay fees and charges less than those of non-Member patients, the
incremental revenues from Member patients can be an important source of revenue
to Providers. There can be no assurance that Providers will continue to
participate in the Programs even if their participation results in such an
increase in revenues since the portion of their practices derived from the
Programs may become less profitable than other aspects of their practices.
The Company periodically reviews a portion of the Providers. This
review includes a patient survey form which is distributed on a random basis by
the Company to Members, the investigation of any complaints received from
Members and a desk or field audit by a Company auditor to confirm that Members
were not charged more than the contracted prices for services and products.
Program Administration and Administration of Claims
The Company receives fees from Sponsors for program administration
services. These fees vary depending upon the type of program involved, the
number of card-holding Members in a Sponsor's program, and the extent of claims
administration and other administrative services involved.
When the Company acts as a third party administrator for Programs
under which the Sponsor pays for Provider services, Members obtaining services
from Providers present their cards to the Providers, who in certain cases
contact the Company to confirm eligibility and, upon performance of services,
submit claim forms to the Company. The Company processes the claims, requests
funds from the appropriate Sponsors, and forwards payments to the Providers
and/or Members from the funds received from Sponsors. Monthly information about
the use of the Programs by Members and cost savings is reported to certain
Sponsors.
Although the Company does not believe it would have any liability due
to any malpractice on the part of any Provider, the usual form of Provider
Agreement requires each Provider to indemnify the Company against any claim
based on the negligence of the Provider in the performance of services for
Members. In addition, Providers are required to carry malpractice insurance with
limits equal to or greater than their state required minimums.
4
<PAGE>
Marketing
The Company markets nationally to potential Sponsors which have or
have access to a large number of potential Members. Marketing is done through
the efforts of the Company's sales personnel and unaffiliated insurance brokers,
general agents and employee benefit consultants compensated on a commission
basis. Substantial marketing services are also provided through National Health
Enterprises, Inc. ("NHE"). See Item 12 - "Certain Relationships and Related
Transactions - Agreements with National Health Enterprises, Inc."
The Company's sales and marketing personnel market the full range of
the Company's products and services. The Company believes that offering a range
of products and services in multiple product lines differentiates it from its
competitors and enables it to offer a more comprehensive solution to its
customers' benefits needs.
The following customers accounted for more than 10% of the Company's
revenues during the periods indicated.
Year ended Year ended
May 31, 1997 May 31, 1996
------------ ------------
National Insurance Services, Inc. 6% 27%
Fraternal Order of Police/
Department of Corrections
(Washington, D.C.) 15% 13%
Blue Cross Blue Shield of Arizona 17% 12%
HealthPartners HealthPlan 14% 0%
The Company is substantially dependent on a limited number of
customers and will be materially adversely affected by termination of its
agreements with such customers. For information regarding a termination notice
received from National Insurance Services, Inc., see Item 6 - "Management's
Discussions and Analysis or Plan of Operation."
Competition
The Company competes for potential Sponsors, Members and Providers,
depending on the geographic area or market, with various provider organizations,
health maintenance organizations and health care membership programs. Most of
these competitors have significantly greater financial, marketing and
administrative resources than the Company. The Company has a competitive
advantage over its competition as it is able to offer a full line of ancillary
benefits while substantially all of its competitors concentrate on one benefit
line.
5
<PAGE>
Regulation
Certain registration and licensing laws and regulations (including
those applicable to third party administrators, preferred provider
organizations, franchises and business opportunities) in many states in which
the Company operates may have application to various of the Company's programs.
In addition, statutes and regulations applicable to insurers and providers,
including those relating to fee splitting, referral fees, advertising, patient
freedom of choice, provider rights to participate and antidiscrimination in
reimbursement, may impact the Company. The Company believes that the extent of
its compliance with such laws and regulations as they are currently enforced and
applicable to the Company is consistent with current industry standards and
practices. However, there can be no assurance that changes in enforcement and
compliance practices will not occur in the future, or that existing laws and
regulations will not be broadened. In any such event, the Company could be
required to effect registration in various additional states and/or post
substantial fidelity or surety bonds in connection therewith. Alternatively, the
Company may be required to alter substantially the services offered by it,
modify its contractual arrangements with Sponsors, Providers and Members, be
precluded from providing some or all of its services in some states, or be
subject to substantial fines or penalties. Any or all of the foregoing
consequences could materially adversely affect the Company.
Employees
As of August 20, 1997, the Company had 33 full-time and 5 part-time
employees, compared to 33 total employees as of August 15, 1996. The Company
believes that its relationship with its employees is good.
Item 2. Description of Properties
The Company maintains its executive offices at 100 West Clarendon,
Suite 2300, Phoenix, Arizona 85013, in space leased from an independent party.
The lease agreement covers approximately 13,300 usable square feet of space and
expires on September 30, 2000. On October 29, 1996 the Company entered into an
agreement to sublease approximately 9,090 usable square feet of space through
October 1, 1997 and all 13,300 usable square feet thereafter, until the
expiration of the Company's lease agreement on August 31, 2000. Subsequent to
year end, the Company entered into a lease agreement for approximately 6,700
usable square feet of office space in Phoenix, Arizona that expires on September
30, 2002. The Company owns and leases various computer equipment, data
processing and other office equipment. The Company has also leased approximately
200 square feet in Washington, D.C. as required by a contract with a D.C.
Sponsor. The Company believes that its facilities and equipment are maintained
in good operating condition and are adequate for the present level of
operations.
6
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Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
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Item 5. Market for Common Stock and Related Stockholder Matters
Market Information. The Company's Common Stock and $10 Class A
Nonvoting Cumulative Convertible Preferred Stock, Series 2 ("Series 2
Preferred") are traded in the over-the-counter market and quotations are
reported in the "pink sheets" published by the National Quotation Bureau, Inc.
and via the NASD's Electronic Bulletin Board. The following table sets forth the
high and low bid price for the Company's Common Stock as reported by the
National Quotation Bureau, Inc. for each quarterly period during fiscal 1997 and
fiscal 1996. Such market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Bid Quotation Range
-------------------
Fiscal Year 1997 High Low
---------------- ---- ---
First Quarter $0.6875 $0.375
Second Quarter 0.4375 0.125
Third Quarter 0.2188 0.125
Fourth Quarter 0.25 0.1875
Fiscal Year 1996
----------------
First Quarter $1.375 $0.9375
Second Quarter 1.01 0.5625
Third Quarter 1.00 0.75
Fourth Quarter 0.875 0.6875
As of August 25, 1997, there were 4,100,420 shares outstanding of the
Common Stock of the Company held by approximately 166 stockholders of record.
Trading activity with respect to the Common Stock has been limited and the
volume of transactions should not of itself be deemed to constitute an
"established public trading market." A public trading market having the
characteristics of depth, liquidity and orderliness depends upon the existence
of market makers as well as the presence of willing buyers and sellers, which
are circumstances over which the Company does not have control.
7
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Dividends. The Company has not paid any dividends on its Common Stock
since its inception and does not expect to pay dividends on its Common Stock at
any time in the foreseeable future. Moreover, the terms of the Series 2
Preferred provide that as long as any shares of the Series 2 Preferred remain
outstanding, the Company may not declare or pay any dividend, whether in cash or
property, on the Common Stock of the Company unless the full dividends on the
Series 2 Preferred for all past dividend periods and the then current dividend
period shall have been paid or declared and a sum set aside for payment thereof.
As of August 19, 1997, there were 388,180 shares of Series 2 Preferred
outstanding, with each share entitled to receive a cumulative dividend at an
annual rate of 9% ($.90 per share), payable when and if declared by the Board of
Directors. Dividend arrearages as of July 31, 1997 totaled $1,689,124. The
Company's Indenture related to its 9 1/2% Convertible Subordinated Debentures
due December 1, 1997 also restricts its ability to pay dividends.
Recent Sales of Unregistered Securities. On January 20, 1997, the
Company granted 10,000 nontransferable options, for services rendered, to a
consultant familiar with the Company's business. The options were granted under
the Company's 1993 Stock Option Plan, pursuant to Section 4(2) of the Act. The
options are currently exercisable for an equal number of the Company's Common
Stock at an exercise price of $1.00 per share and terminate ten years from the
option grant date.
Selected Financial Data
The following table sets forth selected financial information
regarding the Company. This information should be read in conjunction with the
Company's Financial Statements and related notes and Management's Discussion and
Analysis or Plan of Operation included elsewhere in this Form l0-KSB.
8
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The selected financial data for each of the five years in the period
ended May 31, 1997 have been derived from the Company's audited financial
statements. The selected financial data is not required by Form 10-KSB and is
included herein as an unnumbered item.
<TABLE>
<CAPTION>
Years Ended May 31,
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Selected Operating Data: 1997 1996 1995 1994(1) 1993(1)
- ------------------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 5,645,276 $ 6,019,896 $ 6,351,106 $ 4,418,512 $ 4,762,632
Operating expenses 5,739,503 6,106,694 5,986,897 4,620,972 5,699,019
Net income (loss) (190,265) (124,859) 505,411 (134,550) (676,231)
Net income (loss) per
common share (2) (.13) (.12) .02 (.12) (.29)
Years Ended May 31,
----------------------------------------------------------------------
Selected Balance Sheet Data: 1997 1996 1995 1994(1) 1993(1)
- ---------------------------- ----------- ----------- ----------- ----------- -----------
Working capital $ 293,595 $ 422,922 $ 747,566 $ 229,740 $ 388,863
Current assets 1,271,505 864,566 1,242,534 647,522 1,025,394
Total assets 1,639,389 1,650,527 1,839,377 1,195,831 1,649,797
Current liabilities 977,910 441,644 494,968 417,782 636,545
Long term obligations 92,044 449,183 484,850 423,901 524,554
Total liabilities 1,069,954 890,827 979,818 841,683 1,161,099
Total stockholders' equity 569,435 759,700 859,559 354,148 488,698
</TABLE>
(1) Reflects a restatement of certain amounts in the years 1993 and 1994 to
conform to the 1995, 1996 and 1997 presentation.
(2) After provision for preferred stock dividends as follows: $349,162 in 1997,
1996 and 1995; $349,590 in 1994; and $349,812 in 1993.
9
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Item 6. Management's Discussion and Analysis or Plan of Operations
Management's Discussion and Analysis and Results of Operations For the Fiscal
- -------------------------------------------------------------------------------
Years Ended May 31, 1997 and 1996:
- ---------------------------------
The statements contained in this discussion and analysis regarding
management's anticipation of adequacy of cash reserves for operations, adequacy
of reserves for claims, anticipated level of operating expenses related to new
cardholders, adequacy of capital allocation for debentures, sustained viability
of the Company, continued positive cash flows and increased marketability of the
Company constitute "forward-looking" statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements involve risks
and uncertainties which could cause actual results to differ materially from the
forward looking statements. Management's anticipation is based upon assumptions
regarding the market in which the Company operates, the level of competition,
the level of demand for services, the stability of costs, the retention of
Sponsors and cardholders enrolled in the Company's benefit programs, the
relevance of the Company's historical performance, and the stability of the
regulatory environment. Any of these assumptions could prove inaccurate, and
therefore there can be no assurance that the forward-looking information will
prove to be accurate.
The Company derives its administration fee revenue from Plan Sponsors
who customarily pay a set fee per member per month. There are arrangements with
certain Sponsors to pay for services rendered by the Company on a fee for
service basis. Based upon the type of program (e.g., managed care, discount,
third party administration) the Provider's claim for service provided to Members
is paid either by the Company, Sponsor, Member or combination thereof. Buying
Group revenues are recorded at the total amount billed to participating
Providers. Vision Provider fee revenue is based upon a percentage of materials
sold by certain participating providers under certain plans.
Results of Operations:
- ---------------------
The Company's total service revenues in fiscal 1997 decreased 6% from
the prior fiscal year from $6,019,896 to $5,645,276. The decrease was primarily
due to the loss of a major Sponsor that accounted for 27% of total service
revenues in fiscal 1996. The loss has been replaced by the addition of one
significant Sponsor during January 1997, and a second significant Sponsor during
the first quarter of fiscal 1998. The Company was able to decrease operating
expenses in fiscal 1997 by 6% compared to fiscal 1996, from $6,106,694 to
$5,739,503. The Company anticipates based upon historical results that
additional operating expenses related to the above mentioned new customers will
be less than the additional revenue earned.
The Company's vision and hearing programs accounted for $2,607,152
(46%) of total service revenues during fiscal 1997 compared to $2,553,275 (42%)
in fiscal 1996. The increase in vision and hearing revenues from the addition of
the new significant Sponsor, with approximately 42,000 vision cardholders,
helped to offset the loss of revenues from the major Sponsor lost in the current
fiscal year, with approximately 47,000 vision cardholders (as well as
approximately 50,000 dental cardholders),
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as mentioned above. The revenues derived from the new Sponsor are related to a
managed care program, which has a higher cost of service than the discount
program that was lost. Based upon information provided by a second new
significant Sponsor, added after fiscal year end and mentioned above, the
Company anticipates that it will add approximately 150,000 cardholders by
January 1998. There were approximately 385,000 vision and 9,000 hearing
cardholders as of May 31, 1997, compared to approximately 396,000 vision and
82,000 hearing cardholders as of May 31, 1996.
Vision provider fee revenue declined by $62,763 (32%) during fiscal
1997 compared to the same period in fiscal 1996 due in part to a modification of
the Company's agreements with its providers that for certain new Sponsors, the
providers are not required to pay a fee based on gross sales to that Sponsor's
members. The Company expects this trend of decreased provider fee revenue to
continue.
The Company's dental program accounted for $1,253,014 (22%) of total
service revenues during the current fiscal year compared to $1,833,583 (30%) in
fiscal 1996. The decline in this line of business during the current year was
primarily due to the loss of approximately 50,000 cardholders as discussed
above. The decline in cardholders was offset by the addition of approximately
54,000 cardholders from three Sponsors who increased their marketing of the
dental discount program in the current fiscal year. The revenues derived from
the new cardholders are significantly lower than the revenues related to the
lost cardholders discussed above. There were approximately 118,000 dental
cardholders as of May 31, 1997, compared to approximately 114,000 as of May 31,
1996.
On December 30, 1992, the Company completed the sale of its pharmacy
line of business to Med Net, Inc. (formerly Medi-Mail, Inc.), for 298,333
unregistered and 35,000 registered shares of Med Net Common Stock. The Company
contracted to provide certain administrative services with respect to the
pharmacy line of business until December 31, 1993. However, due to delays
encountered by Med Net during the conversion of the claims processing, the
Company entered into a month to month agreement to continue to provide
administrative services to Med Net. Med Net terminated the agreement in August
1995. Pharmaceutical revenues constituted $0 (0%) and $78,281 (1%) of total
service revenues for fiscal 1997 and 1996, respectively. The Company no longer
offers a pharmaceutical program.
The Company makes available to its vision providers a buying group
program that enables the provider to purchase frames from the manufacturers at
discounts from wholesale costs. These discounted prices are generally lower than
a provider could negotiate individually, due to the large volume of purchases of
the buying group. Buying group revenues were $1,582,899 (28%) during fiscal 1997
compared to $1,554,757 (26%) in fiscal 1996.
Past and future revenues in all lines of business are directly related
to the number of cardholders enrolled in the Company's benefit programs.
However, there may be significant pricing differences to Sponsors depending on
whether the benefit is funded
11
<PAGE>
in part or whole by the plan Sponsor. The Company's current cardholder base
principally is derived from a limited number of Sponsors.
The cost of services increased by $290,660 (7%) from $3,916,304 during
fiscal 1996 to $4,206,964 in fiscal 1997. These costs primarily relate to
servicing cardholders, provider network development, and Sponsors under the
Company's vision, hearing, dental and chiropractic benefit programs as well as
the cost of frames that are sold through the Company's buying group program as
discussed above. The increase in cost of services during the current fiscal year
was due to the increased cost associated with paying claims as the number of
managed care (versus discount plan) cardholders increased throughout the current
period. The Company expects the cost of services to remain constant as a
percentage of total service revenues for the foreseeable future, based upon the
anticipation that the current mix of managed care and discount programs will
continue.
General and administrative expenses were $1,027,054 during the current
fiscal year, which represents a decrease of $248,483 (19%) compared to fiscal
1996. The decrease in the current year was primarily due to the sublease of the
overcapacity of office space, thereby reducing rent expense; the absence of
significant legal fees in the current year, in contrast to significant fees
which occurred in connection with litigation which concluded in the prior fiscal
year, and the reduction of payroll related to the reorganization of the
Company's management.
Selling and marketing expenses were $505,485 during fiscal 1997,
representing a decrease of $409,368 (45%) from fiscal 1996. Selling and
marketing expenses include marketing fees, broker commissions, inside sales and
marketing salaries and related expenses, travel related to the Company's sales
activities and an allocation of other overhead expenses relating to the
Company's sales and marketing functions. The decrease is due to the reduction in
broker commissions directly related to the reduction in revenue, the outsourcing
of a portion of the activities previously performed by the inside sales and
marketing department, and the reduction of travel and entertainment
expenditures. A significant amount of the Company's marketing activities has
been outsourced to management consultants, National Health Enterprises, for a
cost lower than the Company incurred when performing the functions internally.
See Item 12 - "Certain Relationships and Related Transactions."
Non-operating expense was $96,038 in fiscal 1997, compared to
non-operating expense of $38,061 in fiscal 1996. Included in non-operating
expense are a loss related to the disposal of software and a gain resulting from
a review of the assumptions related to the discontinued activity of providing
claims processing services for a pharmaceutical benefit plan. The Company
determined during fiscal 1997 to integrate the three separate computer systems
(Data General, AS400 and PC) currently being run, onto a single platform. Due to
the recent increases in the capabilities of the PC platform and the flexibility
for growth that this platform affords, it was deemed the logical choice. As a
result of this decision, the Company has discontinued the AS400 development
project (See Item 12 - "Certain Relationships and Related Transactions -
Software Development Services"), and has expensed the capitalized costs related
to software not placed in service. Also, an
12
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outstanding liability related to programming fees of $67,971 was forgiven as of
fiscal year end. Subsequent to year end, management has contracted with a third
party vendor to develop new systems to support the Company's claims payment,
customer and provider service, quality assurance and network development
functions. The estimated completion date for the new system is February 1998,
with penalties for late delivery and bonuses for early delivery.
Liquidity and Capital Resources
- -------------------------------
The Company had cash and cash equivalents of $817,535 as of May 31,
1997, compared to $436,083 as of May 31, 1996. The increase of $381,452 is
primarily due to the timing of vendor and claim payments and the gain resulting
from a review of the assumptions related to the discontinued activity of
providing claims processing services for a pharmaceutical benefit plan, as
previously discussed. The Company is maintaining its policy of paying vendors on
a net 45 day basis and continues to be current on all of its trade accounts
payable. Current cash on hand and cash provided from operations is expected to
allow the Company to sustain operations for at least the next twelve months.
Subsequent to year end, the Company entered into an agreement with a
third party to develop new software systems, as previously mentioned. The cost
of the project, including necessary hardware, of approximately $250,000 will be
financed through cash from operations.
As of May 31, 1997, the Company had $464,377 of Accounts Payable,
compared to $223,914 in the prior fiscal year. The increase is predominately due
to reserves for claims of $291,533 in the current year for a new Sponsor,
included in Accounts Payable, for claim reimbursements to Providers who
participate in certain managed care programs. The Company believes this reserve
is conservative and adequate.
As of May 31, 1997, the Company had $189,000 of Convertible
Subordinated Debentures, less $1,112 of unamortized discount, due December 1,
1997 and $160,000 of subordinated notes payable to stockholders due March 18,
1998. The Company has allocated the required capital to repay the debenture
holders upon maturity and has reported the amount on the Balance Sheet in cash
and cash equivalents.
The Company's management implemented the following steps in the middle
of fiscal 1997, in order to sustain the viability of the Company and continue
positive cash flows: the sublease of unused office space; the maintenance of the
appropriate level of staff, reducing monthly salary expense and consulting fees;
and the addition of two new significant Sponsors, as previously discussed,
replacing the reduced number of cardholders caused by the loss of a major
Sponsor earlier in the fiscal year. The Company's new office lease agreement
will reduce monthly rent expense by approximately $6,000 as compared to the
monthly rent expense from the subleased office. The Company has also established
a chiropractic benefit and has expanded its dental network of providers to
increase its marketability.
13
<PAGE>
Item 7. Financial Statements
Financial Statements appear commencing at page F-1 immediately
hereafter.
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Financial Statements
May 31, 1997
(With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Avesis Incorporated:
We have audited the accompanying consolidated balance sheet of Avesis
Incorporated and subsidiary as of May 31, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the two-year period ended May 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Avesis Incorporated
and subsidiary as of May 31, 1997, and the results of their operations and their
cash flows for each of the years in the two-year period ended May 31, 1997, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Phoenix, Arizona
July 17, 1997
F-1
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Balance Sheet
May 31, 1997
<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents 817,535
Receivables, net (note 2) 340,356
Prepaid expenses and other 113,614
----------
Total current assets 1,271,505
Property and equipment, net (note 3) 181,795
Deferred debenture issuance costs, less accumulated amortization of $19,327 1,049
Deposits 185,040
----------
$1,639,389
==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 464,377
Accrued expenses:
Compensation 47,264
Other 95,149
Convertible subordinated debentures, net of unamortized discount of $1,112 (note 4) 187,888
Notes payable to stockholders (note 12) 160,000
Deferred income 23,232
----------
Total current liabilities
977,910
Accrued rent (note 5) 92,044
----------
Total liabilities
1,069,954
----------
Stockholders' equity (notes 4, 8, 9 and 12):
Preferred stock, $.01 par value, authorized 12,000,000 shares:
$100 Class A, nonvoting cumulative convertible preferred stock, Series 1,
$.01 par value; authorized 1,000,000 shares; none issued and outstanding
(liquidation preference of $100 per share) --
$10 Class A, nonvoting cumulative convertible preferred stock, Series 2,
$.01 par value; authorized 1,000,000 shares; 388,180 shares issued and
outstanding (liquidation preference of $10 per share) and $1,630,890 of
dividends in arrears at $.90 per share per year 3,882
Class A, voting cumulative convertible preferred stock, Series 3, $.01 par
value; authorized 100,000 shares; none issued and outstanding (liquidation
preference of $100 per share) --
Common stock of $.01 par value, authorized 20,000,000 shares; 4,100,420
shares issued and outstanding 41,004
Additional paid-in capital 9,949,159
Accumulated deficit (9,424,610)
-----------
Total stockholders' equity 569,435
Commitments and contingencies (notes 5, 10, 11, 13 and 15)
-----------
$ 1,639,389
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Statements of Operations
Years ended May 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Service revenues (note 10):
Administration fees $3,865,732 4,170,599
Buying group 1,582,899 1,554,757
Provider fees 136,132 198,895
Other 60,513 95,645
---------- ---------
Total service revenues
5,645,276 6,019,896
Cost of services 4,206,964 3,916,304
---------- ---------
Income from services
1,438,312 2,103,592
General and administrative expenses 1,027,054 1,275,537
Selling and marketing expenses (note 11) 505,485 914,853
---------- ---------
Loss from operations
(94,227) (86,798)
---------- ---------
Non-operating income (expense):
Interest income 25,337 26,546
Interest expense (notes 4 and 12) (29,461) (29,786)
Other expense (notes 12 and 16) (91,914) (34,821)
---------- ---------
Total non-operating expense
(96,038) (38,061)
---------- ---------
Net loss
(190,265) (124,859)
Preferred stock dividends (349,162) (349,162)
---------- ---------
Net loss available to common stockholders
$ (539,427) (474,021)
========== =========
Net loss per common and equivalent share $ (.13) (.12)
========== =========
Weighted average common and equivalent shares outstanding 4,100,420 4,079,530
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended May 31, 1997 and 1996
<TABLE>
<CAPTION>
Preferred stock Additional Total
----------------------------------------- Common paid-in Accumulated stockholders'
Series 1 Series 2 Series 3 stock capital deficit equity
------------- ---------- ------------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1995 $ -- 3,882 -- 40,754 9,924,409 (9,109,486) 859,559
Net loss -- -- -- -- -- (124,859) (124,859)
Issuance of common stock -- -- -- 250 24,750 -- 25,000
------------- ---------- ------------ ---------- ---------- ---------- ----------
Balance, May 31, 1996 -- 3,882 -- 41,004 9,949,159 (9,234,345) 759,700
Net loss -- -- -- -- -- (190,265) (190,265)
------------- ---------- ------------ ---------- ---------- ---------- ----------
Balance, May 31, 1997 $ -- 3,882 -- 41,004 9,949,159 (9,424,610) 569,435
============= ========== ============ ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended May 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (190,265) (124,859)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 178,647 143,001
Write-off of software costs 354,040 --
Provision for losses/(write-off) of accounts receivable (149) 17,090
Gain on sale of fixed assets -- (8,006)
Gain on repurchase of debentures -- (10,257)
Common stock issued for professional services -- 25,000
Changes in assets and liabilities:
(Increase) decrease in receivables (24,800) 7,130
Increase in prepaid expenses and other (538) (25,736)
(Increase) decrease in deposits (1,225) 51,053
Increase (decrease) in accounts payable 240,463 (77,883)
Decrease in deferred income (8,133) (20,352)
Increase in accrued rent 6,468 16,710
(Decrease) increase in other accrued expenses (61,577) 58,805
--------- ---------
Net cash provided by operating activities 492,931 51,696
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (111,479) (379,687)
Proceeds from dispositions of property and equipment -- 8,250
--------- ---------
Net cash used in investing activities (111,479) (371,437)
--------- ---------
Cash flows from financing activities:
Repurchase of convertible subordinated debentures -- (59,743)
--------- ---------
Net cash used in financing activities -- (59,743)
--------- ---------
Net increase (decrease) in cash and cash equivalents 381,452 (379,484)
Cash and cash equivalents, beginning of year 436,083 815,567
--------- ---------
Cash and cash equivalents, end of year 817,535 436,083
========= =========
Supplemental information:
Cash paid for interest 28,344 30,602
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements
May 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
Nature of Business and Consolidation Policy
Avesis Incorporated, a Delaware Corporation, and its wholly-owned
subsidiary, Avesis of Washington, D.C., a District of Columbia
Corporation (collectively, the Company), markets and administers vision,
hearing, dental and chiropractic programs which are designed to enable
participants (members), who are enrolled through various sponsoring
organizations such as insurance carriers, Blue Cross and Blue Shield
organizations, corporations, unions, and various associations (sponsors)
to realize savings on purchases of products and services through
Company-organized networks of providers, such as opticians, optometrists,
ophthalmologists, hearing specialists, dentists and chiropractors
(providers). The Company also makes available to its vision providers a
buying group program that enables the provider to purchase frames from
the manufacturers at discounts from wholesale costs. These discounted
prices are generally lower than a provider could negotiate individually,
due to the large volume of purchases of the buying group. The Company
receives a fee for its services which varies according to the volume of
activity. The consolidated financial statements include the accounts of
Avesis Incorporated and its wholly-owned subsidiary. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Cash Equivalents
Cash and cash equivalents include cash on hand, money market funds, and
short-term investments with original maturities of 90 days or less.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over estimated useful lives which range from five to
ten years. Leasehold improvements are amortized over the shorter of
either the asset's useful life or the related lease term. Software is
amortized over the estimated useful lives which range from 10 months to
five years.
Revenue Recognition
Administrative fee revenue is recognized on the accrual basis, in
accordance with generally accepted accounting principles, during the
month that the member is entitled to use the benefit. Substantially all
administrative fee revenue is received in the month the member is
entitled to use the benefit. Any amounts received in advance are recorded
as deferred income and recognized ratably over the membership period.
Buying group revenue is recognized in the month the merchandise is
shipped to the provider. Provider fee revenue, based on member
utilization, is recognized when the service is performed.
Stock Options and Warrants
All stock options and warrants are granted at fair market value or
greater on the date of grant.
F-6
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Net Loss Per Common and Equivalent Share
For fiscal years 1997 and 1996, net loss per common and equivalent share
is calculated by dividing net loss, after giving appropriate effect for
preferred stock dividends, by the weighted average number of common
shares outstanding during the year.
Dilutive common equivalent shares consist of stock options and warrants
(computed using the treasury stock method) and the assumed conversion of
subordinated convertible debentures into common stock. Fully diluted net
loss per common and equivalent share approximates net loss per common and
equivalent share.
Income Taxes
The Company accounts for income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
be in effect during the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Stock Option Plan
Prior to June 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense was recorded on the date
of grant only if the current market price of the underlying stock
exceeded the exercise price. On June 1, 1996, the Company implemented
SFAS No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1996 and
future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123 when results are material to the financial
statements.
Convertible Debentures
The Company incurred debenture issuance costs which have been deferred
and are being amortized over the term of the debentures on the
straight-line basis. Debenture discount is being amortized as interest
expense over the life of the debentures using the interest method.
Use of Estimates
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets, liabilities, revenues, and expenses
to prepare the financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
F-7
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(2) Receivables
As of May 31, 1997 receivables consists of:
Trade accounts receivable $ 360,207
Less allowance for doubtful accounts (19,851)
-------------------
$ 340,356
===================
(3) Property and Equipment
As of May 31, 1997 property and equipment consists of:
Furniture and fixtures $ 228,535
Equipment 823,160
Leasehold improvements 73,729
Software 57,416
-------------------
1,182,840
Less accumulated depreciation and amortization (1,001,045)
-------------------
$ 181,795
===================
(4) Convertible Subordinated Debentures
The Company's 9-1/2% convertible subordinated debentures are due December
1, 1997 and require semi-annual interest payments on June 1 and December
1. The debentures are convertible into shares of the Company's common
stock at any time prior to maturity, unless previously redeemed, at a
conversion price of $5 per share, subject to adjustment under certain
circumstances.
The debentures are redeemable at the Company's option at any time, in
whole or in part, at a redemption price of 101% of the principal amount
and declining annually to 100% of such principal amount on or after
December 1, 1996. The debentures are subordinated to all senior
indebtedness, as defined in the debenture agreement.
(5) Operating Leases
The Company leases office space under an agreement which expires
September 30, 2000. The Company is obligated to pay its proportionate
share of the building's operating costs not to exceed stated maximums. As
of May 31, 1997, the Company has signed a subleasing agreement and must
move out of the current space by October 1, 1997. The Company also leases
equipment under long-term operating lease agreements. For the years ended
May 31, 1997 and 1996, rent expense for all operating leases was $196,406
and $244,130, respectively.
F-8
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The Company records rent expense using the straight-line method.
Accordingly, the difference between rent expense and actual rent paid has
been recorded as accrued rent for financial reporting purposes. These
balances are included in other accrued expenses and accrued rent in the
accompanying balance sheet.
Future minimum lease payments for operating leases are as follows:
Years ending May 31,
1998 $ 244,915
1999 207,192
2000 144,352
2001 15,114
2002 10,553
Thereafter 10,553
------------------
Total future minimum lease payments $ 632,679
==================
(6) Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires the Company to disclose estimated fair values for its financial
instruments. The following table presents the carrying amounts and
estimated fair values of the Company's financial instruments as of May
31, 1997, together with a description of the methodologies and
assumptions used to determine such amounts.
Carrying Fair
Amount Value
----------- ---------
Financial assets:
Cash and cash equivalents $ 817,535 817,535
Receivables (net) 340,356 340,356
Financial liabilities:
Accounts payable and accrued expenses 606,790 606,790
Convertible subordinated debentures (net) 187,888 187,888
Notes payable to stockholders 160,000 151,613
The carrying amount of cash and cash equivalents approximates fair value
because their maturity is generally less than three months. The carrying
amount of receivables, accounts payable and accrued expenses approximates
fair value since they are expected to be collected or paid within 90 days
of year-end. The fair values of notes payable to stockholders are
estimated by discounting the future cash flows at rates currently offered
to the Company for similar debt instruments.
F-9
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(7) Income Taxes
No income tax benefit was recorded in 1997 due to the establishment of a
100% valuation allowance against the Company's deferred tax assets
because of the uncertainty surrounding the Company's ability to realize
its net operating loss carryforwards.
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows:
Deferred tax assets:
Net operating loss carryforwards (NOL) 2,730,000
Accrued expenses 19,000
Property and equipment 3,100
Valuation allowance (2,752,100)
------------
Net deferred tax assets --
============
Management estimates that it is more likely than not that it will not
realize a substantial portion of the benefits of its deferred tax assets.
Accordingly, it has established a valuation allowance to reflect this
uncertainty. The net change in the valuation allowance for the year ended
May 31, 1997 was an increase of $65,100. The net change for the year
ended May 31, 1996 was an increase of $47,000.
The Company's federal NOLs of approximately $7,500,000 expire between
1999 and 2010.
(8) Stock Option Plans and Warrants
In 1993 the Company adopted a stock option plan (the "Plan"). The stock
option plan sets aside 600,000 shares of common stock (includes incentive
qualified and non-qualified stock options) to be granted to employees at
a price not less than the fair market value of the stock at the date of
grant. The vesting provisions are determined by the Board of Directors at
the dates of grant. At May 31, 1997, there were no incentive options
outstanding under this plan and 310,000 nonqualified options exercisable
at prices ranging from $.40 -$1.00 per share.
In connection with the Long-Term Management Agreement (note 11), National
Health Enterprises, Inc. of Owing Mills, Maryland (NHE) received ten-year
options to purchase up to 4,400,000 shares of the Company's common stock.
Options to purchase 1,400,000 shares at an exercise price of $.40 per
share were vested at inception, and the remaining options to purchase
shares at an exercise price of $.48 per share vested on December 5, 1994,
in connection with a Board of Directors resolution. NHE transferred all
of the options in March 1993 to certain individuals affiliated with NHE.
Effective December 5, 1994, these individuals collectively transferred an
aggregate of 125,000 of the options exercisable at $.48 per share to
Richter & Co., Inc.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plan. Accordingly, no compensation cost has been
recognized for the Plan. Had compensation cost for the Company's
stock-based compensation plan been determined consistent with FASB
Statement No. 123, the Company's net income and earnings per share would
not be materially different from those reported.
F-10
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
The following table summarizes stock option activity:
Common Stock
--------------------------------
Per Share
Exercise
Options Price
------------- ------------
Balance outstanding, May 31, 1995 4,906,325 $.40-1.00
Options granted --
Options exercised --
Options canceled 25,000
-------------
Balance outstanding, May 31, 1996 4,881,325
=============
As of May 31, 1996, options to purchase 4,881,325 shares at prices
ranging from $.40 to $1.00 were exercisable.
Common Stock
--------------------------------
Per Share
Exercise
Options Price
------------- ------------
Balance outstanding, May 31, 1996 4,881,325 $.40-1.00
Options granted 10,000 $1.00
Options exercised --
Options canceled 181,325
-------------
Balance outstanding, May 31, 1997 4,710,000
=============
As of May 31, 1997, options to purchase 4,710,000 shares at prices
ranging from $.40 to $1.00 were exercisable.
A summary of stock options granted at May 31, 1997 follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------- --------------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at May 31, Contractual Life Exercise at May 31, Exercise
Price 1997 Price 1997 Price
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
$.40-$1.00 4,700,000 6.0 years $.45 4,700,000 $.45
$1.00 10,000 10.0 years $1.00 10,000 $1.00
----------------- ----------------- ----------------- -----------------
4,710,000 $.45 4,710,000 $.45
================= ================= ================= =================
</TABLE>
F-11
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
During fiscal 1993, a former employee was granted warrants to purchase
100,000 shares of common stock. The purchase price is $.50 per share for
50,000 shares and $1.00 per share for the remaining 50,000 shares. The
warrants expire on February 1, 1998.
The management agreement discussed above and related transactions with
NHE and certain other substantial transactions were structured and
negotiated for the Company by Richter & Co., Inc. (RCI), a New York
investment banking firm, whose principal, William L. Richter, is a member
of the Company's Board of Directors. RCI received cash consideration of
$50,000 and ten-year warrants to purchase 400,000 shares of common stock.
As of May 31, 1997, 127,273 warrants were exercisable at an exercise
price of $.40 per share and 272,727 warrants were exercisable at an
exercise price of $.48 per share. As of May 31, 1997, 160,000 of these
warrants had been assigned to William L. Richter.
(9) Preferred Stock
The Company has authorized 1,000,000 shares of $10 Class A, Nonvoting
Cumulative Convertible Preferred Stock, Series 2 (the Series 2 Preferred)
with a par value of $.01 per share and quarterly dividends at the fixed
annual rate of $.90 per share. In August 1993, the Board of Directors of
the Company resolved that no dividends would be declared or paid without
its specific authorization. The Series 2 Preferred is convertible at the
option of the holder into common stock of the Company at $4.00 per share,
subject to adjustment under certain conditions. There is a liquidation
preference which entitles holders to receive, out of the assets of the
Company, $10.00 per share plus all accrued and unpaid dividends, before
any amounts are distributed to the holders of common stock. The Series 2
Preferred may be redeemed at any time, in whole or in part, by the
Company, at its option at $10.00 per share plus all the accrued but
unpaid dividends.
No dividends may be paid on common stock unless all accrued and unpaid
dividends have been paid on the Series 2 Preferred.
(10) Concentration of Credit Risk and Major Customers
The Company's programs and services are offered throughout the United
States. Most of the Company's customers are located in the southwestern
states and the D.C. metropolitan area. Three major customers provided
17%, 15% and 14% of total service revenues in 1997 and three major
customers provided 27%, 13% and 12% in 1996.
(11) Long-Term Management and Marketing Agreement
In March 1993, the Company entered into a Long-Term Management Agreement
with NHE, which provides for NHE to manage all aspects of the Company's
business. The initial term of the agreement is five years and is
renewable for two two-year periods. The Company paid NHE $220,000 in
fiscal 1994 and is obligated to pay $200,000 each year thereafter. NHE
also received options to purchase up to 4,400,000 shares of the Company's
common stock (note 8).
Additionally, the Company entered into a Marketing Representation
Agreement with NHE, whereby NHE is entitled to receive a commission of
7.5% of enrollment fees from sponsor contracts generated by NHE, or 2.5%
of enrollment fees where marketing assistance is rendered. The Company
paid approximately $65,000 and $85,000 to NHE under the terms of this
agreement in fiscal 1997 and 1996, respectively.
F-12
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(12) Related Party Transactions
In March 1993, the Company obtained loans in the amount of $80,000 each
from two stockholders of the Company who are also affiliates of NHE. The
entire principal of the notes is due March 18, 1998 and bears interest at
the rate of 6% per annum. Repayment on the notes may be accelerated by
the holders if the Company terminates the NHE Management Agreement
without cause. Interest is payable semiannually, in arrears. The notes
are unsecured and subordinated to the Company's outstanding 9-1/2%
debentures and future indebtedness of the Company. The Company paid
$10,442 and $9,600 in interest under the terms of these notes in fiscal
1997 and 1996, respectively.
During fiscal 1997 and 1996, the Company purchased approximately $76,000
and $326,000, respectively, in software and related programming services
from National Computer Services, Inc. (NCS), a company owned by the
President and two stockholders of the Company who are also affiliates of
NHE. These costs have been capitalized as property and equipment.
Additionally, the Company has contracted with the same Company to lease
its computer system for approximately $2,500 per month. During 1997, the
Company decided to discontinue the software development project in favor
of a new system on a PC platform. Accordingly, a portion of the software
development costs previously capitalized on the Company's balance sheet
were expensed. The charge of $286,069, included in other expense in the
consolidated statement of operations, is net of an outstanding amount due
to the software vendor of $67,971, originally recorded as other accrued
expense on the Company's balance sheet, which is no longer a liability to
the Company due to the discontinuance of the project. Subsequent to
year-end, the Company contracted with a software vendor to develop new
technology to integrate all of the Company's systems.
The Company entered into a Registration Rights Agreement (the
"Registration Rights Agreement") effective March 18, 1993 with NHE, and
two shareholders. The Registration Rights Agreement provides two demand
registrations with respect to 100,000 shares previously purchased and the
shares issuable pursuant to the ten-year options discussed in note 8
("Registrable Securities"). The first demand registration is exercisable
at the request of holders of at least 900,000 Registrable Securities
after the exercise by NHE and/or its transferees of at least 900,000
options. The second demand registration is exercisable at the request of
holders of at least 1,000,000 options after completion of a fiscal year
in which the Company has profits of at least $1,000,000. The Registration
Rights Agreement also provides piggyback registration rights with respect
to registrations in which other selling stockholders are participating.
The Company is obligated to pay the offering expenses of each such
registration, except for the selling stockholders' pro rata portion of
underwriting discounts and commissions. No precise prediction can be made
of the effect, if any, that the availability of shares pursuant to
registrations under the Registration Rights Agreement will have on the
market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the common stock pursuant to such registrations
could adversely affect prevailing marketing prices.
Effective January 18, 1995, the Company retained RCI as exclusive
financial advisor and placement agent. RCI's fees under this arrangement
are payable only upon completion of defined transactions and, in such
event, are calculated upon the basis of a percentage of the transaction
value. The agreement is terminable by the Company upon 90 days notice,
provided that RCI is entitled to receive certain fees for two years
following termination in the event a transaction is concluded with an
entity introduced to the Company by RCI.
RCI provides substantial ongoing financial management and other services
to the Company at no charge. In the opinion of management, the terms of
the Company's arrangements with RCI, NHE and NCS taken as a whole are at
least as favorable to the Company as could be obtained from third
parties.
F-13
<PAGE>
AVESIS INCORPORATED AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(13) Commitments and Contingencies
In June 1992, the California Department of Corporations notified the
Company to cease and desist from operating in California as a health care
service plan without a license under California's Knox-Keene Act.
Approximately 2% of the Company's revenue is derived from
California-related business. Since that time, the Company has sold its
pharmacy line of business and taken certain other steps to restructure
portions of its business in California so as to be exempt from coverage
under the Knox-Keene Act. The Department has taken no further action in
this matter. However, there can be no assurance that these steps will be
considered sufficient by the Department in the event of any future
challenge by the Department. A material interruption of the Company's
California business could materially adversely affect the Company's
overall business.
(14) Employee Benefit Plan
The Company has a qualified 401(k) Plan (defined contribution plan). The
plan covers substantially all employees who have completed three months
of service and attained age twenty-one. Subject to limits imposed by
Internal Revenue Service regulations and other options retained by the
Company affecting participant contribution, participants may voluntarily
contribute a percentage of their annual wages not to exceed limits
established by the Tax Reform Act of 1986. Participants are immediately
vested in the amount of their direct contribution.
(15) Liquidity
The Company has suffered recurring losses from operations. Management is
currently seeking methods to maximize service revenues and control
operating expenses. If the Company is required to obtain additional
financing, there can be no assurances that sources of financing will be
available on terms favorable to the Company, if at all.
(16) Other Expense
As a result of a review of the assumptions relating to the discontinued
activity of providing claims processing services for a Company which
operates a pharmaceutical benefits plan, it was determined that the
aggregate estimated costs associated with the claims payments were in
excess of the actual costs. The Company recorded a gain in other expense
of $192,234 related to this activity.
F-14
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
--------
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
The following table sets forth the names of the directors and
executive officers of the Company and certain biographical information relating
to them.
Name Age Position(s) with Company
- ---- --- ------------------------
William R. Cohen 66 Co-Chairman and Director
William L. Richter 54 Co-Chairman and Director
Kenneth L. Blum, Sr. 70 Director, Acting President and CEO
Gerald L. Cohen 53 Director
Sam Oolie 61 Director
Neal Kempler 29 Corporate Secretary,
Vice President of Operations
Shannon R. Barnett 29 Controller
Joel H. Alperstein 29 Director of Finance
William R. Cohen, 66, Co-Chairman of the Board, has served as a
Director of the Company since April 1986. Mr. Cohen is the President of Star
Uniform Rental Company and Go Lightly Candy Company. Mr. Cohen has served as
Chairman of American Mobile Communications, a cellular communications company
and has also held various positions with CFC Associates, a venture capital
partnership, and its predecessor organizations. Mr. Cohen serves as a lifetime
trustee of the Hospital Center, Orange, New Jersey. Mr. Cohen is not related to
Gerald L. Cohen.
William L. Richter, 54, Co-Chairman of the Board, has been a director
of the Company since August 1993. Mr. Richter has been President of Richter
Investment Corp.
15
<PAGE>
and its wholly-owned subsidiary, Richter & Co., Inc., a registered
broker-dealer, asset management and investment banking firm (or its predecessor
organization) for the past six years. Mr. Richter was Co-Chairman of
Rent-A-Wreck of America, Inc., a franchisor of automobile rental agencies, from
November 1989 to June 1993 and has been Vice Chairman of that Company since June
1993.
Kenneth L. Blum, Sr., 70, has served as a Director of the Company
since August 1993. Mr. Blum has been acting President and Chief Executive
Officer of the Company since September 1996. Mr. Blum has been Chairman of the
Board of Rent-A-Wreck of America, Inc., an automobile rental franchisor, since
June 1993 and President from June 1993 to October 1994, and Chief Executive
Officer since January 1994. Mr. Blum has been the President of KAB, Inc., a
management company, since 1990. Mr. Blum co-founded United HealthCare, Inc., a
Baltimore, Maryland-based healthcare company, in 1974 and served as its
President and Chief Executive Officer until 1990. Since 1990, Mr. Blum has been
a management consultant to a variety of companies, including National Computer
Services, Inc., a computer service bureau; American Business Information
Systems, Inc., a high-volume laser printing company; and Mail-Rx, a mail-order
prescription drug company. Mr. Blum is the father of Kenneth L. Blum, Jr. and
the father-in-law of Alan S. Cohn. See "Management Services Agreement."
Gerald L. Cohen, 53, has served as a Director of the Company since
March 1985. Mr. Cohen is a managing director of Greenley Capital Company, a
limited partnership which is a New York-based investment banking firm. Mr. Cohen
is the sole shareholder of the general partner (Greenley Corp.) of Greenley
Capital Company. From August 1982 through April 1989, Mr. Cohen was a managing
director of Richter, Cohen & Co., a New York-based investment banking firm. Mr.
Cohen also serves as a Director of Marketing Systems of America. Mr. Cohen is
not related to William R. Cohen.
Sam Oolie, 61, has served as a Director of the Company since March
1985. Mr. Oolie has been Chairman of NoFire Technologies, Inc., a manufacturer
of fire retardant coatings and textiles, since August 1995 and has been Chairman
of Oolie Enterprises, an investment company, since July 1985. Mr. Oolie has held
various positions with CFC Associates, a venture capital partnership, and its
predecessor companies since January 1984. He was Vice Chairman of American
Mobile Communications, Inc. a cellular telephone company, from February 1986
until July 1989 and Chairman of the Nostalgia Network, a 24-hour cable
television program service, from April 1987 until January 1990. Mr. Oolie also
serves as a Director of Noise Cancellation Technologies, Inc., and Comverse
Technology, Inc.
Neal Kempler, 29, has been the Corporate Secretary of the Company
since June 1996. Mr. Kempler has been the Vice President of Marketing &
Operations of the Company since August 1996 and was Assistant to the
President/Director of Marketing from January 1993 until August 1996. Mr. Kempler
served as Account Executive of National Health Enterprises, Inc., a management
company, from June 1990 until January 1993.
16
<PAGE>
Shannon R. Barnett, 29, has been Controller of the Company (Principal
Accounting Officer) since August 1996 and was Senior Accountant of the Company
from November 1995 until August 1996. Ms. Barnett was Assistant Controller of
Quality Hotel and Marlyn Nutraceuticals, a vitamin manufacturer, from September
1994 until November 1995 and Staff Accountant of General Atlantic Resources,
Inc. an oil and gas company, from November 1992 until June 1994.
Joel H. Alperstein, 29, has been Director of Finance of the Company
(Principal Financial Officer) since January 1997. Mr. Alperstein was a self-
employed financial consultant from September 1996 until December 1996. Mr.
Alperstein was a Manager at Stout, Causey & Horning, P.A., a full service public
accounting firm, from September 1992 until August 1996, and a Senior Accountant
at Arthur Andersen, LLP, from July 1990 until September 1992. Mr. Alperstein has
a Masters of Business Administration from Loyola College of Maryland and is a
Certified Public Accountant.
All directors will hold office until the next annual meeting of
stockholders and the election and qualification of their successors. Officers
are elected annually and serve at the pleasure of the Board of Directors.
Management Services Agreement
Effective March 18, 1993, the Company entered into a Management
Agreement (the "Management Agreement") with National Health Enterprises, Inc., a
Maryland corporation ("NHE") pursuant to which NHE agreed to manage
substantially all aspects of the Company's business, subject to certain
limitations and the direction of the Company's Board of Directors. See Item 12 -
"Certain Relationships and Related Transactions."
The following individuals, though not necessarily deemed executive
officers of the Company, are providing significant services to the Company
pursuant to the Management Services Agreement:
Kenneth L. Blum, Jr., 33, is President and Chief Executive Officer and
the sole stockholder of NHE. Mr. Blum is also President and Secretary of
Rent-A-Wreck of America, Inc., an automobile rental franchisor, President of
National Computer Services, Inc., a computer service bureau, and President of
American Business Information Systems, Inc., a high-volume laser printing
company. Alan S. Cohn, 42, is providing sales and marketing services on behalf
of the Company through an arrangement with NHE for sales and marketing services.
Kenneth L. Blum, Sr., the Company's acting President, CEO and member of the
Board of Directors, is the father of Kenneth L. Blum, Jr. and the father-in-law
of Alan S. Cohn.
17
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Under the securities laws of the United States, the Company's
directors, its executive officers, and any persons holding more than ten percent
of the Company's Common and Preferred Stock are required to report their initial
ownership of the Company's Common and Preferred Stock and any subsequent changes
in that ownership to the Securities and Exchange Commission. Specific due dates
for these reports have been established and the Company is required to disclose
any failure to file by these dates. The Company believes that all of these
filing requirements were satisfied during the year ended May 31, 1997, except
(i) Kenneth L. Blum, Jr. reported four January 1997 transactions on a Form 4
dated August 8, 1997; (ii) William R. Cohen reported on a Form 4 dated February
18, 1997 the purchase of securities on January 29, 1997; (iii) William L.
Richter reported on a Form 4 dated February 12, 1997 the purchase of securities
on January 29, 1997; (iv) Sam Oolie reported on an amended Form 4 dated November
18, 1996 the sale of securities on May 1, 1996; (v) Benjamin D. Ward, Sr.
reported on a Form 4 dated December 6, 1996 the sale of securities October 4,
1996; (vi) Benjamin D. Ward, Sr. reported on a Form 4 dated December 6, 1996 the
sale of securities August 21, 1995; (vii) Joel H. Alperstein reported on a Form
3 dated January 27, 1997 holdings upon becoming the principal financial officer
on January 13, 1997; (viii) Shannon R. Barnett reported on a Form 3 dated
January 27, 1997 holdings upon becoming the principal accounting officer on
August 19, 1996; and (ix) Neal A. Kempler reported on a Form 3 dated November 5,
1996 holdings upon becoming an officer on June 20, 1996. In making these
disclosures, the Company has relied solely on representations obtained from
certain of its former and current directors, executive officers and ten percent
holders and/or copies of the reports that they have filed with the Commission.
Item 10. Executive Compensation
SUMMARY COMPENSATION TABLE
The following table and related notes set forth information regarding
the compensation awarded to, earned by or paid to both individuals who
served as the Company's Chief Executive Officer during the year ended
May 31, 1997. No executive officer who was serving as an executive
officer during fiscal 1997 received salary and bonus which aggregated
at least $100,000 for services rendered to the Company during the year
ended May 31, 1997.
<TABLE>
<CAPTION>
- -------------------------------------- --------- ------------------------- ------------------------------------------
Annual Compensation Long Term Compensation
------------------------- ------------------------------------------
Awards
- -------------------------------------- --------- ------------------------- ------------------------------------------
Name and Principal Position Year Salary ($) Securities Underlying Options/SARs (#)
- --------------------------- ---- ---------- --------------------------------------
<S> <C> <C> <C>
Kenneth L. Blum, Sr., Acting CEO (3) 1997 $0 -
1996 $0 -
1995 $0 -
Frank Cappadora, Former CEO 1997 $6,000 (1) (2)
1996 $24,000 (1) (2)
1995 $12,000 (1) (2)
- -------------------------------------- --------- ------------------------- ------------------------------------------
</TABLE>
18
<PAGE>
(1) Mr. Cappadora was the President and Chief Executive Officer of the Company
from September 1992 until September 1996 and was designated to such position
by the Board of Directors in connection with the Management Agreement
between the Company and NHE. NHE received cash compensation of $220,000
under the Management Agreement for the year ended March 18, 1994 and
$200,000 per year thereafter plus expense reimbursements and is entitled to
receive commissions pursuant to a Marketing Agreement. Mr. Cappadora is not
a stockholder of NHE, and his compensation from NHE and its affiliated
entities is not tied directly to the services performed by Mr. Cappadora on
behalf of the Company. During 1995, 1996 and 1997 Mr. Cappadora received a
portion of his compensation, shown in the table, directly from the Company,
while the remaining portion was paid to him by NHE.
(2) NHE received options for the purchase of 4,400,000 shares of the Company's
Common Stock in March 1993 in connection with the Management Agreement. As
of August 19, 1997, Mr. Cappadora holds options for 85,500 shares of the
Company's Common Stock, which options were transferred to Mr. Cappadora by
NHE in March 1993.
The options are exercisable at $.48 per share through March 18, 2003.
(3) Mr. Blum replaced Mr. Cappadora as CEO of the Company during September 1996.
See also Item 12 -- "Certain Relationships and Related Transactions -
Agreements with National Health Enterprises, Inc. -- Stock Option Grant."
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUE TABLE
The following table sets forth information with respect to the
executive officers named in the Summary Compensation Table concerning the number
and value of options outstanding at the end of the last fiscal year. The
executive officers named in the Summary Compensation Table did not exercise any
options during the last fiscal year.
<TABLE>
<CAPTION>
- -------------------------------- ----------------------------------------- -----------------------------------------
Number of Unexercised Value of Unexercised
Options at FY-End (#) in-the-Money Options
at FY-End ($)
---------------------- ------------------ ---------------------- ------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Kenneth L. Blum, Sr. --- --- --- ---
Frank Cappadora 85,500 --- $0 (1) ---
- -------------------------------- ---------------------- ------------------ ---------------------- ------------------
</TABLE>
(1) No value is reported because the average of the closing bid and asked prices
on May 31, 1997 as reported by the National Quotation Bureau, Inc. ($0.25)
is less than the exercise price of $.48 per share. See Note 2 to the Summary
Compensation Table and Item 12 - "Certain Relationships and Related
Transactions - Agreements with National Health Enterprises, Inc. -- Stock
Option Grant."
Employment Contracts, Termination of Employment, and Change-in-Control
Arrangements
In the event of termination of the Management Agreement with NHE
without cause, all options granted to NHE in connection with the Management
Agreement remain outstanding for the balance of their 10-year term. See Item 12
- -- "Certain Relationships and Related Transactions -- Agreements with National
Health Enterprises, Inc. -- Stock Option Grant."
19
<PAGE>
Director Compensation
Directors are reimbursed for out-of-pocket expenses incurred in
connection with each Board of Directors or committee meeting attended. Directors
who also are employees of the Company are eligible to participate in the
Company's Incentive Stock Option Plan and the Company's 401(k) Plan, and all
directors are eligible to participate in the Company's 1993 Stock Option Plan
(the "1993 Plan"). Pursuant to the 1993 Plan, options for 100,000 shares of the
Company's Common Stock were granted on April 8, 1993 to each of directors
William R. Cohen, Gerald L. Cohen, and Sam Oolie. The exercise price of such
options is $.40 per share, which was at least the fair market value of the
Company's Common Stock on the date of grant. Options for 25,000 shares of Common
Stock were exercisable by each of the optionees as of the date of grant, with
the balance vesting in equal parts at the end of each of the 10 three-month
periods following the date of grant. As of May 31, 1997 options for 100,000
shares of Common Stock were exercisable by each of the optionees.
Item 11. Security Ownership of Certain Beneficial Owners and Management
As of August 19, 1997 there were 4,100,420 shares of Common Stock and
388,180 shares of Preferred Stock outstanding. The table below sets forth as of
August 19, 1997, certain information regarding the shares of Common Stock
beneficially owned by each director of the Company and each named executive
officer in the Summary Compensation table set forth in Item 10, by all of the
Company's executive officers and directors as a group, and by those persons
known by the Company to have owned beneficially 5% or more of the outstanding
shares of Common Stock, which information as to beneficial ownership is based
upon statements furnished to the Company by such persons.
20
<PAGE>
<TABLE>
<CAPTION>
Common issuable upon conversion or
----------------------------------
exercise of: (1)
----------------
Total Common
Common % of Series 2 % of Options Beneficially Percent of
------ ---- -------- ---- ------- ------------ ----------
Name and Address Stock Common Preferred Stock Pref. or Warrants Owned (1) Common (2)
- ---------------- ----- ------ --------------- ----- ----------- --------- ----------
(actual shares)
<S> <C> <C> <C> <C> <C> <C> <C>
Gerald L. Cohen* 153,359 3.7 22,274 5.7 100,000 309,044 7.3
William R. Cohen* 51,117(5) 1.2 10,552 2.7 100,000 177,497 4.2
William L. Richter 422,120 10.3 50,099 (3) 12.9 521,000(3) 1,068,368(3) 22.5
c/o Richter & Co., Inc.
450 Park Ave., 28th
Floor
New York, NY 10022
Sam Oolie* 220,021(7) 5.4 24,023 6.2 100,000 380,079 8.9
Kenneth L. Blum, Sr. 140,000(8) 3.4 5,000 1.3 --- 152,500 3.7
17133 Ericarose Street
W. Boca Raton, FL
33496
Kenneth L. Blum, 50,000 1.2 --- --- 1,839,750 1,889,750 31.8
Jr.(4) 11460
Cronridge Drive
Suite 120
Owings Mills, MD 21117
Alan S. Cohn(4) 50,000 1.2 --- --- 1,829,750 1,879,750 31.7
11460 Cronridge Drive
Suite 120
Owings Mills, MD 21117
Neal A. Kempler* --- --- --- --- 255,000 255,000 5.9
Frank C. Cappadora --- --- --- --- 85,500 85,500 2.0
3100 Warehime Road
Manchester, MD 21102
Benjamin D. Ward., 931,888 22.7 --- --- --- 931,888 22.7
Sr. 4712 North 41st
Place
Phoenix, Arizona 85018
All directors and 986,617 24.1 111,948 28.8 1,076,000 2,342,487 42.9
executive officers as (5)(6)(7)
a group (6
persons)(4)
</TABLE>
* Address: 100 West Clarendon, Suite 2300, Phoenix, Arizona 85013.
21
<PAGE>
(1) Includes shares of Common Stock with respect to which the identified
person had the right to acquire beneficial ownership on or within 60
days of the date of the above table pursuant to the Series 2 Preferred
or options or warrants, as indicated. Each share of Series 2 Preferred
Stock indicated in the table is convertible into 2 1/2 shares of
Common Stock.
(2) The percentages shown include Common Stock actually owned as of the
date of the above table and Common Stock of which the person had the
right to acquire beneficial ownership within 60 days of such date
pursuant to the Series 2 Preferred, options or warrants, as indicated.
In calculating the percentage of ownership, all shares of Common Stock
which the identified person had the right to acquire within 60 days of
the date of the above table are deemed to be outstanding when
computing the percentage of Common Stock owned by such person but are
not deemed to be outstanding when computing the percentage of Common
Stock owned by any other person.
(3) Includes common shares issuable upon conversion or exercise of 22,300
shares of Series 2 Preferred, 240,000 warrants and 71,000 options
indirectly owned via a corporation, Richter & Co., Inc. ("RCI"), which
thereby beneficially owns in its own name 8.2% of the Company's Common
Stock. Also includes common shares issuable upon conversion of 3,883
and 4,530 shares of Series 2 Preferred held via two other
corporations. Also includes common shares issuable upon conversion of
2,500 shares of Series 2 Preferred and 15,169 shares of Common Stock
held by family members, as to which Mr. Richter disclaims beneficial
ownership.
(4) Mr. Blum, Jr. and Mr. Cohn perform substantial services for the
Company pursuant to the Management Agreement but are not necessarily
deemed executive officers of the Company and are excluded from the
executive officer group data.
(5) Includes 6.67% of the 6,337 shares of common stock and 19,412 shares
of preferred stock held by CFC Associates, with respect to which
William R. Cohen owns 6.67% of the outstanding stock.
(6) William R. Cohen and Sam Oolie own 6.67% and 20% of the outstanding
stock of CFC Associates, respectively.
(7) Includes 20% of the 6,337 shares of common stock and 19,412 shares of
preferred stock held by CFC Associates, with respect to which Mr.
Oolie owns 20% of the outstanding stock. Also includes 8,679 shares
owned by Mr. Oolie's wife, as to which Mr. Oolie disclaims beneficial
ownership.
(8) The indicated shares are held by Mr. Blum's spouse.
22
<PAGE>
Item l2. Certain Relationships and Related Transactions
Agreements with National Health Enterprises, Inc.
Management Agreement. Effective March 18, 1993, the Company entered
into a Management Agreement (the "Management Agreement") with NHE pursuant to
which NHE agreed to manage substantially all aspects of the Company's business,
subject to certain limitations and the direction of the Company's Board of
Directors. NHE is owned by Kenneth L. Blum, Jr., the son of the Company's
President and CEO. The Management Agreement provided cash compensation of
$220,000 in the first year and $200,000 per year thereafter, as well as options
for the purchase of up to 4,400,000 shares of the Company's Common Stock, as
described below. The Management Agreement has an initial term of five years, and
the Company has the right to extend it for up to two additional two-year
periods. The Management Agreement is terminable by the Company for cause, as
defined. Pursuant to the Management Agreement, the Company has agreed that it
will not, without NHE's consent, issue (i) securities for consideration less
than the fair market value thereof; (ii) shares of Common Stock to any director,
officer, employee, or affiliate for less than $.40 per share; or (iii)
securities to any director, officer, employee, or affiliate except to the extent
of 300,000 shares of Common Stock plus options previously issued to such
persons.
The Management Agreement includes certain representations and
warranties and limitations on solicitation by NHE of customers and employees of
the Company during the term of the Management Agreement and for two years
thereafter. The Management Agreement also requires that NHE hold in confidence
the Company's confidential information, provides that confidential information
developed by NHE shall belong to NHE, and further provides that the Company
shall have a nonexclusive, royalty-free, perpetual license to confidential
information developed by NHE.
Stock Option Grant. Effective March 18, 1993, the Company issued
10-year options (the "Options") to NHE for the purchase of up to 4,400,000
shares of the Company's Common Stock, of which Options for the purchase of
1,400,000 shares were exercisable as of the date of grant at an exercise price
of $.40 per share. The remaining Options (an aggregate of 3,000,000 Options)
could become exercisable under their original terms at prices ranging from $.40
to $.80 contingent upon achievement of profitability targets. Pursuant to such
provisions, Options for the purchase of 500,000 shares became exercisable at
$.432 based upon the Company's results for the quarter ended May 31, 1994.
Effective December 5, 1994, the Board of Directors approved the vesting of the
remaining 2,500,000 of these Options at an exercise price of $.48 per share, and
NHE and the Company agreed that the exercise price of the 500,000 Options which
had vested at $.432 per share would be increased to $.48 per share. The actions
of the Board of Directors were predicated upon the Board's view of the Company's
performance relative to the original vesting criteria and other relevant
considerations. Options remain exercisable
23
<PAGE>
throughout the 10-year term of the Options, except that Options terminate 120
days after termination of the Management Agreement by the Company for cause.
The Options are transferable only to employees or affiliates of NHE
performing substantial services for or on behalf of the Company or to employees
of the Company, subject to compliance with applicable law. NHE transferred all
of the Options in March 1993, principally to Kenneth L. Blum, Jr., Alan S. Cohn,
an employee of NHE, and Frank Cappadora, the Company's President at that time.
Effective December 5, 1994, Messrs. Blum, Jr., Cohn and Cappadora transferred an
aggregate of 125,000 of the Options exercisable at $.48 per share to a company
controlled by William L. Richter, the Company's Co-Chairman, Richter & Co., Inc.
("RCI"), in consideration of services performed and to be performed by RCI on
behalf of NHE in connection with NHE's provision of management services to the
Company. RCI in turn transferred 50,000 of such Options to William L. Richter
effective December 5, 1994. Transferred Options may revert to NHE if a
transferee ceases performing substantial services for or on behalf of the
Company. Effective January 27, 1997, NHE transferred 200,000 options, which
automatically reverted to NHE from Mr. Cappadora, to Neal A. Kempler.
Stock Purchase. Kenneth L. Blum, Jr. and Alan S. Cohn each acquired
50,000 shares (the "Shares") of the Company's Common Stock on March 18, 1993 for
consideration of $.40 per share.
Subordinated Promissory Notes. On March 18, 1993, the Company obtained
loans in the amount of $80,000 from each of Mr. Blum, Jr. and Mr. Cohn. The
notes are due March 18, 1998 and bear interest at the rate of 6% per annum,
provided that the notes may be accelerated by the holders thereof if the Company
terminates the Management Agreement without cause. Interest is payable
semiannually in arrears, commencing September 18, 1993. The notes are unsecured
and subordinated to the Company's outstanding 9 1/2% Debentures and future
indebtedness of the Company for borrowed money. The Company paid $10,442 and
$9,600 in interest under the terms of these notes in fiscal 1997 and 1996,
respectively.
Registration Rights Agreement. The Company entered into a Registration
Rights Agreement (the "Registration Rights Agreement") effective March 18, 1993
with NHE, Mr. Blum, and Mr. Cohn. The Registration Rights Agreement provides two
demand registrations with respect to the Shares and the shares issuable pursuant
to the Options ("Registrable Securities"). The first demand registration is
exercisable at the request of holders of at least 900,000 Registrable Securities
after the exercise by NHE and/or its transferees of at least 900,000 Options.
The second demand registration is exercisable at the request of holders of at
least 1,000,000 Options after completion of a fiscal year in which the Company
has Profits of at least $1,000,000. The Registration Rights Agreement also
provides piggyback registration rights with respect to registrations in which
other selling stockholders are participating. The Company is obligated to pay
the offering expenses of each such registration, except for the selling
stockholders' pro rata portion of underwriting discounts and commissions. No
precise prediction can be made of the effect,
24
<PAGE>
if any, that the availability of shares pursuant to registrations under the
Registration Rights Agreement will have on the market price prevailing from time
to time. Nevertheless, sales of substantial amounts of the Common Stock pursuant
to such registrations could adversely affect prevailing market prices.
Marketing Agreement. Effective March 18, 1993, the Company and NHE
entered into a Marketing Representation Agreement (the "Marketing Agreement")
pursuant to which NHE is entitled to receive a commission equal to 7 1/2% of the
enrollment fees (as defined) from Sponsor contracts generated by NHE. The
Company also agreed to pay NHE commissions equal to 2 1/2% of the enrollment
fees from Sponsor contracts with respect to which NHE provides marketing
assistance in procuring the contract, but does not itself generate the initial
Sponsor contact. The term of the Marketing Agreement is coextensive with that of
the Management Agreement. In fiscal 1997 and 1996, the Company paid
approximately $65,000 and $85,000, respectively, to NHE under the Marketing
Agreement.
Litigation Agreement. The Company entered into an agreement with
Kenneth L. Blum, Sr., a director of the Company; Kenneth L. Blum, Jr., a
principal of NHE; and Alan S. Cohn, who provides marketing services for the
Company through an arrangement with NHE, with respect to potential liabilities
and expenses in connection with a suit initiated by United HealthCare, Inc.
("United") against the Company and these individuals in June 1994 and a
countersuit filed against United in December 1994 by these individuals. The
agreement provided that the Company would indemnify the individuals in an amount
based upon the gross profit earned on the contract which was the subject of the
action brought by United and overall Company pretax profitability and gave the
Company an interest in any net proceeds received in connection with the
countersuit. All litigation between the parties was dismissed with prejudice in
May 1995, pursuant to a settlement. The Company paid approximately $140,000 in
legal fees during fiscal 1995 pursuant to the agreement, which did not exceed
the gross profit earned on the contract in question.
Investment Banking Services. The Management Agreement and related
transactions with NHE and certain other substantial transactions were structured
and negotiated for the Company by Richter & Co., Inc., a New York investment
banking firm, which received cash consideration of $50,000 and 10-year warrants
(the "Warrants") to acquire 400,000 shares of the Company's Common Stock, of
which 127,273 were exercisable upon grant at $.40 per share. Under the original
terms of the Warrants, the balance of the Warrants became exercisable contingent
upon achieving profitability targets in the same manner originally applicable to
the Options, as described above. The shares of Common Stock issuable pursuant to
the Warrants are entitled to piggyback registration rights with respect to any
registration in which the shares of Common Stock sold to Mr. Blum, Jr. and Mr.
Cohn or the Common Stock issuable pursuant to the Options are included. A
principal of RCI, William L. Richter, is a member of the Company's Board of
Directors. RCI has assigned Warrants for the purchase of 160,000 shares of the
Company's Common Stock to Mr. Richter. Mr. Richter and his firm have provided
and expect to continue to provide substantial investment services for Messrs.
Blum, Sr. and Jr.,
25
<PAGE>
Mr. Cohn and various of their affiliated entities. To that extent, RCI may be
deemed to have had a conflict of interest with respect to its efforts on behalf
of the Company in effecting the Management Agreement and related agreements with
NHE. The Company's Board of Directors took into account the potential conflict
of interest issues referred to above in structuring and entering into the
investment banking agreement with RCI and believes that the agreement was
desirable and in the best interests of the Company notwithstanding such
possibility.
As a result of actions taken by the Board of Directors on December 5,
1994 in connection with the Options, the 400,000 Warrants referred to in the
preceding paragraph have the following terms: 50,909 Warrants held by Mr.
Richter and 76,364 Warrants held by RCI are exercisable at $.40 per share; and
109,091 Warrants held by Mr. Richter and 163,636 Warrants held by RCI are
exercisable at $.48 per share.
Software Development Services
During fiscal 1995, the Company contracted with National Computer
Services, Inc. ("NCS") to develop software related to the Company's vision,
dental and hearing programs. The Company paid approximately $76,000 and $326,000
to NCS for such services during fiscal 1997 and 1996, respectively.
Additionally, the Company has contracted with NCS to lease its computer system
for approximately $2,500 per month. The Company paid $15,502 and $33,012 of
computer lease charges in fiscal 1997 and 1996, respectively. Kenneth L. Blum,
Jr., a principal of NHE, is President and a stockholder of NCS and the son of
Kenneth L. Blum, Sr., the Acting President, CEO and a director of the Company.
During fiscal 1997, the Company decided to discontinue the programming
services being performed related to portions of the computer system not yet
placed in service. It was further determined that all of the Company's current
systems, which to date have been running on three separate platforms, should be
integrated through the use of the PC platform. The Company will continue to use
the completed modules developed by NCS until the new system is complete. The
capitalized costs related to modules not yet placed in service, $286,069, have
been expensed in fiscal 1997. See Item 6 -- "Management's Discussion and
Analysis or Plan of Operation Liquidity and Capital Resources."
Financial Advisor Agreement
Effective January 18, 1995, the Company retained RCI as exclusive
financial advisor and placement agent. RCI's fees under this arrangement are
payable only upon completion of defined transactions and, in such event, are
calculated upon the basis of a percentage of the transaction value. The
agreement is terminable by the Company upon 90 days notice, provided that RCI is
entitled to receive certain fees for two years following termination in the
event a transaction is concluded with an entity introduced to the Company by
RCI. No fees were paid by the Company to RCI during fiscal 1997 and 1996.
26
<PAGE>
RCI provides substantial ongoing financial management and other
services to the Company at no charge. In the opinion of management, the terms of
the Company's arrangements with RCI, NHE and NCS taken as a whole are at least
as favorable to the Company as could be obtained from third parties.
Item 13. Exhibits and Reports on Form 8-K
(a) See Exhibit Index following the Signatures page which Index is
incorporated herein by reference.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
27
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AVESIS INCORPORATED
Date 8/28/97 By: /s/ Kenneth L. Blum, Sr.
---------- ---------------------------
Kenneth L. Blum, Sr.
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Kenneth L. Blum, Sr. President and Chief August 28, 1997
- ----------------------- Executive Officer
Kenneth L. Blum, Sr. (Principal Execu-
tive Officer), Director
/s/ Neal A. Kempler Corporate Secretary August 27, 1997
- ----------------------- Vice President of Operations
Neal A. Kempler
/s/ Joel H. Alperstein Director of Finance August 27, 1997
- ----------------------- (Principal Financial Officer)
Joel H. Alperstein
/s/ Shannon R. Barnett Controller August 27, 1997
- ----------------------- (Principal Accounting Officer)
Shannon R. Barnett
/s/ Co-Chairman of the August __, 1997
- ----------------------- Board of Directors
William R. Cohen
/s/ William L. Richter Co-Chairman of the August 27, 1997
- ----------------------- Board of Directors
William L. Richter
/s/ Director August __, 1997
- -----------------------
Gerald L. Cohen
/s/ Sam Oolie Director August 28, 1997
- -----------------------
Sam Oolie
28
<PAGE>
<TABLE>
<CAPTION>
Avesis Incorporated
Exhibit Index
Form 10-KSB
For the Fiscal Year Ended May 31, 1997
Exhibit No. Exhibit Incorporated by Reference from the:
----------- ------- -----------------------------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Company's Registration Statement on Form S-1
Incorporation of the Company, as amended (File No. 33-17217) filed January 12, 1988,
and declared effective January 12, 1988.
3.2 Bylaws of the Company Company's Registration Statement on Form S-18
(File No. 33-6366-LA) filed July 11, 1986 and
declared effective July 14, 1986.
3.3 Amendments to Bylaws adopted December 6, 1991 Company's Annual Report on Form 10-K for the
year ended May 31, 1992 (File No. 1-9758).
4.1 Indenture between the Company and Continental Company's Registration Statement on Form S-1
Stock Transfer & Trust Company, as Trustee, (File No. 33-17217) filed January 12, 1988,
including form of Convertible Subordinated and declared effective January 12, 1988.
Debenture
4.2 Statement of Designations, Preferences, Company's report on Form 8-K filed July 9,
Privileges, Voting Powers, Restrictions, 1988 (File No. l-9758).
Qualifications and Rights of the Series l
Preferred
4.3 Statement of Designations, Preferences, Company's Registration Statement on Form S-l
Privileges, Voting Powers, Restrictions, filed May 17, 1989 (File No. 33-28756).
Qualifications and Rights of the Series 2
Preferred
4.4 Specimen Certificate representing $.0l par value Company's Registration Statement on Form S-18
Common Stock (File No. 33-6366-LA) filed July 11, 1986 and
declared effective July 14, 1986.
4.5 Specimen Certificate representing $10 Class A Amendment No. l to the Company's Registration
Nonvoting Cumulative Convertible Preferred Statement on Form S-l filed June 29, 1989
Stock, Series 2 (File No. 33-28756).
10.1 * Incentive Stock Option Plan of the Company, as Company's Registration Statement on Form S-1
amended (File No. 33-17217) filed January 12, 1988,
and declared effective January 12, 1988.
10.2 * 401(k) Plan of the Company Company's annual report on Form 10-K for the
year ended May 31, 1989 (File No. 1-9758).
10.3 * Management Agreement dated March 18, 1993 Company's report on Form 8-K dated March 18,
between the Company and NHE 1993 (File No. 1-9758).
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C>
10.4 * Stock Option Grant to NHE dated March 18, 1993 Company's report on Form 8-K dated March 18,
relating to options for the purchase of 1993 (File No. 1-9758).
4,400,000 shares of the Company's Common Stock
10.5 Subordinated Promissory Note dated March 18, Company's report on Form 8-K dated March 18,
1993 in the amount of $80,000 payable by the 1993 (File No. 1-9758).
Company to Mr. and Ms. Blum
10.6 Subordinated Promissory Note dated March 18, Company's report on Form 8-K dated March 18,
1993 in the amount of $80,000 payable by the 1993 (File No. 1-9758).
Company to Mr. and Mrs. Cohn
10.7 Registration Rights Agreement dated March 18, Company's report on Form 8-K dated March 18,
1993 among NHE, Mr. Blum, and Alan S. Cohn 1993 (File No. 1-9758).
10.8 * Marketing Agreement dated March 18, 1993 between Company's report on Form 8-K dated March 18,
the Company and NHE 1993 (File No. 1-9758).
10.9 Option Transfer Documents dated March 31, 1993 Company's report on Form 8-K dated March 18,
1993 (File No. 1-9758).
10.10 * Stock Purchase Warrant issued to Richter & Co., Company's report on Form 8-K dated March 18,
Inc. dated March 18, 1993 for the purchase of 1993 (File No. 1-9758).
240,000 shares of the Issuer's Common Stock
10.11 * Stock Purchase Warrant issued to William L. Company's report on Form 8-K dated March 18,
Richter dated March 18, 1993 for the purchase of 1993 (File No. 1-9758).
160,000 shares of the Issuer's Common Stock
10.12 * 1993 Stock Option Plan Company's annual report on Form 10-KSB for the
year ended May 31, 1993 (File No. 1-9758).
10.13 Lease Agreement between the Company and Phoenix Company's Report on Form 10-QSB for the
City Square three months ended February 28, 1995 (File
No. 1-9758).
10.14 Fee Agreement between the Company and Richter & Company's Report on Form 10-QSB for the three
Co., Inc. months ended February 28, 1995 (File No.
1-9758).
10.15 Software Development Agreement between the Company's Report on Form 10-QSB for the three
Company and National Computer Services, Inc. months ended August 31, 1995 (File No. 1-9758).
10.16 Litigation Agreement between the Company and Ken filed herewith
Blum, Sr., Ken Blum, Jr., and Alan Cohn
</TABLE>
30
<PAGE>
<TABLE>
<S> <C> <C>
10.17 Sublease Agreement between the Company and filed herewith
InfoImage, Inc.
10.18 Lease Agreement between the Company and filed herewith
Principal Mutual Life Insurance Company
11 Statement recomputation of per-share earnings filed herewith
21 Subsidiary of Registrant filed herewith
27 Financial Data Schedule filed herewith
* Identified as a compensatory arrangement as required by Item 13(a) of Form 10-KSB.
</TABLE>
31
Exhibit 10.16
Litigation Agreement between the Company and Ken Blum, Sr., Ken Blum, Jr., and
Alan Cohn
Liabilities associated with the suit by United HealthCare, Inc.
("United") against Ken Blum and Avesis Incorporated ("Avesis") and counterclaims
by Mr. Blum against United, as well as any future suit initiated by United based
upon the FOP contract, will be handled as follows:
1. Avesis will pay for legal fees and expenses, settlements, and judgments
incurred by it and/or Mr. Blum in connection with the United litigation and Mr.
Blum's counterclaims against United, but only to the extent of 100% of the gross
margin earned by Avesis on D.C. Fraternal Order of Police ("FOP") collected
revenues (including revenues from the current FOP contract and any future
contract(s) between Avesis and the FOP arising from NHE efforts) plus 33 1/3% of
all of the net pretax profits of Avesis during any fiscal year in which the
litigation continues, whether or not derived from FOP business (as determined
based on Avesis' audited financial statements) ("net profits"). "Gross margin"
for this purpose is defined as collected revenue from FOP contracts less all
incremental expenses paid by Avesis as a result of FOP contracts.
2. To the extent that collected gross margins on FOP business plus 33 1/3% of
net profits are inadequate to cover legal fees and expenses, settlements and/or
judgments which may be owing from time to time by Mr. Blum and/or Avesis, such
amounts will. be advanced by Mr. Blum. Avesis will indemnify Mr. Blum for
amounts paid by Mr. Blum pursuant to this paragraph, but only to the extent of
gross margin earned by Avesis on FOP business from time to time thereafter plus
33 1/3% of net profits.
3. Commissions on FOP business will be deferred by NHE (except for fees and
commissions payable to M. Levitt and M. Reamer) until the litigation is finally
resolved. They will ultimately be payable only if, when, and to the extent that
Avesis has recovered all of its legal costs hereunder and has gross profit on
the FOP business after such recovery.
4. Should Mr. Blum make a recovery from counterclaims pursued against United, he
will first recoup his own unreimbursed outlays, if any, for the United
litigation and the counterclaims, next will reimburse Avesis for any
unreimbursed outlays made by it, and then will keep one-half of any surplus and
the balance will be paid to Avesis.
Lest there be any misunderstanding, the net effect of the above is
that Avesis' exposure under the United litigation is limited to its realized and
collected gross margins on FOP revenues plus 33 1/3% of its net profits.
It is agreed and understood that representation of Avesis and Mr. Blum
initially shall be handled jointly by Quarles & Brady and Kramon & Graham, P.A.,
provided that this agreement shall be revisited if joint representation is
deemed undesirable as the litigation develops. All parties waive any applicable
conflicts of interest as necessary to permit the joint representation.
This letter shall govern the rights of NHE, Ken Blum, Jr., and Alan
Cohn in addition to Ken Blum, Sr. as well as each of their respective spouses.
No party shall have liability for any settlement entered into without
the party's written consent, which may not be unreasonably withheld.
Finally, it is understood that Avesis' indemnification obligations as
set forth herein shall be to the maximum extent permitted by Delaware law, and
that the terms of this understanding are exclusive and shall supersede any
general indemnification provisions in Delaware law, Avesis' bylaws or otherwise.
32
<PAGE>
The undersigned agree that the attached memorandum represents their
agreement relating to the lawsuit filed by United HealthCare, Inc. against
Kenneth L. Blum, Sr. and Avesis Incorporated.
AVESIS INCORPORATED
Dated: August, 24, 1994 By:/s/ Frank Cappadora
-- -----------------------
Frank Cappadora, President
Dated: August 24, 1994 /s/ Kenneth L. Blum, Sr.
--------------------------
Kenneth L. Blum, Sr.
Dated: August 24, 1994 /s/ Kenneth L. Blum, Jr.
--------------------------
Kenneth L. Blum, Jr.
Dated: August 24, 1994 /s/ Alan S. Cohn
-- --------------------------
Alan S. Cohn
33
Exhibit 10.17
Sublease Agreement between the Company and InfoImage, Inc.
SUBLEASE
--------
THIS SUBLEASE executed in duplicate in Phoenix, Arizona, this 29th day of
October, 1996 by and between Avesis, Incorporated, a Delaware Corporation herein
called "Sublessor", and Infolmage, Inc. An Arizona Corporation, hereinafter
called "Sublessee".
WITNESSETH:
- ----------
1. (A) Sublessor subleases to Sublessee, and Sublessee hires from Sublessor,
certain premises ("the Premises") attached on Exhibit "A" attached hereto and
hereby made a part hereof, being situated on the 23rd floor of that certain
building know as 100 West Clarendon Avenue. The subleased premises comprise the
Premises leased to Sublessor pursuant to a certain written leased dated
September 19, 1994. Said lease, as so amended, is hereinafter called "the
Underlying Lease".
(B) Sublessee shall grant to Sublessor the right to remain in a portion of
the Premises, as shown on Exhibit "A-1" for a period of up to eight months, to
expire no later than October 1. 1997. Sublessor may vacate the Premises at any
time during this period by giving Sublessee not less than thirty (30) days
written notice.
During the period Sublessor remains in the Premises, as referenced above,
Sublessor shall retain rights to thirty-two percent (32%) of the parking spaces
referenced in the master lease.
2. The term shall be for forty-three and one half (43 1/2) months commencing
January 15, 1997 and ending on August 31, 2000. Sublessor and Sublessee agree
that Sublessee shall have access to the premises beginning January 1 for the
purpose of wiring and fixturization of the Premises.
3. (a) This Sublease shall be and is subject to all of the terms and
conditions of the Underlying Lease, and, excepting as to rental payable by the
Tenant thereunder and as otherwise provided herein, each and every provision of
the Underlying Lease shall be deemed Incorporated and made a part of this
Sublease. Sublessee shall abide by all the applicable provisions of the
Underlying Lease and hereby assumes during the entire term hereof, all the
duties and obligations of the tenant.
(b) The Underlying Lease is hereby incorporated herein by reference. The
Sublessor shall maintain at all times a copy of the Underlying Lease in the
office of the President of Sublessor and make the same fully available for
inspection by Sublessee at reasonable times on request. Sublessee acknowledges
that Sublessee has reviewed and is familiar with the terms thereof as they
pertain to this Sublease.
(c) Any action or inaction of Sublease which is a breach of the Underlying
Lease shall be a breach of this Sublease.
(d) All rights and privileges of Sublessor, as tenant under the Underlying
Lease, are intended to be available to Sublessee under this Sublease, except as
otherwise expressly provided herein. On Sublessee's demand, Sublessor agrees to
take whatever reasonable steps may be necessary to aid Sublessee in the
enforcement of same. If Sublessee wishes Sublessor to take any action or
exercise any right under the Underlying Lease, Sublessee shall give Sublessor
sufficient advance notice to allow a look solely to the landlord under the
Underlying Lease and not to Sublessor for satisfaction of all those rights and
privileges and terms incorporated herein from the Underlying Lease.
(e) Sublessor shall have no obligation to pay for or furnish any repairs,
maintenance or restoration that may be required to be paid for or furnished by
the landlord under the Underlying Lease, and Sublessee hereby waives all right
to make repairs at the expense of Sublessor as provided by any applicable
sections of Arizona law. Sublessee accepts the subleased premises in its present
condition, including any and all conditions not visible or observable upon
inspection, but shall be allowed to make any improvements it deems necessary,
subject to lessor approval.
(f) Upon their vacation of the Premises, Sublessor hereby agrees to restore
their portion of the Premises to its original condition, and reconstruct their
reception area, adding one storage Room as depicted in Exhibit A-1.
34
<PAGE>
(g) In event of any termination of the Underlying Lease, this Sublease
shall terminate; provided, however, that Sublessor agrees not voluntarily to
perform any act which will result in termination of the Underlying Lease without
the Sublessee's consent first.
4. Sublessee shall pay as monthly rent to Sublessor per the schedule below, in
advance without deduction or offset, at such place or places as may be
designated from time to time by Sublessor as designated below during the entire
term.
<TABLE>
<CAPTION>
Months Rent Monthly Rent
<S> <C> <C> <C>
01/15/97-02/28/97 - 0 $0
03/01/97-09/30/97 - $13.38/p.s.f. $10,135.35 (actual rent based on 9,090 square feet)
10/01/97-12/31/97 - $13.38/p.s.f. $14,849.57
01/01/98-12/31/98 - $14.33/p.s.f. $15,903.91
01/01/99-08/31/00 - $15.33/p.s.f. $17,013.74
</TABLE>
In the event Sublessor vacates the Premises, as referenced in Paragraph 1(b),
the Monthly Rent, upon Sublessor's vacancy shall become $14,849.57, based on
Sublessee's use of the entire Premises.
5. Sublessee shall be responsible for any increases in operating expenses billed
to lessor in excess of their pro-rata share of operating expenses during
calendar year 1997, subject to the limitations set forth in Paragraphs 3(c) and
Paragraph 7 of Exhibit "D" of the Underlying Lease.
6. All demands, notices, approvals or requests from the landlord shall be in
writing and shall be sent by registered mail addressed to Sublessee at the
subleased premises, and also addressed to Sublessor. Sublessor and Sublessee
shall have the right from time to time to notify the other party in writing that
it is changing its own address for demands, notices, approvals or requests under
this section.
7. All exterior signage dedicated to Sublessor shall immediately be transferred
to Sublessee. The cost of installing new signage shall the sole responsibility
of Sublessee.
Sublessee shall not assign this Sublease or any interest therein nor
further sublet the subleased premises, or any part thereof, without the written
consent of Sublessor and the landlord under the Underlying Lease. Sublessor
shall not unreasonably withhold such consent. Any such assignment, subleasing,
occupancy or use without the prior written consent of Sublessor and the lessor
under the Underlying Lease shall, at the option of Sublessor, terminate this
Sublease without reducing or mitigating Sublessee's obligation.
The covenants and conditions herein contained shall apply to and bind
the successors and assigns of all the parties hereto.
Time is of the essence of this Sublease.
This Sublease is subject to and conditioned upon the written consent
of the landlord under the Underlying Lease.
IN WITNESS WHEREOF, Sublessor and Sublessee have executed these
documents the day and year first above written.
SUBLESSOR: SUBLESSEE:
By: /s/ Kenneth L. Blum, Sr. By: ______________________________
------------------------
Title: Acting CEO Title: ______________________________
------------------------
Date: ________________________ Date: ______________________________
35
Exhibit 10.18
Lease Agreement between the Company and Principal Mutual Life Insurance Company
OFFICE LEASE
THIS LEASE is made this 21st of July, 1997, between PRINCIPAL MUTUAL LIFE
INSURANCE COMPANY, an Iowa corporation hereinafter called "Landlord" and
AVESIS,INC. a Delaware corporation, hereinafter called "Tenant".
LEASE OF PREMISES
Landlord hereby leases to Tenant and Tenant hires from Landlord,
subject to all of the terms and conditions hereinafter set forth, those certain
premises (hereinafter called the "Premises") as set forth in Item 1 of the Basic
Lease Provisions and as shown in the space plan or floor plan attached hereto as
Exhibit "A" located in that certain office building ("Building") now existing
and located at 3724 North Third Street situated in the City of Phoenix, County
of Maricopa, State of Arizona, as part of an office and commercial project
commonly known as The Clare-Weld Building, which land is improved with
landscaping, parking facilities and other improvements and appurtenances, all of
which land, improvements and appurtenances together with the Building and other
office and commercial structures are referred to collectively herein as "the
Project".
BASIC LEASE PROVISIONS
1. Building Name: The Clare-Weld Building
Suite: 300
Floor(s): Third Floor
Address: 3724 North Third Street
Phoenix, Arizona 85012
2. Rentable Area of the Premises: 6,672 square feet (as referred to in
Paragraph 3.5)
3. Rentable Area of the Building: 19,259 square feet
4. Tenant's Proportionate Share: 35 % (as referred to in Paragraph 3.4)
5. Basic Rent (as referred to in Article 2): $7,228.00 (plus applicable
taxes) The Basic Rent for the first 24 months of this Lease shall be Seven
Thousand Two Hundred Twenty-eight and 00/100 Dollars ($7,228.00) per month
(Plus applicable taxes). Thereafter, the Basic Rent shall be increased as
follows:
Months 25 through 36: $7,506.00 Per Month, Plus Applicable Taxes
Months 37 through 60: $7,784.00 Per Month, Plus Applicable Taxes
6. Base Year: The calendar year of 1997, grossed up to ninety-five percent
(95 %) occupancy.
7. Term (as referred to in Article 1): Five (5) years, commencing on October
1 19 97 and ending on September 30, 2002 .
Tenant acknowledges that Landlord has the right, pursuant to Paragraph
15.3, to terminate this Lease if Tenant notifies Landlord that Tenant
desires to assign this Lease or sublet the Premises or any portion of the
Premises.
8. Security Deposit (as referred to in Article 4): $ 7,228.00 (Plus
applicable taxes)
9. Landlord's Broker (as referred to in Article 40): CB Commercial
10. Tenant's Broker (as referred to in Article 40): CB Commercial
11. Vehicle Parking Spaces Allocated to Tenant (as referred to in Article 53):
Landlord will provide Tenant with twenty-two (22) parking stalls as
follows: Six (6) covered reserved stalls free for initial 24 months of
term; $20.00 per stall per month thereafter (plus sales tax), Sixteen (16)
uncovered, reserved stalls free for term of lease.
36
<PAGE>
12. Additional Basic Lease Provisions:
A. OPTION TO EXTEND: Tenant shall have the option to renew this Lease for
one (1) additional term of (5) years upon the following terms and
conditions:
1) Provided that at the end of the primary term of this
Lease, Tenant is in possession of the Premises and is
not in default of any of the terms, conditions or
covenants contained in this Lease, Tenant herein, for
Tenant's sole use and occupancy, is hereby granted an
option to renew this Lease for an additional term of
five (5) years commencing on October 1, 2002, and
expiring on September 30, 2007, on the same terms and
conditions contained herein, except for rental. The
rental for said extended term shall be at a
renegotiated rental rate based on the then prevailing
market rates, which shall not be less than that paid
during the primary term of this Lease.
2) Tenant shall notify Landlord, in writing, of its
desire to renew this Lease no later than six (6)
months prior to the expiration of the primary term
hereof and Landlord shall within thirty (30) days
after receiving said written notice from tenant,
designate a place and a time to meet with Tenant for
the purpose of negotiating a new rental rate for said
additional five (5) years.
13. All rent payments and notices shall be delivered to Landlord at the
following address:
Principal Mutual Life Insurance Company
c/o Metro Commercial Properties
4411 S. Rural Road, Suite 201
Tempe, Arizona 85282
or at such address as Landlord may designate from time to time.
14. Signatures of Landlord and Tenant:
Landlord and Tenant hereby execute this Lease, consisting of the foregoing
provisions and the Additional Lease Provisions and exhibits which follow,
as of _____, 1997.
IN WITNESS WHEREOF, the parties hereto have signed and sealed this Lease Renewal
Agreement on the date hereinafter written.
EXECUTED BY LANDLORD, this_________day of__________________________,19__.
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, an Iowa Corporation
By: _______________________
Title: _______________________
By: _______________________
Title: _______________________
EXECUTED BY AVESIS, INC., a Delaware corporation, this____day of_________, 19__:
By: _______________________
Title: _______________________
Address:_______________________
37
<PAGE>
City/State/Zip:
2
ADDITIONAL LEASE PROVISIONS
ARTICLE 1 - TERM
1.1 The term of this Lease shall be as shown in Item 8 of the Basic Lease
Provisions and shall commence on the commencement date as shown in Item 8 of the
basic Lease Provisions or such later date as the Premises shall be tendered to
Tenant ready for occupancy as set forth in Section 1.2 below, or upon such
earlier date as Tenant takes possession or commences use of the Premises for any
purpose other than construction. The date of commencement as defined above,
hereinafter called the "Commencement Date", shall be confirmed in writing by the
parties promptly upon such commencement.
1.2 Landlord may, prior to the commencement date set forth in Item 8 of the
basic Lease Provisions, tender the Premises to Tenant upon not less than fifteen
(15) days' prior written notice stating that the Premises will be ready for
occupancy on the date specified in such notice. The Premises shall be deemed
ready for occupancy upon the expiration of fifteen (15) days from the date said
notice is sent, and when Landlord has: (i) put in operation all building
services essential for the use of the Premises by Tenant; (ii) provided
reasonable access to the Premises for Tenant, its agents, employees, licensees
and invitees so that the same may be used without unnecessary interference; and
(iii) substantially completed all the work required to be done by it, or its
obligation to complete such work has been suspended as provided in the Work
Letter executed by the parties contemporaneously herewith.
ARTICLE 2 - RENT
Tenant shall pay a Basic Rent for the Premises in the amount shown in Item
5 of the Basic Lease Provisions for the specified lease year, in monthly
installments payable on the first day of each month in advance, except that if
the Commencement Date occurs on a day other than the first day of a month, then
the Basic Rent for the fraction of the month starting with the Commencement Date
shall be paid on said Commencement Date, prorated on the basis of the actual
number of days in said month. If the term hereof ends on a day other than the
last day of a month, then the Basic Rent for the month during which said
expiration occurs shall be prorated on the basis of the actual number of days in
said month. As used in reference to the Basic Lease Provisions, "lease year"
shall mean such succeeding period of twelve full calendar months during the
term, commencing with the month at the commencement of the lease term. In
addition to said Basic Rent, Tenant agrees to pay additional rent (including, if
applicable, any Consumer Price Index adjustments referred to below) as and when
hereinafter provided in this Lease. Said Basic Rent and additional rent,
together with all other sums payable by Tenant under this Lease, are hereinafter
sometimes referred to collectively as the "rent." The rent shall be payable to
Landlord, without deduction or offset, in lawful money of the United States of
America at the address for Landlord as shown in Item 14 of the Basic Lease
Provisions, or to such other person or at such other place as Landlord may from
time to time designate in writing.
ARTICLE 3 - RENT ADJUSTMENTS
3.1 In addition to Base Rent for each calendar year during the term of this
Lease, Tenant shall pay as additional rent, either of the following:
(b) If Item 7 of Basic Lease Provisions is applicable, the amount computed
by multiplying Tenant's Proportionate Share by the amount by which Total
Operating Expenses (as defined in Paragraph 3.9) for any calendar year after the
Base Year exceed Total Operating Expenses for the Base Year; provided,
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however, that if the Building is not fully occupied (as defined below) during
the entire Base year, the Total Operating Expenses for such year shall be
adjusted to reflect the Total Operating Expenses that would have been incurred
if the Building were fully occupied during the entire Base Year. As used herein,
fully occupied shall mean occupancy of not less than ninety-five (95%) percent
of the rentable area of the Building.
3
Whether Paragraph 3. 1 (a) or 3. 1 (b) is applicable, Landlord shall have
the right to estimate in advance the amount due from Tenant for any calendar
year and to charge Tenant therefor on a monthly basis. In such case, Tenant
shall pay one-twelfth (1/12th) of such amount on the first day of each month
during such year. Any overpayments or underpayment will be adjusted as set forth
in Paragraph 3.3.
3.2 Landlord shall endeavor to provide Tenant with a written notice of the
estimated Total Operating Expenses, as hereinafter defined. No delay by Landlord
in delivering to Tenant any such notices shall affect Tenant's obligations
hereunder, which shall be effective as of the date specified in any such notice.
3.3 Within one hundred twenty (120) days after the end of each calendar year
during the lease term, Landlord shall provide Tenant with a written statement of
the actual Total Operating Expenses for that year. If actual Total Operating
Expense should exceed the estimated Total Operating Expenses for such year, then
Tenant shall pay to Landlord the additional amount due to Landlord within thirty
(30) days.
3.4 "Tenant's Proportionate Share" is defined as that percentage computed by
dividing the Rentable Area of the Premises, as hereinafter defined, by the
Rentable Area of the Building, as hereinafter defined. Tenant acknowledges that
Tenant's Proportionate Share is subject to adjustment, as set forth in Paragraph
3.8.
3.5 "Rentable Area of the Premises" and "Rentable Area of the Building" are
defined as those areas obtained by measuring the Premises and the Building in
accordance with the method of measuring rentable office space specified by the
Building Owners and Managers Association (BOMA). Tenant acknowledges that the
rentable square footage includes a seven percent (7 %) load factor.
3.6 "Operating Expense Overage" is defined as the amount computed by
subtracting the Landlord's Operating Expense Stop, as hereinafter defined, from
the Total Operating Expenses for a calendar year.
3.7 "Landlord's Operating Expense Stop" is defined as that amount computed
by multiplying the Rentable Area of the Building by the Expense Stop Rate stated
in Item 6 of the Basic Lease Provisions.
3.9 "Total Operating Expenses" are defined as those costs and expenses
necessary to operate, manage and maintain the Building in a manner deemed
reasonable and appropriate and for the best interest of the tenants in the
Building, including, but not limited to, the following:
(a) Wages, salaries and fringe benefits of all employees engaged in
the operation and maintenance of the Building; employer's Social Security
taxes, unemployment taxes or insurance, and any other taxes which may be
levied on such wages and salaries; the cost of disability and
hospitalization insurance and pension or retirement benefits for such
employees;
(b) All supplies and materials used in the operation and maintenance
of the Building;
(c) Cost of water, sewer, electricity, gas, telephone and other
utilities used in operating of the Building;
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4
(d) Cost of janitorial service, trash removal, parking lot sweeping,
window washing and landscape maintenance;
(e) Cost of replacement of Building equipment and all maintenance
service agreements on Building equipment, including alarm, security, energy
management, mechanical, electrical, window cleaning and elevator equipment;
(f) Cost of reasonable repairs and general maintenance;
(g) Any capital improvements made or installed for purposes of saving
labor or otherwise reducing applicable operating costs, not to exceed the
aggregate estimated cost savings annualized on a straight line basis over
the useful life of the capital improvements as determined by Landlord in
accordance with generally accepted accounting principles and practices in
effect at the time of acquisition of capital item;
(h) Any "Real Property Tax," which for purposes hereof means: (i) any
fee, license fee, license tax, business license fee, commercial rental tax,
levy, charge, assessment, penalty tax imposed by any taxing authority
against the Premises (or any portion thereof); (ii) any tax on the
Landlord's right to receive, or the receipt of, rent or income from the
Premises (or any portion thereof) or against Landlord's business of leasing
the Premises or any portion thereof); (iii) any tax or charge for fire
protection, streets, sidewalks, road maintenance, refuse or other services
provided to the Premises (or any portion thereof) by any governmental
agency; (iv) any tax imposed upon this transaction or based upon a
re-assessment of the Premises or the Project or any portion thereof due to
a change in ownership or transfer of all or part of Landlord's interest in
the Premises or the Project (or any portion thereof); and (v) any charge or
fee replacing any tax previously included within the definition of real
property tax. "Real Property Tax" does not, however, include Landlord's
federal or state income, franchise, inheritance or estate taxes. If the
Building is not separately assessed, the share of real property taxes
payable with respect to the Building and land shall be reasonably
determined by Landlord based upon the assessor's worksheets or other
reasonably available information.
(i) Cost of casualty and liability insurance applicable to the
Building and Landlord's personal property used in connection therewith
covering loss or damage of such property in the amount of its full
replacement value; such insurance shall also provide protection against all
perils included within the classification of fire, extended coverage,
vandalism, malicious mischief, special extended perils (i.e., all risk),
sprinkler leakage, earthquakes, plate glass damage, and other perils which
Landlord deems necessary.
(j) Cost of all accounting and other professional fees incurred in
connection with the operation of the Building;
(k) Cost of all accounting and other professional fees incurred in
connection with the operation of the Building;
(l) Any management fee, not in excess of current market rates for
similar buildings in the area, payable to Landlord or to any other person
or entity performing management services; and
(m) Common area costs allocable to the Building, as set forth in
Article 42.
Notwithstanding the foregoing, Total Operating Expenses shall not include
expenses for which Landlord is reimbursed or indemnified (either by an insurer,
condemnor, tenant or otherwise); expenses incurred in leasing or procuring
tenants; interest or amortization payments on any mortgage or mortgages, or rent
under any ground or underlying lease or leases; wages, salaries or other
compensation paid to any
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executive employees above the grade of building manager wages, salaries or other
compensation paid for clerks or attendants in concessions or newsstands
operating by Landlord; any cost or expense representing an amount paid to a
corporation affiliated with Landlord which is in excess of the amounts which
would be paid in the absence of such relationship; or cost of capital
improvements and depreciation or amortization, except as provided in Section
3.9(g) or otherwise above. Payment of additional rent pursuant to Section 3.1
above shall not be deemed a reimbursement to Landlord for
5
purposes of this Section 3.9.
3.10 Any operating expense increase for any calendar year during the term
of this Lease shall be apportioned so that Tenant shall be charged under this
Article 3 for only that portion of the increase for such year as falls within
the term. This provision shall survive the expiration or earlier termination of
the term of this Lease.
3.11 Landlord and Tenant, each from time to time upon request of the other,
within five (5) days of such request, shall sign a written memorandum confirming
the amount of the additional rent due hereunder, as adjusted from time to time
hereunder.
ARTICLE 4 - SECURITY DEPOSIT
Tenant has deposited with Landlord the sum set forth in Item 9 of the Basic
Lease Provisions as security for the full and faithful performance of every
provision of this Lease to be performed by Tenant. If Tenant defaults with
respect to any provision of this Lease, including, but not limited to, the
provisions relating to the payment of rent, the repair of damage to the Premises
caused by Tenant or cleaning the Premises upon termination of this Lease,
Landlord may use, apply or retain all or any part of this security deposit for:
(i) the payment of any rent or any other sum in default; (ii) the repair of such
damage to the Premises; (iii) the cost of such cleaning; (iv) the payment of any
other amount which Landlord may spend or become obligated to spend by reason of
Tenant's default; or (v) to compensate Landlord for any other loss or damage
which Landlord may suffer by reason for Tenant's default, to the full extent
permitted by law. If any portion of said deposit is so used or applied, Tenant
shall within ten (10) days after written demand therefor deposit cash with
Landlord in an amount sufficient to restore the security deposit to its original
amount, and Tenant's failure to do so shall be a material breach of this Lease.
Landlord shall not be required to keep this security deposit separate from its
general funds, and Tenant shall not be entitled to interest on such deposit. If
Tenant shall fully and faithfully perform every provision of this Lease to be
performed by it, the security deposit or any balance thereof shall be returned
to Tenant (or, at Landlord's option, to the last assignee of Tenant's interest
hereunder) at the expiration of the Lease term, less the operation expense
increase described in Paragraph 3.10, if applicable.
ARTICLE 5 - UTILITIES AND SERVICES
5.1 Landlord shall furnish to the Premises between the hours of 8:00 a.m.
and 6:00 p.m. Monday through Friday, and between the hours of 9:00 a.m. and 1:00
p.m. Saturday, except legal holidays, such amounts of air conditioning, heating
and ventilation as may be required for the use and occupation of the Premises,
taking into consideration any give time the availability of energy resources and
prudent energy conservation practices. During other hours Landlord will provide
such air conditioning, heating and ventilation upon not less than twenty-four
(24) hours advance notice from Tenant to Landlord, and Tenant, upon presentation
of a bill therefore, shall pay Landlord for such service on an hourly basis at
the then prevailing rates therefore, which is currently $7.26 per hour, as
established by Landlord. If such service is not a continuation of that furnished
during regular business hours, Tenant shall pay for a minimum of three (3) hours
of such service. Subject to provisions set forth below, Landlord shall at all
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times furnish the Premises with elevator service, reasonable amounts of electric
current for normal lighting by building standard overhead fluorescent and
incandescent fixtures and for fractional horsepower office machines and water
for lavatory and drinking purposes. Landlord may impose a reasonable charge for
any utilities or services, including, but not limited to, electric current,
required to be provided by Landlord by reason of any substantial recurrent use
of the Premises at any time other than the hours of 8:00 a.m. to 6:00 p.m.
Monday through Friday and 9:00 a.m. to 1:00 p.m. Saturday excluding legal
holidays. Landlord shall provide janitor service; provided, however that Tenant
shall pay for any unusual janitorial services required by reason of any
non-building standard improvements in the Premises, including, but not limited
to, glass wall coverings and floor coverings, installed by or for Tenant under
the Work Letter or otherwise. Landlord shall replace building standard overhead
fixture lamps and bulbs as required. Tenant shall pay for replacement of all
other bulbs as required. Landlord shall not be liable for any failure to furnish
any of such services or utilities when
6
such failure is caused by accidents, strikes, lockouts, other labor troubles,
governmental action, shortages or other conditions beyond Landlord's reasonable
control, and Tenant shall not be entitled to any damages nor shall any such
failure relieve Tenant of the obligation to pay full rent reserved herein or
constitute or be construed as a constructive or other eviction of Tenant. If at
any time during the term, Tenant's consumption of utilities exceeds the average
consumed by other tenants of the Building, Tenant will reimburse Landlord on
demand for the cost of such excess use. In such event, Landlord reserves the
right to install at Tenant's cost separate meters for utilities for the
Premises.
5.2 Tenant will not, without the written consent of Landlord, use any
apparatus or device in the Premises including, but not limited to, electronic
data processing machines, punch card machines and machines using current in
excess of 110 volts, which will in any way increase the amount of electricity or
water usually furnished or supplied for use of the Premises as general office
space; nor connect any apparatus, machine or device with water pipes or electric
current (except through existing electrical outlets in the Premises), for the
purpose of using electric current or water. If Tenant shall require electric
current in excess of that which Landlord is obligated to furnish under Paragraph
5.1 above, Tenant shall first obtain the consent of Landlord, which Landlord may
refuse, to the use thereof and Landlord may cause an electric current meter to
be installed in the Premises to measure the amount of electric current consumed
for any such other use. The cost of any such meter and of installation,
maintenance and repair thereof shall be paid for by Tenant and Tenant agrees to
pay Landlord promptly upon demand by Landlord for all such electric current
consumed for any such other use as shown by said meter, at the rates charged for
such services by the local public utility furnishing the same, plus any increase
in the Building electricity expense due to an increase in rates caused by
Tenant's increase of the Building's consumption or demand, plus any additional
expense incurred in keeping account of the electric current so consumed. If any
lights, machines or equipment (including, but not limited to, computers) are
used by Tenant in the Premises which materially affect the temperature
otherwise, maintained by the air conditioning system, or generates substantially
more heat in the Premises than would be generated by the building standard
lights and usual fractional horsepower office equipment, Landlord shall have the
right to install any machinery and equipment which Landlord reasonable deems
necessary to restore temperature balance, including, but not limited to,
modifications to the standard air conditioning equipment, and the cost thereof,
including the cost of installation and any additional cost of operation and
maintenance occasioned thereby, shall be paid by Tenant to Landlord upon demand
of Landlord.
ARTICLE 6 - USE OF PREMISES
Tenant shall use and occupy the Premises only for general office purposes
and shall not use or occupy the Premises for any other purpose without the prior
written consent of Landlord, which consent may be withheld at the sole
discretion of Landlord. Tenant shall not use or occupy the Premises in violation
of any ordinance, statute, law or other legal requirement. Tenant, at it sole
cost and expense,
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shall comply with any direction of any governmental authority having
jurisdiction which shall impose any duty upon Tenant or Landlord with respect to
the Premises or the use or occupation thereof, by reason of the nature of
Tenant's use or occupancy of the Premises. Tenant shall not do or permit to be
done anything which will invalidate or increase the cost of any fire and
extended coverage insurance policy covering the Building or property located
therein. Tenant shall reimburse Landlord promptly upon demand for any additional
premium charged for such policy by reason of Tenant's failure to comply with the
provisions of this Article 6.
ARTICLE 7 - ACCEPTANCE OF PREMISES
Tenant acknowledges that neither Landlord nor any agent of Landlord has
made any representation or warranty with respect to the premises or the building
or with respect to the suitability or fitness of either for the conduct of
Tenant's business or for any other purpose. The taking of possession or use of
the premises by tenant for any purpose other than construction shall
conclusively establish that the premises and the building were at such time in
satisfactory condition and in conformity with the provisions of this lease in
all respects, except as to any items for which Landlord is expressly declared
herein to be responsible and as to which Tenant shall give Landlord written
notice in reasonable detail
7
within fifteen (15) days after Tenant takes such possession or commences such
use of the Premises or the term of this Lease otherwise commences as provided in
Article 1 above. Nothing contained in this Article 7 shall affect the
commencement of the term of this Lease or the obligation of Tenant to pay rent
hereunder as provided in Article 2 above. Landlord shall promptly correct any
actual defects of which it is notified as provided above.
ARTICLE 8 - ALTERATIONS AND EQUIPMENT
8.1 Tenant shall make no alterations, additions or improvements to the
Premises without the prior written consent of Landlord, and Landlord may impose
as a condition to such consent such requirements as Landlord in its sole
discretion may deem necessary or desirable, including, but not limited to ,
requirements as to the manner in which, and the time or times at which, such
work shall be done, the right to approve the contractor selected by Tenant to
perform such work, and the right to require Tenant to furnish Landlord (prior to
commencing or performing any such work) with demolition and/or lien and
completion bonds in form and amount satisfactory to Landlord. All such
alterations, additions or improvements shall become the property of Landlord and
shall be surrendered with the Premises, as a part thereof, at the end of the
term hereof, except that Landlord may, by written notice to Tenant given at
least thirty (30) days prior to the end of term, require Tenant to remove all or
any portion of any partitions, counters, railings, and other improvements
installed by Tenant, and to repair any damage to the Premises from such removal,
all at Tenant's sole expense.
8.2 All articles of personal property and all business and trade fixtures,
machinery and equipment, cabinet work, furniture and movable partitions owned by
Tenant or installed by Tenant at its expense in the Premises shall be and remain
the property of Tenant and may be revoked by Tenant at any time during the lease
term when Tenant is not in default hereunder, provided that Tenant promptly
repairs at Tenant's expense any damage to the Premises or the Building caused by
such removal. On the expiration of the term of this Lease, or on any earlier
termination of this Lease, Tenant shall remove all such personal property and
other items in accordance with the provisions of Article 21 below.
ARTICLE 9 - LIENS
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Tenant shall keep the Premises and the Building free from any mechanic's,
materialmen's, or other liens arising out of any work performed, materials
furnished or obligations incurred by Tenant, and agrees to defend, indemnify and
hold harmless Landlord from any against any such lien or claim or action
thereon, together with costs of suit and reasonable attorneys' fees incurred by
Landlord in connection with any such claim or actions.
ARTICLE 10 - TAX ON TENANT'S PROPERTY
10.1 Tenant shall be liable for and shall pay not later than ten (10) days
before delinquency, all taxes levied against any personal property or trade
fixtures placed by Tenant in or about the Premises. If any such taxes on
Tenant's personal property or trade fixtures are levied against Landlord or
Landlord's property and if Landlord, after written notice to Tenant, pays the
same, which Landlord shall have the right to do regardless of the validity of
such levy, but only under proper protest if requested by Tenant, or if the
assessed value of Landlord's property is increased by the inclusion therein of a
value placed upon such personal property or trade fixtures of Tenant and if
Landlord, after written notice to Tenant, pays the taxes based upon such
increased assessment, which Landlord shall have the right to do regardless of
validity thereof, but only under proper protest if requested by Tenant. Tenant
shall upon demand, as the case may be, repay to Landlord the taxes so levied
against Landlord, or the proportion of such taxes resulting from such increase
in the assessment; provided that, in any such event Tenant shall have the right,
in the name of Landlord and with Landlord's full cooperation, but at no cost to
Landlord, to bring suit in any court of competent jurisdiction to recover the
amount of any such taxes so paid under protest, any amount so recovered to
belong to Tenant.
8
10.2 If the tenant improvements in the Premises, whether installed or paid
for by Landlord or Tenant and whether or not affixed to the real property so as
to become a part thereof, are assessed for real property tax purposes at a
valuation higher than the valuation at which tenant improvements conforming to
Landlord's building standard construction in other space in the Building are
assessed, then the real property taxes and assessments levied against Landlord
or Landlord's property be reason of such excess assessed valuation shall be
deemed to be taxes levied against Landlord or Landlord's property by reason of
such excess assessed valuation, shall be deemed to be taxes levied against
personal property of Tenant and shall be governed by the provisions of Section
10.1 above.
ARTICLE 11 - MAINTENANCE AND REPAIR
11.1 Subject to the provisions of Section 11.2 below, Tenant shall keep in
good order, condition and repair the Premises and fixtures therein and, subject
to the provisions of Article 17 and Article 18 below, shall reimburse landlord
for all repairs thereto or to the Building which are made necessary as a result
of any misuse or neglect by Tenant or any of its officers, agents, employees,
contractors, licensees, visitors, guests or invitees.
11.2 Subject to the provisions of Article 17 and Article 18 hereof Landlord
shall repair and maintain the structural components of the Building and public
areas, and all components of the plumbing, air conditioning and electrical
systems serving the Premises that are concealed or used in common by tenants of
the Building, Landlord shall not be liable for any failure to make any repairs
or to perform any maintenance unless such failure shall persist for an
unreasonable time after written notice of the need for such repairs or
maintenance is received by Landlord. Except as provided in Article 17 and
Article 18 hereof, there shall be no abatement of rent and no liability of
Landlord by reason of any injury to or interference with Tenant's business
arising from the making of any repairs, alterations or improvements; provided,
however, that in making such repairs, alterations or improvements, Landlord
shall interfere as little as reasonably practicable with the conduct of Tenant's
business in the Premises. Tenant waives the
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benefit of any present or future law which might give Tenant the right to repair
the Premises at Landlord's expense or to terminate the Lease because of the
condition of the Premises or the Building.
ARTICLE 12 - ENTRY AND INSPECTION
Tenant will permit Landlord and its agents at all reasonable times during
normal business hours and at any time in case of emergency, in such manner as to
cause as little disturbance to Tenant as reasonable practicable, to enter into
and upon the Premises for the purpose of inspecting the same, or for the purpose
of protecting the interest therein of Landlord, and to take all required
materials and equipment into the Premises, and perform all required work
therein, including the erection of scaffolding, props, or other mechanical
devices, for the purpose of making alterations, repairs or additions to the
Premises or to any other portion of the Building in which the Premises are
situated as may be provided for by this Lease or as may be mutually agreed upon
the parties or as Landlord may be required to make by law or for maintaining any
service provided by Landlord to Tenant hereunder, including window cleaning and
janitor service, without any rebate of rent to Tenant for any loss of occupancy
or quiet enjoyment of the Premises, or damage, injury or inconvenience thereby
occasioned. Tenant shall also permit Landlord and its agents, upon request, to
enter or pass through the Premises or any part thereof, at reasonable times
during normal business hours to show the Premises to holders of encumbrances on
the interest of Landlord under the Lease, or prospective purchasers, mortgagees
or lessees of the Building as an entirety, and during the period of six (6)
months prior to the expiration date of this Lease, Landlord may exhibit the
Premises to prospective tenants. Landlord shall also have the right to enter on
or pass through the Premises, or any part thereof, at such times as such entry
shall be required by circumstances of emergency affecting the Premises or any
other portion of the Building in which the Premises are located. If during the
last month of the term hereof, Tenant shall have removed substantially all of
the Tenant's property and personnel from the Premises, Landlord may enter the
Premises and repair, alter and redecorate the same, without abatement of rent
and without liability to Tenant, and such acts shall have no effect on this
Lease.
9
ARTICLE 13 - HOLD HARMLESS AND NON-LIABILITY
Tenant agrees to hold harmless and indemnify Landlord and any and all
principals and affiliates of Landlord, including without limitation any
corporations or other entities controlling, controlled by or under common
control with Landlord, from and against any and all loss, cost, damage,
liability, claim or expense (including without limitation attorneys' fees and
costs) arising from or related to the use and occupancy of the Premises by
Tenant or by anyone claiming through Tenant; the conduct of Tenant's business;
any breach or default under this Lease; claims by any assignee, subtenant,
sublessee or other person, if Landlord declines to consent to any assignment,
sublease or other transfer or encumbrance or terminates this lease pursuant to
the provisions hereof; and any other acts or omissions of Tenant or of anyone
claiming through or under Tenant. Tenant assumes the risk of all such matters
and waives all claims against Landlord and all principals and affiliates of
Landlord in connection therewith, except for matters caused solely by Landlord's
negligence or willful misconduct. Throughout the term of this Lease, Tenant
shall maintain in effect public liability and property damage insurance with
limits of liability of not less than $1,000,000 combined single limit, showing
Landlord as an additional insured under each policy of insurance, and each such
policy of insurance shall provide that it may not be canceled or modified
without 30 days' prior written notice to Landlord. Such insurance shall be with
companies and in a form acceptable to Landlord. Tenant shall provide Landlord
with each original policy or a certificate thereof and proof of payment therefor
prior to the commencement of the term of this Lease and at least thirty (30)
days prior to expiration of any such policy. Except as expressly set forth
above, Landlord shall have no liability to Tenant for any damage to the Premises
or for any loss, damage or injury to property of Tenant therein or thereon
occasioned by bursting, rupture, leakage or overflow of any plumbing or other
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pipe (including but not limited to water, steam or refrigerant lines),
sprinklers, tanks, drains, drinking fountains or washstands or other similar
causes, whether in, above, upon or about the Premises or the Building in which
the Premises are located.
ARTICLE 14 - WAIVER OF SUBROGATION
Each policy of insurance which Tenant obtains for the Premises and which
Landlord obtains for the Building shall include a clause or endorsement denying
the insurer any right of subrogation against the other party hereto to the
extent rights have been waived by the insured party prior to the occurrence of
injury or loss. If this endorsement is unobtainable without additional premium
or charge, then the insured party shall immediately notify the other party and
the other party shall have the right to pay the additional premium or charge for
this endorsement. Landlord and Tenant each waive any rights of recovery against
the other for injury or loss due to hazards covered by its own insurance, to the
extent of the injury or loss covered thereby.
ARTICLE 15 - ASSIGNMENT AND SUBLETTING
15.1 Tenant shall not, either voluntarily or by operation of law, assign,
sell, encumber, pledge or otherwise transfer all or any part of Tenant's
leasehold estate hereunder, or permit the Premises to be occupied by anyone
other than Tenant or Tenant's employees or sublet the Premises or any portion
thereof, without Landlord's prior written consent in each instance, which
consent shall not be unreasonably withheld. Consent by Landlord to one or more
assignments of this Lease or to one or more sublettings of the Premises shall
not constitute a consent to any future or other assignment or subletting to
exhaust Landlord's rights under this paragraph. The voluntary or other surrender
of this Lease by Tenant or mutual cancellation hereof shall not work a merger,
and shall, at the option of Landlord, terminate all or any existing subleases or
subtenancies or shall operate as an assignment to Landlord of such subleases or
subtenancies. If Tenant is a corporation which, under the then current
guidelines published by the Commissioner of Corporations of the State of
Arizona, is not deemed a public corporation, or is an unincorporated association
or partnership, the transfer, assignment or hypothecation of any stock or
interest in such corporation, association, or partnership in the aggregate in
excess of twenty-five percent (25%) shall be deemed an assignment within the
meaning and provisions of this Article 15. Tenant agrees to reimburse Landlord
for Landlord's reasonable costs and attorneys' fees incurred in connection with
the processing and documentation of any such required assignment, subletting,
transfer, change of ownership or hypothecation of this Lease or Tenant's
interest in and to
10
the Premises.
15.2 If Tenant desires at any time to assign this Lease or to sublet the
Premises or any portion thereon it shall first notify Landlord of its desire to
do so and submit in writing to Landlord: (i) the name of the proposed subtenant
or assignee; (ii) the nature of the proposed subtenant's or assignee's business
to be carried on in the Premises; (iii) the terms and provisions of the proposed
sublease or assignment; and (iv) such reasonable financial information as
Landlord may request concerning the proposed subtenant or assignee.
15.3 At any time within ten (10) days after Landlord's receipt of the
information specified in Section 15.2 above, Landlord may, by written notice to
Tenant, elect to (i) consent to the subletting or assignment upon the terms and
to the subtenant or assignee proposed; (ii) refuse to give its consent; (iii)
sublease the Premises or the portion thereof so proposed to be subleased by
Tenant or take an assignment of Tenant's leasehold estate hereunder or such part
thereof as shall be specified in said notice upon the same terms (excluding
terms relating to the use of Tenant's name or the continuation of
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Tenant's business) as those offered to the proposed subtenant or assignee, as
the case may be; or (iv) terminate this Lease as to the portion (including all)
of the Premises so proposed to be subleased or assigned with a proportionate
abatement in the rent payable hereunder. Tenant agrees that no assignment or
subletting consented to by Landlord shall impair or diminish any covenant,
condition or obligation imposed upon Tenant by this Lease or any right, remedy
or benefit afforded Landlord by this Lease. If Landlord consents to such
assignment or subletting, Tenant may, within ninety (90) days after the date of
Landlord's consent, enter into a valid assignment or sublease of the Premises or
portion thereof upon the terms and conditions described in the information
required to be furnished by Tenant to Landlord pursuant to Section 15.2 above,
or upon other terms not more favorable to Tenant; provided, however, that any
material change in such terms shall be subject to Landlord's consent as provided
in this Article 15. Failure of Landlord to exercise any option set forth in
clauses (i) through (iv) above in this Paragraph 15.3 within such ten (10) day
period shall be deemed a refusal of Landlord to consent to the proposed
subletting or assignment.
15.4 No subletting or assignment, even with the consent of Landlord, shall
relieve Tenant of its obligations to pay the rent and to perform all of the
other obligations to be performed by Tenant hereunder, and no such subletting or
assignment shall require Landlord to accept a subtenant or assignee of Tenant as
a tenant under this Lease in the event of a default by Tenant hereunder. The
acceptance by Landlord of any payment due hereunder from any other person shall
not be deemed to be a waiver by Landlord of any provisions of this Lease or to
be a consent to any assignment or subletting.
ARTICLE 16 - TRANSFER OF LANDLORD'S INTEREST
In the event of any transfer or transfers of Landlord's interest in the
Premises or in the real property of which the Premises are a part, other than a
transfer for security purposes only, the transferor shall be automatically
relieved of any and all obligations and liabilities on the part of Landlord
accruing from and after the date of such transfer, including without limitation,
the obligations of Landlord under Article 4 above to return the security deposit
as provided therein, provided such obligations and liabilities are assumed in
writing by the transferee.
ARTICLE 17 - DAMAGE OR DESTRUCTION
17.1 If the Premises are damaged by any casualty, the damage shall be
repaired by and at the expense of Landlord, provided (a) such repairs are
permitted by applicable laws, ordinances and other legal requirements and (b)
such repairs can, in Landlord's opinion, be made within one (1) year after
notice to Landlord of the occurrence of such damage without the payment of
overtime or other premiums. If Landlord is required to make repairs, as set
forth above, then, except as set forth hereinbelow, until such repairs are
completed, the Tent shall be abated in proportion to the part of the Premises
which is unusable by Tenant in the conduct of its business. There shall be no
abatement of rent by reason of any portion of the Premises being unusable for a
period equal to one day or less.
17.2 If such repairs cannot, in Landlord's opinion, be made within such one
(1) year period, Landlord may, at its option, make them within a reasonable time
and in such event this Lease shall continue in effect and the rent shall be
abated in the manner and to the extent provided above. Landlord's election to
make such repairs must be evidenced by written notice to Tenant within thirty
(30) days after notice to Landlord of the occurrence of the damage advising
Tenant whether or not Landlord will make such repairs and the estimated time for
completing the same. If Landlord does not so elect to make such repairs which
cannot be made within such one (1) year period, then either party may be written
notice to the other cancel this Lease as of the date of the occurrence of such
damage.
17.3 In case of any damage or destruction mentioned in this Article 17
which Landlord is required or undertakes to repair as provided herein, Tenant
may terminate this Lease by notice to Landlord any time
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prior to completion of the required repairs if Landlord has not restored and
rebuilt the Premises (exclusive of any property of Tenant or improvements
installed by Tenant located therein) to substantially the same condition as
existed immediately prior to such damage or destruction within one (1) year
after notice to Landlord of the occurrence of such damage or destruction, or
such longer period as Landlord has estimated pursuant to Paragraph 17.2, plus
such additional period thereafter as shall equal the aggregate period Landlord
may have been delayed in doing so by acts of God, adjustment of insurance, labor
trouble, governmental controls, unavailability of materials, or any other cause
beyond Landlord's reasonable control.
17.4 No damages, compensation or claim shall be payable by Landlord for
inconvenience, loss of business or annoyance or otherwise arising from any
repair or restoration of any portion of the Premises or other portion of the
Building. Landlord shall use reasonable efforts to effect such repair or
restoration promptly and to avoid unreasonable interference with Tenant's use
and occupancy.
17.5 Landlord shall not be required to carry insurance of any kind on
Tenant's property and shall not be obligated to repair any damage thereto or to
replace the same.
17.6 If the entire Building is destroyed by casualty, or any part of the
Building other than the Premises is damaged by casualty to the extent that
repairs cannot, in Landlord's opinion, be completed within one (1) year after
the date of such damage, Landlord, at its option, may cancel this Lease as of
the date of the occurrence of such destruction or damage by written notice to
Tenant.
ARTICLE 18 - EMINENT DOMAIN
18.1 If the whole of the Premises, or so much thereof as to render the
balance unusable by Tenant shall be taken under power of eminent domain, this
Lease shall automatically terminate as of the date of such condemnation, or as
of the date possession is taken by the condemning authority, whichever is later.
No aware for any partial or entire taking shall be apportioned, and Tenant
hereby assigns to Landlord any aware which may be made in such taking or
condemnation, together with any and all rights of Tenant now or hereafter
arising in or to the same or any part thereof, provided, however, that nothing
contained herein shall be deemed to give Landlord any interest in or to require
Tenant to assign to Landlord any award made to Tenant for the taking of personal
property and fixtures belonging to the Tenant or for the interruption of or
damage to Tenant's business or for Tenant's unamortized cost of leasehold
improvements.
18.2 In the event of a partial taking which does not result in a
termination of this Lease, rent shall be abated in proportion to the part of the
Premises so made unusable by Tenant.
18.3 No temporary taking of the Premises of Tenant's rights therein or
under this Lease shall terminate this Lease or give Tenant any right to any
abatement of rent hereunder; any award made to Tenant by reason of any such
temporary taking shall belong entirely to Tenant and Landlord shall not be
entitled to share therein.
ARTICLE 19 - RELOCATION
If the Premises contain less than three thousand (3,000) square feet of
rentable area, Landlord shall
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have the right, at its option, upon at least thirty (30) days' written notice to
Tenant, to relocate Tenant and to substitute for the Premises described above
other space in the Building containing at least as much rentable area as the
original Premises. Such substituted premises shall be improved by Landlord at
its expense, with decorations and improvements at least equal in quantity and
quality to those in the original
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Premises. Landlord shall pay the following expenses, to the extent reasonably
incurred by Tenant in connection with such substitution of Premises: costs of
moving, door lettering, telephone relocation and reasonable quantities of new
stationery.
ARTICLE 20 - DEFAULTS AND REMEDIES
20.1 The occurrence of any of the following shall constitute a material
default and breach of this Lease by Tenant:
(a) Any failure by Tenant to pay the rent or to make any other payment
required to be made by Tenant hereunder;
(b) The abandonment or vacation of the Premises by Tenant;
(c) Any failure by Tenant to observe and perform any other provision
of this Lease to be observed or performed by Tenant, where such failure
continues for thirty (30) days (except where a different period of time is
expressly specified in this Lease) after written notice by Landlord to
Tenant; provided, however, that any such notice shall be in lieu of, and
not in addition to, any notice required under Section 1161, et seq., of the
California Code of Civil Procedure; or
(d) The making by Tenant of any general assignment for the benefit of
creditors; the filing by or against Tenant of a petition to have Tenant
adjudged a bankrupt or of a petition or reorganization or arrangement under
any law relating to bankruptcy or insolvency (unless, in the case of a
petition filed against Tenant, the same is dismissed within sixty (60)
days); the appointment of a trustee or receiver to take possession of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where possession is not restored to Tenant within
thirty (30) days; or the attachment, execution or other judicial seizure of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where such seizure is not discharged within thirty
(30) days.
20.2 In the event of any such default by Tenant, then, in addition to any
other remedies available to Landlord at law or in equity, Landlord shall have
the immediate option to terminate this Lease and all rights of Tenant hereunder
by giving Tenant written notice of such election to terminate. In the event that
Landlord shall elect to so terminate this Lease, then Landlord may recover from
Tenant:
(a) The worth at the time of award of any unpaid rent which had been
earned at the time of such termination; plus
(b) 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 aware
exceeds the amount of such rental loss Tenant proves could have been
reasonably avoided; plus
c) The worth at the time of award of the amount by which the unpaid
rent for the balance of the term after the time of award exceeds the amount
of such rental loss that Tenant proves could be reasonably avoided; plus
(d) Any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely
to result therefrom; and
(e) At Landlord's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by applicable
law.
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13
The term "rent" as used herein shall be deemed to be and to mean the Basic
Rent, additional rent and all other sums required to be paid by Tenant pursuant
to the terms of this Lease.
As used in subparagraphs (a) and (b) above, the "worth at the time of
award" is computed by allowing interest at the rate of one percent (1%) per
month. As used in subparagraph (c) above, the "worth at the time of award" is
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award plus one percent (1%).
20.3 In the event of any such default by Tenant, Landlord shall have all
rights and remedies available to it under the prevailing law, with or without
terminated this Lease, to re-enter the Premises and remove all persons and
property from the Premises, such property may be removed and stored in a public
warehouse or elsewhere at the cost of the Tenant.
20.4 In the event of the vacation or abandonment of the Premises by Tenant
or in the event that Landlord shall elect to re-enter as provided above or shall
take possession of the Premises pursuant to legal proceeding or pursuant to any
notice provided by law and Landlord does not elect to terminate this Lease as
provided in this Article 20, then Landlord may, from time to time, without
terminating this Lease, either recover all rent as it becomes due or relet the
Premises or any part thereof for such term or terms and at such rent and upon
such other term and conditions as Landlord in its sole discretion may deem
advisable with the right to make alterations and repairs to the Premises;
provided that if Landlord elects to recover such rent as it becomes dues without
terminating this Lease pursuant to this Paragraph 20.4, Landlord will not
unreasonably withhold its consent to a subletting or assignment by Tenant.
20.5 In the event that Landlord shall elect to so relet, then rent received
by Landlord from such reletting shall be applied as follows: first to the
payment of any indebtedness other than rent due hereunder from Tenant to
Landlord; second, to the payment of any cost of such reletting; third, to the
payment of the cost of any alterations and repairs to the Premises; fourth, to
the payment of-rent due and unpaid hereunder; and the residue, if any, shall be
held by Landlord and applied in payment of future rent as the same may become
due and payable hereunder. Should that portion of such rent received from such
reletting, during any month to which it is applied by the payment of rent
hereunder, be less than the rent payable during that month by Tenant hereunder,
then Tenant shall pay such deficiency to Landlord immediately upon demand
therefor by Landlord. Such deficiency shall be calculated and paid monthly.
Tenant shall also pay to Landlord, as soon as ascertained, any costs and
expenses incurred by Landlord in such reletting or in making such alterations
and repairs not covered by the rent received from such reletting.
20.6 No re-entry or taking possession of the Premises by Landlord pursuant
to this Article 19 shall be construed as an election to terminate this Lease
unless a written notice of such intention is given to Tenant or unless the
termination thereof is decreed by a court of competent jurisdiction.
Notwithstanding any reletting without termination by Landlord because of any
default by Tenant, Landlord may at any time after such reletting elect to
terminate this Lease for any such default.
20.7 In the event of the material default of the Tenant hereunder, Landlord
shall have the right, at Landlord's option, to suspend or discontinue the
services specified in Article 5 above, or any thereof, during the continuance of
any such default and any such suspension or discontinuance shall not be deemed
or construed to be an eviction or ejection of Tenant.
ARTICLE 21 - SURRENDER OF PREMISES; REMOVAL OF PROPERTY
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21.1 The voluntary or other surrender of this Lease by Tenant to Landlord,
or a mutual termination thereof, shall not work a merger, and shall, at the
option of Landlord, operate as an assignment to it of any or all subleases or
subtenancies affecting the Premises.
21.2 Upon the expiration of the term of this Lease, or upon any earlier
termination of this Lease, Tenant shall quit and surrender possession of the
Premises to Landlord in as good order and condition as the same are now or
hereafter may be improved by Landlord or Tenant, reasonable wear and tear and
repairs which are Landlord's obligation excepted, and shall, without expense to
Landlord,
14
remove or cause to be removed from the Premises all debris and rubbish,
furniture, equipment, business and trade fixtures, free-standing cabinet work,
movable partitioning and other articles of personal property owned by Tenant or
installed or replaced by Tenant at its expense in the Premises (exclusive of any
items described in Paragraph 21.4 below), and all similar articles of any other
persons claiming under Tenant, unless Landlord exercises its option to have any
subleases or subtenancies assigned to it, and Tenant shall repair all damages to
the Premises resulting from such removal.
21.3 Whenever Landlord shall re-enter the Premises as provided in Article
20 hereof, or as otherwise provided in this Lease, any property of Tenant not
removed by Tenant upon the expiration of the term of this Lease (or within
forty-eight (48) hours after a termination by reason of Tenant's default), as
provided in this Lease, shall be considered abandoned and Landlord may remove
any or all of such items and dispose of the same in any manner or store the same
in a public warehouse or elsewhere for the account and at the expense and risk
of Tenant, and if Tenant shall fail to pay the cost of storing any such property
after it has been stored for a period of ninety (90) days or more, Landlord may
sell any or all of such property at public or private sale, in such manner and
at such times and places as Landlord, in its sole discretion, may deem proper,
without notice to or demand upon Tenant, for payment of all or any part of such
charges or the removal of any such property, and shall apply the proceeds of
such sale; first, to the cost and expenses of such sale, including reasonable
attorneys' fees actual incurred; second, to the payment of the cost of, or
charges for, storing any such property; third, to the payment of any other sums
of money which may then or thereafter be due to Landlord from Tenant under any
of the terms hereof; and fourth, the balance, if any, to Tenant.
21.4 All fixtures, equipment, alterations, additions, improvements or
appurtenances attached to or built into the Premises prior to or during the term
of this I-ease, whether by Landlord at its expense of Tenant or both, shall be
and remain part of the Premises and shall not be removed by Tenant at the end of
the term unless otherwise expressly provided for in this Lease or unless such
removal is required by Landlord pursuant to the provisions of Article 8 above.
Such fixtures, equipment, alterations, additions, improvements or appurtenances
shall include, but not be limited to: all floor coverings, drapes, paneling,
molding, doors, vaults (exclusive of vault doors), plumbing systems, electrical
systems, lighting systems, silencing equipment, communication systems, fixtures
and outlets for the systems mentioned above and for telephone, radio, telegraph
and television purposes, and any special flooring or ceiling installations.
ARTICLE 22 - WAIVER OF DAMAGES FOR RE-ENTRY
Tenant hereby waives all claims for damages that may be caused by
Landlord's re-entering and taking possession of the Premises or removing and
storing the property of Tenant as herein provided, and Tenant shall hold
Landlord harmless thereby, and no such re-entry shall be considered to be a
forcible entry.
ARTICLE 23 - COSTS OF SUIT
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23.1 If Tenant or Landlord shall bring any action for any relief against
the other, declaratory or otherwise, arising out of or under this Lease,
including any suit by Landlord for the recovery of rent or possession for the
Premises, the prevailing party shall be entitled to a reasonable sum for
attorneys' fees in such suit and such attorneys' fees shall be deemed to have
accrued on the commencement of such action and shall be paid whether or not such
action is prosecuted to judgment.
23.2 Should Landlord, without fault on Landlord's part, be made a party to
any litigation instituted by Tenant, or by any third party against Tenant, or by
or against any person holding under or using the Premises by license of Tenant,
or for the foreclosure of any lien for labor or material furnished to or for
"Tenant, or by any such other person or otherwise arising out of or resulting
from any act or transaction of Tenant or of any such other person, Tenant
covenants to save and hold Landlord harmless from any liability, loss, cost,
damage, expense or judgment rendered against Landlord or the Premises or any
part thereof, and costs and expense, including reasonable attorneys' fees,
incurred by Landlord in or in connection with such litigation.
ARTICLE 24 - WAIVER
The waiver by Landlord or Tenant of any breach of any term, covenant or
condition herein contained shall not be deemed to be a waiver of such term,
covenant or condition as to any subsequent breach of the same or any other term,
covenant or condition herein contained. The subsequent acceptance of rent
hereunder by Landlord shall not be deemed to be a waiver of any preceding breach
of Tenant of any term, covenant or condition of this Lease, other than the
failure of Tenant to pay the particular rental so accepted, regardless of
Landlord's acknowledge of such preceding breach at the time of acceptance of
such rent.
ARTICLE 25 - HOLDING OVER
If Tenant holds over after the term hereof, with the express consent of
Landlord, such tenancy shall be from month-to-month only, and not a renewal
hereof or any extension for any further term, and in such case rent shall be
payable at the rate of one hundred fifty percent (150%) of the rent due for the
last month of the term of this Lease and such month-to-month tenancy shall be
subject to every other term, covenant and agreement contained herein. Nothing
contained in this Article 25 shall be construed as consent by Landlord to any
holding over by Tenant and Landlord expressly reserves the right to require
Tenant to surrender possession of the Premises to Landlord as provided in
Article 21 above forthwith upon the expiration of the term of this Lease or
other termination of this Lease.
ARTICLE 26 - SUBORDINATION; PROTECTION OF LENDERS
26.1 Landlord shall have the right to subordinate this Lease to any ground
lease, deed of trust or mortgage encumbering the Premises or the Project (or any
portion thereof), any advances made on the security thereof and any renewals,
modifications, consolidations, replacements or extensions thereof, whenever made
or recorded. However, Tenant's right to quiet possession of the Premises during
the Lease term shall not be disturbed if Tenant pays the rent and performs all
of Tenant's obligations under this Lease and is not otherwise in default. If any
ground lessor, beneficiary or mortgagee elects to have this Lease prior to the
lien of its ground lease, deed of trust or mortgage and gives written notice
thereof to Tenant, this Lease shall be deemed prior to such ground lease, deed
of trust or mortgage whether this Lease is dated prior or subsequent to the date
of said ground lease, deed of trust or mortgage or the date of recording
thereof.
26.2 If Landlord's interest in the Premises is acquired by any ground
lessor, beneficiary under a deed of trust, mortgagee, or purchaser at a
foreclosure sale, Tenant shall attorn to the transferee of or successor to
Landlord's interest in the Premises and recognize such transferee or successor
as Landlord
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under the Lease. Tenant waives the protection of any statute or rule or law
which gives or purports to give Tenant any right to terminate this Lease or
surrender possession of the Premises upon the transfer of Landlord's interest.
26.3 Tenant shall sign and deliver any instrument or documents necessary or
appropriate to evidence any such attornment or subordination or agreement to do
so, on a form satisfactory to Landlord's lender. If Tenant fails to do so within
ten (10) days after written request, Tenant hereby makes, constitutes and
irrevocably appoints Landlord, or any transferee or successor of Landlord, as
the attorney-in-fact of Tenant to execute and deliver any such instrument of
document.
ARTICLE 27 - RULES AND REGULATIONS
The Rules and Regulations attached hereto as Exhibit "B" are hereby
incorporated herein by this reference and made a part hereof. Tenant agrees to
abide by and comply with said Rules and Regulations and any reasonable and
non-discriminatory amendments, modifications or additions thereto as may
hereafter be adopted and published by written notice to Tenant by Landlord.
Landlord shall not be liable to Tenant for any violation of such Rules and
Regulations by any other tenant or person.
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Tenant shall be responsible for all acts of its employees and a violation
of the Rules and Regulations (including those dealing with security) by any of
Tenant's employees shall constitute a material breach of this Lease by Tenant.
ARTICLE 28 - DEFINED TERMS
The word "Landlord" and "Tenant" as used herein, shall include the plural
as well as the singular. Words used in neuter gender include the masculine and
feminine and words in the masculine or feminine gender include the neuter. If
there be more than one Tenant, the obligation hereunder imposed upon Tenant
shall be joint and several. The headings or titles to the articles of this Lease
are not a part of this Lease and shall have no effect upon the construction or
interpretation of any part thereof.
ARTICLE 29 - HEIRS AND ASSIGNS
Subject to the provisions of Article 15 hereof relating to assignment and
subletting, this Lease is intended to and does bind the heirs, executors,
administrators, personal representatives, successors and assigns of any and all
of the parties hereto.
ARTICLE 30 - TIME OF ESSENCE
Time is of the essence in this Lease.
ARTICLE 31 - ENTIRE AGREEMENT
This instrument along with any exhibits and attachments or other documents
affixed hereto or referred to herein constitutes the entire and exclusive
agreement between Landlord and Tenant relative to the Premises herein described,
and this agreement and said exhibits and attachments and other documents may be
altered, amended or revoked only by an instrument in writing signed by both
Landlord and Tenant. Landlord and Tenant hereby agree that all prior or
contemporaneous oral agreements,
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understandings, or practices relative to the leasing of the Premises are merged
in and revoked by this agreement.
ARTICLE 32 - WORK LETTER
If an Exhibit "C", Work Letter, is attached to this Lease and is initialed
by both parties, then the Premises shall be finished in accordance with the Work
Letter.
ARTICLE 33 - RIGHT OF LANDLORD TO PERFORM
All covenants and agreements to be performed by Tenant under any of the
terms of this Lease shall be performed by Tenant at Tenant's sole cost and
expense and without any abatement of rent. If Tenant shall fail to pay any sum
of money, other than rent, required to required to be paid by it hereunder or
shall fail to perform any other act on its part to be performed hereunder, and
such failure shall continue beyond any applicable grace period set forth in
Article 20, Landlord may, but shall not be obligated so to do, and without
waiving or releasing Tenant from any obligations of Tenant, make any such
payment or perform any such other act on Tenant's part to be made or performed
as in this lease provided. All sums so paid by Landlord and all necessary
incidental costs, together with interest thereon at the rate hereinafter
provided, from the date of such payment by Landlord, shall be payable to
Landlord on demand and Tenant covenants to pay any such sums, and Landlord shall
have (in addition to any other right or remedy of Landlord) the same rights and
remedies in the event of nonpayment thereof by Tenant as in the case of default
by Tenant in the payment of the rent.
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ARTICLE 34 - INTEREST ON TENANT'S OBLIGATIONS
Any amount due from Tenant to Landlord which is not paid when due shall
bear interest at the ratio of twelve percent (12%) per year until paid, but the
payment of such interest shall not excuse or cure the default.
ARTICLE 35 - NOTICE
All notices which Landlord or Tenant may be required, or may desire, to
serve on the other may be served, as an alternative to personal service, by
mailing the same by registered or certified mail, postage prepaid, addressed as
set forth in Item 14 of the Basic Lease Provisions, or, from and after the
Commencement Date, to the Tenant at the Premises whether or not Tenant has
departed from, abandoned or vacated the Premises, or addressed to such other
address or addresses as either Landlord or Tenant may from time to time
designate to the other in writing.
ARTICLE 36 - QUIET ENJOYMENT
Landlord covenants and agrees that Tenant, upon paying the Basic Rent,
additional rent and all other charges herein provided for and observing and
keeping the covenants, agreements and conditions of this Lease on its part to be
kept, shall lawfully and quietly hold, occupy and enjoy the Premises during the
term of this Lease without hindrance or molestation of anyone lawfully claiming
by, through or under Landlord, subject, however, to the matters herein set
forth.
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ARTICLE 37 - ESTOPPEL CERTIFICATES
37.1 Tenant agrees at any time and from time to time upon not less than ten
(10) days' prior notice by Landlord to execute, acknowledge and deliver to
Landlord a statement in form and substance of Exhibit "D" attached hereto
certifying that this Lease is unmodified and in full force and effect (or if
there have been modifications, that the same is in full force and effect as
modified and stating the modifications), and the dates to which the Basic Rent,
additional rent and other charges have been paid in advance, if any, and stating
whether or not to the best knowledge of the signer of such certificate, Landlord
is in default in performance of any covenant, agreement or condition contained
in this Lease and, if so, specifying each such default of which the signer may
have knowledge, it being intended that any such statement delivered pursuant to
this Paragraph 37.1 may be relied upon by any prospective purchaser of the
Building or any mortgagee thereof or any assignee of any mortgage upon the
Building.
37.2 Landlord agrees at any time and from time to time upon not less than
ten (10) days' prior notice by Tenant to execute, acknowledge and deliver to
Tenant a statement in writing certifying that this Lease is unmodified and in
full force and effect (or if there shall have been modifications that the same
is in full force and effect as modified as stating the modifications) and the
dates to which the basic Rent, additional rent and other charges have been paid
in advance, if any, and stating whether or not to the best knowledge of the
signer of such certificate Tenant is in default in the performance of any
covenant, agreement or condition contained in this Lease and , if so, specifying
each such default of which the signer may have knowledge, it being intended that
any such statement delivered pursuant to this Paragraph 37.2 may be relied upon
by any prospective assignee of the Tenant's interest in this Lease.
ARTICLE 38 - ACCESS, CHANGES IN BUILDING FACILITIES, NAME
All except the inside surface of all walls, windows and doors bounding the
Premises (including exterior building walls, core corridor walls and doors and
any Core corridor entrance), and any space in or adjacent to the Premises used
for shafts, stacks, pipes, conduits, fan rooms, ducts, electric or other
utilities, sinks or other building facilities, and the use thereof, as well as
access thereto through the Premises for the purposes of operation, maintenance,
decoration and repair, are reserved to Landlord.
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ARTICLE 39 - NON-DISCRIMINATION
Tenant herein covenants by and for himself, his heirs, executors,
administrators, personal representatives, successors and assigns, and all
persons claiming under or through him, and this Lease is made and accepted upon
and subject to the following conditions: that there shall be no discrimination
against or segregation of any person or group of persons, on account of race,
color, creed, sex, national origin, or ancestry, in the leasing, sub-leasing,
transferring, use, occupancy, tenure or enjoyment of the Premises herein leased
nor shall Tenant, or any person claiming under or through Tenant, establish or
permit any such practice or practices of discrimination or segregation with
reference to the selection, location, number, use or occupancy of tenants,
lessees, subtenants, sublessees or vendees of the Premises.
ARTICLE 40 - BROKERS
The parties recognize as the broker(s) who procured this Lease the firm(s)
specified in Item 10 of the Basic Lease Provisions, and agree that Landlord
shall be solely responsible for the payment of brokerage commissions to the
specified Landlord's Broker, if any. If a Tenant's broker is named in Item 11 of
the Basic Lease, Landlord's Broker shall pay an appropriate portion of its
commission to Tenant's Broker is
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so provided in any agreement between Landlord's Broker and Tenant's Broker.
Nothing contained in this Lease shall impose any obligation on Landlord to pay
commission or fee to any party other than Landlord's Broker. If Tenant has dealt
with any other person or real estate broker with respect to leasing or renting
space in the Premises, Tenant shall be solely responsible for the payment of any
fee due to said person or firm and Tenant shall indemnify Landlord against any
liability, loss, cost, damage or expense (including attorneys' fees and costs)
with respect thereto.
ARTICLE 41 - APPLICABLE LAW
This Lease, and the rights and obligations of the parties hereto, shall be
construed and enforced in accordance with the laws of the State of Arizona.
ARTICLE 42 - COMMON AREAS
42.1 As used in this Lease, "Common Areas" shall mean all areas within the
Project which are available for the common use of tenants of the Project and
which are not leased or held for the exclusive use of Tenant or other tenants,
including, but not limited to, parking areas, driveways, sidewalks, loading
areas, access roads, corridors, landscaping and planted areas. Landlord may from
time to time change the size, location, nature and use of any of the Common
Areas, including converting Common Areas into leasable areas, constructing
additional parking facilities (including parking structures) in the Common
Areas, and increasing or decreasing Common Area land and/or facilities. Tenant
acknowledges that such activities may result in occasional inconvenience to
Tenant from time to time. Such activities and changes shall be expressly
permitted if they do not materially affect Tenant's use of the Property.
42.2 Tenant shall have the non-exclusive right (in common with other
tenants and all others to whom the Landlord has granted or may grant such
rights) to use the Common Areas for the purposes intended, subject to such
reasonable rules and regulations as Landlord may establish from time to time.
Tenant shall abide by such rules and regulations and shall use its best efforts
to cause others who use the Common Areas with Tenant's expressed or implied
permission to abide by Landlord's rules and regulations. At any time, Landlord
may close any Common Areas to perform any acts in and to the Common Areas as, in
Landlord's judgement, may be desirable to improve the Project. Tenant shall not,
at any time, interfere with the rights of Landlord, other tenants, or any other
person entitled to use the Common Areas.
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42.3 Landlord shall maintain the Common Areas in good order, condition and
repair and shall operate the Project, in Landlord's sole discretion, as a first
class commercial real property development. All costs incurred by Landlord for
the operation and maintenance of the Common Areas in the Project shall be
allocated by Landlord, in its discretion, among the buildings within the
Project. The Common Area costs allocated to the Building shall be included in
the Total Operating Expenses, pursuant to Paragraph 3.9(m). Common Area cost
include, but are not limited to, costs and expenses for the following: gardening
and landscaping; utilities, water and sewage charges; maintenance of signs
(other than Tenants' signs), premiums for liability, property damage, fire and
other types of casualty insurance on the Common Areas and worker's compensation
insurance; all real property taxes and assessment levied on or attributable to
the Common Areas and all Common Area improvements; all personal property taxes
levied on or attributable to personal property used in connection with the
Common Areas; straight-line depreciation on personal property owned by Landlord
which is consumed in the operation or maintenance of the (Common Areas; rental
or lease payments paid by Landlord for rented or leased personal property used
in the operation or maintenance of the Common Areas; fees for required licenses
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and permits; repairing, resurfacing, repaving, maintenance, painting, lighting,
cleaning, refuse removal, security and similar items; reserves for roof
replacement and exterior painting and other appropriate reserves; and a
reasonable allowance to Landlord for Landlord's supervision of the Common Areas
(not to exceed five percent (5 %) of the total of all other Common Area costs
for the year). Landlord may cause any or all of such services to be provided by
third parties. Common Area costs shall not include depreciation of real property
which forms part of the Common Area.
ARTICLE 43 - EXAMINATION OF LEASE
Submission of this instrument for examination or signature by Tenant does
not constitute a reservation of or option for Lease, and is not effective as a
Lease or otherwise until execution by and delivery to both Landlord and Tenant.
ARTICLE 44 - NO LIGHT, AIR OR VIEW EASEMENT
Any diminution or shutting off of light, air or view by any structure which
may be erected on lands adjacent to the Building shall in no way affect this
Lease or impose any liability on Landlord.
ARTICLE 45 - SIGNS AND AUCTIONS
Tenant shall not place any sign upon the Premises or Building or conduct
any auction thereon without Landlord's prior written consent. Landlord shall
provide directory signage to Tenant at Landlord's expense.
ARTICLE 46 - COVENANTS, CONDITIONS AND RESTRICTIONS
The Project and the Premises are subject to certain matters, covenant,
conditions, restrictions, easements, rights of way and development agreement.
Tenant agrees to be bound by all matters affecting the Premises or the Project
or any portion thereof, whether apparent or of record, including without
limitation the foregoing covenants, conditions and restrictions, together with
any amendments thereto.
ARTICLE 47 - INVALIDITY
The parties hereto agree that the terms and provisions of this Lease
express the intent of their agreement as fully as possible; however, the
invalidity or unenforceability of any term of provision hereof (except for
Tenant obligations to pay Basic Rent under Item 5 of the Basic Lease Provisions
hereof) shall not affect or impair any other term or provision hereof.
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ARTICLE 48 - CUMULATIVE RIGHTS
All rights, options and remedies of Landlord contained in this Lease shall
be construed and held to be cumulative, and no one of them shall be exclusive of
the other, and Landlord shall have the right to pursue any one or all of such
remedies or any other remedy or relief which may be provided by law or equity,
whether or not stated in this Lease.
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ARTICLE 49 - ACCORD AND SATISFACTION, RECEIPT OF MONEY
No payment by Tenant or receipt by Landlord of a lesser amount than the
rent herein stipulated shall be deemed to be other than on account of the
earliest Basic Rent and/or additional rent due and not yet paid, nor shall any
endorsement or statement on any check or any letter accompanying any check or
payment as rent be deemed an accord and satisfaction, and Landlord may accept
such check or payment without prejudice to Landlord's right to recover the
balance of such rent or pursue any other remedy in the Lease. No receipt of any
money by Landlord from Tenant after the termination of this Lease, after the
service of any notice, after the commencement of any suit, or after final
judgement for possession of the Premises, shall reinstate, continue or extend
the term of this Lease or affect any such notice, demand, suit or judgment.
ARTICLE 50 - NO MEMORANDUM
Tenant shall not record this Lease or any memorandum or short form thereof.
ARTICLE 51 - LATE CHARGE
Tenant acknowledges that late payment of rent due hereunder (including
without limitation Basic Rent and additional rent) will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which are extremely
difficult to ascertain. These costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed on Landlord by
others. Accordingly, if any installment of Basic Rent or additional rent or any
other amounts due form Tenant is not received by Landlord or Landlord's designee
within ten (10) days after the amount is due, Tenant shall pay to Landlord a
late charge equal to ten percent (10%) of the overdue amount. Acceptance of late
charges by Landlord shall not constitute a waiver of Tenant's default with
respect to the overdue amount, nor prevent Landlord from exercising any of the
other rights and remedies granted hereunder or at law or in equity.
ARTICLE 52 - FORCE MAJEURE
If Landlord cannot perform any of its obligations due to events beyond
Landlord's control, the time provided for performing such obligations shall be
extended by a period of time equal to the duration of such events. Events beyond
Landlord's control include, but are not limited to, acts of God, war, civil
commotion, labor disputes, strikes, fire, flood or other casualty, shortages of
labor or material, government regulation or restriction and weather conditions.
ARTICLE 53 - PARKING
53.1 Tenant shall be entitled, subject to the Rules and Regulations from
time to time in effect, to use the vehicle parking spaces in the Project
allocate to Tenant in Paragraph 12 of the Basic Lease Provisions without paying
any additional rent. Tenant's parking shall not be reserved and shall be limited
to vehicles no larger than standard size automobiles or pickup utility vehicles.
Tenant shall not cause large trucks or other large vehicles to parked within the
Project or on the adjacent public streets.
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Temporary parking of large delivery vehicles in the Project may be permitted by
the Rules and Regulations established by Landlord. Vehicles shall be parked only
in striped parking spaces and not in driveways, loading areas or other locations
not specifically designed for parking. If Tenant parks more vehicles in the
parking area than the number set forth in Paragraph 12 of the Basic Lease
Provision such conduct shall be a material breach of the Lease. In addition to
Landlord's other remedies under the Lease, Tenant shall pay a reasonable daily
charge for each such additional vehicle.
53.2 Notwithstanding Paragraph 53.1, Landlord reserves the right, at its
election at any time, to implement procedures regarding the parking facilities
in the Project that Landlord deems to be in the best interest of the tenants in
the Project, including, without limitation, procedures regarding implementation
of parking stickers or other identification devices, reserved parking spaces and
other matters. If Landlord implements any such procedures, all costs in
connection therewith shall be included in the Total Operating Expenses defined
in Paragraph 3.9.
Remainder of this page is intentionally left blank.
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EXHIBIT "A"
SITE PLAN
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EXHIBIT "B"
ATTACHED TO AND MADE A PART OF OFFICE LEASE
RULES AND REGULATIONS OF THE BUILDING
The sidewalks, entrances, passages, courts, elevators, vestibules,
stairways, corridors or halls shall not be obstructed or used for any purpose
other than ingress and egress. The halls, passages, entrances, elevators,
stairways, balconies and roof are not for the use of the general public, and
Landlord shall in all cases retain the Tight to control and prevent access
thereto by all persons whose presence, in the judgment of Landlord, shall be
prejudicial to the safety, character, reputation or interests of the Building
and its tenants, provided that nothing herein contained shall be construed to
prevent such access by persons with whom tenants normally deal in the ordinary
course of their business, unless such persons are engaged in illegal activities.
No tenant and no employees of any tenant shall go upon the roof of the Building
without the written consent of Landlord.
2. No awnings or other projections shall be attached to the outside walls
of the Building without the prior written consent of Landlord. No hanging
planters, television sets or other objects shall be attached to or suspended
from ceilings without the prior written consent of Landlord. No curtains,
blinds, shades or screens shall be attached to or hung in, or used in connection
with, any window or door, without the prior written consent of Landlord. Except
as otherwise specifically approved by Landlord, all electrical
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ceiling fixtures hung in offices or spaces along the perimeter of the Building
must be fluorescent, of a quality, type, design and bulb color approved by
Landlord.
3. No sign, advertisement or notice shall be exhibited, painted or affixed
by any tenant on any part of, or so as to be seen from the outside of, a
tenant's premises or the Building without the prior written consent of Landlord.
In the event of the violation of the foregoing by any tenant, Landlord may
remove same without any liability, and may charge the expense incurred in such
removal to the tenant violating this rule. Interior signs on doors and walls
shall be inscribed, painted or affixed for each tenant by Landlord at the
expense of such tenant, and shall be of a size, color, location and style
acceptable to Landlord.
4. The wash room partitions, mirrors, wash basins and other plumbing
fixtures shall not be used for any purpose other than those for which they were
constructed, and no sweepings, rubbish, rags, or other substances shall be
thrown therein. All damage resulting from any misuse of the fixtures shall be
borne by the tenant who, or whose servants, employees, agents, visitors or
licensees, shall have caused the same.
5. No tenant shall mark, paint, drill into, or in any way deface any part
of its premises or the Building. No boring, cutting or stringing of wires or
laying of linoleum or other similar floor coverings shall be permitted except
with the prior written consent of Landlord and as Landlord may direct.
6. No bicycles, vehicles, vending machines or animals of any kind shall be
brought into or kept in or about any tenant's premises and no cooking shall be
done or permitted by any tenant in its premises except that the preparation of
coffee, tea, hot chocolate and similar items for the tenant and its employees
and business visitors shall be permitted. No tenant shall cause or permit any
unusual or objectionable odors to escape from its premises.
7. No tenant's premises shall be used for manufacturing or for the storage
of merchandise except as such storage may be incidental to the use of such
premises for general office purposes. No tenant shall occupy or permit any
portion of its premises to be occupied as an office for a public stenographer or
typist, or for the manufacture or sale of liquor, narcotics, or tobacco in any
form, or as a medical office, or as a barber shop, manicure shop or employment
agency. No tenant shall engage or pay any employees on its premises except those
actually working for such tenant on its premises, nor advertise for laborers
giving an address at its premises. No tenant's premises shall be used for
lodging or sleeping or for any immoral or illegal purposes.
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8. No tenant shall make, or permit to be made, any unseemly or disturbing
noises, sounds or vibrations, or disturb or interfere with occupants of this or
neighboring buildings or premises or those having business with them, whether by
the use of any musical instrument, radio, phonograph, unusual noise, or in any
other way.
9. No tenant shall throw anything out of doors or down the passageways.
10. No tenant shall at any tine bring or keep upon its premises any
inflammable, combustible or explosive fluid, chemical or substance. No tenant
shall do or permit anything to be done in its premises, or bring or keep
anything therein, which shall in any way increase the rate of fire insurance on
the Building or on the property kept therein, or obstruct or interfere with the
rights of other tenants, or in any way injure or annoy them, or conflict with
the regulations of the fire department or the fire laws, or with any insurance
policy upon the Building or any part thereof, or with any rules and ordinances
established by the local health authority or other governmental authority.
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11. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by any tenant, nor shall any changes be made in existing
locks or the mechanisms thereof. Each tenant must, upon the termination of its
tenancy, restore to Landlord all keys of stores, offices, and toilet rooms,
whether furnished to or otherwise procured by tenant, and in the event of the
loss of any keys so furnished, such tenant shall pay to the Landlord the cost of
replacing the same or of changing the lock or locks opened by such lost key if
Landlord shall deem it necessary to make such a change.
12. All removals, or the carrying in or out of any safes, freight,
furniture, or bulky matter of any description must take place during the hours
which Landlord may establish from time to time. The moving of safes or other
fixtures or bulky matter of any kind must be made upon previous notice to the
manager of the Building and under his supervision, and the persons employed by
any tenant for such work must be acceptable to Landlord. Landlord reserves the
right to inspect all safes, freight or other bulky articles to be brought into
the Building. Landlord reserves the right to prohibit or impose conditions upon
the installation of heavy objects which might overload the Building floors.
13. No tenant shall purchase or otherwise obtain for use in its premises,
water, ice, towel, vending machines, janitorial, maintenance or other services
of any kind except from persons authorized by Landlord, and at hours and under
regulations fixed by Landlord.
14. Landlord shall have the right to prohibit any advertising by any tenant
which, in Landlord's opinion, tends to impair the reputation of the Building or
its desirability as an office building. Upon written notice from Landlord, any
tenant shall refrain from or discontinue such advertising.
15. Landlord reserves the right to exclude all persons from the Building
between the hours of 6 p.m. and 8 a.m. and at all hours of Saturdays, Sundays
and legal holidays. Each tenant shah be responsible for all persons for whom he
requests access and shall be liable to Landlord for all acts of such persons.
Nothing in this Paragraph 15 shall limit Landlord's right to control and prevent
access under Paragraph I above.
16. Any persons employed by any tenant to do janitorial work, shall, while
in the Building and outside of the tenant's premises, be subject to and under
the control and direction of the manager of the Building (but not as an agent or
servant of said manager or of Landlord, and the tenant shall be responsible for
all acts of such persons).
17. All doors opening into public corridors or lobbies shall be kept
closed, except when in use for ingress and egress.
18. The requirements of tenants will be attended to only upon application
to the building manager's office.
19. Canvassing, soliciting and peddling in the Building, unless approved by
Landlord, are prohibited and each tenant shall cooperate to prevent the same.
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20.All office equipment of any electrical or mechanical nature shall be
placed by tenants in their premises in settings approved by Landlord, so as to
absorb or prevent any vibration, noise or annoyance to other tenants.
21. No air conditioning unit or other similar apparatus shall be installed
or used by any tenant without the written consent of Landlord.
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22. There shall not be used in any space, or the public halls of the
Building, either by tenants or others, any hand trucks except those equipped
with rubber tires and side guards.
23. Landlord will direct electricians as to where and how telephone or
telegraph wires are to be introduced. No boring or cutting for wires or string
of wires will be allowed without written consent of Landlord. The location of
telephones, call boxes and other office equipment affixed to premises shall be
subject to the approval of Landlord.
24. All parking areas, pedestrian walkways, plazas and other public areas
forming a part of the Building shall be under the sole and absolute control of
Landlord with the exclusive right to regulate and control these areas. Tenant
agrees to conform to the rules and regulations that may be established by
Landlord for those areas from time to time. The Parking Rules and Regulations
attached hereto as Exhibit "B-1 " form a part hereof and are subject to change
in accordance with Paragraph 30 hereof.
25. Landlord shall have the right, exercisable without notice and without
liability to Tenant, to change the name and street address of the Building of
which the Premises are a part.
26. Landlord shall have the right to control and operate the public
portions of the Building, and the public facilities, and heating and air
conditioning, as well as facilities furnished for the common use of the tenants,
in such manner as it deems best for the benefit of the tenants generally.
27. The sashes, sash doors, skylights, windows, and doors that reflect or
admit light and air into halls, passageways or other public places in the
Building shall not be covered or obstructed by any tenant, nor shall any
bottles, parcels or other articles be placed on the window sills. Tenant shall
see that the windows, transoms and doors of the premises are closed and securely
locked before leaving the Building and must observe strict care not to leave
windows open when it rains. Tenant shall exercise extraordinary care and caution
that all water faucets or water apparatus are entirely shut off before tenant or
tenant's employees leave the Building, and that all electricity, gas or air
shall likewise be carefully shut off, as to prevent wage or damage. Tenant shall
cooperate with Landlord in obtaining maximum effectiveness of the cooling system
by closing drapes when the sun's rays fall directly on the windows of the
Premises. Tenant shall not tamper with or change the setting of any thermostats
or temperature control values.
28. The scheduling of tenant move-ins shall be subject to the reasonable
discretion of Landlord.
29. The term "personal goods or services vendors" as used herein means
personel who periodically enter the Building for the purpose of selling goods or
services to a tenant, other than goods or services which are used by the tenant
only for the purpose of conducting its business on the Premises. "Personal goods
or services" include, but are not limited to, drinking water and other
beverages, food, barbering services, and shoe shining services. Landlord
reserves the right to prohibit personal goods and services vendors from access
to the Building except upon such reasonable terms and conditions, including, but
not limited to, the payment of a reasonable fee and provision for insurance
coverage, as are related to the safety, care and cleanliness of the Building,
the preservation of good order therein, and the relief of any financial or other
burden on the Landlord occasioned by the presence of such vendors or the sale by
them of personal goods or services to the Tenant or its employees. If necessary
for the accomplishment of these purposes, Landlord may exclude a particular
vendor entirely or limit the number of vendors who may be present at any one
time in the Building.
30. Landlord may at any time revoke, supplement or modify these Rules and
Regulations, or any portion thereof, whenever in Landlord's sole opinion such
changes are required for the care,
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cleanliness, safety or preservation of good order in the Building. All such
changes shall be effective five (5) days after delivery to tenant of written
notice thereof, except in the event of emergency, in which event they shall be
effective immediately upon notice to tenant.
3i. Tenant shall not place, install or operate on the Premises or in any
part of the Building, any engine, stove, or machinery, or conduct mechanical
operations or cook thereon or therein, or place or use in or about the Premises
any explosives, gasoline, kerosene, oil, acids, caustics, or any other
inflammable, explosive, or hazardous material without the prior written consent
of the Landlord.
32. Landlord will not be responsible for any lost or stolen personal
property, equipment, money, or jewelry from the Premises or from public rooms,
regardless of whether such less occurs when the areas is locked against entry.
33. No birds or animals shall be brought onto the Project, and no bicycles
or vehicles shall be brought into or kept in the Buildings.
34. No draperies, shutters, or window coverings shall be installed on
exterior windows or on windows or doors facing public corridors without
Landlord's prior written approval.
35. Employees of Landlord shall not receive or carry message for or to any
tenant or other occupant on the Property, nor shall they contract to render free
or paid services to any tenant or any tenant's agents, employees, or invitees;
if any of Landlord's employees perform any such services, such employees shall
be deemed the agent of the tenant for whom the services are being performed,
regardless of whether or how payment is arranged for services, and Landlord is
expressly relieved from any and all liability for any injury to persons or
damage to property (or any other damages) in connection with any such services.
36. Directories will be placed by Landlord, at its own expense, in
conspicuous places in the Building. No other directories shall be permitted,
unless previously consented to by Landlord in writing.
37. Tenant shall place, affix, or attach on any door or wall of the
Building exposed to the public only those identification markers and other
pre-approved by Landlord as to style, size, lettering and color. Landlord
reserves the right to place any such identification markers and signs on
Tenant's doors and walls and the cost thereof shall be billed to Tenant.
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EXHIBIT "B-1 " PARKING RULES AND REGULATIONS
So long as the Lease to which this Exhibit 'B-1" is attached remains
in effect, and so long as the parking rules and regulation adopted by Landlord
are not violated, Tenant or persons designated by Tenant shall be entitled on a
non-exclusive basis to use parking spaces in the Project parking structure (if
any) and on surface parking. Landlord expressly reserves the right to
redesignate parking areas and to modify the parking facilities for other uses or
to any extent.
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A condition of any parking shall be compliance by the porker with parking
facilities rules and regulations, and amendments thereto, including any sticker
or other identification system established by Landlord's parking operator.
Landlord reserves the right to impose parking charges except as provided in
Paragraph 53.1 of the Lease, on Tenant and Tenant's employees for any parking
now or hereafter available. The following Parking Rules and Regulations are in
effect until notice is given to Tenant of any change. Landlord reserves the
right to modify and/or adopt such other reasonable and nondiscriminatory rules
and regulations for the parking facilities as it deems necessary for the
operation of the parking facilities. Landlord may refuse to permit any person
who violates the within rules to park in the parking facilities, and any
violation hereof shall subject the car to removal at the owner's cost. In either
of said events the sticker of any other form of identification supplied by
Landlord shall be returned to Landlord.
1. Hours for the parking facility shall be 6:00 a.m. to 2:30 a.m.
2. Cars must be parked entirely within the stall lines painted on the
floor or pavement.
3. All directional signs and arrows must be observed.
4. The speed limit shall be 5 miles per hour.
5. Parking is prohibited:
(a) in areas not striped for parking
(b) in aisles
(c) where "no parking" signs are posted
(d) on ramps
(e) in cross hatched areas
(f) in such other areas as may be designated by Landlord's
parking operator.
6. Parking stickers or any other device or form of identification supplied
by Landlord shall remain the property of Landlord. Such parking identification
device must be displayed as requested and may not be mutilated in any manner.
The serial number of the parking identification device may not be obliterated.
Devices are not transferable and any device in the possession of any
unauthorized holder will be void. There will be a replacement charge payable by
Tenant or person designated by Tenant equal to the amount posed from time to
time by Landlord for loss of any magnetic parking card or parking sticker.
7. Parking facilities managers or attendants are not authorized to make or
allow any exception to these Parking Rules and Regulations.
8. Every parker is required to park and lock his own car. All
responsibility for damage to cars or persons is assumed by the parker and
Landlord and/or its agent shall have no liability whatsoever in connection
therewith.
9. Loss or theft of parking identification devices from automobiles must be
reported to the property manager immediately, and a lost or stolen report must
be filed by the customer at that time.
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(a) Any parking identification device reported lost or stolen
found on any unauthorized car will be confiscated and the illegal
holder will be subject to prosecution.
(b) Lost or stolen devices found by the purchaser must be
reported to the office of the property manager immediately to
avoid confusion.
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10. Spaces rented to persons are for the express purpose of parking one
automobile per space. Washing, waxing, cleaning or servicing of any vehicle by
the customer and/or his agents is prohibited.
11. Landlord and the property management reserves the right to refuse the
sale of monthly stickers or other parking identification devices, or use of the
parking facilities, to any tenant or person and/or his agents or representatives
who fail or refuse to comply with the above Parking Rules and Regulations and
with all unposted City, State or Federal legal requirements, ordinances, laws or
agreements.
12. Tenant shall acquaint all persons to whom Tenant assigns parking spaces
with these Parking Rules and Regulations.
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EXHIBIT C
WORK LETTER AGREEMENT
THIS WORK LETTER AGREEMENT is entered into as of the 7th day of August, 1997 by
and between Principal Mutual Life Insurance Company ("Landlord") and Avesis,
Inc.,a Delaware corporation ("Tenant").
RECITALS:
A. Concurrently with the execution of this Work Letter Agreement, Landlord
and Tenant have entered into a lease (the "Lease") covering certain
premises (the "Premises") more particularly described in Exhibit A
attached to the Lease.
B. In order to induce Tenant to enter into the Lease (which is hereby
incorporated by reference to the extent applicable) and in
consideration of the mutual covenants hereinafter contained, Landlord
and Tenant hereby agree as follows:
1. Completion Schedule. With ten (10) days after the execution of the
Lease and this Work Letter Agreement, Landlord shall deliver to
Tenant, for Tenant's review and approval, a schedule (the "Work
Schedule") setting forth a timetable for the planning and completion
of the installation of the Tenant Improvements (as defined in
Paragraph 2 below) to be constructed in the Premises, and the
estimated Commencement Date for the Term of the Lease. The Work
Schedule shall set forth each of the various items of work to be done
by or approval to be given by Landlord and Tenant in connection with
the completion of the Tenant Improvements. The Work Schedule shall be
submitted to Tenant for its approval and, upon approval by both
Landlord and Tenant, the approved Work Schedule shall become the basis
for completing the Tenant Improvements. If Tenant shall fail to
approve the Work Schedule as it may be modified after discussions
between Landlord and Tenant, within five (5) business days after the
date the Work Schedule is first received by Tenant, Landlord may, at
its option, terminate the lease and all of its obligations thereunder,
and in the event of such a lease termination Tenant shall be
responsible for all costs incurred hereunder and under the Lease,
including but not limited to the cost of Tenant Improvements, lease
commissions and design fees:
2. Tenant Improvement Allowance.
(a) Reference herein to "Tenant Improvements" shall include any or
all of the following work to be done in the Premises pursuant
to the Tenant Improvement Plans (defined in Paragraph 3
below):
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(i) Installation within the Premises of all partitioning,
doors, floor coverings, ceiling, painting, millwork
and similar items;
(ii) All electrical wiring, lighting fixtures, outlets and
switches, and other electrical work to be installed
within the Premises, and additional panels or
transformers to accommodate Tenant's requirements;
(iii) The furnishing and installation of all duct work,
terminal boxes, diffusers and accessories required
for the completion of the heating, ventilation and
air conditioning systems within the Premises;
(iv) All fire and life safety control systems, such as
fire walls, sprinklers, halon, fire alarms, including
piping, wiring and accessories, installed within the
Premises;
(v) All plumbing, fixtures, pipes and accessories to be
installed within the Premises;
(vi) Testing and inspection costs;
(vii) Contractor's fees, including but not limited to any
fees based on general conditions; and
(viii) Construction management by Landlord's representative
for the supervision of the tenant improvement
installation.
In no event, however, shall the Tenant Improvements include trade fixtures,
furniture or equipment of the Tenant.
(b) Landlord hereby grants to Tenant a "Tenant Improvement Allowance" of $8.00
per square foot. Landlord's maximum contribution towards the Tenant Improvements
shall be limited to said Tenant Improvement allowance. The Tenant Improvement
Allowance shall only be used for: Improvements that are mutually acceptable to
both parties.
(i) Payment of the cost of preparing the space plan and the Tenant
Improvement Plans, including mechanical, electrical, plumbing
and structural drawings and of all other aspects necessary to
complete the Tenant Improvement Plans. The Tenant Improvement
Allowance will not be used for the payment of extraordinary
design work or extraordinary or overstandard improvements not
included within the scope of Landlord's Building Standards or
for payments to any other consultants, designers or architects
other than Landlord's architect and/or space planner.
(ii) The payment of plan check, permit and license fees relating to
construction of the Tenant Improvements.
(iii) Construction of the Tenant Improvements; provided, however,
that the Tenant Improvement Allowance will be used
Non-Standard Improvements, if any, unless Landlord, in its
sole discretion, agrees in writing to payment of some or all
of the Non-Standard Improvements out of the Tenant Improvement
Allowance.
(iv) All other costs expended by Landlord in the construction of
the Tenant Improvements, including those costs incurred by
Landlord for construction of elements of the Tenant
Improvements in the Premises, which construction was performed
by Landlord prior to execution of this Lease by Landlord and
Tenant, which construction is for the benefit of tenants and
is customarily performed by Landlord prior to execution of
leases for space in the Project for reasons of economics
(examples of such construction would include,
66
<PAGE>
but not be linked to, the extension of mechanical [including
heating, ventilating and air condition systems] and electrical
distribution systems outside of the core of the Building, wall
construction, column enclosures and painting outside of the
core of the Building, ceiling hanger wires and window
treatment).
(c) The costs of each item referenced in Paragraph 2(b) above shall be
charged against the Tenant Improvement Allowance. In the event that
the cost of installing the Tenant Improvements, as established by
Landlord's final pricing schedule, shall exceed the Tenant Improvement
Allowance, or if any of the Tenant Improvements are not to be paid out
of the Tenant Allowance as provided in Paragraph 2(b) above, the
excess shall be paid by Tenant to Landlord prior to the commencement
of construction of the Tenant Improvements.
(d) In the event that, after the Tenant Improvement Plans have been
prepared and a price therefore established by Landlord, Tenant shall
require any changes or substitutions to the Tenant Improvement Plans,
any additional costs related hereto shall be paid by Tenant to
Landlord prior to the commencement of construction of the Tenant
Improvements. Landlord shall have the right to decline Tenant's
request for a change to the Tenant Improvement Plans if such changes
are inconsistent with the provisions of Paragraph 3 and 4 below, or if
the change would, in Landlord's opinion, unreasonably delay
construction of the Tenant Improvements.
(e) Any unused portion of the Tenant Improvement Allowance upon completion
of the Tenant Improvements shall not be refunded to Tenant or be
available to Tenant as a credit against any obligations of Tenant
under the Lease.
3. Tenant Improvement Plans. Immediately after the execution of the Lease and
this Work Letter Agreement and subject to the time frames required by the
Work Schedule, Tenant agrees to meet with Landlord's architect and/or space
planner for the purpose of promptly finalizing a space plan for the layout
of the Premises. Based upon such space plan, Landlord's architect shall
prepare final working drawings and specifications for the Tenant
Improvements. Such final working drawings and specifications are referred
to herein as the "Tenant Improvement Plans." The Tenant Improvement Plans
must be consistent with Landlord's standard specifications for tenant
improvements for the project (the "Building Standard"), as the same may be
changed from time to time by Landlord.
4. Non-Standard Tenant Improvements. Landlord shall permit Tenant to deviate
from the Building Standards for the Tenant Improvements (the "Non Standard
Improvements"), provided that (a) the deviations shall not be of a lesser
quality than the Building Standards; (b) the total lighting for the
Premises shall not exceed 1.65 watts per Rentable Square Foot of the
Premises; (c) the deviations conform to applicable governmental regulations
and necessary governmental permits and approvals have been secured; (d) the
deviations do not require building service beyond the levels normally
provided to other tenants in the Project; and (e) Landlord has determined
in its sole discretion that the deviations are of a nature and quality that
are consistent with the overall objectives of Landlord for the Project.
Any Non-Standard improvements made shall remain on and be surrendered with
the Premises upon expiration of the Term, except that Landlord may, within
30 days before or 30 days after expiration of the Term, elect to require
Tenant to remove any NonStandard Improvements which may have been made to
the Premises. If Landlord so elects, at its own cost Tenant shall restore
the Premises to the condition designated by Landlord in its election,
before the last day of the term or within 30 days after notice of its
election is given, whichever is later.
5. Final Pricing and Drawing Schedule. After the preparation of the space plan
(attached as Exhibit X) and after Tenant's written approval thereof, in
accordance with the Work Schedule, Landlord shall cause its architect to
prepare and submit to Tenant the Tenant Improvement Plans. The
67
<PAGE>
Tenant Improvement Plans shall be approved by Landlord and Tenant in
accordance with the Work Schedule and shall thereafter be submitted to the
appropriate governmental body by Landlord's architect for plan checking and
the issuance of a building permit. Landlord, with Tenant's cooperation,
shall cause to be made to the Tenant Improvement Plans any changes
necessary to obtain the building permit. Concurrent with the plan checking,
Landlord shall have prepared a final pricing for Tenant's approval, in
accordance with the Work Schedule, taking into account any modifications
which may be required to reflect changes in the Tenant Improvement Plans
required by the City or County in which the Premises are located. After
final approval of the Tenant Improvement Plans, no further changes may be
made thereto without the prior written approval from both Landlord and
Tenant, and then only after agreement by Tenant to pay any excess costs
resulting from the deign and/or construction of such changes. Tenant hereby
acknowledges that any such changes shall be subject to the terms of
Paragraph 7 below.
6. Construction of Tenant Improvements. After the Tenant Improvement Plans
have been prepared and approved, the final pricing has been approved and a
building permit for the Tenant Improvements has been issued, Landlord shall
cause its contractor to begin installation of the Tenant Improvements in
accordance with the Tenant Improvement Plans.
Landlord shall supervise the completion of such work and shall use
reasonable commercial efforts to secure substantial completion of the work
in accordance with the Work Schedule. The cost of such work shall be paid
as provided in Paragraph 2 above. Landlord shall not be liable for any
damages, whether direct or consequential, as a result of delays in
construction beyond Landlord's reasonable control, including, but not
limited to, war, civil unrest, strike, labor troubles, unusually inclement
weather, governmental delays, inability to secure governmental approvals or
permits, governmental restrictions, availability of materials or labor,
acts of God, or delays by Tenant (or its architect or anyone performing
services on behalf of Tenant).
7. Completion and Rental Commencement Date. The commencement of the Term of
the Lease and Tenant's obligation for the payment of rent under the Lease
shall commence as of the date referred to in Section 7* of the Lease
provided, however, that if there shall be a delay in substantial completion
of the Tenant Improvements as a result of:
(a) Tenant's failure to approve any items or perform any other obligation
in accordance with and by the date specified in the Work Schedule;
(b) Tenant's request for materials, finishes or installations other than
those readily available;
(c) Tenant's changes in the Tenant Improvement Plans after the previous
approval of the Tenant Improvement Plans by Tenant. or
(d) Tenant's request to deviate from the Building Standards for the Tenant
Improvements;
then the commencement of the Term of the Lease and the rent commencement
date shall be accelerated by the number of days of such delay. The Tenant
Improvements shall be deemed substantially complete notwithstanding the
fact that minor details of construction, mechanical adjustments or
decorations which do not materially interfere with Tenant's use and
enjoyment of the Premises remain to be performed (items normally referred
to as "Punch List" items).
8. Certificate of Occupancy. Upon completion of the Tenant Improvements and
the issuances by the City or other relevant government agency of a
Certificate of Occupancy or other comparable certificate authorizing
occupancy of the Premises, Tenant will promptly provide Landlord with a
copy of the Certificate of Occupancy or other such certificate.
Section 7. of the Basic Lease Provisions
9. Force Majeure. Landlord shall have no liability whatsoever to Tenant on
account of the inability or delay of Landlord in fulfilling any of
Landlord's obligations under this Work Letter by reason of
68
<PAGE>
strike, other labor trouble, governmental controls in connection with a
national or other public emergency, or shortages of fuel, supplies or labor
resulting therefrom or any other cause, whether similar or dissimilar to
the above, beyond Landlord's reasonable control. If this Work Letter
specifies a time period for performance of an obligation of Landlord, that
time period shall be extended by the period of any delay in Landlord's
performance caused by any of the events of force majeure described above.
IN WITNESS WHEREOF, this Work Letter Agreement is entered into as of the date
first written above.
LANDLORD:
Principal Mutual Life Insurance Company
---------------------------------------
By: _____________________________
Print Name:_____________________________
TENANT:
Avesis, Inc. ,a
------------------------------
Delaware Corporation
--------------------
By: _____________________________
Print Name:_____________________________
Its: _____________________________
By: _____________________________
Print Name:_____________________________
Its: _____________________________
EXHIBIT "D"
ESTOPPEL CERTIFICATE
The undersigned _________________, does hereby make the following statements:
I They are the Tenant under a certain Lease dated _____________________ with
_______________________ and ____________________________ as
Landlord, leasing the Property commonly known as _________________________.
2. The lease dated _____________________ is in full force and effect and the
undersigned is aware of no
69
<PAGE>
defaults under the terms and conditions of the Lease and has no offsets
against rentals due the Landlord or to become due the Landlord.
3. The undersigned accepted possession of the Property on __________________
the Lease Term began on ________________________,and ends on
__________________ and the obligation to pay Base Rent begins on
____________________, pursuant to the terms and conditions of the Lease.
4. The total Base Rent to be paid pursuant to the terms of said Lease is not
less than $ and no Base Rent has been paid more than one month in advance.
By ____________________________
Title____________________________
Date ____________________________
30
EXHIBIT "E"
The addendum is attached to and made a part of that certain Lease (the "Lease")
of even date herewith between PRINCIPAL MUTUAL LIFE INSURANCE as Landlord, and
AVESIS, INC. as Tenant, relating to premises located at 3724 North Third Street,
Phoenix, Arizona 85012. This Addendum shall supplement and amend the Lease, and
the provisions set forth below shall supersede any inconsistent provisions set
forth in the Lease. To the extent possible, the provisions set forth below have
been numbered to coincide with the numbered articles and sections of the Lease
to which they relate. Except as may otherwise be specifically provided below,
any terms used below which are defined in the Lease shall have their respective
meanings set forth in the Lease.
Section 54: HAZARDOUS MATERIALS.
(a) Definition. As used in this Lease, the term "Hazardous Material" means any
flammable items, explosives, radioactive materials, hazardous or toxic
substances, material or waste or related materials, including any
substances defined as or included in the definition of "hazardous
substances", "hazardous wastes", 'infectious wastes", "hazardous materials"
or "toxic substances" now or subsequently regulated under any applicable
federal, state or local laws or regulations including, without limitation,
oil, petroleum-based products, paints, solvents, lead, cyanide, DDT,
printing inks, acids, pesticides, ammonia compounds and other chemical
produce, asbestos, PCBs and similar compounds, and including any different
products and materials which are subsequently found to have adverse effects
on the environment or the health and safety of persons.
(b) General Prohibition. Tenant shall not cause or permit any Hazardous
Material to be generated, produced, brought upon, used, stored, treated or
disposed of in or about the Premises or the Property by Tenant, its agents,
employees, contractors, sublessee or invitees without the prior written
consent of Landlord. Landlord shall be entitled to take into account such
factors or facts as Landlord may in its good faith business judgement
determine to be relevant in determining whether to grant, condition or
withhold consent to Tenant's proposed activity with respect to Hazardous
Material and Tenant shall indemnify, defend and hold Landlord harmless
70
<PAGE>
from any and all actions (including, without limitation. remedial or
enforcement actions of any kind, administrative or judicial proceedings and
orders or judgements, arising out of or resulting therefrom), costs,
claims, damages, (including, without limitation, punitive damages),
expenses (including, without limitation attorneys', consultants' and
experts' fees, court costs and amounts paid in settlement or any claims or
actions), fines forfeitures or other civil, administrative or criminal
penalties, injunctive or other relief (whether or not based upon personal
injury, property damage, contamination of, or adverse effects upon, the
environment, water tables or natural resources), liabilities or liabilities
or losses (economic or other) arising from a breach of this prohibition by
Tenant, its agents, employees, contractors, sublessee or invites, In no
event, however, shall Landlord be required to consent to the installation
or use of any storage tanks in, on or under the Premises or the Property.
If Landlord consents to the generation, production, use , storage,
treatment or disposal of Hazardous Materials in or about the Premises by
Tenant, its agents, employees, contractors, sublessee or invitees, then, in
addition to any other requirements or conditions that Landlord may impose
in connection with such consent, (1) Tenant promptly shall deliver to
Landlord copies of all permits, approvals, filings, and reports reflecting
the legal and proper generation, production, use, storage, treatment or
disposal of all Hazardous materials, generated, used, stored, treated or
removed from the Premises and the Property and, upon Landlord's request,
copies of all hazardous waste manifests relating thereto, and (2) upon
expiration or earlier termination of this Lease, Tenant shall cause all
Hazardous Materials arising out of or related to the use or occupancy of
the Premises by Tenant or its agents, affiliates, customers, employees,
business associates or assigns to be removed from the Premises and the
Property and transported for use, storage or disposal in accordance with
all applicable laws, regulations and ordinances and Tenant shall provide
Landlord with evidence reasonable satisfactory to Landlord of the same.
(c) In the event that Hazardous Materials are discovered upon, in, or under the
Premises, and the applicable governmental agency or entity having
jurisdiction over the Premises requires the removal of such Hazardous
Materials arising to of or related to the use or occupancy of the premises
by Tenant or its agents, affiliates, customers, employees, business
associates or assigns but not those of its predecessors, tenant shall at
its sole cost and expense remove such Hazardous Materials, and perform any
remediation required by the applicable governmental agency or reasonable
necessary to make full economic use of the Property in a manner consistent
with its current use. Notwithstanding the foregoing, Tenant shall not take
any remedial action in or about the Premises or the Property, nor enter
into any settlement agreement, consent decree or other compromise with
respect to any claims relating to any Hazardous Material in any way
connected with the Premises or the Property without first notifying
Landlord of Tenant's intention to do so and affording Landlord the
opportunity to appear, intervene or otherwise appropriately assert and
protect Landlord's interest with respect thereto. Tenant immediately shall
notify Landlord in writing of: (i) any spill, release, discharge or
disposal of any Hazardous Material in, on or under the Premise, the
Property or any portion thereof, (ii) any enforcement, cleanup, removal or
other governmental or regulatory action instituted, contemplated, or
threatened pursuant to any Hazardous Materials Laws; (iii) any claim made
or threatened by any person against Tenant, the Premises, or the Property
relating to damage, contribution, cost recovery, compensation, loss or
injury resulting from or claimed to result from any Hazardous Materials;
and (iv) any reports made to any environmental agency arising out of or in
connection with any Hazardous materials in, on or removed from the Premises
or the Property, including any complaints, notices, warnings, reports or
asserted violations in connection therewith. Tenant also shall -supply to
Landlord as promptly as possible, and in any event within five (5) business
days after Tenant first receives or sends the same, copies of all claims,
reports, complaints, notices, warnings or asserted violations relating in
any way to the Premises, the Property or Tenant's use thereof.
71
Exhibit 11
Calculation of Earnings per Common Share
For the Year Ended May 31, 1997
Primary Fully Diluted
---------------------------
CSE's:
Common Stock 4,100,420 4,100,420
Series 2 Preferred (CSE) 970,450 970,450
Debentures (non-CSE):
# bonds 189 189
x conversion rate 200 200
------------------------
# shares under bonds outstanding 37,800 37,800
x exercise price 5 5
------------------------
= cash generated 189,000 189,000
Market price of common stock:
Average $ 0.2784
Closing $ 0.25
# treasury shares that could be repurchased 678,857 756,000
------------------------
Incremental # shares 0 0
Warrants & options:
# options & warrants outstanding 5,210,000 5,210,000
x exercise price = cash generated 2,386,818 2,386,818
Market price of common stock:
Average $ 0.2784
Closing $ 0.25
# treasury shares that could be repurchased 8,573,061 9,547,273
------------------------
Incremental # shares 0 0
------------------------
Total CSE 4,100,420 4,100,420
========================
Debentures "if converted" 37,800
=========
EARNINGS PER SHARE:
Net income (190,265) (190,265)
Subtract: preferred stock dividends 349,162 349,162
---------
Add: interest expense on non-CSE debt 17,955
------------------------
(539,427) (521,472)
Divided by #CSEs + non-CSE debt 4,100,420 4,138,220
------------------------
EPS (0.13) (0.13)
========================
Net income (190,265) (190,265)
Add: interest expense on non-CSE debt 17,955
------------------------
(190,265) (172,310)
Divided by #CSEs + non-CSE debt 5,070,870 5,108,670
------------------------
EPS (0.04) (0.03)
========================
(Preferred Stock is anti-dilutive so it is not included in EPS.) (Debt is
determined to be non-CSE due to the interest rate test.)
72
Exhibit 21
Subsidiary of Registrant
Avesis of Washington, D.C., Inc.
State of Incorporation: District of Columbia
Name under which business is done: Avesis of Washington, D.C., Inc.
73
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial
information extracted from the Company's
Form 10-KSB for the year ended May 31, 1997
and is qualified in its entirety by
reference to such form 10-KSB.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-31-1997
<EXCHANGE-RATE> 1
<CASH> 817,535
<SECURITIES> 0
<RECEIVABLES> 360,207
<ALLOWANCES> (19,851)
<INVENTORY> 0
<CURRENT-ASSETS> 1,271,505
<PP&E> 1,182,840
<DEPRECIATION> (1,001,045)
<TOTAL-ASSETS> 1,639,389
<CURRENT-LIABILITIES> 977,910
<BONDS> 0
0
3,882
<COMMON> 41,004
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,639,389
<SALES> 0
<TOTAL-REVENUES> 5,645,276
<CGS> 0
<TOTAL-COSTS> 4,206,964
<OTHER-EXPENSES> 1,532,539
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (29,461)
<INCOME-PRETAX> (190,265)
<INCOME-TAX> 0
<INCOME-CONTINUING> (190,265)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (190,265)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
