<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1999
REGISTRATION NO. 333-87285
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MEDICALOGIC, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
OREGON 7374 93-0890696
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
20500 NW EVERGREEN PARKWAY
HILLSBORO, OREGON 97124
(503) 531-7000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------------------
MARK K. LEAVITT
CHIEF EXECUTIVE OFFICER
20500 NW EVERGREEN PARKWAY
HILLSBORO, OREGON 97124
(503) 531-7000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
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STEPHEN E. BABSON ROY W. TUCKER
TODD A. BAUMAN PERKINS COIE LLP
STOEL RIVES LLP 1211 SW FIFTH AVENUE, SUITE 1500
900 SW FIFTH AVENUE, SUITE 2600 PORTLAND, OR 97204
PORTLAND, OREGON 97204 (503) 727-2000
(503) 224-3380
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
--------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
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<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 29, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS
, 1999
MEDICALOGIC, INC.
[MEDICALOGIC LOGO]
______ SHARES OF COMMON STOCK
- --------------------------------------------------------------------------------
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<S> <C>
MARKET AND PROPOSED SYMBOL: THE OFFERING:
- - We have applied for listing on the - The underwriters have an option to
Nasdaq National Market with the purchase an additional shares
symbol MDLI. from us to cover over-allotments.
- We anticipate that the initial
public offering price will be between
$12.00 and $14.00 per share.
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C>
Per Share Total
- --------------------------------------------------------------------------------
Public offering price: $ $
Underwriting fees:
Proceeds to MedicaLogic:
</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
Neither the SEC nor any state securities commission has approved or disapproved
of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE
ROBERTSON STEPHENS
U.S. BANCORP PIPER JAFFRAY
DLJDIRECT INC.
<PAGE>
TABLE OF CONTENTS
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Page
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Prospectus Summary.................... 3
Risk Factors.......................... 8
Use Of Proceeds....................... 16
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Consolidated Financial
Data................................ 19
Management's Discussion And Analysis
Of Financial Condition And Results
Of Operations....................... 20
Business.............................. 30
</TABLE>
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<CAPTION>
Page
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Management............................ 46
Related-Party Transactions............ 54
Principal Shareholders................ 56
Description Of Capital Stock.......... 59
Shares Eligible For Future Sale....... 62
Underwriting.......................... 64
Where You Can Find More Information... 66
Legal Matters......................... 66
Experts............................... 66
Index to Financial Statements......... F-1
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING MEDICALOGIC AND THE COMMON STOCK BEING SOLD IN THIS
OFFERING IN OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE
IN THIS PROSPECTUS AND OUR RISK FACTORS BEGINNING ON PAGE 8.
MEDICALOGIC, INC.
Our business is connecting physicians and patients through the Internet. For
physicians, we offer a line of enterprise and Internet-based electronic medical
record products and services for use at the point of care in the exam room, with
configurations suitable for practices of all sizes. For patients, we will
provide in early 2000 a Web site that will allow them to access healthcare
information from their physician-generated medical record, enter personal
medical information and effectively communicate with their physician. For both
physicians and patients, we will provide focused healthcare content and commerce
opportunities, keyed to information in a selectively shared database that unites
physicians and patients. Together, these products, services and databases will
comprise our Internet Health Services Center.
For over a decade, MedicaLogic has developed, marketed and supported
electronic medical record software used by physicians at the point of care
throughout the United States. We have focused exclusively on the challenge of
providing clinical solutions that are used by physicians at the point of care to
create and access the electronic medical record. More than 7,000 health
professionals, including approximately 3,000 physicians, now maintain electronic
medical records with our enterprise electronic medical record software,
constituting an estimated base of over 7 million electronic patient records. Our
technology will use the Internet to link healthcare consumers to physicians
using either our enterprise or Internet-based electronic medical record. Our
customers include academic medical centers such as Baylor College of Medicine in
Houston, Texas, integrated healthcare delivery systems such as Providence Health
System in Portland, Oregon, and other customers such as the NASA space shuttle
program. We believe we are a leading provider of electronic medical record
software in the healthcare industry.
The vast majority of clinical data is still recorded in handwritten or
hand-typed notes filed within paper charts that cannot be accessed, aggregated
or organized electronically. We believe the Internet has made computerized tools
more useful and more affordable than traditional client-server applications to
the 600,000 practicing physicians in the United States and will facilitate the
widespread adoption of an electronic medical record. We believe the Internet is
also an efficient means to distribute medical information to healthcare
consumers.
Our solution to the market opportunity provided by the Internet is the
Internet Health Services Center. The products and services that will comprise
our Internet Health Services Center are:
- LOGICIAN, our proprietary client-server electronic medical record
enterprise software, which has been commercially available since 1996;
- LOGICIAN INTERNET, our product for creating and managing electronic
medical records over the Internet, which became commercially available in
October 1999;
- 98POINT6, our Web site for healthcare consumers, which is currently being
tested in a pilot program and will be commercially available in early
2000, through which patients will be able to maintain their own personal
health portfolio based on their physician-created electronic medical
record and access specific healthcare information as well as commerce
opportunities; and
- MEDICALOGIC.COM, our Web site for physicians and other medical
professionals, which has been commercially available since 1996 although
further engineering is necessary to provide some
3
<PAGE>
features, providing for physician access to patient electronic medical
records and, upon further development, a range of healthcare information
and commerce opportunities and services.
We believe the Internet Health Services Center will provide the following
benefits:
- Improve the quality of care by increasing the flow of patient medical
information among all healthcare participants, which ultimately will
result in more accurate diagnoses and more timely and appropriate
treatments;
- Empower healthcare consumers by giving them quicker, more efficient and
more effective access to pertinent medical information through electronic
communication with other healthcare participants, such as physicians,
payers and suppliers;
- Improve the physician-patient relationship by facilitating communication
between physicians and patients; and
- Reduce healthcare costs by, among other things:
- Reducing the inefficiencies of manual and paper-based transactions;
- Reducing transcription costs;
- Reducing duplicative and unnecessary laboratory tests resulting from
inaccurate or misplaced records;
- Facilitating compliance with Health Care Financing Administration account
coding regulations; and
- Reducing hospitalizations related to harmful drug interaction events.
Our objective is to be the leading provider of Internet-based electronic
medical record information. Our strategy to achieve this objective has the
following key elements:
- Gain rapid adoption by physicians of our electronic medical record
solutions;
- Offer the most compelling Internet destination for healthcare consumers;
- Become a catalyst of clinical e-commerce transactions; and
- Utilize our large, clinically-rich database.
To provide the electronic transaction services that will form part of the
Internet Health Services Center, we will form relationships with strategic
partners who can provide these services. These services will include electronic
processing of claims, automatic filling and refilling of prescriptions and
electronic transmission of laboratory results. In addition, we will enter into
strategic partnerships with vendors who will provide medical content to our
customers as well as partnerships that will allow our physician customers to
have access to computer hardware on which they may use our products and
services. To pursue this strategy, we have recently entered into strategic
relationships with CVS.com, a leading online pharmacy, Dell Computer
Corporation, Envoy Corporation, a leader in electronic transaction processing in
the healthcare industry, and Lernout & Hauspie Speech Products, a provider of
speech recognition software.
MedicaLogic, Inc. was incorporated in Oregon in May 1985 and commenced
operations that year. Our executive offices are located at 20500 NW Evergreen
Parkway, Hillsboro, Oregon 97124. Our telephone number is (503) 531-7000.
MedicaLogic, Practice With Knowledge, Logician, SIMPL, Quickstep,
ScheduLogic, LinkLogic, KnowledgeBank, AboutMyHealth, 98point6 and the
MedicaLogic logo are trademarks or service marks of MedicaLogic. Other
trademarks or service marks appearing in this prospectus are the property of
their holders.
4
<PAGE>
THE OFFERING
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Common stock offered by MedicaLogic.......... shares
Common stock to be outstanding after the
offering................................... shares
Nasdaq National Market Symbol................ MDLI
Use of proceeds.............................. - working capital;
- general corporate purposes; and
- potential acquisitions.
</TABLE>
The number of shares of common stock to be outstanding after the offering
excludes an aggregate of 7,997,192 shares of common stock reserved for issuance
under our stock plans, of which 2,829,826 shares of common stock were subject to
outstanding options as of October 15, 1999 at a weighted average exercise price
of $6.10 per share.
ASSUMPTIONS THAT APPLY TO THIS PROSPECTUS
Unless we indicate otherwise, all information in this prospectus reflects
the following:
- completion of a one-for-two reverse stock split of shares of our common
stock;
- the conversion of our outstanding preferred stock on a two-for-one basis
into common stock; and
- no exercise by the underwriters of their over-allotment option to purchase
up to additional shares of common stock.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary consolidated historical financial information below was derived
from the consolidated financial statements beginning on page F-1. This summary
should be read together with the consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 20.
We completed our acquisition of PrimaCis Health Information
Technology, Inc. in January 1999. The unaudited pro forma consolidated
statements of operations data combine MedicaLogic's and PrimaCis' historical
statements of operations for the year ended December 31, 1998 and give effect to
the acquisition as if it occurred on January 1, 1998. This information is
presented for illustrative purposes only and is not necessarily indicative of
the operating results that would have actually occurred if the acquisition had
been completed as of the dates indicated, nor is it necessarily indicative of
our future operating results.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------- NINE MONTHS ENDED
PRO SEPTEMBER 30,
FORMA ----------------------
1996 1997 1998 1998 1998 1999
-------- -------- -------- ----------- ----------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues.............................. $ 9,664 $ 12,807 $16,160 $ 16,408 $10,759 $ 14,992
Operating expenses:
Cost of revenues.................... 6,120 7,756 6,754 6,875 4,962 5,724
Marketing and sales................. 6,667 7,681 7,882 9,814 5,647 12,300
Research and development............ 6,583 7,047 8,071 8,525 5,981 8,495
General and administrative.......... 718 1,315 1,151 3,014 735 2,511
-------- -------- ------- -------- ------- --------
Operating loss........................ (10,424) (10,992) (7,698) (11,820) (6,566) (14,038)
Net loss attributed to common
shareholders........................ $(10,364) $(10,819) $(7,232) $(11,278) $(6,394) $(13,381)
======== ======== ======= ======== ======= ========
Basic and diluted net loss per common
share(1)............................ $ (1.58) $ (1.63) $ (1.05) $ (1.48) $ (0.93) $ (1.61)
======== ======== ======= ======== ======= ========
Weighted average shares used in
computing basic and diluted net loss
per common share(1)................. 6,576 6,635 6,883 7,633 6,882 8,331
Pro forma basic and diluted net loss
per common share(1)................. $ (0.41) $ (0.63)
======= ========
Weighted average shares used in
computing pro forma basic and
diluted net loss per common
share(1)............................ 17,479 21,084
</TABLE>
6
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<CAPTION>
SEPTEMBER 30, 1999
-------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 7,081 $
Working capital........................................... 43,151
Total assets.............................................. 67,727
Long-term obligations, net of current portion............. 1,659
Convertible redeemable preferred stock.................... 97,825
Total stockholders' equity (deficit)...................... (40,564)
</TABLE>
- ------------------------
(1) For a description of the computation of the net loss per share and number of
shares used in per share calculations, see note 1 of the notes to the
consolidated financial statements. Pro forma basic and diluted net loss per
share includes shares of common stock issued on the conversion of our
outstanding preferred stock on a two-for-one basis into common stock.
(2) As adjusted to reflect the conversion of all outstanding shares of preferred
stock into common stock and the sale by us of shares of common stock
offered by this prospectus at an initial public offering price of $ per
share and after deducting the estimated underwriting discounts and
commissions and offering expenses payable by us.
7
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RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS,
INCLUDING OUR FINANCIAL STATEMENTS AND RELATED NOTES, BEFORE YOU PURCHASE ANY
SHARES OF OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS WOULD LIKELY SUFFER. IF
THAT HAPPENS, THE TRADING PRICE OF OUR COMMON STOCK COULD FALL, AND YOU MAY LOSE
ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK.
RISKS RELATED TO MEDICALOGIC
OUR INTERNET-BASED BUSINESS MODEL MAY NOT BE SUCCESSFULLY IMPLEMENTED, AND IT IS
DIFFICULT TO EVALUATE BECAUSE IT IS NEW AND UNPROVEN.
We have only recently implemented our Internet-based business model, and we
do not have an operating history with this model upon which you can evaluate our
prospects. In attempting to implement our Internet-based business model, we are
significantly changing our business operations, sales and implementation
practices, customer service and support operations and management focus. We are
also facing new risks and challenges, including a lack of meaningful historical
financial data upon which to plan future budgets, the need to develop strategic
relationships and other risks described below. For each of the last three fiscal
years and the first nine months of 1999, all of our revenue was generated from
the sale of licenses on and services related to our enterprise software and no
revenue was derived from our LOGICIAN INTERNET system or other Internet-based
products and services. Our operating history is not indicative of our future
performance under our Internet-based business model, and you should not rely
upon our past performance to predict our future performance. We may not be able
to implement our business model successfully.
WE MAY NOT ACHIEVE BROAD ACCEPTANCE OF OUR PRODUCTS AND SERVICES BY PHYSICIANS,
PATIENTS AND OTHER HEALTHCARE STAKEHOLDERS.
Our business model depends on our ability both to sell our LOGICIAN and
LOGICIAN INTERNET systems to physicians and other healthcare providers and to
generate usage by a large number of physicians. Failure to achieve broad
acceptance of our products and services by physicians and other healthcare
stakeholders would severely limit our ability to implement our Internet-based
business model. Achieving market acceptance for our products and services will
require substantial marketing efforts and the expenditure of significant
financial and other resources to create awareness and demand by physicians and
healthcare consumers. Use of our products and services requires physicians to
integrate our products and services into their office work flow and to adopt
different behavior patterns and new methods of conducting business and
exchanging information. Physicians may not choose to use our products and
services.
WE ARE DEPENDENT ON A SMALL NUMBER OF CUSTOMERS, AND IF WE LOSE ANY OF THEM OUR
REVENUES COULD DECLINE SUBSTANTIALLY.
We currently derive and expect to continue to derive a significant portion
of our revenues from a limited number of customers. If any significant customer
spends less money on licenses for LOGICIAN or related services, or terminates
its relationship with us, our revenues could decline substantially. In 1998, we
derived 21% of our revenue from VHA, Inc., a distribution partner, and in the
first nine months of 1999, we derived approximately 41% of our revenue from
Baylor College of Medicine and Carilion Health Systems. We expect to continue to
derive a significant portion of our future revenues from sales of our LOGICIAN
enterprise product to a limited number of large integrated healthcare delivery
networks. Failure to make these sales during any quarter could cause our
revenues and results of operations to fall short of expectations, which could
adversely affect the price of our common stock.
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WE HAVE A HISTORY OF NET OPERATING LOSSES AND MAY NOT BE PROFITABLE IN THE
FUTURE.
Failure to achieve or maintain profitability could materially and adversely
affect the market price of our common stock. We have experienced net losses of
approximately $10.3 million in 1996, $10.7 million in 1997, $7.0 million in 1998
and $13.1 million in the first nine months of 1999. At September 30, 1999, we
had a retained deficit of $48.9 million. We are investing heavily to develop our
Internet-based products and services and expand our sales and marketing
capabilities related to our Internet-based business. To date, we have not
achieved any revenue from our Internet-based products or services. We expect to
continue to experience net losses, and we are not certain when we will become
profitable, if at all. Even if we do achieve profitability, we may not sustain
or increase profitability on a quarterly or annual basis.
OUR RESULTS OF OPERATIONS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY, WHICH MAY HAVE
A NEGATIVE IMPACT ON OUR STOCK PRICE.
We may experience significant variations in results of operations from
quarter to quarter primarily because most of our costs are based on projected
revenue levels and our revenues are difficult to predict. These variations in
our results may negatively affect our stock price. Sales and results of
operations may fluctuate from quarter to quarter depending on:
- The amount and timing of operating costs and capital expenditures relating
to development and expansion of our business;
- Acceptance of our emerging business;
- Our introduction of new or enhanced services and products, and similar
introductions by our competitors; and
- The budgetary cycles of large healthcare providers and other healthcare
organizations.
In addition, the sales cycle for our products and services varies widely,
particularly for sales of our LOGICIAN product to large integrated healthcare
delivery networks, and it is difficult for us to predict the timing of
particular sales.
As a result, we believe that quarter-to-quarter comparisons of our sales and
results of operations are not necessarily meaningful and that these comparisons
may not be accurate indicators of future performance.
OUR FAILURE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS AND SERVICES AND ENHANCE
CURRENT PRODUCTS AND SERVICES COULD ADVERSELY AFFECT THE IMPLEMENTATION OF OUR
INTERNET-BASED BUSINESS MODEL.
Any failure by us to introduce planned products or to introduce these
products on schedule could make it difficult for us to implement our
Internet-based business model. These include LOGICIAN INTERNET, which we began
to offer on a commercial basis in October 1999, and our consumer Web site
98POINT6, which is currently being tested in a pilot program and will be
released commercially in early 2000. We may not be able to introduce these
products and services or our other products and services under development on
schedule, or at all. For example, LOGICIAN INTERNET was introduced one month
after its planned release date. In addition, early releases of software often
contain errors or defects. Despite our extensive testing, errors could be found
in our new product releases and services before or after commercial release,
which would result in product redevelopment costs and loss of, or delay in,
market acceptance. Past releases of LOGICIAN have contained errors and defects
that required us to provide corrections and other upgrades.
Our products and services often must be integrated and customized to operate
with existing customer legacy computer systems. For example, we are working on
enhancements that will allow our LOGICIAN and LOGICIAN INTERNET products to
communicate with each other to facilitate connections
9
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between physicians in integrated healthcare delivery networks, who primarily use
LOGICIAN, and physicians who use LOGICIAN INTERNET. Failure to enhance our
product and service offerings to add functionality in areas such as interfacing
with the products of our strategic partners could make it more difficult for us
to implement our Internet-based business model. Developing, integrating,
enhancing and customizing our products and services will be expensive and time
consuming.
WE RELY ON ESTABLISHING AND MAINTAINING STRATEGIC RELATIONSHIPS THAT MAY NOT
PROVIDE ANTICIPATED BENEFITS.
We will depend upon our strategic relationships to extend the reach of our
products and services to a larger number of participants in the healthcare
industry, develop and deploy new products and generate additional revenue. If we
lose any of our existing strategic relationships or fail to establish additional
relationships, or if our strategic relationships fail to benefit us as expected,
we may not be able to execute our business plan.
To date, we have established only a limited number of strategic
relationships, and these relationships are in the early stages of development.
We have limited experience in establishing and maintaining strategic
relationships with healthcare and Internet industry participants. Entering into
strategic relationships is complicated by several factors, including the
following:
- Current or future strategic partners may decide to compete with us in some
or all of our markets;
- Key participants in the healthcare industry may refuse to establish
strategic relationships with us if we have entered into relationships with
their competitors; and
- Potential strategic partners may be reluctant to work with us until our
products and services have obtained widespread market acceptance.
POTENTIAL INTEGRATED HEALTHCARE DELIVERY NETWORK CUSTOMERS COULD TAKE A LONG
TIME TO EVALUATE THE PURCHASE OF OUR PRODUCTS AND SERVICES AND TO COMPLETE THE
PURCHASE EVEN AFTER A DECISION HAS BEEN MADE.
One element of our strategy is to market our services directly to large
healthcare organizations. The sale and implementation of our products and
services are often subject to delays due to these organizations' internal
budgets and procedures for approving large capital expenditures and deploying
new technologies within their networks. As a result, sales of our products and
services to new integrated healthcare delivery network customers may grow slowly
and unevenly due to those organizations' purchasing cycles. If the time and
resources required to sell our products and services to new integrated
healthcare delivery network customers materially exceed our expectations, it may
adversely affect our share price.
The average period from our first contact with an integrated healthcare
delivery network customer and its implementation of our products and services is
two years and the average period between a sale and implementation is four
months. We do not control many of the factors that will influence our customers'
buying decisions or affect the timing of implementation.
INTENSE COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED SALES OF OUR PRODUCTS AND
SERVICES.
Our industry is intensely competitive and subject to fragmentation, high
growth and rapid technological change. We may face significant competition from
traditional healthcare information system vendors and Internet healthcare
companies as they expand their product offerings. Many of these companies have
significantly greater financial resources, well-established brand names and
large installed customer bases. We may be unable to compete successfully against
these organizations. We believe that, to be successful, we must gain significant
market share with our products and services
10
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before our competitors introduce alternative products and services with features
similar to ours. Failure to achieve a significant market share may materially
reduce our ability to compete successfully, if at all, with other market
participants and may lead to reduced sales of our products and services.
OUR FAILURE TO KEEP PACE WITH ADVANCES IN TECHNOLOGY COULD HARM OUR BUSINESS.
If we cannot adapt to changing technologies, we may not be able to compete
effectively in our industry. The Internet and healthcare information markets are
characterized by rapid technological change, changes in users' and customers'
requirements, frequent new service and product introductions embodying new
technologies and the emergence of new industry standards and practices that
could make our existing technology obsolete. Our success will depend, in part,
on our ability to continue to enhance our products and services, develop new
technology that addresses the increasingly sophisticated and varied needs of our
prospective customers, license leading technologies and respond to technological
advances and emerging industry standards and practices on a timely and
cost-effective basis. We may not be successful in using new technologies
effectively or adapting our proprietary technology to evolving customer
requirements or emerging industry standards.
OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD HAVE A SIGNIFICANT NEGATIVE
IMPACT ON OUR BUSINESS OPERATIONS.
We will need to expand our operations if we successfully achieve market
acceptance for our products and services. Difficulties in managing any future
growth could have a significant negative impact on our business operations,
increase our costs and make it more difficult for us to achieve profitability.
We cannot be certain that our systems, procedures, controls and existing space
will be adequate to support expansion of our operations. We may not be able to
project the rate or timing of increases in the use of our products and services
accurately or to expand and upgrade our systems and infrastructure to
accommodate these increases. Our future results of operations will depend on the
ability of our officers and key employees to manage changing business conditions
and to implement and improve our technical, administrative, financial control
and reporting systems.
OUR FAILURE TO RETAIN AND ATTRACT KEY PERSONNEL COULD SIGNIFICANTLY HINDER THE
EXECUTION OF OUR BUSINESS STRATEGY.
Our success depends in large part on the continued service of our management
and other key personnel and our ability to continue to attract, motivate and
retain highly qualified employees. In particular, the services of Mark K.
Leavitt, our president and chief executive officer, David C. Moffenbeier, our
chief operating officer, Harvey J. Anderson, our senior vice president, general
manager of Internet operations, and Cameron Lewis, our vice president, Internet
marketing and e-commerce strategies, are integral to the execution of our
business strategy. If one or more of our key employees leaves MedicaLogic and we
are unable to find a replacement with the combination of skills and attributes
necessary to execute our strategy, we may be unable to execute our strategy
successfully. Competition for skilled employees is intense, and the process of
finding qualified individuals can be lengthy and expensive. We do not maintain
key person life insurance on any of our employees.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE
POSITION MAY BE ADVERSELY AFFECTED.
Our ability to compete depends upon our proprietary systems and technology,
including LOGICIAN INTERNET and LOGICIAN. The steps we currently take to protect
our intellectual property rights may prove to be inadequate, time consuming and
expensive. Despite our efforts, we may be unable to prevent third parties from
infringing upon or misappropriating our intellectual property. Misappropriation
of our intellectual property may make us less competitive and require us to
engage in expensive litigation to enforce or protect our intellectual property
rights or to defend against claims of invalidity.
11
<PAGE>
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST US CAN BE COSTLY AND RESULT IN
THE LOSS OF SIGNIFICANT RIGHTS.
We could be subject to intellectual property infringement claims as the
number of our competitors grows and the functionality of our products and
services overlaps with competing products. One party has recently filed a patent
infringement lawsuit against us and several other companies asserting broad
proprietary rights in processes similar to our electronic medical record
solutions. Similar infringement claims may be asserted against us and may be
successful. We could incur substantial costs and diversion of management
resources defending any infringement claims. In addition, a party making a claim
against us could secure a judgment awarding substantial damages, as well as
injunctive or other equitable relief that could effectively block our ability to
provide products or services. Licenses for intellectual property of third
parties that might be required for our products or services may not be available
on commercially reasonable terms, or at all.
WE ARE VULNERABLE TO INTERRUPTIONS IN OUR OPERATIONS, WHICH COULD HARM OUR
ABILITY TO ATTRACT CUSTOMERS TO OUR WEB SITES.
Failure of our Internet services to function as desired could harm our
ability to attract physicians and consumers to our Web sites. Our operations are
vulnerable to interruption from a variety of sources, many of which are not
within our control, including:
- Power loss and telecommunications failures;
- Software and hardware errors, failures or crashes; and
- Computer viruses and similar disruptive problems.
We have not yet completed comprehensive plans addressing these
contingencies. In addition, some of our communications and information services
are provided through our service providers. We expect to depend on independent
service providers for many of the services we provide through our Internet
Health Services Center, including the routing of transaction data to third-party
payers.
We may have no means of replacing services on a timely basis or at all if
they are inadequate or if there is a service interruption or failure. We may
face liability for the failure of our system to function for any reason.
IF WE ARE HELD LIABLE FOR USE OF DATA WE PROVIDE, WE COULD BE REQUIRED TO PAY
MATERIAL DAMAGES TO INJURED THIRD PARTIES.
We provide data for use by physicians, consumers and other healthcare
stakeholders. This data may be obtained from our physician customers, strategic
partners, other third parties or, with patient consent, from the aggregation of
patient health records. Claims regarding injuries related to the use of this
data may be made in the future, and we may not be able to insure adequately
against these claims. A claim brought against us that is uninsured or
under-insured could lead to material damages against us.
OUR INTERNET INFRASTRUCTURE IS UNPROVEN AND MAY NOT ACCOMMODATE HIGH LEVELS OF
USE.
To date, we have processed a limited number and variety of Internet-based
transactions. In addition, our Internet products and services have only been
used by a limited number of physicians and healthcare consumers. Our
infrastructure may not accommodate increased use while maintaining acceptable
overall performance. To successfully implement our Internet-based business
model, we must continue to expand and adapt our network infrastructure to
accommodate additional users, increased transaction volumes and changing
customer requirements. An unexpectedly large increase in the volume or pace of
traffic on our Web site, the number of physicians using LOGICIAN INTERNET or our
12
<PAGE>
other Internet-based products and services, or orders placed by customers may
require us to expand and further upgrade our technology. This expansion and
adaptation would be expensive and will divert our attention from other
activities.
OUR INABILITY TO PREVENT SECURITY BREACHES COULD DETER PEOPLE FROM USING OUR
PRODUCTS AND SERVICES AND COULD EXPOSE US TO CLAIMS FOR DAMAGES.
Any well-publicized compromise of Internet security could deter people from
using our products and services to conduct transactions that involve
transmitting confidential healthcare information over the Internet.
A security breach could occur if a third party were able to penetrate our
network security and misappropriate our patient and other information. If this
happened, we could also be subject to liability and litigation. The difficulty
of securely transmitting confidential information over the Internet has been a
significant barrier to conducting e-commerce and engaging in sensitive
communications. We may have to devote significant financial and other resources
to protect against security breaches or to alleviate problems caused by
breaches.
WE MAY NOT BE ABLE TO IMPLEMENT OUR NEW MANAGEMENT INFORMATION SYSTEMS IN A
TIMELY MANNER AND THE NEW SYSTEMS MAY NOT BE ADEQUATE TO SUPPORT OUR OPERATIONS.
The growth in the complexity of our business has placed and will continue to
place a significant strain on our operational, financial and management
information systems. In June, 1999 we purchased a new management information
system from Oracle Corporation and the required hardware to support it. This
system includes accounting, operations, purchasing and project billing
capability. We must integrate this system with our Internet products and
services and with our existing customer relationship management system. The
successful implementation of this system is expected to be crucial to our
operations. We may not be able to implement this new system in an efficient and
timely manner and the new system may not be adequate to support our operations.
RISKS RELATED TO THE HEALTHCARE INDUSTRY AND THE INTERNET
FEDERAL AND STATE LEGISLATION AND REGULATION AFFECTING THE HEALTHCARE INDUSTRY
COULD SEVERELY RESTRICT OUR ABILITY TO OPERATE OUR BUSINESS.
We are subject to federal and state legislation and regulation affecting the
healthcare industry. Existing and new laws and regulations applicable to the
healthcare industry could have a material adverse effect on our ability to
operate our business. The federal and state governments extensively regulate the
confidentiality and release of patient records. Additional legislation governing
the distribution of medical records has been proposed at both the state and
federal level. It may be expensive to implement security or other measures
designed to comply with any new legislation. Moreover, we may be restricted or
prevented from delivering patient records electronically.
Other legislation currently being considered at the federal level could also
negatively affect our business. For example, the Health Insurance Portability
and Accountability Act of 1996 mandates the use of standard transactions and
identifiers, prescribed security measures and other provisions within two years
after the adoption of final regulations by the Department of Health and Human
Services. In addition, our success depends on other healthcare participants
complying with these regulations.
If United States Food and Drug Administration, or FDA, regulations were
applicable to any of our products and services, we believe that complying with
those regulations would be time consuming, burdensome and expensive and could
delay our introduction of new products or services. Some computer applications
and software are considered medical devices and are subject to regulation by the
FDA. We do not believe that our current products or services are subject to FDA
regulation. We may, however, expand our product and service offerings into areas
that subject us to FDA regulation. We have no experience in complying with FDA
regulations.
13
<PAGE>
A federal law commonly known as the Medicare/Medicaid antikickback law, and
several similar state laws, prohibit payments that are intended to induce
physicians or others to acquire, arrange for or recommend the acquisition of
healthcare products or services. Another federal law, commonly known as the
Stark law, prohibits physicians from referring Medicare and Medicaid patients
for designated health services to entities with which they have a financial
relationship, unless that relationship qualifies for an explicit exception to
the referral ban. The application and interpretation of these laws are complex
and difficult to predict and could constrain our financial and marketing
relationships.
GOVERNMENT REGULATION OF THE INTERNET COULD SEVERELY RESTRICT OUR ABILITY TO
OPERATE OUR BUSINESS.
Our business is subject to evolving government regulation of the Internet.
Existing as well as new laws and regulations could severely restrict our ability
to operate our business. Laws and regulations may be adopted to govern the
Internet or other online services covering issues such as:
- User privacy;
- Pricing;
- Content;
- Copyrights;
- Distribution; and
- Characteristics and quality of products and services.
The applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Demand for our
applications and services may be affected by additional regulation of the
Internet. For example, until recently Health Care Financing Administration
guidelines prohibited transmission of Medicare eligibility information over the
Internet.
CONSOLIDATION IN THE HEALTHCARE INDUSTRY COULD RESULT IN MORE INTENSE
COMPETITION.
Many healthcare industry participants are consolidating to create integrated
healthcare delivery systems with greater market power. As the healthcare
industry consolidates, competition to provide products and services to industry
participants will become more intense. These industry participants may try to
use their market power to negotiate price reductions for our products and
services. If we were forced to reduce our prices, our revenues and results of
operations could suffer. In addition, the acquisition by third parties of any of
our customers could have an adverse effect on our relationship with that
customer.
RISKS RELATED TO THIS OFFERING AND OUR COMMON STOCK
THE DEMAND FOR AND PRICE OF OUR COMMON STOCK COULD FLUCTUATE SIGNIFICANTLY.
Before this offering, there has been no public market for our common stock.
We cannot guarantee that an active trading market will develop or be sustained
or that the market price of our common stock will not decline. Even if an active
trading market develops, the market price of our common stock is likely to be
highly volatile and could fluctuate significantly in response to various
factors, including:
- Actual or anticipated variations in our quarterly results of operations;
- Announcements of technological innovations or new services or products by
us or our competitors;
- Timeliness of our introductions of new products; and
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<PAGE>
- Changes in financial estimates by securities analysts.
In addition, the stock markets, especially the Nasdaq National Market, have
experienced extreme price and volume fluctuations that have affected the market
prices of equity securities of many technology companies, and Internet-related
companies in particular. These fluctuations have often been unrelated or
disproportionate to operating performance. The trading prices of many technology
companies' stocks are at or near historical highs. These high trading prices may
not be sustained. These broad market factors may materially affect the trading
price of our common stock. General economic, political and market conditions
like recessions and interest rate fluctuations may also have an adverse effect
on the market price of our common stock. In the past, following periods of
volatility in the market price for a company's securities, shareholders have
often initiated securities class action litigation. Any securities class action
litigation could result in substantial costs and the diversion of management's
attention and resources.
SUBSTANTIAL SALES OF OUR COMMON STOCK AFTER THE OFFERING COULD RESULT IN A LOWER
MARKET PRICE OF OUR COMMON STOCK.
Sales of substantial amounts of our common stock in the public market after
this offering, or the perception that these sales will occur, could adversely
affect the market price of our common stock and make it more difficult for us to
raise funds through equity offerings in the future. After the offering, based on
shares outstanding on September 30, 1999, the holders of approximately
16,327,967 of our shares of common stock will be entitled to registration rights
with respect to these shares until the holders may sell the shares under
Rule 144 or 144(k) of the Securities Act. On the 181(st) day after the date of
this prospectus, approximately 22,752,297 shares of our common stock, including
11,139,545 of the shares subject to registration rights, will be eligible for
sale in the public market subject in some cases to volume limitations, based on
shares outstanding on September 30, 1999. In addition, a substantial number of
outstanding shares of common stock and shares issuable upon exercise of
outstanding options will become available for resale in the public market at
prescribed times. After the offering, we intend to register 7,997,192 shares of
common stock reserved for issuance under our stock incentive plans.
OUR RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS WE EXPRESS IN OUR
FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS.
This prospectus contains forward-looking statements that involve risks and
uncertainties, including those discussed above and in other sections of this
prospectus. These statements often contain words like believe, expect,
anticipate, intend, contemplate, seek, plan, estimate or similar expressions.
Forward-looking statements do not guarantee future performance. Because we
cannot predict all of the risks and uncertainties that may affect us, or control
the ones we do predict, these risks and uncertainties can cause our results to
differ materially from the results we express in our forward-looking statements.
Recognize these statements for what they are and do not rely on them as facts.
We are not obligated to update forward-looking statements.
15
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $
million, or approximately $ million if the underwriters' overallotment
option is exercised in full, from the sale of shares of common stock offered by
us. These estimates assume an initial public offering price of $ per share,
after deducting the estimated underwriting discounts and commissions and
offering expenses payable by us.
We expect to use the net proceeds from this offering for working capital and
other general corporate purposes. In addition, although we are not currently
participating in any active negotiations and have no commitments or agreements
with respect to any acquisition, we might use a portion of the remaining
proceeds to pay for acquisitions. We intend to invest the net proceeds from this
offering in short-term, investment grade, interest-bearing instruments until
they are used.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
we do not anticipate paying cash dividends. We currently intend to retain
earnings, if any, to fund the development and growth of our business.
16
<PAGE>
CAPITALIZATION
The table below presents the following information:
- our actual capitalization as of September 30, 1999; and
- our pro forma capitalization after giving effect to the conversion of all
outstanding shares of preferred stock into common stock, the sale by us of
the shares of common stock offered by this prospectus at an
initial public offering price of $ per share and after deducting the
estimated underwriting discounts and commissions and offering expenses
payable by us and the filing upon the closing of the offering of amended
and restated articles of incorporation to increase the number of
authorized shares of common stock to 100 million.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and related notes appearing in this prospectus. The shares
issued and outstanding do not include 2,829,826 shares issuable on the exercise
of outstanding options as of October 15, 1999.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and short-term investments........... $ 45,140 $
======== ========
Capital leases and notes payable, less current portion...... $ 1,659 $
-------- --------
Convertible redeemable preferred stock; 50,000,000 shares
authorized, $99,418 aggregate liquidation preference,
46,091,527 shares designated, 31,901,388 issued and
outstanding at September 30, 1999, actual; no shares
issued or outstanding, as adjusted........................ 97,825
Shareholders' equity (deficit):
Common stock, 100,000,000 shares authorized, 8,926,281
issued and outstanding at September 30, 1999, actual;
100,000,000 shares authorized, shares issued and
outstanding, as adjusted................................ 15,793
Common stock notes receivable............................. (6,449)
Deferred compensation..................................... (988)
Accumulated deficit....................................... (48,920)
-------- --------
Total shareholders' equity (deficit)........................ (40,564)
-------- --------
Total capitalization........................................ $ 57,261 $
======== ========
</TABLE>
17
<PAGE>
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was
approximately $52,491,000 or $2.11 per share. Pro forma net tangible book value
per share represents the amount of our total tangible assets less total
liabilities, divided by the total pro forma number of shares of common stock
outstanding after giving effect to the conversion of all outstanding shares of
preferred stock into common stock. Dilution in net tangible book value per share
represents the difference between the amount per share paid by purchasers of
shares of our common stock in this offering and the net tangible book value per
share of our common stock immediately afterwards.
After giving effect to our sale of shares of common stock offered by
this prospectus and after deducting the underwriting discounts and commissions
and estimated offering expenses payable by us, our pro forma net tangible book
value would have been approximately $ , or approximately $ per share.
This represents an immediate increase in pro forma net tangible book value of
$ per share to existing shareholders and an immediate dilution in pro forma
net tangible book value of $ per share to new investors, as illustrated in
the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
-----------------------
Pro forma net tangible book value per share as of September
30, 1999.................................................. $ 2.11
Increase attributable to this offering......................
-----------------------
Pro forma net tangible book value per share after this
offering..................................................
-----------------------
Dilution to new investors................................... $
</TABLE>
The following table summarizes, as of September 30, 1999 on the pro forma
basis described above, the total number of shares of common stock purchased from
us, the total consideration paid and the average price paid per share by the
existing shareholders and by the new investors based upon an initial public
offering price of $ per share before deducting the estimated underwriting
discounts and commissions and offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------------------ ---------------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------------------- -------- ----------------------- -----------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing shareholders....... 24,876,975 % $114,153 % $ 4.58
----------------------- -----------------------
New investors............... $
---------- ----------------------- -------- ----------------------- -----------------------
Total....................... 100.0% $ 100.0%
========== ======================= =======================
</TABLE>
These tables exclude all options that will remain outstanding upon
completion of this offering. See note 7 to notes to the consolidated financial
statements. The exercise of outstanding options having an exercise price less
than the offering price would increase the dilutive effect to new investors.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with the consolidated financial statements and
accompanying notes, which are included in this prospectus. The consolidated
statements of operations data for the three-year period ended December 31, 1998
and the nine-month period ended September 30, 1999 and the consolidated balance
sheet data as of December 31, 1997 and 1998 and September 30, 1999 are derived
from, and are qualified by reference to, the audited consolidated financial
statements included in this prospectus. The consolidated statements of
operations data for the two-year period ended December 31, 1995 and the
consolidated balance sheet data as of December 31, 1994, 1995 and 1996 are
derived from, and are qualified by reference to, audited consolidated financial
statements that are not included in this prospectus. The consolidated statements
of operations data for the nine-month period ended September 30, 1998 are
derived from unaudited financial statements included in this prospectus and, in
the opinion of our management, include all adjustments, consisting only of
normal recurring adjustments, which are necessary for a fair presentation of the
financial position and results of operations for this period. Historical results
of operations are not necessarily indicative of future results, and the results
for interim periods are not necessarily indicative of the results that may be
expected for the entire year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- ----------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Licenses........................................ $ 2,084 $ 6,765 $ 6,845 $ 7,617 $10,410 $ 6,534 $ 9,620
Service and support............................. 366 772 2,819 5,190 5,750 4,225 5,372
------- ------- -------- -------- ------- ------- --------
Total revenues.................................... 2,450 7,537 9,664 12,807 16,160 10,759 14,992
Operating expenses:
Cost of licenses................................ 263 1,036 2,089 1,702 939 608 813
Cost of service and support..................... 724 2,105 4,031 6,054 5,815 4,354 4,911
Marketing and sales............................. 2,755 5,061 6,667 7,681 7,882 5,647 12,300
Research and development........................ 1,024 2,980 6,583 7,047 8,071 5,981 8,495
General and administrative...................... 376 582 718 1,315 1,151 735 2,511
------- ------- -------- -------- ------- ------- --------
Total operating expenses.......................... 5,142 11,764 20,088 23,799 23,858 17,325 29,030
------- ------- -------- -------- ------- ------- --------
Operating loss.................................... (2,692) (4,227) (10,424) (10,992) (7,698) (6,566) (14,038)
------- ------- -------- -------- ------- ------- --------
Other income (expense):
Interest expense................................ (88) (176) (251) (240) (187) (145) (180)
Interest income................................. 70 172 456 617 707 504 1,113
Other, net...................................... (22) (30) (96) (55) 143 (40) 9
------- ------- -------- -------- ------- ------- --------
Total other income (expense)...................... (40) (34) 109 322 663 319 942
------- ------- -------- -------- ------- ------- --------
Loss before income taxes.......................... (2,732) (4,261) (10,315) (10,670) (7,035) (6,247) (13,096)
Provision for income taxes........................ -- -- -- -- -- --
Accretion of preferred stock redemption
preference.................................... -- -- (49) (149) (197) (147) (285)
------- ------- -------- -------- ------- ------- --------
Net loss attributed to common shareholders...... $(2,732) $(4,261) $(10,364) $(10,819) $(7,232) $(6,394) $(13,381)
======= ======= ======== ======== ======= ======= ========
Net loss per share:
Basic and diluted............................... $ (0.58) $ (0.68) $ (1.58) $ (1.63) $ (1.05) $ (0.93) $ (1.61)
======= ======= ======== ======== ======= ======= ========
Weighted average shares--basic and diluted...... 4,687 6,302 6,576 6,635 6,883 6,882 8,331
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................. $3,545 $10,614 $ 18,651 $ 4,924 $ 4,718 $ 7,081
Working capital........................................ 4,159 10,245 19,096 14,870 16,091 43,151
Total assets........................................... 6,242 14,787 26,074 22,072 24,308 67,727
Long-term obligations, net of current portion.......... 406 1,454 977 278 679 1,659
Convertible redeemable preferred stock................. 5,698 15,795 35,867 42,791 49,782 97,825
Total shareholders' deficit............................ (869) (4,995) (15,317) (26,093) (32,439) (40,564)
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
MedicaLogic was founded in 1985 and released its first DOS-based electronic
medical record product in 1989. In 1996, we released LOGICIAN, our Windows-based
electronic medical record product. From 1994 through 1998, we concentrated on
building our development and implementation capabilities by hiring additional
engineering and sales personnel, improving the functionality of LOGICIAN through
the release of three major upgrades, and implementing our product at customer
sites. During the first nine months of 1999, we released our current version of
LOGICIAN, for which we shipped an upgrade in September 1999. Our revenues
totaled approximately $16.2 million and $15.0 million for the year ended
December 31, 1998 and the nine months ended September 30, 1999, respectively.
All of this revenue was derived from the sale and associated support and
services of our LOGICIAN software product, both directly and through resellers,
to physicians in integrated healthcare delivery systems.
We receive software license revenues from licensing our software products
both directly to end-users and indirectly through resellers. We receive service
revenues from two major sources: customer support contracts and consulting
contracts. Customer support revenue, which consists of annual subscription fees
for ongoing support of the product, including upgrades, is recognized ratably
over the term of the contract, which is typically one year. We derive consulting
revenues primarily from the implementation services performed on a
time-and-materials basis under separate service arrangements related to the
implementation of our software products. We recognize revenues from consulting
services as the services are performed.
During 1996, four customers accounted for approximately 41% of total
revenues. During 1997, two customers accounted for approximately 32% of our
total revenues and in 1998, one customer accounted for approximately 21% of our
total revenues. During the first nine months of 1999, Baylor College of Medicine
accounted for approximately 31% of our total revenues and Carilion Health
Systems accounted for approximately 10% of our total revenues.
Costs of license revenues consist of licensing fees paid to third-party
software vendors, product media, product duplication, and manuals. Costs of
service revenues consist of implementation and support personnel and third-party
service provider costs related to customer support. Our third-party licensing
fees represent charges for use of Oracle databases and industry specific content
we include in our software. The majority of these licensing fees are based on
the number of licenses we distribute to our customers. Marketing and sales
expenses consist primarily of salaries, commissions and bonuses earned by sales
and marketing personnel, travel and promotional expenses and facility and
communication costs. Research and development expenses consist primarily of
salaries and benefits paid to software developers, quality assurance personnel
and technical writers, equipment for software developers and payments to outside
contractors. General and administrative expenses consist primarily of salaries,
benefits and related costs for our finance and administrative personnel and
professional services fees.
We recognize software license revenues consistent with Statement of Position
97-2, SOFTWARE REVENUE RECOGNITION, as amended by Statement of Position 98-4.
These statements provide guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions and have been applied
to transactions entered into after January 1, 1998. The application of SOP 97-2
has not had a material impact on our results of operations.
With the implementation of our Internet business model, we expect that our
historical revenue sources, sales of software licenses and services, will
gradually be replaced by sources of revenue related to our Internet business
model. Our first Internet product, LOGICIAN INTERNET, was not commercially
introduced until October 1999. Our consumer Web site, 98POINT6 is being tested
in a pilot program and
20
<PAGE>
will not be introduced until early 2000. Because our Internet business model is
in an emerging stage, revenue and income potential from our Internet products
and services is unproven. For this reason, we expect our historical revenue
sources will continue to be major contributors to our overall revenues. Despite
the continued importance of our historical revenue sources, you should not use
our past results as a basis to predict our future performance due to the
implementation of our Internet business model.
In addition to our historical revenue sources, we expect to generate future
revenue from the following sources:
- Subscription fees for use of LOGICIAN, rather than the one-time license
fees we have historically charged;
- Subscription fees for LOGICIAN INTERNET, our hosted application that
allows physicians and other healthcare providers to create and manage
electronic medical records over the Internet;
- Transaction fees for drug prescriptions transmitted through the Internet
Health Services Center;
- Transaction fees to process payment claims through our Internet Health
Services Center; and
- Fees charged to advertisers for posting banner and other forms of
advertising on our physician-and consumer-oriented Web sites.
The subscription revenue associated with LOGICIAN and LOGICIAN INTERNET will
be recognized on a monthly basis over the life of the agreement or as services
are rendered. Transaction and advertising fee revenues will be recorded as they
are received.
Since inception, but increasingly during the past year, we have made
substantial investments in infrastructure and in staffing and management to
accommodate current and anticipated future growth. From January 1, 1999 through
September 30, 1999, we hired 78 employees, or approximately 34% of our current
workforce, and invested approximately $9.0 million in capital assets. A large
portion of these assets is dedicated to the development of our Internet Health
Services Center. Our planned growth will require additional staff and
infrastructure.
We have incurred net losses each year since we began operations. We had a
net loss of approximately $7.0 million for the year ended December 31, 1998 and
$13.1 million for the nine months ended September 30, 1999 and, as of
September 30, 1999, had an accumulated deficit of $48.9 million. We intend to
increase further our spending on technology infrastructure development,
marketing and promotion, services development and strategic relationships, all
of which are related to the establishment of our Internet Health Services
Center. As a result, we expect to continue incurring net losses and negative
cash flows from operations at least through 2000.
Effective January 1999, we acquired PrimaCis Health Information
Technology, Inc. in a transaction that was accounted for as a purchase.
PrimaCis, which was founded by faculty members of the Baylor College of
Medicine, was a developer of electronic medical record software and had
developed in-depth Internet-based oncology content for its Internet site. We
paid PrimaCis shareholders total consideration of $6.3 million and paid $153,000
in merger-related costs to acquire the outstanding shares of PrimaCis capital
stock. These amounts consisted of $2.1 million in cash, the issuance of shares
of MedicaLogic common stock valued at $3.3 million and the assumption of
$1.1 million in PrimaCis' liabilities. Of this amount, $3.3 million was
allocated to a customer list, which will be amortized on a straight line basis
over a two-year period. Goodwill in the amount of $3.2 million, reflecting the
excess of the purchase price for PrimaCis over the fair value of the net
tangible and other intangible assets acquired, will be amortized on a
straight-line basis over a four-year period.
At about the time of the PrimaCis acquisition, we entered into an agreement
with the Baylor College of Medicine. This agreement provides that for each
purchase of licenses of LOGICIAN by December 31, 2002 by Baylor College of
Medicine or any other institution or health care provider in
21
<PAGE>
the Houston, Texas area, we will issue as payment to Baylor College of Medicine
shares of our common stock having a then-current fair market value equal to 50%
of the license fees received from that sale, up to an aggregate maximum of
$12.0 million of our common stock. We account for sales of LOGICIAN in the
Houston, Texas area in one of two ways: when we sell additional licenses to
Baylor College of Medicine, the amount of revenue we recognize reflects a sales
discount equal to 50% of the license fee; and when we sell licenses covered by
this agreement to others, we reflect the payment to Baylor College of Medicine
in the form of a sales commission.
For the nine months ended September 30, 1999, we recorded aggregate deferred
compensation of $1.1 million for the grant of stock options and restricted stock
at prices less than the estimated fair value on the grant date. We expect to
record additional deferred compensation of $538,000 in the fourth quarter of
1999. The deferred compensation is being amortized over the vesting period of
the securities, which is generally three years. Of the total deferred
compensation, $70,000 was amortized through the nine-month period ended
September 30, 1999.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -------------------------
1996 1997 1998 1998 1999
-------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses....................................... 70.8% 59.5% 64.4% 60.7% 64.2%
Service and support............................ 29.2 40.5 35.6 39.3 35.8
------ ----- ----- ----- -----
Total revenues................................. 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Cost of licenses............................... 21.6 13.3 5.8 5.7 5.4
Cost of service and support.................... 41.7 47.3 36.0 40.5 32.8
Marketing and sales............................ 69.0 60.0 48.8 52.5 82.0
Research and development....................... 68.1 55.0 49.9 55.6 56.7
General and administrative..................... 7.4 10.3 7.1 6.8 16.7
------ ----- ----- ----- -----
Total operating expenses..................... 207.8 185.9 147.6 161.1 193.6
Operating loss................................. (107.8) (85.9) (47.6) (61.1) (93.6)
Other income (expense):
Interest expense............................... (2.6) (1.9) (1.2) (1.3) (1.2)
Interest income................................ 4.7 4.8 4.4 4.7 7.4
Other, net..................................... (1.0) (0.4) 0.9 (0.4) 0.1
------ ----- ----- ----- -----
Total other income (expense):................ 1.1 2.5 4.1 3.0 6.3
Loss before income taxes..................... (106.7) (83.4) (43.5) (58.1) (87.3)
Provision for income taxes....................... -- -- -- -- --
------ ----- ----- ----- -----
Net loss..................................... (106.7)% (83.4)% (43.5)% (58.1)% (87.3)%
====== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUES
Total revenues, which consisted of software licenses and service revenues,
increased to $15.0 million for the first nine months of 1999 from $10.8 million
for the first nine months of 1998. This increase primarily resulted from an
increase of $3.1 million in software revenue, which in turn was
22
<PAGE>
primarily attributable to increases in the average selling price of LOGICIAN,
partly offset by a decrease in the total licenses sold. The increase in the
average selling price resulted primarily from a higher percentage of products
sold through direct channels versus products sold through reseller channels.
Total service revenue increased to $5.4 million for the first nine months of
1999 from $4.2 million for the first nine months of 1998, due primarily to an
increase in our LOGICIAN installed base to 7,468 users on September 30, 1999
from 5,486 users on September 30, 1998. Service revenue represented 36% of our
total revenues for the first nine months of 1999 and 39% for the same period in
1998. The decrease as a percentage of total revenue was due primarily to the
relatively higher increase in software license revenue compared to service
revenue.
OPERATING EXPENSES
COSTS OF REVENUES
Costs of licenses increased 34%, to $813,000 for the first nine months of
1999 from $608,000 for the first nine months of 1998. Costs of licenses as a
percentage of related license revenues was 8% for the first nine months of 1999
and 9% for the first nine months of 1998. We anticipate some increased costs for
third party licensing fees as we add additional third party content.
Costs of service and support increased 13%, to $4.9 million for the first
nine months of 1999 from $4.4 million for the first nine months of 1998. The
increase in dollar amount resulted primarily from an increase in support and
implementation personnel. Costs of service and support as a percentage of
related service revenues was 91% for the first nine months of 1999 and 103% for
the first nine months of 1998. The decreases in marginal costs of service and
support as a percentage of the related service revenues resulted from allocating
these costs over a larger revenue base. The cost of providing service to
customers as a percentage of associated revenues often varies between periods
because the costs of implementation and support personnel are relatively fixed
and, at any given time, the staff may not be fully utilized. If we are required
to hire additional support staff to service installed licenses on support
contracts, we may experience short term increases in costs relative to the
revenue produced.
MARKETING AND SALES
Marketing and sales expenses increased to $12.3 million for the first nine
months of 1999 from $5.6 million for the first nine months of 1998. Marketing
and sales expenses represented 82% of our total revenues for the nine months
ended September 30, 1999 and 53% of our total revenues for the nine months ended
September 30, 1998. The increase in dollar amount and percentage of our
marketing and sales expenses resulted primarily from costs of $500,000 related
to our LOGICIAN INTERNET Beta Program, amortization of costs of $1.2 million
related to acquiring PrimaCis' customer list, incremental expenses of
$3.6 million related to our new Internet business, including the cost of
independent contractors and the hiring of 27 new employees, and an increase of
$900,000 in other marketing activities, including trade shows and public
relations. We believe that we will need to continue to increase our sales and
marketing efforts to expand our market penetration and increase acceptance of
our Internet products and services.
23
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $8.5 million for the first
nine months of 1999 from $6.0 million for the first nine months of 1998. Of the
increase, $1.4 million was used to fund an increase in the number of software
developers and quality assurance personnel to 81 as of September 30, 1999 from
55 as of September 30, 1998 and $560,000 to fund the use of outside contractors
to support our product development and testing activities. Research and
development costs represented 57% of total revenue for the nine months ended
September 30, 1999 and 56% of total revenues for the nine months ended
September 30, 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $2.5 million for the first
nine months of 1999 from $735,000 for the first nine months of 1998. The
increase resulted from amortization of $539,000 of goodwill related to the
PrimaCis acquisition, $70,000 in compensation expense related to issuing
securities below the estimated fair value, and an increase in finance and
administrative personnel to 23 as of September 30, 1999 from 9 as of
September 30, 1998, to support the growth of our business. These increases were
partially offset by a net decrease of $175,000 related to the settlement of
litigation related to two customer contracts. General and administrative cost
represented 17% of our total revenues for the nine months ended September 30,
1999 and 7% of our total revenues for the nine months ended September 30, 1998.
We believe our general and administrative expenses will continue to increase as
we expand our administrative staff and incur expenses associated with becoming a
public company, including, annual and other public reporting costs, director and
officer liability insurance, investor relations programs and professional
services fees.
OTHER INCOME (EXPENSE)
Other income consists of earnings on our cash and cash equivalents and
short-term investment balances offset by interest expense associated with debt
obligations and other non-operating costs. Other income was $942,000 for the
first nine months of 1999 compared to $319,000 for the first nine months of
1998. The increase in other income is primarily the result of an increase of
$609,000 in interest earned on cash and cash equivalents and short term
investments.
PROVISION FOR INCOME TAXES
As a result of our net operating losses, no provision for income taxes
during the nine-month periods ended September 30, 1999 and 1998 was recorded. As
of September 30, 1999 we had net operating loss carryforwards for tax reporting
purposes of approximately $48.0 million and research and experimentation credits
of approximately $1.6 million which expire through 2019. Approximately
$7.1 million of the net operating loss is subject to an annual utilization
limitation due to ownership changes in prior years.
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
REVENUES
Total revenues increased from $9.7 million in 1996 to $12.8 million in 1997,
and to $16.2 million in 1998. License revenues increased from $6.8 million in
1996 to $7.6 million in 1997, and to $10.4 million in 1998. The increase in
license revenues from 1996 to 1997 primarily resulted from an increase in the
average selling price from 1996 to 1997 due to more sales through direct rather
than reseller channels. The increase in license revenues from 1997 to 1998
continued the trend of realizing higher average selling prices through our
direct sales channel.
24
<PAGE>
Service revenues increased from $2.8 million in 1996 to $5.2 million in
1997, and to $5.8 million in 1998. The increase in the dollar value of service
revenues is the result of support contracts on newly installed licenses that
have been added each year. Service revenue represented 29% of total revenues in
1996, 41% in 1997 and 36% in 1998. The fluctuation in service revenues as a
percentage of total revenues reflects purchasing and implementation cycles of
our customers and a lower level of revenues during the early period of our
business.
OPERATING EXPENSES
COSTS OF REVENUES
Costs of licenses decreased from $2.1 million in 1996 to $1.7 million in
1997, and to $939,000 in 1998. Costs of license revenues as a percentage of
license revenues was 31% in 1996, 22% in 1997 and 9% in 1998. The decrease in
dollar amounts and percentage of revenue amounts from 1997 to 1998 is primarily
due to the more favorable license fee terms negotiated with Oracle.
Costs of service and support increased from $4.0 million in 1996 to
$6.1 million in 1997, and decreased to $5.8 million in 1998. Costs of service
revenues as a percentage of service revenues was 143% in 1996, 117% in 1997 and
101% in 1998. The decrease in dollar amount from 1997 to 1998 reflects the
reorganization of our consulting practice, which included personnel changes, the
relocation of personnel to in-home offices from rented space and the reduction
of our use of third-party contractors and the decreasing marginal cost of
service on each additional installed license.
MARKETING AND SALES
Marketing and sales expenses increased from $6.7 million in 1996 to
$7.7 million in 1997, and to $7.9 million in 1998. The increases in marketing
and sales expenses from 1996 to 1998 resulted primarily from an increase in
commissions paid to sales staff based on increased sales and marketing
activities, including trade shows and public relations. Marketing and sales
expenses represented 69% of our total revenues in 1996, 60% in 1997 and 49% in
1998. The decrease in marketing and sales expenses as a percentage of total
revenues reflects the more rapid growth in our revenues compared to the growth
of marketing and sales expenses due to our early investment in marketing
activities to create product awareness.
RESEARCH AND DEVELOPMENT
Research and development expenses increased from $6.6 million in 1996 to
$7.0 million in 1997, and to $8.1 million in 1998. The increases in research and
development expenses from 1996 to 1998 resulted from an increase in the number
of software developers and quality assurance personnel and the use of outside
contractors to support our product development and testing activities. Research
and development costs represented 68% of total revenues for 1996, 55% in 1997
and 50% in 1998. The decrease in research and development expenses as a
percentage of total revenues primarily reflects the higher increase in revenues
relative to the increase in research and development staff to develop and
enhance our LOGICIAN product.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $718,000 in 1996 to
$1.3 million in 1997, and decreased to $1.2 million in 1998. The increase from
1996 to 1998 resulted primarily from the addition of finance and administrative
personnel and professional services to support the growth of our business during
these periods and, in 1997, reflects an accrual of $450,000 for litigation
expenses. General and administrative expenses represented approximately 7% of
total revenues in 1996, 10% in 1997 and 7% in 1998.
25
<PAGE>
OTHER INCOME (EXPENSE)
Other income increased from $109,000 in 1996 to $322,000 in 1997, and to
$663,000 in 1998. The increase from 1996 to 1998 in other income is mainly
attributable to an increase in interest earned on cash and cash equivalents and
short term investments.
PROVISION FOR INCOME TAXES
As a result of our net operating loss in 1998 and prior years, we made no
provision or benefit for federal or state income taxes.
QUARTERLY RESULTS OF OPERATIONS
The following table presents our unaudited quarterly results of operations
for 1998 and the first nine months of 1999. You should read the following table
in conjunction with our consolidated financial statements and related notes
included elsewhere in this prospectus. We have prepared this unaudited
information on the same basis as the audited consolidated financial statements.
This table includes all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of our financial
position and results of operations for the quarters presented. You should not
draw any conclusions about our future results from the results of operations for
any quarter.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1998 1999 1999 1999
---------- --------- -------------- ------------- ---------- --------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License.................. $ 1,417 $ 2,572 $ 2,545 $ 3,876 $ 2,137 $ 3,650 $ 3,833
Service and support...... 1,394 1,276 1,555 1,525 1,490 1,698 2,184
------- ------- ------- ------- ------- ------- -------
Total revenues......... 2,811 3,848 4,100 5,401 3,627 5,348 6,017
Operating expenses:
Cost of
revenue--license....... 234 215 158 332 188 279 346
Costs of revenue--service
and support............ 1,420 1,414 1,521 1,460 1,414 1,537 1,960
Sales and marketing...... 1,742 1,943 1,962 2,235 2,749 3,510 6,041
Research and
development............ 1,886 2,027 2,068 2,090 2,292 2,800 3,403
General and
administrative......... 203 248 284 416 136 793 1,582
------- ------- ------- ------- ------- ------- -------
Total operating
expense.............. 5,485 5,847 5,993 6,533 6,779 8,919 13,332
Operating loss............. (2,674) (1,999) (1,893) (1,132) (3,152) (3,571) (7,315)
Other income (expense),
net...................... 36 139 144 344 211 206 525
------- ------- ------- ------- ------- ------- -------
Loss before income tax..... (2,638) (1,860) (1,749) (788) (2,941) (3,365) (6,790)
Provision for income
taxes.................... -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income................. $(2,638) $(1,860) $(1,749) $ (788) $(2,941) $(3,365) $(6,790)
======= ======= ======= ======= ======= ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have primarily financed our operations through
private placements of equity securities with investors such as Continental
Casualty Company; Dell Computer Corporation; Franklin Capital Associates
III, L.P.; Furman Selz SBIC, L.P.; Glynn Ventures III, L.P.; New Enterprise
Associates VI, Limited Partnership; Sequoia funds; Soros investment funds; and
VHA, Inc. As of September 30, 1999, net proceeds from these private placements
totaled $97.0 million.
26
<PAGE>
As of September 30, we had cash and cash equivalents of $7.1 million and
short term investments of $38.1 million. We have a $3.3 million term loan
facility with General Electric Capital Business Asset Funding Corporation to
finance the purchase of new capital equipment. We have borrowed $2.1 million
under this facility, and $1.2 million remains available. Notes issued under this
facility are payable in two years if they relate to the purchase of computer
equipment and in three years if they relate to other office equipment. Interest
accrues annually at rates ranging from 9.4% to 10.4%. Principal and interest are
payable monthly in arrears and amortized over the term of the note.
In August 1999, we entered into a leasing arrangement for the purpose of
leasing computer equipment for the development of our Internet products and
services. The cost of the financed equipment totaled $1.8 million with a lease
term of two years. We paid $423,000 of this amount as a down payment. The
remaining principal and interest is amortized over the life of the lease.
Our operating activities resulted in net cash outflows of $4.3 million for
the first nine months of 1999 and $5.0 million for the first nine months of
1998. The reduction in cash outflows during the first nine months of 1999
resulted from improved collections on customer contracts and an increase in
accounts payable due to the timing of invoice due dates. Cash outflows in 1997,
1998 and 1999 resulted from our continued investment in research and
development, consulting services and sales and marketing, which led to operating
losses.
Investing activities used cash of $42.4 million in the first nine months of
1999. Of that amount, $9.0 million was used to purchase fixed assets,
$2.1 million was used for the acquisition of PrimaCis and $43.0 million was
invested in short term investment instruments. Financing activities provided
cash of $49.1 million in the nine months ended September 30, 1999, $7.8 million
in 1998 and $5.6 million in 1997, primarily through the issuance of equity
securities and partially offset by payments on capital equipment lease and note
obligations.
We currently anticipate that we will continue to experience significant
growth in our operating expenses as we:
- Enter new markets for our products and services;
- Increase marketing activities;
- Increase research and development spending;
- Develop new distribution channels;
- Expand our infrastructure; and
- Improve our operational and financial systems.
These operating expenses will consume a material amount of our cash
resources, including a large portion of the proceeds of this offering. We
believe the net proceeds of this offering, together with our existing cash and
cash equivalents, and available bank borrowings, will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next 12 months. Thereafter, we may require additional funds to support our
working capital requirements or for other purposes and may seek to raise these
additional funds through public or private equity financing or from other
sources. We may not be able to obtain adequate or favorable financing at that
time. Any financing we obtain may dilute your ownership interest.
YEAR 2000 COMPLIANCE
Many currently installed computer systems are not capable of distinguishing
21(st) century dates from 20(th) century dates. As a result, beginning on
January 1, 2000, computer systems and software used by many companies and
organizations in a wide variety of industries including technology,
transportation, utilities, finance and telecommunications, will produce
erroneous results or fail unless they have been
27
<PAGE>
modified or upgraded to process date information correctly. Significant
uncertainty exists in the software industry and other industries concerning the
scope and magnitude of problems associated with the century change. We recognize
the need to ensure our operations will not be adversely affected by Year 2000
software failures. We are assessing the readiness of our software products and
our information technology and non-information technology systems and the
potential overall impact of the impending century change on our business,
financial condition and results of operations.
Based on our assessment to date, we believe the current versions of our
software products are Year 2000 compliant; that is, they are capable of
adequately distinguishing 21(st) century dates from 20(th) century dates.
However, our products are generally integrated into enterprise systems involving
sophisticated hardware and complex software products that may not be Year 2000
compliant.
We periodically review our internal management information technology and
other systems to identify any products, services or systems that are not
Year 2000 compliant and to take corrective action. Significant information
technology systems include our production system, composed of the servers,
networks and software that comprise the underlying technical infrastructure that
runs our business, and various internal office systems. Our significant
non-information technology systems include the telephone systems, air
conditioning and security system. To date, we have not encountered any material
Year 2000 problems with our computer systems or any other equipment that might
be subject to these problems.
In addition to assessing the readiness of our systems, we have gathered
information from, and have directly communicated through written correspondence,
telephone calls and in face-to-face meetings with, our third-party systems and
software vendors, as well as other suppliers, to identify and, to the extent
possible, resolve issues involving the Year 2000 problem. Based on
representations made to us by applicable suppliers, we believe that the
third-party software and systems that are material to our business are Year 2000
compliant. However, we have limited or no control over the actions of our
third-party suppliers. Thus, while we expect that we will be able to resolve any
significant Year 2000 problems with our systems, we cannot guarantee that our
third-party suppliers will resolve all Year 2000 problems with their systems
before the occurrence of a material disruption to our business. Any failure of
material third-party suppliers to resolve Year 2000 problems with their systems
in a timely manner would have a negative effect on our ability to conduct
business.
The majority of our Internet development and marketing groups will be moving
into a new facility in the fourth quarter of 1999 at a location currently under
construction. Before the relocation, we will complete our evaluation of whether
the infrastructure and building systems associated with the facility, such as
security and sprinkler systems, and all information technology systems, such as
telephone and computer network systems, are Year 2000 compliant.
In addition, we cannot be certain that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside of our control will be Year 2000 compliant. The failure by these
entities to be Year 2000 compliant could result in a systemic failure beyond our
control, such as a prolonged Internet, telecommunications or electrical failure,
that could prevent us from delivering our services to our customers, decrease
the use of the Internet or prevent users from accessing our Web site, any of
which could have a material adverse effect on our business, financial condition
and results of operations.
We do not expect the total cost of these Year 2000 compliance activities to
be material to our business, financial condition and results of operations. To
date, we have spent approximately $450,000 on Year 2000 compliance issues and
expect to incur approximately $200,000 in additional expenses to evaluate and
address these issues. These costs and the timing of when we plan to complete our
Year 2000 modifications and testing processes are based on our management's
estimates. However, we may not identify and correct all significant Year 2000
problems before January 1, 2000. Year 2000
28
<PAGE>
compliance efforts may involve significant time and expense and unremediated
problems could materially adversely affect our business, financial condition and
results of operations.
We may face claims based on Year 2000 problems in other companies' products
or issues arising from the integration of multiple products within an overall
system. Although we have not been a party to any litigation or arbitration
proceeding involving our products or services on Year 2000-related disputes, any
liability we have for Year 2000 related damages, including consequential
damages, could materially adversely affect our business, financial condition and
results of operations. In addition, we believe that the purchasing patterns of
customers and potential customers may be affected by Year 2000 compliance. These
expenditures may result in reduced funds available to purchase software products
such as those we offer. To the extent Year 2000 issues cause a significant delay
in, or cancellation of, decisions to purchase our products or services, our
business, financial condition and results of operations would be materially
adversely affected.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes methods
of accounting for derivative financial instruments and hedging activities
related to those instruments as well as other hedging activities. Because we
currently hold no derivative financial instruments and do not currently engage
in hedging activities, adoption of SFAS No. 133 is expected to have no material
impact on our financial condition or results of operations. In June 1999, the
FASB issued Statement No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133. Statement
No. 137 defers the effective date of Statement No. 133 for one year. Statement
No. 133, as amended, is now effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000.
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position, or SOP, 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1 requires that
entities capitalize some costs related to internal use software once specified
criteria have been met. We are required to implement SOP 98-1 for the year
ending December 31, 1999. Adoption of SOP 98-1 is expected to have no material
impact on our financial condition or results of operations.
In December 1998, the AICPA issued SOP 98-9, MODIFICATION OF SOP 97-2,
SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS. SOP 98-9
requires recognition of revenue using the "residual method" in a
multiple-element software arrangement when fair value does not exist for one or
more of the delivered elements in the arrangement. Under the "residual method,"
the total fair value of the undelivered elements is deferred and recognized in
accordance with SOP 97-2. We are required to implement SOP 98-9 for the year
ending December 31, 2000. SOP 98-9 also extends the deferral of the application
of SOP 97-2 to other multiple-element software arrangements through our fiscal
year ending December 31, 1999. Adoption of SOP 98-9 is expected to have no
material impact on our financial condition or results of operations.
29
<PAGE>
BUSINESS
OVERVIEW
Our business is connecting physicians and patients through the Internet. For
physicians, we offer a line of enterprise and Internet-based electronic medical
record products and services for use at the point of care in the exam room, with
configurations suitable for practices of all sizes. For patients, we will
provide a Web site that will allow them to access healthcare information from
their physician-generated medical record, enter personal medical information and
effectively communicate with their physician. For both physicians and patients,
we will provide focused healthcare content and commerce opportunities, keyed to
information in a selectively shared database that unites physicians and
patients. Together, these products, services and databases will comprise our
Internet Health Services Center. We believe we can increase the efficiency and
quality of healthcare and enhance the physician-patient relationship through our
Internet Health Services Center.
Founded in 1985, MedicaLogic has been developing, marketing and supporting
electronic medical records for over a decade and has products in daily use by
physicians across the country. While most healthcare information systems have
primarily supported financial and administrative functions, we have focused
exclusively on the challenge of providing clinical solutions that are used by
physicians at the point of care to create and access the electronic medical
record. Our customers include academic medical centers such as Baylor College of
Medicine in Houston, Texas, integrated healthcare delivery systems such as
Providence Health System in Portland, Oregon, and other customers such as the
NASA space shuttle program. More than 7,000 health professionals, including
approximately 3,000 physicians, now maintain electronic medical records with our
enterprise electronic medical record software, constituting an estimated base of
over 7 million electronic patient records. Our technology will use the Internet
to link healthcare consumers to physicians using either our enterprise or
Internet-based electronic medical record. We believe we are a leading provider
of electronic medical record software in the healthcare industry.
The Internet, with its open architecture and broadening availability at
home, in the workplace and at the point of care, makes it possible for us to
create our Internet Health Services Center and make electronic medical records
more useful and cost-effective for physicians who practice alone, in small
groups or with integrated healthcare delivery networks. As a result, we believe
we can substantially accelerate the rate of adoption of electronic medical
record technology by physicians. As these electronic medical records are
created, our Internet Health Services Center will make available to consumers
accurate and timely access to their physician-created medical information. By
connecting physicians and consumers around this shared database of Internet
health records, we believe we can enhance the physician-patient relationship and
make common communications processes, such as prescription refills or
appointment requests, much more convenient. Finally, we expect to offer
healthcare consumers a combination of health news, education, goods and services
that will be precisely tailored to their health status and interests because it
will be based on the physician-created clinical information included in their
personal health record.
INDUSTRY BACKGROUND
OVERVIEW OF THE HEALTHCARE INDUSTRY. According to the Health Insurance
Association of America, healthcare is the largest single sector of the U.S.
economy, consuming approximately $1 trillion annually, or 14% of the country's
gross domestic product. The participants include:
- PATIENTS: the individual consumers of healthcare services;
- PROVIDERS: physicians and organizations such as hospitals, rehabilitation
centers and nursing homes;
30
<PAGE>
- SUPPLIERS: manufacturers and distributors of goods such as
pharmaceuticals, medical devices and healthcare supplies, and providers of
ancillary services such as laboratories and others; and
- PAYERS: the Medicare and Medicaid programs, indemnity insurers, health
plans, employers, individuals, government agencies, insurance companies,
managed care organizations and other enterprises that pay the bills for
healthcare.
In the midst of this complex industry, and despite additional complexity
introduced by managed care programs, the physician remains the ultimate
decision-maker. Based on data contained in 1999 ENVIRONMENTAL ASSESSMENT, a
joint publication of VHA and Deloitte & Touche, 85% of the dollars spent on
healthcare, such as admitting patients and ordering lab tests, are initiated by
the attending physician. However, the information the physician relies upon to
make healthcare decisions is largely contained in a paper record that often is
unorganized and cannot be sorted or retrieved easily or effectively.
Inefficiencies within the healthcare system consume enormous amounts of
time, resources and money. In a recent report to Congress and the General
Accounting Office dated November 1998, the Health Care Financing Administration,
or HCFA, estimated that over $250 billion, or 25% of every healthcare dollar, is
wasted through the delivery of unnecessary care, performance of redundant tests
and procedures and excessive administrative costs. As a result, HCFA has
instituted a program to monitor physician billing practices, which has forced
physicians to spend more time writing and dictating to comply with strict
documentation requirements. Because of this regulatory burden and other
administrative burdens created by managed care, the length of a typical
physician-patient encounter has been reduced.
THE PATIENT MEDICAL RECORD. The patient medical record developed and
maintained by the physician is of paramount importance in the U.S. healthcare
system. This medical record chronicles all patient history, encounters,
medication orders, procedures, referrals and vital statistics. All transactions,
from the order of laboratory tests, medical procedures and medication
prescriptions to invoice generation, payment requests, payer documentation
compliance and clinical research data compilation are recorded in the patient's
medical record. Physicians require this information about specific patients to
diagnose accurately and prescribe appropriate treatments.
Despite increasing needs by the healthcare industry for information about
its processes and outcomes, the vast majority of clinical data is still recorded
today in handwritten or hand-typed notes filed within paper charts which cannot
be accessed or aggregated and organized electronically. Recent studies have
demonstrated that paper charts are unavailable for patient encounters up to 30%
of the time, and that the data within them is frequently inaccurate and
incomplete, missing diagnoses, allergies, medication details, and plans for
follow-up. Studies show that six out of every 100 hospital admissions are the
result of an adverse drug event of which 28% were preventable. Besides the
obvious impact on quality, studies have also shown cost consequences, such as
laboratory tests being unnecessarily duplicated 11% of the time solely because
results have been misfiled.
GROWTH OF THE INTERNET AND APPLICABILITY TO HEALTHCARE. The Internet's open
architecture, accessibility and growing acceptance make it an increasingly
important means of information exchange for both business-to-business and
business-to-consumer interaction. Use of the Internet is rapidly expanding from
simple information publishing, messaging and data gathering to critical business
transactions and confidential communications.
We believe the Internet has changed the electronic medical records software
environment and made computerized tools more useful and acceptable to
physicians. In the past, two principal factors have limited the rate of adoption
by physicians of computerized tools for creating and accessing the medical
record. First, the cost of acquiring, installing and maintaining the
workstations, servers and networks required for a conventional client-server
product exceeds the capital budgets of most physician practices. Second, there
has been a shortage of personnel skilled in implementing advanced
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information technology within the physician office sector. Internet-hosted
applications have the potential to dramatically lower the capital and resources
required of customers, insulating them from the cost and complexity of server
configuration and administration. In addition, the availability and falling cost
of personal computers, and the simple point-and-click paradigm of the Internet
have raised the level of computer usage within the general population and
clearly shown the benefit of easily accessible digital information. Physicians
have not been left behind in this diffusion of new technology: a 1998 survey
published in Modern Physician magazine reported that 84% of doctors surveyed
used the Internet for e-mail and 78% used the Internet for educational purposes.
Moreover, reports indicate that this trend will continue as a new generation of
physicians who are more familiar with Internet technology enter the profession.
CONSUMER INTEREST IN HEALTHCARE INFORMATION. Consumer interest in
healthcare information is growing rapidly, driven in part by consumers' needs to
form their own opinions about treatment options and restrictions imposed by
their health plan, as well as a perception that physicians have less time to
explain their health conditions and treatments to them. According to a 1997
survey in the Journal of the American Medical Association, 43% of U.S. adults
who used the Internet were seeking health information. According to CYBER
DIALOGUE, 78% of Internet users with health insurance are interested in managing
their health insurance benefits online and 23% of all Internet users are
interested in purchasing prescription drugs online. Also according to CYBER
DIALOGUE, 90% of all Internet users have health insurance. In addition, the
Department of Health and Human Services has recently adopted guidelines
stipulating that individuals have a right to access their own or their
dependents' medical information. Finally, as healthcare payment models shift
more of the financial responsibility for healthcare to the consumer, we expect
consumer interest in healthcare information and treatment options to increase.
THE MEDICALOGIC SOLUTION
Our solution is the Internet Health Services Center, which will integrate
the following:
- ELECTRONIC MEDICAL RECORDS--for physicians, Internet-hosted applications,
which have been commercially available since October 1999, and
Internet-enabled client-server applications, which will become
commercially available in early 2000, used at the point of care to
document physician-patient encounters and manage clinical information.
- PERSONAL HEALTH PORTFOLIO--for consumers, a compelling Internet
application, which will become commercially available in early 2000, and
let consumers maintain a personal health portfolio, combining portions of
their physician-created electronic medical record with personally entered
information.
- CONTEXT-SPECIFIC CONTENT AND E-COMMERCE--for both consumers and
physicians, health information content and e-commerce opportunities, which
will become commercially available beginning in mid 2000, precisely
tailored to the patient's clinical conditions and needs based on data in
the Internet Health Record. The content and e-commerce will be provided
through strategic relationships with our e-healthcare partners.
- INTERNET HEALTH RECORD--a highly secure, clinically rich and deeply
structured core database for use by physicians, patients and our strategic
partners, which, beginning in early 2000, will combine data from the
electronic medical record, the personal health portfolio and our strategic
partners. This core database will allow for the sharing of selective data
among all the participants in the Internet Health Services Center.
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The shaded center of the following diagram shows graphically that the
Internet Health Record will consist of data in personal health portfolios
entered by patients, data in electronic medical records entered by physicians
and services and content provided by our strategic eHealthcare partners.
THE MEDICALOGIC INTERNET HEALTH SERVICES CENTER
eHEALTHCARE PARTNERS
[GRAPHIC]
HEALTHCARE CONSUMERS PHYSICIANS
[graphic containing three overlapping circles. In the top circle is caption
"Context-specific Content and e-Commerce," in the left circle is caption
"Personal Health Portfolio" and in the right circle is caption "Electronic
Medical Record." The overlapping section of the three circles contains the
caption "Internet Health Record."]
The MedicaLogic solution provides the following key benefits:
IMPROVED QUALITY OF CARE. Our solution is designed to increase patient
medical information flows among all healthcare participants, which we believe
will ultimately result in more accurate diagnoses and more timely and
appropriate treatments. Online access to accurate, up-to-date healthcare records
will facilitate timely and accurate determinations by physicians regarding a
patient's condition and appropriate treatment. In particular, this access could
significantly enhance the ability of providers in remote areas to provide
quality care. Using our solution, physicians will be able to enter and access
patient-specific data online at the point of care, allowing them, for example,
to review data regarding potentially harmful drug interactions, without manually
searching through the often unorganized and incomplete paper records. We believe
these are just a few of the benefits provided by our solution that will result
in improved quality of care.
EMPOWER HEALTHCARE CONSUMERS WITH INFORMATION REGARDING THEIR
HEALTHCARE. Whether they see a physician themselves on a regular or episodic
basis, or act as a coordinator of healthcare for a child, elderly parent or
other relative, healthcare consumers want more information and more control over
their healthcare needs. Through the use of the Internet, our solution is
designed to increase information flows among all healthcare participants,
including patients, which ultimately gives patients greater control. For healthy
adults, our solution will help them gather their medical and family history and
set and achieve wellness goals. For those with significant illness together with
these persons' healthcare coordinators, our solution will allow them to manage
multiple patient records generated by different physicians, provide a
physician-patient communication channel for managing disease, deliver
educational information and offer a convenient way to purchase healthcare
products. With the adoption of legislation and guidelines that will require
providers to give patients access to their medical records, we believe the
electronic access to healthcare records that will be provided to patients and
others
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through our solution is timely and significant. Likewise, our solution will
permit consumers to communicate electronically with other healthcare
participants, such as payers and suppliers, giving them quicker, more efficient
and more effective access to prescription drugs, payment services and
information and other health-related supplies and services.
IMPROVED PHYSICIAN-PATIENT RELATIONSHIP. Our Internet solution is designed
to facilitate communication between physicians and patients. We believe improved
physician access to information at the point of care will result in
higher-quality clinical interaction between physicians and patients. Likewise,
providing patients with better access to information and electronic
communication with physicians will result in a better understanding of physician
instructions by patients and, ultimately, a lower risk of treatment error.
REDUCED HEALTHCARE COSTS. Our solution is designed to reduce healthcare
costs and improve the management of patient records by reducing the
inefficiencies of manual and paper-based transactions, eliminating redundant
data entry, reducing transcription costs, reducing hospitalizations related to
harmful drug interaction events, reducing repetitive and unnecessary laboratory
tests resulting from inaccurate or misplaced records, rationalizing entry and
availability of Health Care Financing Administration-mandated patient chart and
account coding information and decreasing the communication inefficiencies
created by isolated proprietary systems. In addition, through greater efficiency
and better access to patient medical records, health maintenance should be
improved and the costs of treatment reduced.
OUR GROWTH STRATEGY
Our objective is to be the leading provider of Internet-based electronic
health record information. Our strategy to achieve this objective has the
following key elements:
GAIN RAPID ADOPTION BY PHYSICIANS OF OUR ELECTRONIC MEDICAL RECORD
SOLUTIONS. We intend to build on our position as the leading provider of
electronic medical record solutions to define the industry standard for this
service. Using Internet technology, we are delivering a solution at a
dramatically lower cost than was previously possible, which will allow the
physician to reduce his operating costs from the first month of use. We believe
the value of our solution to physicians will increase and its adoption rate will
accelerate as physicians standardize on electronic records and it becomes
possible to exchange electronic medical records in the course of referrals and
transfers of care. Another key component of creating physician-friendly software
is our unique KnowledgeBank, an Internet-based community repository that is
available today at our MEDICALOGIC.COM Web site and allows physicians to submit
their ideas for the design and layout of clinical encounter forms. The best
ideas are implemented and then made available to all physician customers at no
additional cost. As a result of KnowledgeBank, the refinement and applicability
of our product for specific practices has been continually increasing. As of
September 30, 1999, our electronic medical record solutions were being used by
more that 7,000 health professionals, including approximately 3,000 physicians,
constituting an estimated base of over 7 million electronic patient records.
OFFER THE MOST COMPELLING WEB DESTINATION FOR HEALTHCARE CONSUMERS. We
believe that our Web-site, 98POINT6, will be highly valued by consumers. This
Web site is currently being tested in a pilot program and will be released
commercially in early 2000. When released, the Web site will provide consumers
with access to portions of their physician-generated medical records, enable
consumers to communicate with physicians and contain highly personalized content
surrounding a patient's personal health data. We also believe that as word
spreads among consumers of this new level of healthcare service, consumers'
usage will increase physician interest in adopting the electronic medical
records solutions that make the Internet Health Record possible.
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BECOME A CATALYST OF CLINICAL E-COMMERCE TRANSACTIONS. Because of our
unique position at the point of care, where clinical decisions are made that
influence the majority of healthcare expenditures, we believe our systems can
provide decision support that makes healthcare more consistent and efficient.
For example, in LOGICIAN, the physician can quickly select a drug, screen the
patient's medical record for harmful drug interactions, check the cost and
confirm the acceptability of the chosen drug within the formulary of that
patient's health plan, all before the physician has released the prescription to
the patient. Without electronic medical records, none of the automatic checks
are made, and prescriptions may be rejected when the patient arrives at the
pharmacy, creating inefficiencies and frustrations. The desirability of using
our systems at the point of care will position us to become a catalyst of
clinical e-commerce transactions, which will be completed through strategic
partnerships with the appropriate healthcare stakeholders, such as pharmacies,
laboratories and electronic claims clearinghouses. We expect these e-commerce
services to start becoming available in mid 2000.
UTILIZATION OF OUR LARGE, CLINICALLY-RICH DATABASE. As physicians and
patients use our systems, we will develop a large and clinically-rich database.
With the consent of providers and patients, and in accordance with legal
requirements, the aggregated statistical and epidemiological data may be
marketed to a range of interested parties in the healthcare industry. These
include clinical research organizations, pharmaceutical companies and
governmental agencies. We believe that the information in this database has the
potential to become one of the most valuable resources in the healthcare
industry. We expect to begin providing data to these third parties in late 2000
or early 2001.
PRODUCTS AND MARKETS
The primary target markets for our solution consist of healthcare providers
and healthcare consumers. The healthcare provider market is divided into two
segments: physicians in private practice and physicians in integrated healthcare
delivery systems. In addition, with appropriate patient consent, and in
compliance with applicable law, we intend to aggregate anonymous data contained
in the Internet Health Record and market the information to a variety of parties
in the healthcare industry.
PHYSICIANS IN PRIVATE PRACTICE. There are approximately 450,000 physicians
in private practice, constituting approximately 75% of the practicing physician
population in the United States. Our product offering for this market is
LOGICIAN INTERNET, which we introduced commercially in October 1999. LOGICIAN
INTERNET provides the following benefits:
- The creation of required documentation at a lower cost and with higher
quality than is currently possible with handwriting or
dictation/transcription;
- The ability to verify automatically compliance with Health Care Financing
Administration documentation guidelines for the level of service billed;
- The ability to obtain secure and rapid access to key patient clinical
information from any Web browser by accessing the MEDICALOGIC.COM Web
site;
- The ability to be used at the point of care in the exam room, without
requiring a continuous Internet connection;
- The ability to securely store electronic records at our data center; and
- Additional planned benefits in future releases including integration of
laboratory results, electronic prescription transmission, claims
submission and eligibility checking as well as the ability of physicians
to communicate with patients using 98POINT6 by sharing records data and
exchanging messages on the patients' personal health portfolios. We expect
these features to start becoming available in mid 2000.
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To minimize the challenges for nontechnical users in installing software and
obtaining Internet access, LOGICIAN INTERNET is available as a complete,
ready-to-run solution. For a monthly fee, a physician receives a complete
package that includes an ultramobile laptop computer from Dell Computer
Corporation, pre-installed speech recognition software from Lernout & Hauspie,
Internet access service and the LOGICIAN INTERNET hosted application with
storage for an unlimited number of charts. For users who already have a suitable
computer and Internet access, the hosted application and storage service is made
available at a lower monthly fee.
PHYSICIANS IN INTEGRATED HEALTHCARE DELIVERY SYSTEMS. Integrated healthcare
delivery systems currently employ approximately 150,000 physicians. Our
solutions for this market include LOGICIAN, a comprehensive client-server based
electronic medical record software solution that has been commercially available
for several years, and LOGICIAN INTERNET, depending on the needs of the
institution. Clients will be able to migrate between LOGICIAN and LOGICIAN
INTERNET in future releases. After delivering first-generation electronic
medical record products for the PC-DOS environment from 1990 to 1995, we
released LOGICIAN for the Windows client-server environment in 1996 and have
delivered three major upgrade releases since then. Our current customers include
Allina Health System, Baylor College of Medicine, Carilion Health System,
Providence Health System, Riverside Health System and more than 30 others.
LOGICIAN provides the following benefits specially designed for this market:
- Extensive clinical decision support to improve outcomes, including
preventive care reminders, drug interaction and allergy checking and
formulary management;
- Enhanced ability to measure and manage patient populations using query,
reporting and intervention tools;
- The creation of required documentation at a lower cost and with higher
quality than is currently possible with handwriting or
dictation/transcription;
- The ability to automatically verify compliance with Health Care Financing
Administration documentation guidelines for the level of service billed,
which will help capture revenue for which physicians are not being
adequately reimbursed today; and
- The ability to be used at the point of care, in the exam room.
In future releases, we expect that LOGICIAN will also provide the following
benefits:
- The ability to store electronic records at our data center securely;
- The ability of physicians to communicate with patients using 98POINT6 by
sharing records data and exchanging messages via their personal health
portfolio; and
- Additional planned benefits in future releases including integration of
laboratory results, electronic prescription transmission and eligibility
checking.
LOGICIAN interfaces have been developed and implemented with major vendor
systems encountered in the integrated healthcare delivery system environment,
including laboratory systems, practice management systems and transcription
systems. We intend to expand the interfacing capabilities of LOGICIAN to include
e-commerce transaction capabilities such as electronic prescription
transmission. We will continue to deliver an enterprise-wide electronic medical
record solution to this market, evolving from its traditional license-based
pricing to monthly subscription pricing. We also expect to enhance the
enterprise product's compatibility with the Internet and the interconnectivity
between LOGICIAN and LOGICIAN INTERNET.
HEALTHCARE CONSUMERS. We estimate that at least 75% of Americans are
healthcare consumers, whether they see a physician themselves on a regular or
episodic basis, or act as a coordinator of
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healthcare for a child, elderly parent, or other relative. Healthcare consumers
want more information and more control over their healthcare. To provide this,
we will offer a Web site 98POINT6, which is currently in a pilot program and
which we expect to be commercially available in early 2000. 98POINT6 will
provide the following benefits for healthcare consumers:
- The ability to securely view summary data from the physician, including
medications, diagnoses, allergies, health directives and laboratory
results;
- The ability to enter information about medical and family history,
wellness goals and behaviors into a personal health portfolio;
- The ability to integrate these two sources of data into the Internet
Health Record, providing useful information that can be shared selectively
with other individuals and health professionals;
- The ability to conveniently communicate with their personal physician, to
request appointments, obtain medication refills, ask questions or clarify
their records;
- The ability to access health information content that is tailored to their
personal needs through data in the Internet Health Record; and
- The ability to engage in commerce, which would also be tailored to
specific medical needs through data in the Internet Health Record.
The personal health portfolio will have the appeal of a personalized Web
page while providing specialized tools for health data entry and display, and
specific viewing privileges controlled by the individual. For a child, it will
provide a visual record of growth and development as well as a timeline of
medical incidents. For healthy adults, it will help them gather their medical
and family history and set and achieve wellness goals. For those with
significant illness together with these persons' healthcare coordinators, it
will allow them to manage multiple patient records generated by different
physicians, provide a physician-patient communication channel for managing
disease, deliver educational information and offer a convenient way to purchase
medical products.
OTHER HEALTHCARE STAKEHOLDERS. As a result of our position as a provider
and custodian of personal and professional health data on the Internet, we have
the opportunity to become a catalyst of healthcare e-commerce transactions, such
as placing prescription orders with pharmacies, and to become a healthcare
infomediary, providing aggregated and anonymous health data to organizations
such as clinical research organizations. With the consent of individual patients
and physicians, and in compliance with applicable legal requirements, these
opportunities include:
- Pharmacy--delivery of new and refill prescription orders from physicians
and patients to pharmacies and pharmacy benefit managers;
- Laboratory--delivery of orders and return of results to physicians and
patients;
- Payers--direct submission of claims to clearinghouses from physicians
using electronic data interchange and electronic bill presentment/payment
to clearinghouses by physicians on behalf of patients using their personal
health portfolio;
- Clinical research organizations--enhanced recruitment of patients for
studies through automated screening and notification;
- Healthcare organizations, both government and private--aggregated and
anonymous data about the health of designated populations for
epidemiologic research, planning and management;
- Pharmaceutical marketing research--more accessible data on the use and
outcomes of drugs; and
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- Advertising/sponsorship--highly personalized and targeted marketing to
consumers and physicians for healthcare-related products or services.
We expect to begin providing this data beginning mid 2000 through 2001.
CUSTOMER SERVICE AND SUPPORT
We believe effective customer service is essential to both attracting and
retaining physician usage of our electronic healthcare applications as well as
attracting consumers and retaining them as customers of our Internet-based
services. We are acutely sensitive to the demands for person-to-person
responsiveness of the healthcare community. We provide a wide range of customer
support services through a staff of customer service personnel, multiple call
centers and an e-mail help desk. We also offer Web-based support services that
are available 24 hours a day, seven days a week and are frequently updated to
improve existing information and to support new services. Our ongoing telephone
support is accessible by a toll-free telephone number and is available from
either 5 a.m. to 6 p.m. Pacific Time, Monday through Friday or, for an
additional charge 24 hours a day, seven days a week. Our operators screen all
requests for telephone support and direct the call to the appropriate customer
service personnel. Technical support personnel are responsible for consulting
with our strategic partners regarding technical support issues and for resolving
technical problems encountered by users, strategic partners or other parties. We
also employ technical support personnel who work closely with our direct sales
force, distribution partners and customers. We provide our customers with the
ability to purchase maintenance for our applications and services, which
includes technical support and upgrades. We also provide training programs for
our customers.
In addition, we provide enterprise planning, site evaluation, work flow
preparation, hardware and software installation, interface development and
installation and training of physicians and their staff in connection with the
implementation of our LOGICIAN application. Enterprise and site evaluation helps
us understand how best to implement our LOGICIAN application within the
enterprise and physician's office work flow. The objective of the implementation
process is to maximize the benefits of electronic medical records to the
enterprise and the physician's practice.
SIGNIFICANT CUSTOMERS
We market our products and services to physicians and large integrated
healthcare delivery networks. Because of our historical reliance on large
integrated healthcare delivery networks, a large portion of our revenue has been
derived from relatively few customers. In 1996, we derived approximately
$1.5 million, or 16%, of our revenue from North Memorial Medical Center,
$1.0 million, or 11%, of our revenue from Eli Lilly & Company, $990,000, or 11%,
of our revenue from Arkansas Blue Cross Blue Shield and $920,000, or 10%, of our
revenue from Riverside Physicians Services. In 1997, we derived approximately
$2.7 million, or 20%, of our revenue from VHA, Inc., one of our distribution
partners, and approximately $1.6 million, or 12%, from Wake Forest Baptist
Medical Center. In 1998, we derived approximately $3.4 million, or 21%, of our
revenue from VHA. In the first nine months of 1999, we derived approximately
$4.5 million, or 31% of our revenue from Baylor College of Medicine and
approximately $1.5 million, or 10% from Carilion Health Systems.
Our products and services are currently being used by 40 integrated
healthcare delivery networks, including:
- Allina Health System;
- Baylor College of Medicine;
- Carilion Health Systems;
- Christiana Care Health System;
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- Eastern Maine Healthcare;
- MeritCare Health System;
- Promina Health System;
- Providence Health System;
- Riverside Physician Services; and
- Wake Forest University Baptist Medical Center.
SALES AND MARKETING
Our sales and marketing programs are organized around our main customer
segments: integrated healthcare delivery systems, physicians in private practice
and healthcare consumers. Our products and services are distributed by a
nationwide direct sales force, a complementary inside sales team and a select
number of strategic distribution partners, and directly through the Internet. We
also partner with national consulting firms and systems integrators to deliver
complete information technology solutions for large system customers.
PHYSICIANS IN PRIVATE PRACTICE. We promote our products and services to
physicians in private practice with programs designed to take advantage of the
value of peer-to-peer relationships in the physician community. In contrast to
the national image-building campaign required for sales to large health systems,
we are building our individual physician sales and marketing campaign around
activities that will stimulate physician referrals of LOGICIAN INTERNET. Sales
will be offered primarily through online subscription capabilities supported by
an inside telephone sales team. Programs for this market segment will include:
- A team of physicians who use our products and who are trained and
compensated to present at more than 200 national, state and local
physician society meetings from the fourth quarter of 1999 through 2000;
- Promotion of free trial periods and low cost bundled hardware packages;
- A physician incentive program that offers every physician subscribing to
LOGICIAN INTERNET a points-based redeemable reward for referring fellow
physicians;
- An affiliate program for e-commerce partners and professional
associations;
- A media relations campaign targeted at physician publications and local
media; and
- Online and offline brand and product advertising aimed at early adopters
and high volume specialties.
INTEGRATED HEALTHCARE DELIVERY SYSTEMS. We approach the integrated
healthcare delivery system market primarily through direct sales and
distribution partners. We believe our access to premier reference accounts plays
a large part in the success of the sales process. Direct sales are supported by
marketing programs that include:
- Participation at national health information technology trade conferences;
- A speakers program placing current customers and executives before key
decision makers of prospective customers;
- An editorial and news presence in the healthcare information technology
press supported by targeted advertising of our brand;
- Publication of industry-reference briefs and texts addressing critical
adoption issues; and
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- Internet access to online product and service information, demonstrations
and promotional trials and offline publications.
HEALTHCARE CONSUMERS. We believe marketing programs for the healthcare
consumer market are likely to be more successful when they are supported by the
existing relationship between the physician or local health system and their
patients. Based on that premise, we will be launching a Web site 98POINT6, which
is currently being tested in a pilot program and which we expect to release
commercially in early 2000, that is co-branded with local integrated healthcare
delivery networks. In addition, promotion of 98POINT6 will include a national
brand building campaign designed to create interest by healthcare consumers
through physicians. Consumers will register for membership at no charge at the
98POINT6 site or through a co-branded provider partner site. Marketing programs
will include:
- Co-branded direct mail and point of service promotional campaigns
developed and sponsored by us and executed with provider partners;
- Consumer brand building in communities with a high concentration of
physician users of electronic medical record products that can be
interfaced to 98POINT6;
- Online advertising with consumer e-commerce and content partners; and
- An aggressive, locally-based media relations campaign targeting people
with chronic disease and women, who tend to be the primary health
coordinators of their families.
Our executive sales and marketing management is located in our Hillsboro,
Oregon office with significant Internet marketing and business development
resources located in our San Francisco, California facilities, while our account
representatives are deployed across the United States. As of September 30, 1999,
we employed 60 people in the areas of sales and marketing.
STRATEGIC RELATIONSHIPS
Because our products and services are used at the point of care, we believe
we are well positioned to offer electronic transaction services to both
physicians and their patients. To pursue these opportunities, we will form
relationships with strategic partners who can provide these electronic
transaction services, including electronic processing of claims, automatic
filling and refilling of prescriptions and electronic transmission of laboratory
results. In addition, we will enter into strategic partnerships with vendors who
will provide medical content to our customers as well as partnerships that will
allow our physician customers to have access to computer hardware on which they
may use our products and services.
To date, we have entered into strategic relationships with the following
companies:
CVS.COM. CVS.com, a subsidiary of CVS Corporation, is a leading online
pharmacy and source of health, beauty and wellness products. We have entered
into an agreement with CVS.com that provides access to an online licensed
pharmacy that will receive and fill orders for prescriptions generated from
physicians and patients using our Internet-based products. The one year
agreement provides that CVS will pay a transaction fee to us for each
prescription filled by its pharmacy pursuant to an order received through our
Internet-based products. The agreement may be renewed for subsequent one-year
terms.
DELL. Dell Marketing L.P. is a subsidiary of Dell Computer Corporation, a
leading manufacturer of personal computers and related equipment and a
shareholder of MedicaLogic. We have entered into a nonexclusive agreement with
Dell Marketing L.P. providing for a mutual marketing relationship to promote
each other's products and services, including hyperlinks between each of our Web
sites and cooperative marketing efforts which may include trade shows, direct
mail campaigns and sales training.
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The agreement designates Dell as our preferred provider of notebooks, personal
computers and other hardware, and we granted Dell a nonexclusive right and
license to reproduce and install our software programs and related materials on
Dell branded hardware products. We will promote the Dell products with our
pre-installed software programs.
ENVOY. Envoy Corporation is a leader in electronic transaction processing
in the healthcare industry. We have entered into an agreement with Envoy that
provides us with a nonexclusive and nontransferable license to Envoy's services
for the processing of healthcare transactions, including patient eligibility and
referral checks and medical claims submissions. Envoy will also provide
technical assistance in developing new functionality to facilitate claims
submission. Envoy will charge us transaction fees for use of its services. These
fees will be passed on to our LOGICIAN INTERNET customers who elect to subscribe
to this premium service, for which we will charge an additional fee. The
agreement provides that Envoy will rebate to us a portion of the transaction
fees received by Envoy for batch electronic transactions generated through
LOGICIAN INTERNET that are submitted by Envoy to its participating payers. We
expect this service to become available to our LOGICIAN INTERNET subscribers in
early 2000.
L&H. L&H Applications USA, Inc. is a subsidiary of Lernout & Hauspie Speech
Products N.V., a leading provider of dictation software programs for use in
professional services. We have entered into an agreement with L&H that provides
us with a nonexclusive and nontransferable license to L&H's medical-specific
speech recognition software programs for distribution with LOGICIAN INTERNET. We
will make royalty payments to L&H for each copy of the software licensed,
including a maintenance and support fee. Royalties will be prepaid quarterly,
contingent upon development milestones to be met by L&H. This service is
currently available to our LOGICIAN INTERNET subscribers.
COMPETITION
High growth, intense competition, and technological change characterize the
market for electronic healthcare information services and e-commerce. In
addition to direct competitors in the electronic medical records market, none of
which has a significant share of the market, we face competition from many
companies with significantly greater financial resources, well-established brand
names and large installed customer bases. We expect significant competition
from:
TRADITIONAL HEALTHCARE INFORMATION SYSTEM VENDORS. These vendors, including
Cerner Corporation, Epic Systems Corporation, IDX Corporation, McKesson/HBOC,
Medic, a division of Misys PLC, and Shared Medical Systems Corporation, focus on
providing information systems to large healthcare enterprises and physician
practice groups. They have large installed bases of customers. Although they
have not traditionally focused on providing electronic medical record solutions,
they have begun to pursue a variety of Internet strategies, some of which could
provide functions competitive with our products and services.
INTERNET HEALTHCARE COMPANIES. Internet healthcare companies are focusing
on a wide variety of areas, including:
- Automating financial, administrative and clinical transactions, such as
Healtheon Corporation and CareInsite, Inc.;
- Attracting physicians with journalistic content, such as Medscape, Inc.
and Physicians Online, Inc.; and
- Targeting the health consumer area, including drkoop.com, Inc. and
iVillage Inc. for content, as well as online pharmacies, such as
drugstore.com, Inc.
Each of these companies can be expected to compete with us within segments
of the evolving Internet healthcare market, but it is also likely that some of
them will serve in the role of our partner
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or vendor. Major Internet companies, including those not currently specializing
in the healthcare industry, may also enter our markets. Many of these companies
have longer operating histories, larger customer bases, substantially greater
financial, technical, sales and marketing resources and greater name recognition
than we do and we may be unable to compete successfully against these companies.
The most significant competitive factors include clinical focus, service
reliability, breadth of product offerings, price/performance, network security,
ease of access and use, content bundling, customer support, brand recognition
and operating experience. We believe we will be able to compete favorably with
respect to these factors.
TECHNOLOGY
Our Internet Health Services Center consists of a fault tolerant
configuration of Web and database server computers interconnected through
redundant, high speed network components. The center is currently located at a
secure third-party data center. A new, state-of-the-art data center is being
constructed at our San Francisco office. All data centers incorporate advanced
technology to provide a high degree of security in the transmission of highly
sensitive and confidential patient medical record data over the Internet. This
includes strict authentication, sophisticated data encryption techniques, strong
network firewalls, stringent personnel policies, tightly controlled physical
access to the data centers and independent overall security audits of those
sites. All of our services will be linked to advanced storage systems that
provide data protection through techniques such as replication. We also will
maintain on-site backup power systems in the San Francisco data center and will
install similar facilities in our back-up data center. These safeguards are
designed to provide a reliable and secure environment for the storage and
exchange of confidential patient and customer data. Although we believe our
facilities are highly resistant to systems failure and sabotage, we are
developing, and are in the process of implementing, a disaster recovery and
contingency operations plan.
DEVELOPMENT AND ENGINEERING
We believe our future success will depend on our ability to continue to
maintain and enhance our Internet Health Services Center, LOGICIAN applications
and collateral services. We have developed applications and services in house,
although future extensions to our products and services may come through
acquisitions as well. In any event, we will continue to work closely with other
companies in our development efforts.
We have several significant projects currently in development. These include
the continued enhancement of LOGICIAN, development of new services such as
LOGICIAN INTERNET and our physician and consumer oriented Web sites and
development of interfaces with our strategic partners' and others' technology.
As of September 30, 1999, we employed 101 people in the areas of applications
design, research and development, quality assurance and technical support.
Rapid technological developments and evolving industry standards
characterize the emerging market for Internet-based electronic medical records
and associated transaction processing. The emerging nature of this market and
its rapid evolution will require that we continually improve the performance,
features and reliability of LOGICIAN and the Internet Health Services Center,
particularly in response to competing offerings.
We must maintain a high standard and desire for the most effective and
innovative technologies. The success of new product and service introductions is
dependent on several factors, including:
- Proper definition of new applications or services;
- Appropriate staffing of expertise on the particular assignment;
- Timely completion and introduction of new products and services; and
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- Differentiation of new products and services from those of our
competitors.
GOVERNMENT REGULATION AND HEALTHCARE REFORM
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
healthcare organizations. Proposals to reform the U.S. healthcare system have
been and will continue to be considered by the U.S. Congress. These programs may
contain proposals to increase or decrease government involvement in healthcare
or change the operating environment for our potential customers. Healthcare
organizations may react to these proposals and the uncertainty surrounding these
proposals by curtailing or deferring investments, including those for our
products and services. On the other hand, changes in the regulatory environment
have in the past increased and may continue to increase the needs of healthcare
organizations for cost-effective information management and thereby enhance the
marketability of our applications and services. We cannot predict with any
certainty what impact, if any, these proposals or healthcare reforms might have
on our business, financial condition and results of operations.
The Health Insurance Portability and Accountability Act of 1996 mandates the
use of standard transactions and identifiers, prescribed security measures and
other provisions within two years after the adoption of final regulations by the
Department of Health and Human Services. It will be necessary for our products
and services to be in compliance with the proposed regulations. Congress is also
likely to consider legislation that would establish rules about individuals'
rights to access their own or someone else's medical information within
legislation known as a Patient Bill of Rights. This legislation, if enacted,
would likely define what is to be considered protected health information and
outline steps to ensure the confidentiality of this information.
The United States Food and Drug Administration is responsible for assuring
the safety and effectiveness of medical devices under the Federal Food, Drug and
Cosmetic Act. Computer applications and software are considered medical devices
and subject to regulation by the FDA when they are indicated, labeled or
intended to be used in the diagnosis of disease or other conditions, or in the
cure, mitigation, treatment or prevention of disease, or are intended to affect
the structure or function of the body. We do not believe that any of our current
applications or services are subject to FDA jurisdiction or regulation; however,
we plan to expand our application and service offerings into areas that may
subject us to FDA regulation. We have no experience in complying with FDA
regulations. Our compliance with FDA regulations could prove to be time
consuming, burdensome and expensive, which could have a material adverse effect
on our ability to introduce new applications or services in a timely manner.
The confidentiality of patient records and the circumstances under which
records may be released for inclusion in our databases are subject to
substantial and rapidly evolving regulation governing both the disclosure and
the use of confidential patient medical record information. Legislation
governing the dissemination of medical record information has been proposed at
both the state and federal levels. This legislation may require holders of
medical records to implement security measures that may require substantial
expenditures by us or materially restrict the ability of healthcare providers to
submit information from patient records using our applications.
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may be
adopted that address issues such as online content, user privacy, pricing and
characteristics and quality of applications and services. For example, although
two key provisions of the act were held unconstitutional, the Communications
Decency Act of 1996 prohibited the transmission over the Internet of some types
of information and content.
Internet user privacy has become an issue in the United States. Current
United States privacy law consists of a few disparate statutes directed at
specific industries that collect personal data, none of which specifically
covers the collection of personal information online. The United States or any
state
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may adopt legislation to attempt to protect this privacy. Any legislation
addressing these issues could affect the way in which we are allowed to conduct
our business, especially those aspects that involve the collection or use of
personal information, and could have a material adverse effect on our business,
financial condition and results of operations. Moreover, it may take years to
determine the extent to which existing laws governing issues such as property
ownership, libel, negligence and personal privacy are applicable to the
Internet.
International regulations with respect to the Internet, privacy and
transborder data flows are considerably more developed than regulations in the
United States. We intend to develop applications and services to be used on a
worldwide basis and, consequently, will be required to comply with international
regulations regarding the Internet and electronic commerce, as well as with U.S.
regulations. We have not evaluated the effect that these regulations would have
on our business. These regulations also may have an adverse effect on our
ability to compete internationally.
The tax treatment of the Internet and e-commerce is currently unsettled. A
number of proposals have been made at the federal, state and local level and by
some foreign governments that could impose taxes on the sale of goods and
services and some other Internet activities. A recently passed law places a
temporary moratorium on specific types of taxation on Internet commerce. We
cannot predict the effect of current attempts at taxing or regulating commerce
over the Internet. Any legislation that substantially impairs the growth of
e-commerce could have a material adverse effect on our business, financial
condition and results of operations.
INTELLECTUAL PROPERTY RIGHTS
We believe patent, trade secret and copyright protection are less
significant to our success than our ability to develop new products and
services. We rely on a combination of trademark, trade secret and copyright law,
and contractual restrictions to protect the proprietary aspects of our
technology. We presently have several federal trademark registrations, including
MedicaLogic, Practice With Knowledge, Logician, SIMPL and LinkLogic and numerous
pending trademark applications, including KnowledgeBank, AboutMyHealth,
98point6, Quickstep and ScheduLogic. We are currently preparing 12 applications
for U.S. patents. We seek to protect our source code for our software,
documentation and other written materials under trade secret and copyright laws.
We presently have nine pending copyright applications for our software, tools
and KnowledgeBank forms, reports and templates. We license our software under
signed license agreements, which impose restrictions on the licensee's ability
to utilize the software. Finally, we seek to avoid disclosure of our
intellectual property by requiring employees and consultants with access to our
proprietary information to execute confidentiality agreements with us and by
restricting access to our source code.
The steps taken by us to protect our proprietary rights may be inadequate
and, as a result, third parties may infringe upon or misappropriate our
copyrights, trademarks, service marks and similar proprietary rights. In
addition, the global nature of the Internet makes it impossible to control the
ultimate destination of our services and effective copyright and trademark
protection may be unenforceable or limited in foreign countries.
Our competitors or others may adopt product or service names similar to
ours, thereby impeding our ability to build brand identity and possibly leading
to customer confusion. Moreover, because Internet domain names derive value from
the individual's ability to remember these names, our domain name may lose its
value if, for example, users begin to rely on mechanisms other than domain names
to access online resources. Our inability to protect our marks adequately could
have a material adverse effect on the acceptance of our brand and on our
business, financial condition and results of operations. In the future,
litigation may be necessary to enforce and protect our trade secrets, copyrights
and other intellectual property rights. Litigation would divert management
resources and be expensive and may not effectively protect our intellectual
property.
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EMPLOYEES
As of September 30, 1999, we employed 230 persons on a full-time basis, of
whom there were 101 in technical development and support, 60 in sales and
marketing, 29 in professional services, 17 in operations and networks and 23 in
finance and administration. None of our employees is a member of a labor union
or is covered by a collective bargaining agreement and we have never experienced
a work stoppage. We believe we have good relations with our employees.
FACILITIES
Our executive offices are located in Hillsboro, Oregon in approximately
103,000 square feet of leased space under a lease that expires in
December 2007. We also lease approximately 38,000 square feet of office space in
San Francisco, California under a lease that expires in May 2009. We believe our
facilities are adequate for our current operations.
LEGAL PROCEEDINGS
We have been named as a defendant in an action filed by AllCare Health
Management Systems, Inc. on June 14, 1999 in the United States District Court
for the Northern District of Texas. The complaint alleges that MedicaLogic and
eleven other named defendants are infringing a patent relating to an integrated
healthcare system. Pursuant to the complaint, the plaintiff is seeking to
recover damages in an unspecified amount. We believe the suit against
MedicaLogic is without merit and intend to vigorously defend against these
claims.
This litigation, whether or not determined in our favor or settled by us,
may be costly and may divert the efforts and attention of our management from
normal business operations. We do not believe, however, that the ultimate
disposition of this litigation will have a material adverse effect on our
financial condition, liquidity and results of operations.
We are not currently subject to any other material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth information with respect to our executive
officers, directors and key employees as of September 30, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Mark K. Leavitt...................... 49 Chairman of the Board and Chief Executive Officer
David C. Moffenbeier................. 48 Chief Operating Officer and Director
Harvey J. Anderson................... 35 Senior Vice President, General Manager of Internet
Operations
Frank J. Spina....................... 45 Senior Vice President and Chief Financial Officer
Thomas M. Watson..................... 49 Senior Vice President, Worldwide Sales and Professional
Services
Eliot H. Bergson..................... 40 Vice President, Internet Content Programming
Guy E. Field......................... 44 Vice President, Finance
Joseph M. Godsil..................... 34 Vice President, Network Architecture and Data Center
Operations
D. Cameron Lewis..................... 48 Vice President, Internet Marketing and e-Commerce
Strategies
Blackford Middleton.................. 41 Vice President, Clinical Informatics
C. Sue Reber......................... 53 Vice President, Marketing and Corporate Communications
Richard L. Samco..................... 49 Vice President and Chief Technology Officer
Charles D. Burwell................... 54 Director
Bruce M. Fried....................... 49 Director
Ronald H. Kase....................... 41 Director
Neal Moszkowski...................... 33 Director
Mark A. Stevens...................... 39 Director
Ronald R. Taylor..................... 51 Director
David W. Wroe........................ 52 Director
</TABLE>
MARK K. LEAVITT founded MedicaLogic in 1985 and has served as its chairman
of the board and chief executive officer since its inception. From
December 1997 to June 1998, Dr. Leavitt served as a director of Physician
Partners, Inc., a physician practice management company. From 1992 to 1996,
Dr. Leavitt served as a faculty member for St. Vincent Internal Medicine
Practice and concurrently served as medical director and regional information
systems director for Sisters of Providence Health System from 1992 to 1994.
Dr. Leavitt operated a private practice of internal medicine from 1982 to 1992.
Dr. Leavitt received a B.S. from the University of Arizona and an M.S. and a
Ph.D. in electronic engineering from Stanford University. Dr. Leavitt received
an M.D. from the University of Miami and served as a resident in internal
medicine at Oregon Health Sciences University from 1979 to 1982.
DAVID C. MOFFENBEIER has served as chief operating officer and as a director
since 1994. From 1993 to 1994, Mr. Moffenbeier served as chairman of the board
of directors of Summit Design Inc., a supplier of software tools for integrated
circuits. Previously, Mr. Moffenbeier co-founded Mentor Graphics Corp., a
manufacturer of hardware and software for electronic design automation, where he
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served as a director from 1981 to 1993 and the company's chief financial officer
from 1981 to 1984, its vice president of international sales from 1985 to 1988
and its vice president of worldwide sales from 1989 to 1993. He currently serves
on the board of directors of Providence Good Health Plan, a health care
management organization, and North Pacific Group, Inc., a wholesale distributor
of commodities. Mr. Moffenbeier received a B.A. from Wesleyan University and an
M.B.A. from Harvard University. Mr. Moffenbeier is a certified public
accountant.
HARVEY J. ANDERSON has served as senior vice president, general manager of
Internet operations since March 1999. From 1996 to 1999, Mr. Anderson served as
the assistant general counsel for Netscape Communications Corp., a provider of
software, services and Web site resources for the Internet. From 1993 to 1996,
Mr. Anderson practiced intellectual property law with McCutchen Doyle Brown &
Enersen, LLP, a law firm in San Francisco, California. Mr. Anderson received a
B.S. from Marquette University and a J.D. from the University of San Francisco
School of Law.
FRANK J. SPINA was hired by MedicaLogic to serve as its senior vice
president and chief financial officer starting in November 1999. From 1997 to
1999, Mr. Spina served as the chief financial officer for 3D Systems
Corporation, a provider of solid imaging systems. From 1994 to 1997, Mr. Spina
served as vice president and corporate controller of Qualcomm, Inc., a developer
and manufacturer of wireless communication equipment. From 1985 to 1994,
Mr. Spina served in a variety of positions with Motorola, Inc., including
division controller and group operations controller. Mr. Spina received his B.A.
from Baldwin Wallace College and is a certified public accountant.
THOMAS M. WATSON has served as senior vice president, worldwide sales and
professional services since March 1999. From 1997 to 1999, Mr. Watson served as
our vice president, sales. From 1989 to 1997, Mr. Watson served as vice
president of sales at Phamis Inc., a leading provider of healthcare information
systems solutions. Mr. Watson received a B.A. from Drexel University.
ELIOT H. BERGSON has served as vice president, Internet content programming
since May 1999. From 1998 to 1999, Mr. Bergson served as acting director of
content and production at Network Associates, Inc., a network security and
management software company. From 1995 to 1998, he served as editor-in-chief at
Netscape Communications Corp. From 1994 to 1995, Mr. Bergson served as editor
for both Online Design, a publication for professional designers, photographers
and illustrators, and HotWired, an Internet site on Web technology and culture.
From 1992 to 1994, Mr. Bergson served as editor for NeXTWORLD, a publication
covering the NEXT and NEXTSTEP markets. Mr. Bergson received a B.A. from the
University of Vermont.
GUY E. FIELD has served as vice president, finance since 1998. From 1994 to
1997, Mr. Field served as the corporate controller of MedicaLogic. From 1983 to
1994, Mr. Field held management positions in treasury, finance, marketing and
major account management with Mentor Graphics Corp. He has served on the board
of directors of the Software Association of Oregon since 1998. Mr. Field
received a B.A. from Loyola University in Los Angeles and is a certified public
accountant.
JOSEPH M. GODSIL has served as vice president, network architecture and data
center operations since May 1999. From 1996 to 1999, Mr. Godsil served as area
engineering manager at Netscape Communications Corp. From 1994 to 1996, he
served as regional engineer for Sun Microsystems, Inc., a leading provider of
hardware, software and services for the Internet. Mr. Godsil received a B.S.
from Millikin University in Decatur, Illinois.
D. CAMERON LEWIS has served as vice president, Internet marketing and
e-commerce strategies since May 1999. From 1998 to 1999, Mr. Lewis served as
director of electronic commerce and Internet operations at Network
Associates, Inc. From 1995 to 1998, Mr. Lewis served as group manager of the
electronic commerce group and acting vice president of customer marketing at
Netscape Communications Corp. From 1994 to 1995, Mr. Lewis served as vice
president of sales and marketing
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for Magellan Interactive. Mr. Lewis received a B.A. from the University of
Western Ontario and an executive business degree from the University of Toronto.
BLACKFORD F. MIDDLETON has served as vice president, clinical informatics
since 1994. From 1992 to 1994, Dr. Middleton served as the medical director for
information management and technology at Stanford University. Since 1995,
Dr. Middleton has served on the Computer-based Patient Record Institute, or
CPRI, board of directors and currently serves as its chairman. Dr. Middleton is
a general internist who practiced in academic medical centers for over 15 years
and received a B.A. from the University of Colorado and an M.D. from Stanford
University and additional training in epidemiology and public health at Yale
University.
C. SUE REBER has served as vice president, strategic marketing and corporate
communications since March 1999. From 1993 to 1999, Ms. Reber served as vice
president of marketing. Before joining MedicaLogic, Ms. Reber had more than
15 years of experience in healthcare sales and marketing in managed care,
medical equipment distribution and hospital management. She received a nursing
degree from the Johns Hopkins Hospital School of Nursing and received an M.B.A.
from St. Mary's College in Emmitsburg, Maryland.
RICHARD L. SAMCO has served as vice president and chief technology officer
since March 1999. From 1991 to 1999, Mr. Samco served as our vice president,
engineering and vice president, product development. Mr. Samco was a co-founder
of Mentor Graphics Corp. in 1981 and served in various engineering and
management positions from 1981 to 1991. Before 1981, Mr. Samco held various
engineering management positions with Tektronix Inc., a maker of high technology
products, and Burroughs Corp., a leading computer corporation now known as
Unisys Corporation. Mr. Samco received a B.S. from Stanford University.
CHARLES D. BURWELL has been a director since 1997. Since 1993, Mr. Burwell
has served as senior vice president of VHA, Inc., a healthcare alliance. As head
of information services, he oversees activities associated with VHA's healthcare
information technologies and VHA's management information systems team.
Mr. Burwell received a B.A. from Northeastern Oklahoma University.
BRUCE M. FRIED has been a director since 1998. Mr. Fried is a partner and
chair of the healthcare practice group at Shaw Pittman Potts & Trowbridge, a law
firm in Washington, D.C. From 1995 to 1998, Mr. Fried served as the Health Care
Financing Administration's director of the Center for Health Plans and
Providers, where he was responsible for policy development and execution and
operations for the Medicare program. From 1994 to 1995, Mr. Fried was vice
president of federal affairs at FHP International Corporation, one of the
nation's largest managed care organizations. Mr. Fried received a B.A. and a
J.D. from the University of Florida.
RONALD H. KASE has been a director since July 1994. Mr. Kase joined New
Enterprise Associates, a venture capital investment firm in 1990 and has been a
general partner since May 1995. Mr. Kase serves on the boards of directors of
several privately-held information technology and healthcare companies.
Mr. Kase received a B.S. from Purdue University and received an M.B.A. from the
University of Chicago.
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NEAL MOSZKOWSKI has been a director since May 1999. Since 1998,
Mr. Moszkowski has served as a partner of Soros Private Equity Partners, LLC, a
venture capital investment firm. From 1993 to 1998, Mr. Moszkowski was an
executive director in the principal investment area of Goldman, Sachs
International and a vice president of Goldman, Sachs & Co. Mr. Moszkowski serves
on the board of directors of Integra Life Sciences Holdings Corporation, a
developer and marketer of medical products, implants and biomaterials, Crystal
Gas Storage, Inc., a natural gas storage company, Bluefly, Inc., an off-price
apparel Internet retailer, and several private companies. Mr. Moszkowski earned
his B.A. from Amherst College and an M.B.A. from Stanford University.
MARK A. STEVENS has been a director since 1994. Mr. Stevens joined Sequoia
Capital in 1989 and has been a general partner since 1993. Mr. Stevens serves on
the boards of directors of MP3.com, Inc., an online music Internet company,
NVidia Corp., a supplier of graphics processors and software and Terayon
Communication Systems, Inc., a cable modem system supplier, and several
privately held Internet and semiconductor companies. Mr. Stevens received a
B.S.E.E., a B.A. and an M.S. in computer engineering from the University of
Southern California and an M.B.A. from Harvard University.
RONALD R. TAYLOR has been a director since 1995. Since 1998, Mr. Taylor has
been a general partner of Enterprise Partners, a venture capital firm. In 1987,
Mr. Taylor founded Pyxis Corporation, a medical information systems company, and
served as its chairman and chief executive officer until it merged with Cardinal
Health, Inc. in 1996. Mr. Taylor serves on the boards of directors of Watson
Pharmaceuticals, Inc., a pharmaceutical company, and Cavanaugh's Hospitality
Corporation, a leading owner of full service hotels in the Northwest. He
received a B.A. from the University of Saskatchewan and an M.A. from the
University of California at Irvine.
DAVID W. WROE has been a director since 1999. Since 1996, he has served as a
senior vice president and chief technology officer for Continental Casualty
Company, an insurance company. From 1983 to 1996, Mr. Wroe served as chief
executive officer of Agency Management Services, Inc., a CCC majority-owned
automation company, and Mr. Wroe continues to serve as the chairman of its board
of directors. Mr. Wroe serves on the boards of directors of Rogers & Gray
Insurance Company, an insurance company, Home Financial Network, a software
company, and Healthware Solutions International, Inc., a software company.
Mr. Wroe earned a B.A. from Providence College.
Executive officers serve at the discretion of the board of directors and
hold office until their successors have been elected and qualified. There are no
family relationships among any of the directors, officers or key employees of
MedicaLogic.
Directors are elected at the annual shareholders meeting and hold office
until their successors are elected and qualified.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors has an audit committee and a compensation committee.
The audit committee reviews and makes recommendations to the board of
directors concerning our internal accounting procedures, reviews and consults
with our independent accountants on the accounting principles and auditing
practices used for our financial statements and makes recommendations to the
board of directors concerning the engagement of independent accountants and the
scope of the audit to be undertaken by the accountants. The current members of
the audit committee are Bruce M. Fried, Neal Moszkowski and Ronald R. Taylor.
The compensation committee reviews and makes recommendations to the board of
directors concerning the policies, practices and procedures relating to the
compensation and benefits of our officers and managerial employees. The
compensation committee exercises all authority under our stock
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<PAGE>
incentive plans and advises and consults with our officers regarding personnel
policies. The current members of the compensation committee are Charles D.
Burwell, Ronald H. Kase and Mark A. Stevens.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Before establishing the compensation committee, the board of directors as a
whole performed the functions delegated to the compensation committee. No member
of the board of directors or the compensation committee serves as a member of
the board of directors or compensation committee of any entity that has one or
more directors serving as an executive officer of MedicaLogic.
DIRECTOR COMPENSATION
Generally, directors do not receive any cash compensation from us for their
service as members of the board of directors, but directors are reimbursed for
expenses incurred in connection with their attendance at board and committee
meetings. Under our stock incentive plan, non-employee directors are granted a
one-time option to purchase 30,000 shares of our common stock upon initial
election to the board. In addition, we have entered into an arrangement pursuant
to which we pay Enterprise Partners, of which Ronald R. Taylor serves as a
general partner, $2,000 for each directors meeting attended by Mr. Taylor.
Directors' fees totaling $4,000 have been paid to Enterprise Partners for
Mr. Taylor's attendance at board meetings. We carry an insurance policy for the
protection of our officers and directors against any liability asserted against
them in their official capacities.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued for
services rendered to us in all capacities by our Chief Executive Officer and our
four other most highly compensated executive officers whose salary and bonus
exceeded $100,000 during the year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)(2)
- --------------------------- -------- -------- -------- ------------------
<S> <C> <C> <C> <C>
Mark K. Leavitt, Chairman of the Board and Chief
Executive Officer............................... 1998 $210,000 -- --
David C. Moffenbeier, Chief Operating Officer..... 1998 $190,000 -- $50,000
Blackford Middleton, Senior Vice President,
Clinical Informatics............................ 1998 $160,000 $20,000 $48,621
Richard L. Samco, Senior Vice President and Chief
Technology Officer.............................. 1998 $185,000 -- --
Thomas M. Watson, Senior Vice President, Worldwide
Sales and Professional Services................. 1998 $150,000 $75,559(3) --
</TABLE>
- ------------------------
(1) Comprised of commission payments.
(2) See "Long-Term Incentive Plans--Awards in Last Fiscal Year."
(3) Includes $20,000 payment for 1997 performance.
We have entered into an employment agreement with Dr. Leavitt. The agreement
may be terminated with 60-days notice.
50
<PAGE>
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERFORMANCE OR
NUMBER OF OTHER PERIOD UNTIL
NAME SHARES(#) MATURATION OR PAYOUT(3)
- ---- --------- -----------------------
<S> <C> <C>
Mark K. Leavitt........................................ 15,000 Before July 1, 2000
David C. Moffenbeier................................... 15,000 Before July 1, 2000
Blackford Middleton.................................... 7,500(1) Before July 1, 2000
Richard L. Samco....................................... 15,000 Before July 1, 2000
Thomas M. Watson....................................... 15,000(2) Before July 1, 2000
</TABLE>
- ------------------------
(1) Does not include 12,500 shares of restricted stock issued to Mr. Middleton
on July 1, 1998 upon his surrender of 12,500 outstanding options to purchase
common stock. Of these 12,500 shares of restricted stock, 5,556 were not
subject to a right of repurchase, and 6,945 shares were subject to a right
of repurchase by MedicaLogic and have been released from the repurchase
option ratably over a period of 20 months beginning July 1, 1998.
(2) Does not include 75,000 shares of restricted stock issued to Mr. Watson on
July 1, 1998 upon his surrender of 75,000 outstanding options to purchase
common stock. Of these 75,000 shares of restricted stock, 33,334 shares were
not subject to a right of repurchase, and 41,667 were subject to a right of
repurchase by MedicaLogic and have been released from the repurchase option
ratably over a period of 20 months beginning July 1, 1998.
(3) Unless the repurchase option is terminated earlier upon satisfaction of
performance criteria.
Except as otherwise provided, shares of restricted stock are subject to
MedicaLogic's right of repurchase if specific performance criteria are not met.
Our option to repurchase is exercisable for all of the shares if the holder
voluntarily terminates his employment within two years of the date the shares
were originally granted unless we complete an initial public offering, release
an Internet version of LOGICIAN and release a consumer based Internet product
before December 31, 1999. If all performance criteria are met on or before
December 31, 1999, the shares will be released from the repurchase option. As of
December 31, 1998, the named executive officers beneficially owned 234,500
shares of restricted stock with an aggregate value of $779,000.
OPTION GRANTS IN LAST FISCAL YEAR
No options were granted to, or exercised by, any of the named executive
officers during the year ended December 31, 1998.
STOCK INCENTIVE PLANS
An aggregate of 6,997,192 shares of common stock have been reserved for
issuance under our three stock incentive plans described below.
The STOCK INCENTIVE PLAN was adopted February 9, 1993 and, as amended,
allowed for issuance of 2,247,192 shares. Under the 1996 STOCK INCENTIVE PLAN,
adopted December 27, 1996, 500,000 shares were originally reserved for issuance.
The 1996 plan was amended in 1998 to reserve an additional 350,000 shares for
issuance and in 1999 to reserve an additional 1,900,000 shares for issuance,
bringing the total number of shares reserved under the 1993 plan and the 1996
plan to 4,997,192. The stock option plans were approved by the board of
directors and the shareholders. The 1996 plan provides for the granting to
employees of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, for the granting to employees and
consultants of nonstatutory stock options
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<PAGE>
and for the issuance of stock bonuses, restricted stock and stock appreciation
rights. Unless terminated earlier, the 1996 stock incentive plan will terminate
automatically in December 2006.
The 1999 STOCK INCENTIVE PLAN authorizes the issuance of 2,000,000 shares of
our common stock. The 1999 plan was approved by the board of directors and the
shareholders. The 1999 plan provides for the granting to employees of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, for the granting to employees and consultants of nonstatutory
stock options and for the issuance of stock bonuses, restricted stock and stock
appreciation rights. Unless terminated earlier, the 1999 plan will terminate
automatically in September 2009.
As of October 15, 1999, options to purchase 2,829,826 shares of common stock
at a weighted average exercise price of $6.10 per share were outstanding and
1,170,000 shares of restricted stock had been issued under the stock incentive
plans.
The stock incentive plans are administered by the board of directors. The
board has the power to determine the terms of the options or rights granted,
including the exercise price, the number of shares subject to each option or
right, the character of the grant, the exercisability of the grant and the form
of consideration payable upon exercise of options. The board of directors may
delegate administration of the stock incentive plans to a committee.
The exercise price of incentive stock options must not be less than the fair
market value of the common stock at the date of the grant or, in the case of
incentive stock options issued to holders of more than 10% of the outstanding
common stock, 110% of the fair market value. The maximum term of incentive stock
options is 10 years, or five years in the case of 10% shareholders. The
aggregate fair market value, on the date of the grant, of the common stock for
which incentive stock options are exercisable for the first time by an employee
during any calendar year may not exceed $100,000.
Options granted under the stock incentive plans are generally
nontransferable and, unless otherwise determined by the board of directors, must
be exercised during the period of the option holder's employment or service with
MedicaLogic or within 90 days of termination of employment or service.
The stock incentive plans provide that if we merge with or into another
corporation, or we sell substantially all of our assets, each outstanding option
will be assumed by the successor corporation.
EMPLOYEE STOCK PURCHASE PLAN
The board of directors has adopted and the shareholders have approved an
employee stock purchase plan, or ESPP, for the benefit of MedicaLogic's
employees. A total of 1,000,000 shares are reserved for issuance under the ESPP.
Except as described below, all full-time employees of MedicaLogic and
designated subsidiaries of MedicaLogic are eligible to participate in the ESPP.
Any employee who would, after a purchase of shares under an offering, own or be
deemed to own five percent or more of the voting power or value of all classes
of stock of MedicaLogic, or any parent or subsidiary of MedicaLogic, is
ineligible to participate in an offering.
Except for the first offering period, offering periods are six months long
and commence on January 1 and July 1 of each year and end on the last day of the
following June and December. The first offering period will commence on the date
of this prospectus and end on June 30, 2000. On the first trading day of each
offering period, known as the offering date, each eligible employee is
automatically granted an option to purchase shares of MedicaLogic's common stock
to be automatically exercised on the last trading day of the six-month purchase
period comprising an offering period. The last trading day of a purchase period
is known as a purchase date. No option will permit an employee
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<PAGE>
to purchase more than 10,000 shares or permit an employee's right to purchase
shares under the ESPP to accrue at a rate that exceeds $25,000 of fair market
value, as determined on the offering date, for each calendar year that the
option is outstanding. Each eligible employee may elect to participate in the
ESPP by filing a subscription and payroll deduction authorization. Shares may be
purchased under the ESPP only through payroll deductions of not more than 15
percent of an employee's total compensation. On the purchase date, the amounts
withheld will be applied to purchase shares for the employee from MedicaLogic.
The purchase price will be the lesser of 85 percent of the closing market price
of MedicaLogic's common stock on the offering date or on the purchase date.
The ESPP is administered by the board of directors. The board of directors
may promulgate rules and regulations for the operation of the ESPP, adopt forms
for use in connection with the ESPP, decide any question of interpretation of
the ESPP or rights arising under the ESPP and generally supervise the
administration of the ESPP. MedicaLogic pays all expenses of the ESPP other than
commissions on sales of shares for employees' accounts by the custodian.
An independent custodian maintains the records under the ESPP. Shares
purchased by employees under the ESPP are delivered to and held by the custodian
on behalf of the employees. By appropriate instructions from an employee, all or
part of the shares may be sold or transferred into the employee's own name and
delivered to the employee.
The board of directors may amend the ESPP, except that increases in the
number of reserved shares, other than adjustments authorized by the ESPP, or
decreases in the purchase price of shares offered under the ESPP require
shareholder approval. The board of directors may terminate the ESPP at any time.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
Our articles of incorporation eliminate, to the fullest extent permitted by
Oregon law, liability of a director to MedicaLogic or its shareholders for
monetary damages resulting from conduct as a director. Although liability for
monetary damages has been eliminated, equitable remedies such as injunctive
relief or rescission remain available. In addition, a director is not relieved
of his responsibilities under any other law, including the federal securities
laws.
Our articles of incorporation require us to indemnify our directors to the
fullest extent permitted by law. We believe that the limitation of liability
provisions in our articles of incorporation enhance our ability to attract and
retain qualified individuals to serve as directors.
We carry an insurance policy for the protection of our officers and
directors against any liability asserted against them in their official
capacities.
To the extent that indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of MedicaLogic under the above provisions MedicaLogic has been advised
that in the opinion of the Securities and Exchange Commission this
indemnification is against public policy as expressed in the act and is,
therefore, unenforceable.
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<PAGE>
RELATED-PARTY TRANSACTIONS
We have accepted promissory notes from the following persons in the amounts
listed below as consideration for restricted stock issued to them:
<TABLE>
<CAPTION>
PRINCIPAL
NAME AMOUNT OF NOTE DATE OF NOTE
- ---- -------------- ----------------
<S> <C> <C>
Harvey J. Anderson........................... $ 385,000 March 31, 1999
Harvey J. Anderson........................... 66,000 March 31, 1999
Guy E. Field................................. 30,000 February 2, 1995
Guy E. Field................................. 100,000 July 1, 1998
Guy E. Field................................. 30,000 July 1, 1998
Guy E. Field................................. 33,000 March 31, 1999
Mark K. Leavitt.............................. 60,000 July 1, 1998
Mark K. Leavitt.............................. 66,000 March 31, 1999
Berkeley T. Merchant......................... 125,000 June 29, 1994
Berkeley T. Merchant......................... 120,000 July 1, 1998
Blackford F. Middleton....................... 159,000 August 11, 1995
Blackford F. Middleton....................... 50,000 July 1, 1998
Blackford F. Middleton....................... 30,000 July 1, 1998
Blackford F. Middleton....................... 33,000 March 31, 1999
David C. Moffenbeier......................... 60,000 July 1, 1998
David C. Moffenbeier......................... 66,000 March 31, 1999
Richard L. Samco............................. 60,000 July 1, 1998
Richard L. Samco............................. 66,000 March 1, 1999
Frank J. Spina............................... 1,187,500 October 20, 1999
Thomas M. Watson............................. 300,000 July 1, 1998
Thomas M. Watson............................. 60,000 July 1, 1998
Thomas M. Watson............................. 66,000 March 1, 1999
</TABLE>
All of the above non-negotiable promissory notes accrue interest at an
annual rate of 6% on the unpaid principal balance from the date of the note
until the principal balance is paid in full. Interest is payable quarterly in
arrears. The notes are payable in full 10 years from the date of the loan and
each note can be prepaid without penalty.
We loaned Harvey J. Anderson $103,800 to pay for relocation expenses in the
form of an unsecured promissory note. The promissory note accrues interest at an
annual rate of 6% on the unpaid principal balance from the date of the note
until the principal is paid in full. The note is payable in full on the earlier
to occur of the sale of his residence located in Portland, Oregon, the
termination of his employment by us, or July 1, 2001. The note is prepayable in
full without penalty.
In September 1999, we entered into a separate agreement with Mr. Anderson in
consideration of Mr. Anderson relocating to San Francisco, California. We agreed
to reimburse Mr. Anderson $7,930 for improvements to his Portland, Oregon
residence and any shortfall between the sales price on his Portland, Oregon
residence and the original purchase price of $520,000 paid by Mr. Anderson and
any transaction costs not covered by the sales price of this residence, unless
the sales price is greater than the purchase price. We also agreed to forgive
the interest accrued on the unsecured promissory note referred to above, which
will be repaid from the proceeds of the sale of the Portland, Oregon residence
and to pay the mortgage payment on Mr. Anderson's residence in Portland, Oregon
until it is sold.
In connection with our series C preferred stock financing, we sold an
aggregate of 2,505,970 additional shares of series C preferred stock at a price
of $2.25 per share in May 1996, including 514,445 shares of series C preferred
stock to New Enterprise Associates IV Limited Partnership, a
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<PAGE>
beneficial owner of greater than 5% of our common stock on a converted basis,
and an aggregate of 514,445 shares of series C preferred stock to entities
associated with Sequoia Funds, a group of affiliated entities beneficially
owning greater than 5% of our common stock on a converted basis.
In August 1998, we entered into stock purchase agreements with Enterprise
Partners IV Associates, L.P. and Enterprise Partners IV, L.P. for the issuance
of an aggregate of 175,000 shares of our common stock at a price of $4.00 per
share. We also granted an option to purchase 8,000 shares of our common stock at
a price of $4.00 per share to Enterprise Partners IV Associates, L.P. and
granted an option to purchase 92,000 shares of common stock to Enterprise
Partners IV, L.P. The options were exercised on April 14, 1999. Directors Ronald
R. Taylor and Ronald H. Kase are affiliated with the Enterprise funds.
In connection with our series J preferred stock financing, we sold an
aggregate of 1,052,632 shares of series J preferred stock in May 1999 to Sequoia
Capital Franchise Fund and Sequoia Capital Franchise Partners, both of which are
affiliates of Mark A. Stevens, a director of MedicaLogic.
Bruce M. Fried, a member of our board of directors, is a partner in a law
firm retained by us to provide legal counsel regarding regulatory and
intellectual property issues.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table presents the beneficial ownership of our common stock as
of September 30, 1999 and as adjusted to reflect the common stock offered by
this prospectus, by (a) each person known by us to be the beneficial owner of
more than 5% of the outstanding shares of our common stock on a converted basis;
(b) each director and named executive officer; and (c) all directors and
officers as a group. Shares that the person or entity has the right to acquire
within 60 days after September 30, 1999 are considered to be outstanding in
calculating the percentage ownership of the person or entity but are not
considered to be outstanding for any other person or entity.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-----------------------------------------------------
PERCENTAGE PERCENTAGE
NAME NUMBER BEFORE OFFERING AFTER OFFERING
- ---- ---------- --------------- --------------
<S> <C> <C> <C>
ENTITIES ASSOCIATED WITH SEQUOIA FUNDS ........ 2,803,840(1) 11.3%
3000 Sand Hill Road
Building 4, Suite 280
Menlo Park, CA 94025
NEW ENTERPRISE ASSOCIATES ..................... 2,353,595 9.5%
2490 Sand Hill Road
Menlo Park, CA 94025
CONTINENTAL CASUALTY COMPANY .................. 2,000,000(2) 8.0%
CNA Insurance
CNA Plaza
Chicago, IL 60685
QUANTUM INDUSTRIAL PARTNERS LDC ............... 1,568,421 6.3%
Kaya Flamboyan 9
Willemstad, Curacao
Netherlands Antilles
SFM DOMESTIC INVESTMENT LLC ................... 1,568,421 6.3%
c/o Soros Fund Management LLC
888 Seventh Avenue
New York, NY 10016
MARK A. STEVENS ............................... 2,831,340(3) 11.4%
3000 Sand Hill Rd.,
Bldg. 4, Ste. 280
Menlo Park, CA 94025
RONALD H. KASE ................................ 2,381,095(4) 9.6%
2490 Sand Hill Road
Menlo Park, CA 94025
DAVID W. WROE ................................. 2,000,000(2) 8.0%
CNA Insurance
CNA Plaza
Chicago, IL 60685
MARK K. LEAVITT ............................... 1,520,000(5) 6.1%
20500 NW Evergreen Pky.
Hillsboro, Oregon 97124
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-----------------------------------------------------
PERCENTAGE PERCENTAGE
NAME NUMBER BEFORE OFFERING AFTER OFFERING
- ---- ---------- --------------- --------------
<S> <C> <C> <C>
RICHARD L. SAMCO .............................. 970,303(6) 3.9%
20500 NW Evergreen Pky.
Hillsboro, Oregon 97124
DAVID C. MOFFENBEIER .......................... 658,952(7) 2.6%
20500 NW Evergreen Pky.
Hillsboro, Oregon 97124
RONALD R. TAYLOR .............................. 529,167(8) 2.1%
Enterprise Partners
7979 Ivanhoe Ave., Ste. 550
La Jolla, CA 92037
BLACKFORD F. MIDDLETON ........................ 108,250(9) Less than 1%
20500 NW Evergreen Pky.
Hillsboro, Oregon 97124
THOMAS M. WATSON .............................. 105,000 Less than 1%
20500 NW Evergreen Pky.
Hillsboro, Oregon 97124
BRUCE M. FRIED ................................ 11,250(10) Less than 1%
2300 N. Street, NW
Washington, DC 20037
CHARLES D. BURWELL ............................ 27,500(11) Less than 1%
220 East Las Colinas Blvd.
Irving, TX 75039
NEAL MOSZKOWSKI ............................... 0(12) Less than 1%
888 Seventh Avenue
Suite 3300
New York, NY 10106
ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP
(15 PERSONS)................................. 11,343,931(13) 45.4%
</TABLE>
- ------------------------
(1) Includes 1,775,008 shares of common stock held of record by Sequoia Capital
Growth Fund; 358,271 shares of common stock held of record by Sequoia
Capital VI; 15,749 shares of common stock held of record by Sequoia 1995;
19,685 shares of common stock held of record by Sequoia Technology Partners
VI; 108,812 shares of common stock held of record by Sequoia Technology
Partners III; 447,369 shares of common stock held of record by Sequoia
Capital Franchise Fund; and 78,948 shares of common stock held of record by
Sequoia Capital Franchise Partner.
(2) Includes 2,000,000 shares of common stock held of record by Continental
Casualty Company. Mr. Wroe is Senior Vice President and Chief Technology
Officer of Continental Casualty Company.
(3) Includes 2,803,840 shares of common stock held of record by entities
associated with Sequoia funds, of which Mr. Stevens disclaims beneficial
ownership, except to the extent of his pecuniary interest. See note (1).
Mr. Stevens is a general partner of Sequoia Capital VI and Sequoia
Technology Partners VI and is a managing member of Sequoia Capital
Franchise Fund and Sequoia Capital Franchise Partners. Mr. Stevens
participates in the voting control of the shares held of record by Sequoia
Capital Growth Fund, Sequoia 1995 and Sequoia Technology
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<PAGE>
Partners III. The share amount also includes 3,334 shares subject to an
option held of record by Mr. Stevens that is exerciseable within 60 days of
September 30, 1999.
(4) Includes 2,353,595 shares of common stock held of record by New Enterprises
Associates VI, LP, of which Mr. Kase disclaims beneficial ownership.
Includes 27,500 shares subject to an option held of record by Mr. Kase that
is exerciseable within 60 days of September 30, 1999.
(5) Includes 252,500 shares of common stock held of record by Sandra Leavitt,
Dr. Leavitt's former wife, which are voted by Dr. Leavitt as trustee of a
voting trust, 5,000 shares of common stock held of record by Amy Elizabeth
Leavitt and 85,000 shares of common stock held in trust for Amy Elizabeth
Leavitt.
(6) Includes 5,000 shares of common stock held of record by Courtaney E. Samco
and 5,000 shares of common stock held of record by Mark R. Samco.
(7) Includes 250,000 shares of common stock held of record by Elizabeth
Moffenbeier.
(8) Includes 475,000 shares of common stock held of record by entities
associated with Enterprise Partners, for which Mr. Taylor disclaims
beneficial ownership, except to the extent of his pecuniary interest. Of
those shares for which beneficial ownership is disclaimed, Mr. Taylor has
the right to acquire beneficial ownership of 27,778 shares at any time.
Also includes 29,167 shares subject to an option held of record by
Mr. Taylor that is exerciseable within 60 days of September 30, 1999 and an
aggregate of 12,000 shares of common stock of which 4,000 shares each are
held of record by his children, Luke Rand Williams, Leah Williams Barbieri
and Tiffany Marie Taylor.
(9) Includes 2,500 shares of common stock held of record by Allie Middleton.
(10) Includes 7,500 shares subject to an option held of record by Mr. Fried
that is exerciseable within 60 days of September 30, 1999.
(11) Consists of 27,500 shares subject to an option held of record by
Mr. Burwell that is exerciseable within 60 days of September 30, 1999.
Mr. Burwell disclaims beneficial ownership of the shares underlying these
options. Mr. Burwell is a Senior Vice President of VHA, Inc, which holds
of record 793,651 shares of common stock. Mr. Burwell disclaims beneficial
ownership in shares of common stock held of record by VHA as he does not
have voting or dispositive power over these shares.
(12) Mr. Moszkowski is an employee of Soros Fund Management LLC, which is the
principal investment advisor to Quantum Industrial Partners LDC.
Mr. Moszkowski is also a non-managing member of SFM Domestic Investments
LLC. Mr. Moszkowski does not have voting or dispositive power over shares
held of record by Quantum Industrial Partners LDC or SFM Domestic
Investments LLC.
(13) Includes 99,514 shares subject to options that are exercisable within
60 days of September 30, 1999.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, we will be authorized to issue
100,000,000 shares of common stock, and 50,000,000 shares of undesignated
preferred stock. The following summary describes all material provisions of our
capital stock. However, we encourage you to read the provisions of our articles
of incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus forms a part, and which, together with
applicable Oregon law, contain the legal terms that govern our capital stock.
COMMON STOCK
As of September 30, 1999, there were 24,876,975 shares of our common stock
outstanding, which were held of record by approximately 262 shareholders, after
giving effect to the conversion of the outstanding series of preferred stock.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably the dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available for that
purpose. If we liquidate, dissolve or wind up, the holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to the prior distribution rights of preferred stock, if any, then
outstanding. The holders of common stock have no preemptive or conversion rights
or other subscription rights. There are no redemption or sinking fund provisions
applicable to our common stock. The outstanding shares of common stock are, and
the shares of common stock offered by this prospectus when issued will be, fully
paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority, without action by the
shareholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may be
greater than the rights of our common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of our common stock until the board of directors determines the
specific rights of the holders of preferred stock. However, the effects might
include:
- Restricting dividends on our common stock;
- Diluting the voting power of our common stock;
- Impairing the liquidation rights of our common stock; and
- Delaying or preventing a change in control of MedicaLogic without further
action by the shareholders.
Upon the completion of this offering, no shares of preferred stock will be
outstanding, and we have no present plans to issue any shares of preferred
stock.
REGISTRATION RIGHTS
After this offering, the holders of 16,327,967 shares of common stock will
be entitled to rights with respect to the registration of these shares under the
Securities Act. Under the terms of the agreements between us and the holders of
these shares, if we propose to register any of our securities under the
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<PAGE>
Securities Act, either for our own account or for the account of other security
holders exercising registration rights, these holders are entitled to:
- notice of registration;
- include their shares of common stock in the registration; and
- specified demand registration rights under which they may require us to
file a registration statement under the Securities Act at our expense with
respect to their shares of our common stock, and we are required to use
our best efforts to effect this registration.
Further, some of the holders of these demand registration rights may require
us to file additional registration statements. All of the registration rights
are subject to conditions and limitations, including the right of the
underwriters of an offering to limit the number of shares included in the
registration and our right not to effect a requested registration within sixty
days following the effectiveness of a registration statement registering any of
our stock or other securities in connection with the public offering of those
securities solely for cash.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, LLC.
OREGON CONTROL SHARE AND BUSINESS COMBINATION STATUTES
Upon completion of this offering, we will become subject to the Oregon
Control Share Act. The Oregon Control Share Act generally provides that a person
who acquires voting stock of an Oregon corporation in a transaction, other than
a transaction in which voting shares are acquired from the issuing public
corporation, that results in the acquiror, broadly defined to include companies
or persons acting as a group to acquire the shares, holding more than 20%,
33 1/3% or 50% of the total voting power of the corporation cannot vote the
shares it acquires in the acquisition unless voting rights are given to the
control shares by:
- A majority of each voting group entitled to vote; and
- The holders of a majority of the outstanding voting shares, excluding the
control shares held by the acquiror and shares held by the company's
officers and inside directors.
The acquiror may, but is not required to, submit to the target company a
statement including specific information about the acquiror and its plans with
respect to the company. The statement may also request that the company call a
special meeting of shareholders to determine whether voting rights will be
accorded to the control shares. If the acquiror does not request a special
meeting of shareholders, the issue of voting rights of control shares will be
considered at the next annual or special meeting of shareholders. If the
acquiror's control shares are accorded voting rights and represent a majority or
more of all voting power, shareholders who do not vote in favor of voting rights
for the control shares will have the right to receive the appraised fair value
of their shares, which may not be less than the highest price paid per share by
the acquiror for the control shares.
Upon completion of this offering, we will become subject to the provisions
of the Oregon Business Corporation Act that govern business combinations between
corporations and interested shareholders. The Oregon Business Corporation Act
generally provides that if a person or entity acquires 15% or more of the
outstanding voting stock of an Oregon corporation, the corporation and the
acquiring shareholder, or any affiliated entity of the acquiring shareholder,
may not engage in business combination transactions for three years following
the date the person acquired the shares. Business combination transactions for
this purpose include:
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- A merger or plan of share exchange;
- Any sale, lease, mortgage or other disposition of 10% or more of the
assets of the corporation; and
- Transactions that result in the issuance or transfer of capital stock of
the corporation to the acquiring shareholder.
These restrictions do not apply if:
- The acquiring shareholder, as a result of the transaction in which the
person acquired the shares, owns at least 85% of the outstanding voting
stock of the corporation, disregarding shares owned by directors who are
also officers and some employee benefits plans;
- The board of directors approves the business combination or the
transaction that resulted in the shareholder acquiring the shares before
the acquiring shareholder acquires 15% or more of the corporation's voting
stock; or
- The board of directors and the holders of at least two-thirds of the
outstanding voting stock of the corporation, disregarding shares owned by
the acquiring shareholder, approve the business combination after the
acquiring shareholder acquires 15% or more of the corporation's voting
stock.
STAGGERED BOARD; REMOVAL OF DIRECTORS ONLY FOR CAUSE
Our articles and restated bylaws contain provisions that:
- Classify the board of directors into three classes as nearly equal in
number as possible, each of which will serve for three years with one
class being elected each year; and
- Provide that directors may be removed by shareholders only for cause and
only upon the vote of 75% of the votes then entitled to be cast for the
election of directors.
The classified board provisions may have the effect of lengthening the time
required for a third party to acquire control of MedicaLogic through a proxy
contest or the election of a majority of the board of directors and may deter
any potential unfriendly offers or other efforts to obtain control of
MedicaLogic. These provisions could deprive you of opportunities to realize a
premium for your shares and could make removal of incumbent directors more
difficult. At the same time, these provisions may have the effect of inducing
any third parties seeking control of MedicaLogic to negotiate terms acceptable
to the board of directors. In addition, the provisions regarding removal of
directors will make the removal of any director more difficult, even if you
believe removal is in your best interests. Since these provisions make the
removal of directors more difficult, they increase the likelihood that incumbent
directors will retain their position and, since the board has the power to
retain and discharge management, could perpetuate incumbent management.
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SHARES ELIGIBLE FOR FUTURE SALE
If our shareholders sell substantial amounts of common stock, including
shares issued upon the exercise of outstanding options, in the public market
following this offering, the market price of our common stock could fall. These
sales also might make it more difficult for us to sell equity or equity related
securities in the future and at a time and price that we consider appropriate.
Upon completion of this offering, we will have outstanding an aggregate of
shares of our common stock, assuming no exercise of outstanding options
or warrants. As of September 30, 1999, we had approximately 262 holders of
common stock, after giving effect to the conversion of the convertible preferred
stock. All of the shares sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act, unless these
shares are purchased by our affiliates, or persons who directly or indirectly
control, are controlled by or are under common control with us. Shares held by
affiliates may generally only be sold in compliance with the limitations of Rule
144 of the Securities Act described below. This leaves 24,876,975 shares
eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ---------------- ----
<C> <S>
22,752,297................. After 180 days from the date of this prospectus, subject, in
some cases, to volume limitations.
2,124,679.................. At various times after 181 days from the date of this
prospectus, subject, in some cases, to volume limitations.
</TABLE>
LOCK-UP AGREEMENTS
All of our officers and directors and shareholders holding substantially all
of our outstanding shares of common stock have signed lock-up agreements with
our underwriters under which they agreed not to transfer or dispose of, directly
or indirectly, any shares of our common stock or any securities convertible into
or exercisable or exchangeable for shares of our common stock, for a period of
180 days after the date of this prospectus. Transfers or dispositions can be
made sooner with the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding, which
will equal approximately shares immediately after this offering;
or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
MedicaLogic, Inc.
RULE 144(k)
Under Rule 144(k) as currently in effect, a person who is not deemed to have
been one of our affiliates at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years, including the holding period of any prior owner other than an affiliate,
is entitled to sell those shares without complying with the manner of sale,
public
62
<PAGE>
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, Rule 144(k) shares may be sold immediately upon the
completion of this offering.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchases shares of our common
stock from us in connection with a compensatory stock or option plan or other
written agreement is eligible to resell those shares 90 days after the effective
date of this prospectus in reliance on Rule 144, but without compliance with
some of the restrictions, including the holding period, contained in Rule 144.
REGISTRATION RIGHTS
After this offering, the holders of 16,327,967 shares of our common stock
will be entitled to rights with respect to the registration of those shares
under the Securities Act. If these shares are registered, they will become
freely tradeable without restriction under the Securities Act. These sales could
have a material adverse effect on the trading price of our common stock.
STOCK OPTIONS
Shortly after this offering, we intend to file a registration statement on
Form S-8 covering the shares of common stock reserved for issuance under our
stock option plans. Shares of common stock registered under any registration
statement will, subject to Rule 144 volume limitations applicable to affiliates,
be available for sale in the open market, unless the shares are subject to
vesting restrictions or the lock-up agreements described above.
63
<PAGE>
UNDERWRITING
Subject to the terms and conditions in the underwriting agreement, dated
, 1999, the underwriters named below, for whom Donaldson, Lufkin &
Jenrette Securities Corporation, BancBoston Robertson Stephens Inc., U.S.
Bancorp Piper Jaffray Inc. and DLJDIRECT Inc. are acting as representatives,
have each agreed to purchase from MedicaLogic the number of shares of common
stock indicated opposite each of their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
BancBoston Robertson Stephens Inc...........................
U.S. Bancorp Piper Jaffray Inc..............................
DLJDIRECT Inc...............................................
---------
Total...................................................
=========
</TABLE>
The underwriting agreement provides that the obligations of each of the
underwriters to purchase and accept delivery of the shares of common stock
offered by this prospectus are subject to approval by their counsel of legal
matters and to other specified conditions. The underwriters are obligated to
purchase and accept delivery of all the shares of common stock offered by this
prospectus (other than those shares covered by the over-allotment option
described below) if any are purchased.
The underwriters initially propose to offer the shares of common stock in
part directly to the public at the initial public offering price indicated on
the cover page of this prospectus and in part to dealers, including the
underwriters, at that price less a concession not in excess of $ per share.
The underwriters may allow, and the dealers may re-allow, to other dealers a
concession not in excess of $ per share. After the initial offering of the
common stock, the public offering price and other selling terms may be changed
by the representatives at any time without notice. The underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
We have granted to the underwriters an option, exercisable within 30 days
after the date of this prospectus, to purchase, from time to time, in whole or
in part, up to an aggregate of additional shares of common stock at the
initial public offering price less underwriting discounts and commissions. The
underwriters may exercise this option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise this option, each underwriter will become obligated, subject to
specified conditions, to purchase its pro rata portion of the additional shares
based on the underwriter's percentage underwriting commitment as indicated in
the preceding table.
The following table shows the underwriting fees to be paid to the
underwriters by us in this offering. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase additional
shares of our common stock to cover over-allotments.
<TABLE>
<CAPTION>
NO FULL
EXERCISE EXERCISE
-------- --------
<S> <C> <C>
Per Share..................................................
Total......................................................
</TABLE>
We will pay the offering expenses, estimated to be $ .
An electronic prospectus is available on the Internet site maintained by
DLJDIRECT Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation. Other than the prospectus in electronic format, the information on
the Internet site relating to our offering is not a part of this prospectus, has
64
<PAGE>
not been approved or endorsed by us or any underwriter and should not be relied
on by prospective purchasers.
We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act, or to contribute to payments
that the underwriters may be required to make in connection with these
liabilities.
Each of MedicaLogic, its executive officers and directors and most of our
shareholders has agreed, subject to exceptions, not to (a) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or transfer
or dispose of, directly or indirectly, any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock or
(b) enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any common stock,
regardless of whether any of the transactions described in clause (a) or
(b) are to be settled by the delivery of common stock, or other securities, in
cash or by any other method, for a period of 180 days after the date of this
prospectus without the prior written consent of Donaldson Lufkin & Jenrette
Securities Corporation. In addition, during this period, we have also agreed not
to file any registration statement for, and each of our executive officers,
directors and most of our shareholders has agreed not to make any demand for, or
exercise any right for, the registration of any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock
without the prior written consent of Donaldson Lufkin & Jenrette Securities
Corporation.
Before this offering, there has been no established trading market for our
common stock. The initial public offering price for the shares of common stock
offered by this prospectus will be determined by negotiation among us and the
representatives. The factors to be considered in determining the initial public
offering price include the history of and the prospects for the industry in
which we compete, our past and present operations, our historical results of
operations, our prospects for future earnings, the recent market prices of
securities of generally comparable companies and the general condition of the
securities markets at the time of this offering.
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol MDLI.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
offered by this prospectus in any jurisdiction where action for that purpose is
required. The shares of common stock offered by this prospectus may not be
offered or sold, directly or indirectly, nor may this prospectus or any other
offering material or advertisements in connection with the offer and sale of any
of the shares of common stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of the jurisdiction. Persons into whose possession this
prospectus comes are advised to inform themselves about and to observe any
restrictions relating to this offering and the distribution of this prospectus.
This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any shares of common stock offered by this prospectus in any
jurisdiction in which an offer or a solicitation is unlawful.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or affect the price of our common stock.
Specifically, the underwriters may over-allot this offering, meaning syndicate
sales may be in excess of the offering size which creates a syndicate short
position. The underwriters may bid for and purchase shares of common stock in
the open market to cover the syndicate short position or to stabilize the price
of our common stock. In addition, the underwriting syndicate may reclaim selling
concessions from syndicate members if the syndicate repurchases previously
distributed common stock in syndicate covering transactions, in stabilization
transactions or in other transactions. Any of these activities may stabilize or
maintain the market price
65
<PAGE>
of our common stock above independent market levels. The underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
The underwriters, at our request, have reserved for sale at the initial
public offering price up to 8% of the shares of common stock to be sold in this
offering for sale to our employees, directors and other persons we designate.
The number of shares available for sale to the general public will be reduced to
the extent that any reserved shares are purchased. Any reserved shares not
purchased will be offered by the underwriters on the same basis as the other
shares offered by this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 for the common stock offered by this prospectus. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information included in the registration statement or the
exhibits and schedules that are part of the registration statement. For further
information on us and our common stock, you should review the registration
statement and its exhibits and schedules. Any document we file may be read and
copied at the Commission's public reference rooms at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commissioner located at Seven World Trade Center, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Please call the Commission at 1-800-SEC-0330 for further
information about the public reference rooms. Our filings with the Commission
are also available to the public from the Commission's Web site at
HTTP://WWW.SEC.GOV.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and will file
periodic reports, proxy statements and other information with the Commission.
These periodic reports, proxy statements and other information will be available
for inspection and copying at the Commission's public reference rooms and the
Web site of the Commission referred to above.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Stoel Rives LLP, Portland, Oregon. Stoel Rives LLP holds a
warrant to purchase 10,000 shares of MedicaLogic's common stock at an exercise
price of $6.50 a share. Legal matters will be passed upon for the underwriters
by Perkins Coie LLP, Portland, Oregon. As of the date of this prospectus,
partners and employees of Stoel Rives LLP beneficially owned an aggregate of
25,000 shares of our common stock.
EXPERTS
The financial statements of MedicaLogic, Inc. as of December 31, 1997 and
1998 and September 30, 1999 and for each of the years in the three-year period
ended December 31, 1998 and for the nine-month period ended September 30, 1999
have been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing herein
and upon the authority of such firm as experts in auditing and accounting.
The financial statements of PrimaCis Health Information Technology, Inc. as
of December 31, 1998 and for the year then ended have been included herein in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein and upon the authority of such firm as experts in
auditing and accounting.
66
<PAGE>
MEDICALOGIC, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
MedicaLogic, Inc.--Consolidated Financial Statements:
Report of KPMG LLP........................................ F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Shareholders' Equity
(Deficit)............................................... F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
PrimaCis Health Information Technology, Inc.--Financial
Statements:
Report of KPMG LLP........................................ F-27
Balance Sheet............................................. F-28
Statement of Operations................................... F-29
Statement of Shareholders' Deficit........................ F-30
Statement of Cash Flows................................... F-31
Notes to Financial Statements............................. F-32
Pro Forma Financial Information:
Summary................................................... F-40
Unaudited Pro Forma Condensed Combined Statement of
Operations for the Nine-Month Period Ended
September 30, 1998...................................... F-41
Unaudited Pro Forma Condensed Combined Statement of
Operations for the Year Ended December 31, 1998......... F-42
Notes to the Unaudited Pro Forma Condensed Combined
Financial Information................................... F-43
</TABLE>
F-1
<PAGE>
When the reverse stock split referred to in note 13(d) to the consolidated
financial statements has been consummated, we will render the following opinion.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MedicaLogic, Inc.:
We have audited the accompanying consolidated balance sheets of
MedicaLogic, Inc. and subsidiaries as of December 31, 1997, 1998, and
September 30, 1999 and the related consolidated statements of operations,
shareholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1998 and the nine-month period ended
September 30, 1999. These consolidated financial statements are the
responsibility of MedicaLogic's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MedicaLogic, Inc.
and subsidiaries as of December 31, 1997, 1998, and September 30, 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 and the nine-month period ended
September 30, 1999 in conformity with generally accepted accounting principles.
Portland, Oregon
October 22, 1999, except as to note 13(d)
which is as of November , 1999
F-2
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998 SEPTEMBER 30, 1999
-------- -------- -------------------------
(PRO FORMA)
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,924 $ 4,718 $ 7,081
Short-term investments.................................... 7,116 7,030 38,059
Accounts receivable, net.................................. 7,663 10,084 4,537
Prepaid expenses and other current assets................. 263 545 2,031
-------- -------- --------
Total current assets.................................... 19,966 22,377 51,708
Property and equipment, net................................. 1,969 1,804 10,853
Other assets, net........................................... 137 127 5,166
-------- -------- --------
Total assets............................................ $ 22,072 $ 24,308 $ 67,727
======== ======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... 667 557 2,993
Accrued and other liabilities............................. 2,187 2,286 1,347
Deferred revenue.......................................... 1,396 2,701 2,554
Current portion of capital leases......................... 846 215 557
Current portion of notes payable.......................... -- 527 1,106
-------- -------- --------
Total current liabilities............................... 5,096 6,286 8,557
Non-current portion of capital leases....................... 278 92 868
Non-current portion of notes payable........................ -- 587 791
Deferred rent............................................... -- -- 250
-------- -------- --------
Total liabilities....................................... 5,374 6,965 10,466
-------- -------- --------
Convertible redeemable preferred stock; 50,000,000 shares
authorized; aggregate liquidation preference $99,418 at
September 30, 1999; issued and outstanding 19,525,545,
21,524,545, and 31,901,388 at December 31, 1997 and 1998,
and September 30, 1999, respectively; pro forma no shares
issued and outstanding.................................... 42,791 49,782 97,825 $ --
Commitments and contingencies
Shareholders' equity (deficit):
Common stock, no par value; authorized 100,000,000 shares;
issued and outstanding 6,654,280, 7,127,556 and
8,926,281 shares at December 31, 1997 and 1998 and
September 30, 1999, respectively; pro forma 24,876,975
shares issued and outstanding........................... 3,202 5,139 15,793 113,618
Common stock notes receivable............................. (988) (2,039) (6,449) (6,449)
Deferred stock compensation............................... -- -- (988) (988)
Accumulated deficit....................................... (28,307) (35,539) (48,920) (48,920)
-------- -------- -------- --------
Total shareholders' equity (deficit).................... (26,093) (32,439) (40,564) $ 57,261
-------- -------- -------- ========
Total liabilities, redeemable preferred stock and
shareholders' equity (deficit)........................ $ 22,072 $ 24,308 $ 67,727
======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses.................... $ 6,845 $ 7,617 $ 10,410 $ 6,534 $ 9,620
Service and support......... 2,819 5,190 5,750 4,225 5,372
----------- ----------- ----------- ----------- -----------
Total revenues.......... 9,664 12,807 16,160 10,759 14,992
Operating expenses:
Cost of licenses............ 2,089 1,702 939 608 813
Cost of service and
support................... 4,031 6,054 5,815 4,354 4,911
Marketing and sales......... 6,667 7,681 7,882 5,647 12,300
Research and development.... 6,583 7,047 8,071 5,981 8,495
General and
administrative............ 718 1,315 1,151 735 2,511
----------- ----------- ----------- ----------- -----------
Total operating
expenses.............. 20,088 23,799 23,858 17,325 29,030
----------- ----------- ----------- ----------- -----------
Operating loss.......... (10,424) (10,992) (7,698) (6,566) (14,038)
Other income (expense):
Interest expense............ (251) (240) (187) (145) (180)
Interest income............. 456 617 707 504 1,113
Other, net.................. (96) (55) 143 (40) 9
----------- ----------- ----------- ----------- -----------
Total other income...... 109 322 663 319 942
----------- ----------- ----------- ----------- -----------
Loss before income
taxes................. (10,315) (10,670) (7,035) (6,247) (13,096)
Provision for income taxes.... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss................ $ (10,315) $ (10,670) $ (7,035) $ (6,247) $ (13,096)
=========== =========== =========== =========== ===========
Accretion of preferred stock
redemption preference....... (49) (149) (197) (147) (285)
----------- ----------- ----------- ----------- -----------
Net loss attributed to
common shareholders... $ (10,364) $ (10,819) $ (7,232) $ (6,394) $ (13,381)
=========== =========== =========== =========== ===========
Historical net loss per share:
Basic and diluted........... $ (1.58) $ (1.63) $ (1.05) $ (0.93) $ (1.61)
=========== =========== =========== =========== ===========
Weighted average shares--
basic and diluted......... 6,576,278 6,634,541 6,883,036 6,881,578 8,331,102
Pro forma net loss per share:
Basic and diluted........... $ (0.41) $ (0.63)
=========== ===========
Weighted average shares--
basic and diluted......... 17,478,642 21,083,550
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON TOTAL
COMMON STOCK STOCK SHAREHOLDERS'
--------------------- NOTES DEFERRED ACCUMULATED EQUITY
SHARES AMOUNT RECEIVABLE COMPENSATION DEFICIT (DEFICIT)
---------- -------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.................. 6,528,112 $ 2,812 $ (683) $ -- $ (7,124) $ (4,995)
Issuance of common stock in exchange for a
promissory note............................. 52,500 210 (210) -- -- --
Issuance of common stock in exchange for
services.................................... 12,500 50 -- -- -- 50
Issuance of common stock for cash............. 2,500 10 -- -- -- 10
Options exercised............................. 18,250 26 -- -- -- 26
Interest accrued on common stock notes
receivable.................................. -- -- (44) -- -- (44)
Accretion of preferred stock redemption
preference.................................. -- -- -- -- (49) (49)
Net loss...................................... -- -- -- -- (10,315) (10,315)
---------- ------- ------- ------- -------- --------
Balance at December 31, 1996.................. 6,613,862 3,108 (937) -- (17,488) (15,317)
Issuance of common stock in exchange for
services.................................... 14,350 51 -- -- -- 51
Options exercised............................. 26,068 43 -- -- -- 43
Interest accrued on common stock notes
receivable.................................. -- -- (51) -- -- (51)
Accretion of preferred stock redemption
preference.................................. -- -- -- -- (149) (149)
Net loss...................................... -- -- -- -- (10,670) (10,670)
---------- ------- ------- ------- -------- --------
Balance at December 31, 1997.................. 6,654,280 3,202 (988) -- (28,307) (26,093)
Issuance of common stock for acquisition...... 13,750 55 -- -- -- 55
Issuance of common stock for cash............. 175,000 700 -- -- -- 700
Issuance of restricted common stock in
exchange for promissory notes............... 250,000 1,000 (1,000) -- -- --
Non-cash stock compensation................... -- 110 -- -- -- 110
Options exercised............................. 34,526 72 -- -- -- 72
Interest accrued on common stock notes
receivable.................................. -- -- (51) -- -- (51)
Accretion of preferred stock redemption
preference.................................. -- -- -- -- (197) (197)
Net loss...................................... -- -- -- -- (7,035) (7,035)
---------- ------- ------- ------- -------- --------
Balance at December 31, 1998.................. 7,127,556 5,139 (2,039) -- (35,539) (32,439)
Issuance of common stock for acquisition...... 750,000 3,300 -- -- -- 3,300
Issuance of restricted common stock in
exchange for promissory notes............... 742,500 4,196 (4,196) -- -- --
Issuance of common stock in exchange for
services.................................... 58,750 398 -- -- -- 398
Issuance of common stock for commission....... 14,868 141 -- -- -- 141
Warrants exercised............................ 22,500 13 -- -- -- 13
Options exercised............................. 210,107 758 -- -- -- 758
Stock compensation expense.................... -- 790 -- 70 -- 860
Interest accrued on common stock notes
receivable.................................. -- -- (214) -- -- (214)
Deferred compensation related to stock
options..................................... -- 1,058 -- (1,058) -- --
Accretion of preferred stock redemption
preference.................................. -- -- -- -- (285) (285)
Net loss...................................... -- -- -- -- (13,096) (13,096)
---------- ------- ------- ------- -------- --------
Balance at September 30, 1999................. 8,926,281 $15,793 $(6,449) $ (988) $(48,920) $(40,564)
========== ======= ======= ======= ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------ ----------------------
1996 1997 1998 1998 1999
-------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(10,315) $(10,670) $ (7,035) $ (6,247) $(13,096)
Adjustments to reconcile net loss to net cash (used by)
provided by operating activities:
Depreciation and amortization......................... 912 1,464 1,537 1,152 3,085
Non-cash expenses..................................... 50 51 110 110 1,001
Provisions for doubtful accounts...................... 304 829 756 50 405
Loss (gain) on disposition of assets.................. -- 14 (2) (2) (11)
Other non-cash expenses............................... (44) (51) (51) (38) 249
Changes in assets and liabilities:
Accounts receivable................................. (3,027) (3,630) (3,177) 194 5,142
Prepaid expenses and other current assets........... (25) (133) (239) (235) (1,486)
Other assets........................................ 300 (35) -- (48) (177)
Accounts payable.................................... 1,131 (906) (110) (130) 1,383
Accrued and other liabilities....................... 80 1,314 99 (259) (939)
Deferred rent....................................... -- -- -- -- 250
Deferred revenue.................................... (250) 113 1,305 481 (147)
-------- -------- -------- -------- --------
Net cash (used by) provided by operating
activities...................................... (10,884) (11,640) (6,807) (4,972) (4,341)
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of fixed assets.................................. (263) (525) (1,280) (990) (9,027)
Purchase of business...................................... -- -- (12) (12) (2,117)
Proceeds from sale of fixed assets........................ -- -- 6 6 18
Purchase of short-term investments........................ -- (15,261) (28,248) (23,868) (42,990)
Purchase from maturities of short-term investments........ -- 8,145 28,334 18,911 11,961
Issuance of long-term note receivable..................... -- -- -- -- (200)
-------- -------- -------- -------- --------
Net cash used by investing activities............. (263) (7,641) (1,200) (5,953) (42,355)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock............. 20,023 6,775 6,794 6,794 47,758
Net proceeds from issuance of common stock................ 36 43 772 745 771
Proceeds from issuance of notes payable................... -- -- 1,264 967 1,311
Principal payments under capital lease.................... (875) (1,264) (879) (697) (253)
Principal payments under note obligations................. -- -- (150) (33) (528)
-------- -------- -------- -------- --------
Net cash provided by financing activities......... 19,184 5,554 7,801 7,776 49,059
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 8,037 (13,727) (206) (3,149) 2,363
Cash and cash equivalents at beginning of period............ 10,614 18,651 4,924 4,924 4,718
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period.................. $ 18,651 $ 4,924 $ 4,718 $ 1,775 $ 7,081
======== ======== ======== ======== ========
Summary of non-cash investing and financing activities:
Issuance of common stock in exchange for note
receivable.............................................. $ 210 $ -- $ 1,000 $ 1,000 $ 4,196
Issuance of common stock for purchase of a business....... -- -- 55 55 3,300
Assets acquired or exchanged under capital leases......... 1,451 593 62 62 1,371
Accretion of preferred stock redemption preference........ 49 149 197 147 285
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) COMPANY
MedicaLogic, Inc. (MedicaLogic) develops, markets and supports electronic
medical record software used by physicians at the point of care, throughout
the U.S.
The accompanying consolidated financial statements include the accounts of
MedicaLogic and subsidiaries. All significant intercompany balances have
been eliminated in consolidation.
(b) UNAUDITED QUARTERLY INFORMATION
The financial information included herein for the nine-month period ended
September 30, 1998 is unaudited. However, such information reflects all
adjustments, consisting only of normal recurring adjustments, which are, in
the opinion of management, necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim
period. The unaudited interim consolidated financial statements should be
read together with the consolidated financial statements and the notes
included in the consolidated financial statements. The results of operations
for the interim periods presented are not necessarily indicative of the
results to be expected for the full year.
(c) CASH EQUIVALENTS
For purposes of these statements, MedicaLogic considers all highly liquid
instruments with an original maturity of three months or less to be cash
equivalents.
(d) SHORT-TERM INVESTMENTS
Short-term investments include various corporate debt instruments and have
been classified as available-for-sale securities in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES at December 31, 1997 and
1998. Short-term investments are carried at amortized cost, which
approximates market. At September 30, 1999, contractual maturities of
short-term investments ranged from ninety to two hundred ninety-six days.
(e) ACCOUNTS RECEIVABLE
Accounts receivable are shown net of allowance for doubtful accounts of
$852, $1,360 and $1,235 at December 31, 1997 and 1998 and September 30,
1999, respectively. The following table presents a rollforward of the
allowance for doubtful accounts for the respective periods:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ SEPTEMBER 30,
1996 1997 1998 1999
-------- -------- -------- --------------
<S> <C> <C> <C> <C>
Balance--beginning of period..... $ 30 $ 165 $ 852 $1,360
Provision........................ 304 829 756 405
Charge offs...................... (169) (142) (248) (530)
----- ----- ------ ------
Balance--end of period........... $ 165 $ 852 $1,360 $1,235
===== ===== ====== ======
</TABLE>
F-7
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment under
capital leases are stated at the lower of the present value of minimum lease
payments at the beginning of the lease term or fair value of the leased
assets at the inception of the lease. The cost of repairs and maintenance is
expensed as incurred.
Depreciation on furniture, equipment and leasehold improvements is
calculated on a straight-line basis over the estimated useful lives of the
assets, five years for furniture and two to three years for equipment.
Property and equipment held under capital leases are amortized on a
straight-line basis over the shorter of the lease term or estimated useful
life of the asset. Amortization of leasehold improvements is recognized over
the shorter of the life of the improvement or the remaining life of the
lease using the straight-line method.
In accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, management reviews
long-lived assets and the related intangible assets for impairment whenever
events or changes in circumstances indicate the carrying amount of such
assets may not be recoverable. Recoverability of these assets is determined
by comparing the forecasted undiscounted net cash flows of the operation to
which the assets relate, to the carrying amount including associated
intangible assets of such operation. If the operation is determined to be
unable to recover the carrying amount of its assets, then intangible assets
are written down first, followed by the other long-lived assets of the
operation, to fair value. Fair value is determined based on discounted cash
flows or appraised values, depending upon the nature of the assets.
(g) GOODWILL
Goodwill represents the excess of the aggregate purchase price over the fair
value of the tangible and intangible assets acquired in various
acquisitions. Goodwill costs are being amortized on a straight-line basis,
over periods ranging from two to four years. Amortization expense for the
years ended December 31, 1996, 1997 and 1998 and for the nine-month period
ended September 30, 1999 was $-0-, $-0-, $34 and $566, respectively.
Accumulated amortization at December 31, 1997 and 1998 and at September 30,
1999 was $-0-, $34 and $600, respectively. Recoverability of goodwill is
periodically reviewed for impairment.
(h) SOFTWARE DEVELOPMENT COSTS
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, ACCOUNTING FOR THE COSTS
OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. Under the
standard, capitalization of software development costs begins upon the
establishment of technological feasibility, subject to net realizable value
considerations. To date, the period between achieving technological
feasibility and the general availability of such software has been short;
therefore, software development costs qualifying for capitalization have
been immaterial. Accordingly, MedicaLogic has not capitalized any software
development costs and charged all costs to research and development expense.
F-8
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i) REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, SOFTWARE REVENUE RECOGNITION.
Subsequently, in March 1998, the Financial Accounting Standards Board
("FASB") approved SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE OF A PROVISION OF
97-2, SOFTWARE REVENUE RECOGNITION. SOP 98-4 defers for one year, the
application of several paragraphs and examples in SOP 97-2 that limit the
definition of vendor specific objective evidence (VSOE) of the fair value of
various elements in a multiple element arrangement. The provisions of SOP's
97-2 and 98-4 have been applied to transactions entered into by MedicaLogic
beginning January 1, 1998. Prior to 1997, MedicaLogic's revenue policy was
in accordance with the preceding authoritative guidance provided by SOP
No. 91-1, SOFTWARE REVENUE RECOGNITION.
SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on VSOE of
the relative fair values of each element in the arrangement. MedicaLogic
establishes VSOE based on the average selling prices of our product and
support during the respective period.
MedicaLogic recognizes revenue from license fees generally when a signed
agreement has been obtained, the delivery of the product has occurred, there
are no uncertainties surrounding product acceptance, the fee is fixed and
determinable and collectibility of the license fee is probable. Term based
licenses from internet products will be recognized on a subscription basis.
Support revenue consists of annual subscriptions for maintenance and
post-customer support services. Subscriptions, conveying the right to obtain
upgrades, when and if available, are generally paid in advance and revenue
is recognized ratably over the term of subscription.
Services revenue generally consists of consulting, training and integration
fees. Such services are typically billed separately from the license fees
and are recognized as the related services are performed.
In December 1998, the AICPA issued SOP 98-9, MODIFICATION OF SOP 97-2,
SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS. This SOP
amends SOP 97-2 to require recognition of revenue using the "residual
method" in circumstances outlined in the SOP. Under the residual method,
revenue is recognized as follows: (1) the total fair value of undelivered
elements, as indicated by VSOE, is deferred and subsequently recognized in
accordance with the relevant sections of SOP 97-2 and (2) the difference
between the total arrangement fee and the amount deferred for the
undelivered elements is recognized as revenue related to the delivered
elements.
SOP 98-9 is effective for fiscal years beginning after March 15, 1999. Also,
the provisions of SOP 97-2 that were deferred by SOP 98-4 will continue to
be deferred until the date SOP 98-9 becomes effective.
(j) INCOME TAXES
MedicaLogic accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred income taxes reflect the
future tax consequences of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end.
F-9
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in
operations in the period that include the enactment date. Valuation
allowances are established when necessary to reduce deferred tax assets to
the amount expected to be realized.
(k) STOCK-BASED EMPLOYEE COMPENSATION
MedicaLogic has adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which defines a fair value based method of accounting for
employee stock options and similar equity instruments. As is permitted under
SFAS No. 123, MedicaLogic has elected to continue to account for its stock-
based compensation plans under APB Opinion No. 25 and provide the pro forma
disclosures as prescribed by SFAS No. 123.
(l) ADVERTISING
MedicaLogic expenses costs of advertising when the costs are incurred.
Advertising expense was approximately $700, $836, $896 and $1,471 for the
years ended December 31, 1996, 1997 and 1998 and for the nine-month period
ended September 30, 1999, respectively.
(m) NET LOSS PER SHARE
MedicaLogic has adopted SFAS No. 128, EARNINGS PER SHARE, which provides
that "basic net income (loss) per share" and "diluted net income (loss) per
share" for all periods presented are to be computed using the weighted
average number of common shares outstanding during each period, with diluted
net income per share including the effect of potentially dilutive common
shares. The reconciliation of shares used to calculate basic and diluted
income per share consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ --------------------------------------
1996 1997 1998 1998 1998 1999 1999
--------- --------- --------- ------------ ----------- --------- ------------
(PRO FORMA) (UNAUDITED) (PRO FORMA)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Basic weighted average
shares of common
stock............... 6,576,278 6,634,541 6,883,036 17,478,642 6,881,578 8,331,102 21,083,550
Effect of dilutive
securities:
Stock options and
warrants.......... -- -- -- -- -- -- --
--------- --------- --------- ---------- --------- --------- ----------
Diluted weighted
average shares of
common stock........ 6,576,278 6,634,541 6,883,036 17,478,642 6,881,578 8,331,102 21,083,550
========= ========= ========= ========== ========= ========= ==========
</TABLE>
Common stock equivalents related to stock options and warrants of 419,927,
915,284, 1,129,724, 1,088,518 (unaudited) and 2,161,773 are anti-dilutive in
a net loss year and, therefore, are not
F-10
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
included during the years ended December 1996, 1997 and 1998, and the
nine-month periods ended September 30, 1998 and 1999 for calculation of net
loss per share.
The pro forma net loss per share information assumes the conversion, on a
weighted average basis, of 10,595,606 and 12,752,488 shares of preferred
stock into common stock for the year ended December 31, 1998 and the
nine-month period ended September 30, 1999.
(n) COMPREHENSIVE LOSS
MedicaLogic has no material components of other comprehensive loss and
accordingly the comprehensive loss is the same as net loss for all periods
presented.
(o) USE OF ESTIMATES
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amount of assets,
liabilities and contingencies at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
(p) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, and accounts payable approximate fair value due to the
short-term nature of these instruments. The carrying amounts of capital
leases and notes payable approximate fair value as the stated interest rates
reflect current market rates. Fair value estimates are made at a specific
point in time, based on relevant market information about the financial
instrument when available. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
(q) COSTS OF SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
Internal use software development costs are accounted for in accordance with
SOP 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE. Costs incurred in the preliminary project stage
are expensed as incurred and costs incurred in the application and
development stage, which meet the capitalization criteria, are capitalized
and amortized on a straight-line basis over five years, the estimated useful
life of the asset.
(r) CONTINGENCIES AND FACTORS THAT COULD AFFECT FUTURE RESULTS
A substantial portion of MedicaLogic's revenues each year are generated from
the development and release to market of computer software products. In the
extremely competitive industry environment in which MedicaLogic operates,
such product generating, development and marketing processes are uncertain
and complex, requiring accurate prediction of market trends and demand as
well as successful management of various development risks inherent in such
products. In light of these dependencies, it is possible that failure to
successfully manage a significant product
F-11
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
introduction could have a severe near term impact on MedicaLogic's growth
and results of operations.
(s) PRO FORMA SHAREHOLDERS EQUITY (UNAUDITED)
Pro forma net loss per share has been computed as described above and also
gives effect to common equivalent shares from preferred stock that will
automatically convert upon the closing of MedicaLogic's initial public
offering (using the as-if-converted method). If MedicaLogic's initial public
offering is consummated, all of the convertible preferred stock outstanding
as of the closing date will automatically be converted into an aggregate of
15,950,964 shares of common stock based on the shares of convertible
preferred stock outstanding at September 30, 1999. Unaudited pro forma
shareholders' equity at September 30, 1999, as adjusted for the conversion
of the convertible preferred stock, is disclosed on the balance sheet.
(2) ACQUISITIONS
On January 5, 1998, MedicaLogic paid $12 in cash and issued 13,750 shares of
common stock valued at $4.00 per share to acquire certain intangible assets of
Health Outcome Technologies, Inc. (HOT). This acquisition was accounted for as a
purchase and results of operations for the acquired company are included only
from the date of acquisition forward. In connection with this acquisition,
MedicaLogic recorded goodwill of $67, which is being amortized over two years,
the estimated economic life of the goodwill. The separate results of operations
of HOT were not material compared to MedicaLogic's overall results of operations
and as such, pro forma financial information has been omitted.
In January 1999, MedicaLogic acquired PrimaCis Health Information Technology,
Inc. (PrimaCis), a Delaware corporation. The total purchase price, including
acquisition costs, was $6,453 and consisted of $2,100 in cash, the assumption of
$1,053 in liabilities and the issuance of 750,000 shares of common stock at an
estimated fair value of $4.40 per share.
The purchase accounting allocations resulted in goodwill of approximately $3,200
and other intangible assets of approximately $3,300, which consists primarily of
a customer list. Goodwill is amortized on a straight-line basis over a four year
period. Other intangible assets are amortized on a straight-line basis over a
two year period.
The pro forma results shown below assume the PrimaCis acquisition occurred as of
the beginning of 1998.
<TABLE>
<S> <C>
Revenues.................................................... $ 16,408
Net loss.................................................... (11,278)
Diluted net loss per share.................................. (1.48)
</TABLE>
The pro forma results are not necessarily indicative of what actually would have
occurred had the acquisition been in effect for the 1998 period. The pro forma
statement of operations data for the nine-months ended September 30, 1999 have
not been presented as the results of operations presented for MedicaLogic during
this period include PrimaCis' operating results. In addition, they are not
intended to be a projection of the future results that may be achieved from the
combined operations.
F-12
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(2) ACQUISITIONS (CONTINUED)
In connection with the acquisition of PrimaCis, MedicaLogic entered into a
separate agreement with a customer of PrimaCis under which MedicaLogic received
a purchase order for 1,500 licenses. MedicaLogic delivered 500 licenses to this
customer on March 31, 1999 and delivered 1,000 licenses to this customer on
June 17, 1999 under a standard license agreement. In addition, Medicalogic is
performing training and implementation services on a time and materials basis.
(3) BALANCE SHEET COMPONENTS
(a) PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases, consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Furniture and equipment............... $ 3,850 $ 4,565 $12,086
Leasehold improvements................ 876 1,267 3,551
------- ------- -------
4,726 5,832 15,637
Less accumulated depreciation and
amortization........................ (2,757) (4,028) (4,784)
------- ------- -------
$ 1,969 $ 1,804 $10,853
======= ======= =======
</TABLE>
(b) ACCRUED AND OTHER LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Royalties............................... $ 947 $ 843 $ 599
Payroll and related liabilities......... 674 627 412
Litigation accruals..................... 301 488 175
Other................................... 265 328 161
------ ------ ------
$2,187 $2,286 $1,347
====== ====== ======
</TABLE>
(4) LEASES
MedicaLogic leases certain office furniture and equipment under long-term
capital leases, which expire over the next two years. At December 31, 1997 and
1998 and September 30, 1999, the net book value of leased furniture and
equipment included in property and equipment was $1,122, $307 and $1,425
respectively.
MedicaLogic also leases its office facilities under non-cancelable operating
lease agreements.
F-13
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(4) LEASES (CONTINUED)
Future minimum lease payments under non-cancelable operating leases and the
capital leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
Year ending December 31:
1999 (for the three months ended December 31)........... $ 199 $ 590
2000.................................................... 730 2,838
2001.................................................... 838 2,884
2002.................................................... -- 2,884
2003.................................................... -- 3,003
Thereafter.............................................. -- 16,353
------ -------
Total minimum lease payments........................ 1,767 $28,552
=======
Less amount representing interest......................... (342)
------
Present value of net minimum capital lease
payments.......................................... 1,425
Less current portion of capital leases.................... (557)
------
Non-current portion of capital leases............... $ 868
======
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 and for the
nine-month period ended September 30, 1999 totaled approximately $600, $611,
$1,073 and $981, respectively.
On May 12, 1999 MedicaLogic entered into a ten year operating lease agreement
for office space. The lease requires a letter of credit in lieu of a cash
security deposit in the amount of $1,750. Also in connection with this lease,
MedicaLogic granted options to the lessor to purchase up to 25,000 shares of
common stock, at a price of $6.50 per share. The lessor is required to exercise
the option at any time within three years of MedicaLogic's initial public
offering. In addition, at the time of MedicaLogic's initial public offering the
lessor will have the right to purchase the greater of 50,000 shares of common
stock or 1% of the number of shares offered at the initial offering price.
The fair value of the options to issued to the lessor was determined by applying
the Black-Scholes methodology using the commitment date of the lease for
performance of the lessor as the measurement date. The per share weighted
average fair market value was $1.30 on the date of grant, with the following
weighted average assumptions: Risk-free interest rate of 5.75%, expected
dividend yield -0-%, a three year term, an expected volatility of 100%. The fair
value of $65 will be amortized over the lease period.
F-14
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(5) NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- --------------
1997 1998 1999
-------- -------- --------------
<S> <C> <C> <C>
Note payable, monthly principal and interest
payments of $1; interest at 11% per annum;
final payment due December 31, 2008;
unsecured...................................... $ -- $ 70 $ 67
Note payable, monthly principal and interest
payments of $3; interest at 11% per annum;
final payment due November 30, 1999;
unsecured...................................... -- 37 7
Notes payable, under term facility, monthly
principal and interest payments of $47;
interest at two-year treasury constant
maturities plus 5% per annum (10.4% as of
December 31, 1998 and 9.53% at September 30,
1999); maturing between September 2000 and
September 2001; secured by equipment purchased
thereunder..................................... -- 1,007 650
Notes payable under term facility, monthly
principal and interest payments of $25;
interest at a two-year treasury constant
maturities plus 5% per annum (9.45% at
September 30, 1999); maturing between March
2001 and September 2001; secured by equipment
purchased thereunder........................... -- -- 834
Note payable under term facility, quarterly
principal and interest payments of $38;
interest at 7.96% per annum; final payment due
April 2001; secured by equipment purchased
thereunder..................................... -- -- 339
----- ------ ------
-- 1,114 1,897
Less current portion of notes payable............ -- 527 1,106
----- ------ ------
$ -- $ 587 $ 791
===== ====== ======
</TABLE>
MedicaLogic has a $3,300 term loan facility to finance the purchase of new
capital equipment. $1,823 is outstanding, as described above, under this
facility at September 30, 1999.
Future maturities are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999 (for the three months ended December 31)............. $ 274
2000...................................................... 1,049
2001...................................................... 483
2002...................................................... 44
2003...................................................... 8
Thereafter................................................ 39
------
Total................................................... $1,897
======
</TABLE>
F-15
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(6) CONVERTIBLE REDEEMABLE PREFERRED STOCK
MedicaLogic has authorized several series of convertible redeemable preferred
stock. The title, carrying amount, and number of shares issued and outstanding
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- --------------
1997 1998 1999
-------- -------- --------------
<S> <C> <C> <C>
Series A, $1.00 liquidation preference; issued
and outstanding 5,750,001 at December 31,
1997 and 1998 and September 30, 1999........ 5,734 5,745 5,750
Series A-1, $10.00 liquidation preference; no
shares issued and outstanding at
September 30, 1999.......................... -- -- --
Series C, $2.25 liquidation preference; issued
and outstanding 7,012,637 shares at
December 31, 1997 and 1998 and
September 30, 1999.......................... 15,744 15,767 15,779
Series C-1, $22.50 liquidation preference; no
shares issued and outstanding at
September 30, 1999.......................... -- -- --
Series E, $3.15 liquidation preference;
4,761,907 shares issued and outstanding at
December 31, 1997 and 1998 and
September 30, 1999.......................... 14,538 14,694 14,811
Series E-1, $31.50 liquidation preference; no
shares issued and outstanding at
September 30, 1999.......................... -- -- --
Series F, $3.40 liquidation preference;
2,000,000, 4,000,000 and 4,000,000 shares
issued and outstanding at December 31, 1997
and 1998 and September 30, 1999............. 6,775 13,576 13,582
Series F-1, $34.00 liquidation preference; no
shares issued and outstanding at
September 30, 1999.......................... -- -- --
Series I, $3.80 liquidation preference; no
shares issued and outstanding at
September 30, 1999.......................... -- -- --
Series I-1, $38.00 liquidation preference; no
shares issued and outstanding at
September 30, 1999.......................... -- -- --
Series J, $4.75 liquidation preference;
10,376,843 shares issued and outstanding at
September 30, 1999.......................... -- -- 47,930
Series J-1, $47.50 liquidation preference; no
shares issued and outstanding at
September 30, 1999.......................... -- -- --
------- ------- -------
Total convertible redeemable preferred
stock................................... 42,791 49,782 97,825
======= ======= =======
</TABLE>
The terms for each series of preferred stock are similar and are summarized
below:
DIVIDENDS
Preferred shareholders are entitled to receive dividends when and if declared by
the Board of Directors at an annual rate of $.10 and $1 per share for Series A
and A-1, $.225 and $2.25 per share for Series C and C-1, $.315, $3.15 for
Series E and E-1, $.340 and $3.40 for Series F and F-1, and $.380 and $3.80 for
Series I and I-1, and $0.475 and $4.75 for Series J and J-1, respectively. The
right to receive
F-16
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(6) CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
dividends on preferred stock is not cumulative and no right to receive dividends
accrues to holders of the preferred stock in the event the Board of Directors
does not declare dividends. No dividends may be declared or paid on common stock
until all declared dividends on preferred stock have been paid. As of
September 30, 1999, no dividends had been declared or paid.
LIQUIDATION PREFERENCES
Upon dissolution, liquidation or winding up of the affairs of MedicaLogic,
either voluntarily or involuntarily, the preferred shareholders receive
preference in liquidation over the common shareholders of MedicaLogic. The
liquidation value for each outstanding share is $1 and $10 for Series A and A-1,
$2.25 and $22.50 for Series C and C-1. $3.15 and $31.50 for Series E and E-1,
$3.40 and $34.00 for Series F and F-1. $3.80 and $38.00 for Series I and I-1,
and $4.75 and $47.50 for Series J and J-1, respectively, adjusted for any stock
dividends. The holders of Series E and E-1, Series F and F-1, Series I and I-1
and Series J and J-1, on a parity basis among these Series, are entitled to
receive their liquidation value prior to and in preference to any distribution
to the holders of Series A and A-1 and Series C and C-1 preferred stock. The
holders of Series C and C-1 preferred stock are entitled to receive their
liquidation value prior to and in preference to any distribution to the holders
of Series A and A-1.
REDEMPTION
The preferred stock is subject to certain mandatory redemption features
following the affirmative vote of a majority of the outstanding shares of the
preferred stock, effective no earlier than December 31, 2001. Upon the majority
vote of the outstanding shares, MedicaLogic is required to redeem all of the
then outstanding preferred stock or an amount determined by MedicaLogic for
which funds are available for redemption. The per share redemption price for
each series of preferred stock is equal to its per share liquidation value for
each respective series discussed above.
In the event of a redemption of only a portion of the total outstanding
preferred stock, MedicaLogic is required to redeem Series E and E-1, Series F
and F-1, Series I and I-1 and Series J and J-1 prior to and in preference to the
holders of Series A and A-1 and Series C and C-1 preferred stock. In addition,
the holders of Series C and C-1 will have preference over the holders of
Series A and A-1 preferred stock.
VOTING
The holder of each share of each series of preferred stock is entitled to the
number of votes such holder would be entitled to if the shares of preferred
stock were converted to common stock.
CONVERSION
Two shares of preferred stock is voluntarily convertible into one share of
common stock at any time after the date of issuance at a rate that equals the
original issue price divided by the conversion price at the time in effect,
subject to certain adjustments as set forth in the purchase agreements.
Automatic conversion to common stock at the then effective conversion rate will
occur for Series A, A-1, C, C-1,
F-17
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(6) CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED)
E and E-1, following the effectiveness of a registration statement under the
Securities Act of 1933 in which the aggregate price to the public equals or
exceeds $7,500,000 and in which the public offering price of common stock equals
or exceeds $10 per share. The public offering price of MedicaLogic's common
stock that will trigger automatic conversion of the Series F and F-1, the
Series I and I-1 and Series J and J-1 preferred stock is $10.80, $11.58 and
$10.80 per share, respectively.
(7) SHAREHOLDERS' EQUITY
(a) SHAREHOLDERS' AGREEMENT
MedicaLogic and certain of its shareholders have an agreement that includes
restrictions on the purchase and sale of MedicaLogic's stock. Except as
expressly provided, no shareholder is allowed to transfer ownership of stock
without the prior written consent of the other shareholders that are party
to the agreement. These restrictions lapse upon the effectiveness of a
registration of common stock under the Securities Act of 1933, as amended,
and the consummation of the sale of common stock pursuant to that
registration statement.
The agreement entitles MedicaLogic to purchase a shareholder's stock under
certain conditions. The acquisition price is equal to the fair value of the
shares to be purchased.
(b) STOCK INCENTIVE PLAN
On February 9, 1993, MedicaLogic adopted a Stock Incentive Plan which
allowed for the issuance of 2,249,692 shares of common stock. Under the 1996
Stock Incentive Plan, adopted December 31, 1996, together with the 1993
Stock Incentive Plan (the Plans), 500,000 shares of common stock were
reserved for issuance. The 1996 Plan was amended in 1998 to reserve an
additional 350,000 shares of common stock for issuance, bringing the total
under the Plans to 3,097,192. Pursuant to the terms of the Plans, the Board
of Directors is authorized to grant incentive stock options, non-statutory
stock options and to sell restricted stock to employees or others providing
services or benefits to MedicaLogic. The Plans also allow granting of stock
bonuses, stock appreciation rights, and other forms of stock based
incentives, although none have been granted to date. Option prices for
incentive stock options are set at not less than the fair market value of
the common stock at the date of grant. Options vest over periods determined
by the Board of Directors. Options to employees are contingent upon
continued employment with MedicaLogic and, unless otherwise specified,
expire ten years from the date of grant.
In March 1998, MedicaLogic extended the term of all outstanding options from
five years to ten years, which constituted a new measurement date. The fair
value of the stock as determined by the Board of Directors on the date the
change was effective was $4.00 per share. 121,025 of these options had
exercise prices of less than $4.00 per share and were fully vested.
MedicaLogic recorded a compensation charge of $110 in connection with this
change in option terms. The compensation expense was calculated by taking
the difference between the original grant price and the fair value on the
new measurement date.
F-18
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(7) SHAREHOLDERS' EQUITY (CONTINUED)
On April 30, 1999, MedicaLogic's 1996 Plan was amended to reserve an
additional 1,900,000 shares of common stock. In September 1999 MedicaLogic
adopted the 1999 Stock Incentive Plan, which authorizes the issuance of
2,000,000 shares, bringing the total to 6,997,192.
The per share weighted average fair market value, as determined by applying
the Black-Scholes option pricing model to stock options granted under the
Plans during 1996, 1997, 1998 and the nine-month period ended September 30,
1999 was $2.88, $2.90, $3.44 and $5.02, respectively, on the date of grant,
with the following weighted average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED NINE-MONTH
DECEMBER 31, PERIOD ENDED
------------------------------ SEPTEMBER 30,
1996 1997 1998 1999
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Risk-free interest rate................ 6.3% 6.5% 6.0% 5.75%
Expected dividend yield................ 0% 0% 0% 0%
Expected life (in years)............... 4 4 7 7
Expected volatility.................... 100% 100% 100% 100%
</TABLE>
MedicaLogic continues to apply APB Opinion No. 25 in accounting for the
Plans and, accordingly, compensation cost is generally not recognized for
its stock options in the financial statements. The effect on MedicaLogic's
net loss, had MedicaLogic determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123 is as
follows:
<TABLE>
<CAPTION>
NINE-MONTH
YEARS ENDED DECEMBER 31, PERIOD ENDED
------------------------------ SEPTEMBER 30,
1996 1997 1998 1999
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Net loss................... $(10,364) $(10,819) $(7,232) $(13,381)
Pro forma net loss......... (10,908) (11,921) (8,342) (16,289)
Net loss per share......... (1.58) (1.63) (1.05) (1.61)
Pro forma net loss per
share.................... (1.65) (1.77) (1.20) (1.92)
</TABLE>
F-19
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(7) SHAREHOLDERS' EQUITY (CONTINUED)
Transactions involving the Plans are summarized as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Options outstanding, December 31, 1995..... 295,520 $2.40
Granted.................................... 248,150 4.00
Exercised.................................. (18,250) 1.50
Forfeited.................................. (21,350) 2.50
--------- -----
Options outstanding, December 31, 1996..... 504,070 3.08
Granted.................................... 536,475 4.00
Exercised.................................. (26,068) 1.64
Forfeited.................................. (40,462) 3.90
--------- -----
Options outstanding, December 31, 1997..... 974,015 3.68
Granted.................................... 480,493 4.10
Exercised.................................. (34,526) 2.10
Forfeited.................................. (206,576) 3.98
--------- -----
Options outstanding, December 31, 1998..... 1,213,406 3.80
Granted.................................... 1,193,750 5.92
Exercised.................................. (210,107) 3.60
Forfeited.................................. (35,276) 5.04
--------- -----
Options outstanding, September 30, 1999.... 2,161,773 $4.98
========= =====
</TABLE>
F-20
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(7) SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------- -------------------------
WEIGHTED
NUMBER OF AVERAGE WEIGHED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30, EXERCISE
EXERCISE PRICE 1999 LIFE PRICE 1999 PRICE
--------------------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
1.60--2.00 73,225 3.62 1.78 73,225 1.78
4.00--4.40 1,243,798 8.30 4.12 728,712 4.04
6.50 844,750 9.54 6.50 36,842 6.50
----------- --------- ---- ---- ------- ----
1.60--6.50 2,161,773 8.5 4.98 838,779 3.95
</TABLE>
At September 30, 1999, 2,036,784 shares were available for grant.
MedicaLogic has recorded deferred stock compensation expense of $1,058 at
September 30, 1999. This deferred stock compensation expense is based on the
difference between the deemed fair market value of common stock and the
exercise price of the option or stock on the grant date. Deferred
compensation is being amortized over the vesting period of the options,
which is generally three years. MedicaLogic recognized expense of $70 in the
nine-month period ended September 30, 1999 related to these grants.
(c) STOCK WARRANTS
In 1994, MedicaLogic entered into a Stock Purchase Warrant Agreement (the
Agreement) with Indius, Inc. (II). Pursuant to the Agreement, MedicaLogic
issued II warrants to purchase up to 22,500 shares of common stock at $.62
per share, conditioned on II meeting certain software development and
licensing requirements. These warrants were exercised in March 1999.
(d) RESTRICTED STOCK PURCHASE AGREEMENTS
As of September 30, 1999, MedicaLogic had sold 1,045,000 shares of common
stock at prices ranging from $4.00 to $6.50 to senior management of
MedicaLogic. These shares were sold under agreements which allow
MedicaLogic, at its option, to repurchase these shares at the original sale
price. In accordance with the repurchase agreements associated with 827,500
of these shares, the shares subject to repurchase are reduced in equal
increments over 36 months from the original vesting dates which range from
February 28, 1996 to August 20, 2000. At December 31, 1997 and 1998 and
September 30, 1999 there were 22,951, 141,530 and 809,376 shares outstanding
that were eligible for repurchase.
217,500 of these shares of common stock are released from MedicaLogic's
repurchase rights if certain key business performance criteria are met. In
connection with these stock issuances, MedicaLogic recorded compensation
expense of $790 for nine months ended September 30, 1999. 82,500 and 217,500
of these shares were eligible for repurchase at December 31, 1998 and
September 30, 1999, respectively.
(e) SHARES ISSUED FOR SERVICES
During 1996, MedicaLogic issued 12,500 shares of common stock valued at $50
in exchange for consulting services performed by an independent third party.
F-21
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(7) SHAREHOLDERS' EQUITY (CONTINUED)
During 1997, MedicaLogic issued 14,350 shares of common stock valued at $57,
in exchange for contracted engineering services by an independent
third-party.
During 1999, MedicaLogic issued 58,750 shares of common stock valued at $398
for public relations consulting, headhunter services, and contracted
engineering services by independent third-parties. 208,422 shares of
preferred stock were issued to the three principals of an investment group
as a commission in conjunction with the Series J preferred stock issuance.
The preferred shares were valued at $990. A warrant for 10,000 shares of
common shares at a price of $6.50 and a two year term was issued for legal
services. The value of the warrant was $35.
(f) EMPLOYEE STOCK PURCHASE PLAN
In September 1999, MedicaLogic adopted the MedicaLogic Employee Stock
Purchase Plan. 1,000,000 shares were authorized for issuance under this
Plan.
(8) INCOME TAXES
MedicaLogic incurred a loss for both financial reporting and tax return purposes
for the years ended December 31, 1996, 1997 and 1998 and the nine-month period
ended September 30, 1999. As such, there was no current or deferred tax
provision for these periods.
The actual income tax expense differs from the expected tax expense (computed by
applying the U.S. federal corporate income tax rate of 34% to net loss before
income taxes) as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE-MONTH
------------------------------------ PERIOD ENDED
1996 1997 1998 1999
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Computed expected income tax (benefit)
expense............................... (34.0)% (34.0)% (34.0)% (34.0)%
Increase (reduction) in income tax
expense (benefit) resulting from:
State income tax (benefit)
expense........................... (4.3) (4.3) (4.3) (4.3)
Increase in valuation allowance..... 39.0 43.8 44.7 38.7
Research and development credits.... (0.7) (3.1) (8.3) (2.0)
Other............................... -- (2.4) 1.9 1.6
----- ----- ----- -----
Income tax expense................ --% --% --% --%
===== ===== ===== =====
</TABLE>
F-22
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(8) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
NINE-MONTH
DECEMBER 31, PERIOD ENDED
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Furniture and equipment due to differences
in depreciation......................... $ 165 $ 229 $ 107
Net operating loss and research and
experimentation credit carryforwards.... 11,221 14,169 19,220
Allowance for doubtful accounts........... 326 234 474
Other accruals............................ 173 215 425
-------- -------- --------
Gross deferred tax assets............... 11,885 14,847 20,226
Less valuation allowance.................. (11,406) (14,559) (20,046)
-------- -------- --------
Net deferred tax assets................. 479 288 180
-------- -------- --------
Deferred tax liabilities:
Change in method of accounting............ (467) (280) (175)
Other..................................... (12) (8) (5)
-------- -------- --------
Net deferred tax liabilities............ (479) (288) (180)
-------- -------- --------
Net deferred tax assets and
liabilities........................... $ -- $ -- $ --
======== ======== ========
</TABLE>
The valuation allowance for deferred tax assets as of September 30, 1999 was
approximately $20,046. The net change in the total valuation allowance for the
years ending December 31, 1996, 1997 and 1998 and the nine-month period ended
September 30, 1999 was an increase of approximately $4,067, $4,668, $3,153 and
$5,487 respectively.
At September 30, 1999, MedicaLogic has available federal and state net operating
loss carryforwards for tax purposes of approximately $47,963 and research and
experimentation credits of approximately $1,597, which expire through 2019.
Approximately $7,100 of the net operating losses are subject to annual
utilization limitation due to ownership changes in prior years.
(9) COMMITMENTS AND CONTINGENCIES
In September 1999, MedicaLogic entered into a license agreement with L&H
Applications USA, Inc. (L&H). L&H has granted to MedicaLogic a non-exclusive,
non-transferable license to incorporate L&H's product into MedicaLogic's
Logician family of products. MedicaLogic has committed to a non-refundable
pre-payment of royalty fees of $1,100 due on December 20, 1999. MedicaLogic is
required to make additional minimum payments of $230 and $795 for the years
ended December 31, 2000 and 2001, respectively.
MedicaLogic has agreed to issue common stock to a customer at fair market
value up to $12,000, contingent upon sales of additional licenses to third
parties in the customer's geographic area.
F-23
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
MedicaLogic has issued 14,868 shares of common stock with an estimated fair
value of $9.50 per share, to this customer as of September 30, 1999. The stock
agreement expires December 31, 2002.
MedicaLogic is involved in various claims and legal actions in the normal
course of business. The most significant of these are described below.
MedicaLogic was the defendant in a suit at December 31, 1998 arising out of
an alleged breach of contract with a channel partner. This suit was settled in
April 1999. MedicaLogic was also the defendant at December 31, 1998 in a suit
filed by a customer. This suit was a counter-claim to a breach of contract
MedicaLogic had filed. The suit sought a refund of amounts paid to MedicaLogic
for the product. This suit was settled in July 1999. MedicaLogic accrued for its
estimated exposure related to these suits based on a review of the current facts
and circumstances at both December 31, 1997 and 1998.
MedicaLogic is currently a defendant in an action relating to a patent
infringement claim. The plaintiff is seeking unspecified damages. MedicaLogic
believes this suit is without merit and intends to vigorously defend against the
claims.
In the opinion of management, the ultimate disposition of outstanding claims
and legal actions will not have a material effect on MedicaLogic's consolidated
financial position, results of operations or liquidity.
(10) SEGMENT INFORMATION
MedicaLogic derives its revenue from a single operating segment, electronic
medical records, and the service and support related to these products.
GEOGRAPHIC INFORMATION
MedicaLogic operates solely within the United States and to date has derived
all of its revenue from within the United States.
MAJOR CUSTOMERS
In 1996, MedicaLogic derived greater than 10% of its revenue from the
following customers: North Memorial Medical Center ($1,500), Eli Lilly & Company
($1,000), Arkansas Blue Cross Blue Shield ($990).
In 1997, MedicaLogic derived greater than 10% of its revenue from VHA, Inc.,
one of our distribution partners ($2,700), and from Wake Forest Baptist Medical
Center ($1,600). MedicaLogic had accounts receivable from these customers
representing approximately 36% of trade accounts receivable at December 31,
1997.
In 1998, MedicaLogic derived greater than 10% of its revenue from VHA, Inc.,
($3,400). MedicaLogic had accounts receivable from this customer representing
approximately 20% of trade accounts receivable at December 31, 1998.
F-24
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(10) SEGMENT INFORMATION (CONTINUED)
During the nine-month period ended September 30, 1999, MedicaLogic derived
10% or greater of its revenue from Baylor College of Medicine ($4,500) and
Carilion Health Systems ($1,500).
(11) 401(K) PLAN
MedicaLogic sponsors a 401(k) deferred savings plan for all employees.
Employees become eligible to participate in the plan upon employment. Employees
may contribute up to 15% of their pay to the plan, subject to the limitation of
$10 by the Internal Revenue Code. All employee contributions vest immediately.
MedicaLogic has not made any matching contributions but does pay administrative
costs for the Plan. These costs were not significant for any period presented.
(12) RELATED PARTY TRANSACTIONS
MedicaLogic has accepted promissory notes aggregating $1,965 of principal
amount at September 30, 1999 from Company officers in consideration for
restricted stock issued. These notes accrue interest at 6% per annum and are
payable in full 10 years from the date of the loan. MedicaLogic also has loaned
an officer approximately $104 to help pay for relocation expenses, pursuant to
an unsecured promissory note, which bears interest at 6% per annum. The note is
payable in full on the earlier to occur of the sale of his residence located in
Portland, Oregon, the termination of his employment by the Company, or July 1,
2001. The note is prepayable in full without penalty.
In September 1999, MedicaLogic entered into an agreement with a Company
officer in consideration of relocating to San Francisco, California. MedicaLogic
agreed to reimburse this officer $8 for improvements to his Portland, Oregon
residence and any shortfall between the sales price on his Portland, Oregon
residence and the original purchase price of $520 paid by this officer and any
transaction costs not covered by the sales price of this residence, unless the
sales price is greater than the purchase price. MedicaLogic also agreed to
forgive the interest accrued on the unsecured promissory note referred to above,
which will be repaid from the proceeds of the sale of the Portland, Oregon
residence and to pay the mortgage payment on the officer's residence in
Portland, Oregon until it is sold.
In May 1996, MedicaLogic sold a total of 514,445 shares of Series C
preferred stock for $1,158 to beneficial owners of greater than 5% of
MedicaLogic's common stock on a converted basis.
In August 1998, MedicaLogic entered into stock purchase agreements with two
entities that are affiliated with two directors of MedicaLogic. These agreements
were for the issuance of 175,000 shares of common stock at a price of $4.00 per
share. Options for 100,000 shares of common stock were also granted to these
entities with a fair value using the Black-Scholes of $113. These stock options
were exercised by these entities for an additional 100,000 shares of common
stock in April 1999.
In May 1999, MedicaLogic sold an aggregate of 526,316 shares of Series J
preferred stock to two entities that are affiliated with a director of
MedicaLogic.
A member of MedicaLogic's Board of Directors is a partner in a law firm
retained by MedicaLogic to provide legal counsel.
F-25
<PAGE>
MEDICALOGIC, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(13) SUBSEQUENT EVENTS
(a) STOCK INCENTIVE PLAN
In October 1999, MedicaLogic granted 719,250 options under the 1999
stock incentive plan. The options were granted at $9.50, the fair market
value at the grant date. The fair value was determined by MedicaLogic's
Board of Directors.
(b) SHARES ISSUED
In October 1999, MedicaLogic issued 157,895 shares to Baylor College of
Medicine associated with sales to a third party. The estimated fair market
value of the common stock on the date of issuance was $9.50 per share
resulting in commission expense of $1,501.
(c) BORROWINGS
In October 1999, MedicaLogic used $581 of its term loan referenced in
note 5 to acquire additional capital equipment. These borrowings are secured
by the equipment purchased and bear interest at the rate of 10% per annum.
(d) STOCK SPLIT
On November , 1999, the Board of Directors approved a one-for-two
reverse stock split of outstanding common shares. Common share data for all
periods presented in the accompanying financial statements have been
adjusted to give effect to the stock split.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PrimaCis Health Information
Technology, Inc.:
We have audited the accompanying balance sheet of PrimaCis Health
Information Technology, Inc. as of December 31, 1998, and the related statements
of operations, stockholders' deficit, and cash flows for the year ended
December 31, 1998. These financial statements are the responsibility of
PrimaCis' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PrimaCis Health Information
Technology, Inc. as of December 31, 1998, and the results of its operations and
its cash flows for the year ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Portland, Oregon
July 23, 1999
F-27
<PAGE>
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 50
Accounts receivable....................................... 51
Other receivables......................................... 10
-------
Total current assets.................................. 111
Property and equipment, net................................. 58
Other assets................................................ 11
-------
Total assets.......................................... $ 180
=======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... 19
Accrued liabilities....................................... 72
Deferred revenue.......................................... 225
Current portion of capital leases......................... 10
Notes payable to related party............................ 381
-------
Total current liabilities............................. 707
Non-current portion of capital leases....................... 10
-------
Total liabilities..................................... 717
-------
Stockholders' deficit:
Common stock, par value $0.001 per share; authorized
15,000,000 shares;
issued and outstanding 11,361,425 shares at December 31,
1998.................................................... 11
Additional paid in capital................................ 3,005
Notes from shareholders................................... (39)
Warrants.................................................. 109
Accumulated deficit....................................... (3,623)
-------
Total stockholders' deficit........................... (537)
-------
Total liabilities and stockholders' deficit........... $ 180
=======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-28
<PAGE>
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
Revenues:
Licenses.................................................. $ 70
Service and support....................................... 178
-----------
Total revenues........................................ 248
Operating expenses:
Cost of licenses.......................................... 16
Cost of service and support............................... 105
Marketing and sales....................................... 282
Research and development.................................. 454
General and administrative................................ 1,063
-----------
Operating loss........................................ (1,672)
Other income (expense):
Interest expense.......................................... (116)
Interest income........................................... 2
Other..................................................... (7)
-----------
Loss before income taxes.............................. (1,793)
Provision for income taxes.................................. --
-----------
Net loss.............................................. $ (1,793)
===========
Net loss per share--basic and diluted....................... $ (0.16)
===========
Shares used in computing net loss per share--basic and
diluted................................................... 11,481,704
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-29
<PAGE>
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID IN NOTES FROM ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL SHAREHOLDERS WARRANTS DEFICIT DEFICIT
---------- -------- ---------- ------------ --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997...... 9,458,093 $ 9 $1,687 $ -- $ -- $(1,830) $ (134)
Issuance of common stock........... 3,203,332 3 1,329 (39) -- -- 1,293
Cancellation of common stock....... (1,300,000) (1) (11) -- -- -- (12)
Issuance of stock warrants......... -- -- -- -- 109 -- 109
Net loss........................... -- -- -- -- -- (1,793) (1,793)
---------- --- ------ ---- ---- ------- -------
Balances at December 31, 1998...... 11,361,425 $11 $3,005 $(39) $109 $(3,623) $ (537)
========== === ====== ==== ==== ======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-30
<PAGE>
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,793)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................... 37
Other non-cash expense.................................. 91
Changes in assets and liabilities:
Accounts receivable................................... (22)
Prepaid expenses and other current assets............. 5
Accounts payable...................................... 16
Accrued and other liabilities......................... (128)
Deferred revenue...................................... 200
-------
Net cash used by operating activities............... (1,594)
-------
Cash flows from investing activities:
Purchase of fixed assets.................................. (37)
-------
Net cash used by investing activities............... (37)
-------
Cash flows from financing activities:
Net proceeds from issuance of common stock................ 1,293
Proceeds from issuance of notes payable................... 381
Principal payments under capital lease.................... (7)
-------
Net cash provided by financing activities........... 1,667
-------
Net increase in cash and cash equivalents........... 36
Cash and cash equivalents at beginning of year.............. 14
-------
Cash and cash equivalents at end of year.................... $ 50
=======
Summary of non-cash investing and financing activities:
Issuance of common stock in exchange for note
receivable.............................................. $ 39
Assets acquired or exchanged under capital leases......... 23
=======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-31
<PAGE>
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) COMPANY
PrimaCis Health Information Technology, Inc. (PrimaCis), located in
Houston, Texas, was formed in April 1996. PrimaCis develops, supports and
markets its electronic medical record software and its Internet-based
oncology content for its Internet site.
(b) CASH EQUIVALENTS
For purposes of the statement of cash flows, PrimaCis considers all
highly liquid instruments with an original maturity of three months or less
to be cash equivalents.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment under
capital leases are stated at the lower of the present value of minimum lease
payments at the beginning of the lease term or fair value of the leased
assets at the inception of the lease. The cost of repairs and maintenance is
expensed as incurred.
Depreciation on property and equipment is calculated on a
double-declining basis over the estimated useful lives of the assets,
generally five to seven years. Property and equipment held under capital
leases is amortized on the straight-line method over the shorter of the
lease term or estimated useful life of the asset. Amortization of leasehold
improvements is recognized over the shorter of the life of the improvement
or the remaining life of the lease using the straight-line method.
(d) SOFTWARE DEVELOPMENT COSTS
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, ACCOUNTING FOR THE COSTS
OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. Under the
standard, capitalization of software development costs begins upon the
establishment of technological feasibility, subject to net realizable value
considerations. To date, the period between achieving technological
feasibility and the general availability of such software has been short;
therefore, software development costs qualifying for capitalization have
been immaterial. Accordingly, PrimaCis has not capitalized any software
development costs and charged all such costs to research and development
expense.
(e) REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, SOFTWARE REVENUE RECOGNITION.
Subsequently, in March 1998, the Financial Accounting Standards Board
("FASB") approved SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE OF A PROVISION OF
97-2, SOFTWARE REVENUE RECOGNITION. SOP 98-4 defers for one year, the
application of several paragraphs and examples in SOP 97-2 that limit the
definition of vendor specific objective evidence (VSOE) of the fair value of
various elements in a multiple element
F-32
<PAGE>
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
arrangement. The provisions of SOP's 97-2 and 98-4 have been applied to
transactions entered into beginning January 1, 1998. Prior to 1997,
PrimaCis' revenue policy was in accordance with the preceding authoritative
guidance provided by SOP No. 91-1, SOFTWARE REVENUE RECOGNITION.
SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on VSOE of
the relative fair values of each element in the arrangement. PrimaCis
establishes VSOE based on the average selling price of our products, support
and services during the period.
PrimaCis recognizes revenue from license fees generally when a signed
agreement has been obtained, the delivery of the product has occurred, there
are no uncertainties surrounding product acceptance, the fee is fixed and
determinable and collectibility of the license fee is probable.
Support revenue consists of annual subscriptions for maintenance and
post-customer support services. Subscriptions, containing the right to
obtain upgrades, when and if available, are generally paid in advance and
revenue is recognized ratably over the term of the subscription.
Services revenue generally consists of consulting, training and
integration fees. Such services are typically billed separately from the
license fees and are recognized as the related services are performed.
In December 1998, the AICPA issued SOP 98-9, MODIFICATION OF SOP 97-2,
SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS. This SOP
amends SOP 97-2 to require recognition of revenue using the "residual
method" in circumstances outlined in the SOP. Under the residual method,
revenue is recognized as follows: (1) the total fair value of undelivered
elements, as indicated by VSOE, is deferred and subsequently recognized in
accordance with the relevant sections of SOP 97-2 and (2) the difference
between the total arrangement fee and the amount deferred for the
undelivered elements is recognized as revenue related to the delivered
elements.
SOP 98-9 is effective for fiscal years beginning after March 15, 1999.
Also, the provisions of SOP 97-2 that were deferred by SOP 98-4 will
continue to be deferred until the date SOP 98-9 becomes effective.
(f) INCOME TAXES
PrimaCis accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred income taxes reflect the
future tax consequences of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in operations in the
period that include the enactment date. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
F-33
<PAGE>
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g) STOCK-BASED EMPLOYEE COMPENSATION
PrimaCis has adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which defines a fair value based method of accounting for
employee stock options and similar equity instruments. As is permitted under
SFAS No. 123, PrimaCis has elected to continue to account for its stock-
based compensation plans under APB Opinion No. 25 and provide the pro forma
disclosures as prescribed by SFAS No. 123.
(h) NET LOSS PER SHARE
PrimaCis has adopted SFAS No. 128, EARNINGS PER SHARE, which provides
that "basic net income (loss) per share" and "diluted net income (loss) per
share" for all prior periods presented are to be computed using the weighted
average number of common shares outstanding during each period, with diluted
net income per share including the effect of potentially dilutive common
shares. The reconciliation of shares used to calculate basic and diluted
income per share consists of the following as of December 31, 1998:
<TABLE>
<S> <C>
Basic weighted average shares of common stock........... 11,481,704
Effect of dilutive securities:
Stock options and warrants............................ 400,000
----------
Diluted weighted average share of common stock.......... 11,881,704
==========
</TABLE>
Common stock equivalents related to stock options and warrants are
anti-dilutive in a net loss year and, therefore, are not included in the
1998 net loss per share.
(i) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
and accounts payable approximate fair value due to the short-term nature of
these instruments. The carrying amounts of capital leases and notes payable
approximate fair value as the stated interest rates reflect current market
rates. Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instrument when available.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
(j) USE OF ESTIMATES
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amount of assets,
liabilities and contingencies at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
F-34
<PAGE>
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(k) OTHER ASSETS
Other assets consist primarily of legal costs related to the
organization of the Company. The organizational costs are being amortized on
a straight-line basis over a period of five years. Amortization expense for
the year ended December 31, 1998 was $5. Accumulated amortization at
December 31, 1998 was $14.
(l) CONTINGENCIES AND FACTORS THAT COULD AFFECT FUTURE RESULTS
A substantial portion of PrimaCis' revenues each year are generated from
the development and release to market of computer software products. In the
extremely competitive industry environment in which PrimaCis operates, such
product generating, development and marketing processes are uncertain and
complex, requiring accurate prediction of market trends and demand as well
as successful management of various development risks inherent in such
products. In light of these dependencies, it is possible that failure to
successfully manage a significant product introduction could have a sever
near term impact on the Company's growth and results of operations.
(2) PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases, consist of
the following at December 31, 1998:
<TABLE>
<S> <C>
Furniture................................................... $ 74
Equipment................................................... 27
----
101
Less accumulated depreciation and amortization.............. 43
----
$ 58
====
</TABLE>
(3) LEASES
The Company leases certain office furniture and equipment under a long-term
capital lease, which expires on December 2, 2000. At December 31, 1998, the net
book value of leased furniture and equipment included in property and equipment
was $20.
The Company also leases its office facilities under non-cancelable operating
lease agreements.
F-35
<PAGE>
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(3) LEASES (CONTINUED)
Future minimum lease payments under non-cancelable operating leases and the
capital leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
Year ending December 31:
1999..................................................... $12 $42
2000..................................................... 12 12
2001..................................................... -- --
2002..................................................... -- --
2003..................................................... -- --
Thereafter............................................... -- --
--- ---
Total minimum lease payments........................... 24 $54
===
Less amount representing interest.......................... 4
---
Present value of net minimum capital lease payments.... 20
Less current portion of capital leases..................... 10
---
Non-current portion of capital leases.................. $10
===
</TABLE>
Rent expense for the year ended December 31, 1998, totaled approximately
$35.
(4) NOTES PAYABLE
During 1998, PrimaCis received an unsecured loan of $381 from an officer and
shareholder of PrimaCis. The loan was evidenced by a promissory note payable and
other supporting documentation, and was paid in full during 1999. In conjunction
with this loan, PrimaCis granted the shareholder the option to purchase 300,000
shares of common stock of PrimaCis at an exercise price of $0.06 per share. The
Company recorded the option at fair value, as determined by the Black-Scholes
method, as additional interest expense over the life of the loan.
(5) STOCKHOLDERS' EQUITY
(a) STOCKHOLDERS' AGREEMENT
The Company and its stockholders have an agreement that includes
restrictions on the purchase and sale of PrimaCis' stock. Except as
expressly provided, no stockholder is allowed to transfer ownership of stock
without the prior written consent of all stockholders.
F-36
<PAGE>
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(5) STOCKHOLDERS' EQUITY (CONTINUED)
(b) STOCK INCENTIVE PLAN
In 1997, PrimaCis adopted an Incentive Stock Option Plan (the Plan).
Pursuant to the terms of the Plan, the Board of Directors is authorized to
grant incentive stock options, non-statutory stock options and restricted
stock to employees or non-employees. Option prices for incentive stock
options are generally set at not less than the fair market value of the
common stock at the date of grant. Options vest over periods determined by
the Board of Directors. Options are contingent upon continued employment
with PrimaCis and, unless otherwise specified, expire ten years from the
date of grant. PrimaCis has reserved 500,000 shares of its common stock for
issuance under the Plan.
The per share weighted average fair market value, as determined by
applying the Black-Scholes method to stock options granted under the Plan
during 1998, was $0.37 on the date of grant with the following weighted
average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
- ----------------------------
<S> <C>
Risk free interest rate..................................... 6.0%
Expected dividend yield..................................... 0%
Expected life (in years).................................... 10.0
Expected volatility......................................... 100%
</TABLE>
PrimaCis continues to apply APB Opinion No. 25 in accounting for its
Plan and, accordingly, compensation cost is generally not recognized for its
stock options in the financial statements. For the year ended December 31,
1998, PrimaCis recognized $282 in compensation costs with respect to stock
based compensation awards as valued under APB No. 25. The effect on
PrimaCis' net loss, had PrimaCis determined compensation cost based on the
fair value at the grant date for its stock options under SFAS No. 123, for
the year ended December 31, 1998 is as follows:
<TABLE>
<S> <C>
Net loss.................................................... $(1,793)
Pro forma net loss.......................................... (1,801)
Net loss per share.......................................... $ (0.16)
Pro forma net loss per share................................ (0.16)
</TABLE>
F-37
<PAGE>
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(5) STOCKHOLDERS' EQUITY (CONTINUED)
Transactions involving the Plan are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
<S> <C> <C>
Options outstanding, December 31, 1997................... -- $ --
Granted.................................................. 270,000 0.48
Exercised................................................ -- --
Forfeited................................................ (205,000) 0.59
-------- -----
Options outstanding, December 31, 1998................... 65,000 $0.14
======== =====
</TABLE>
At December 31, 1998, the range of exercise prices and weighted average
remaining contractual life of outstanding options were $.06 to $.60 and ten
years, respectively. At December 31, 1998, 65,000 options were exercisable
with a weighted average exercise price of $0.14.
At December 31, 1998, 435,000 shares were available for grant.
(c) WARRANTS
During fiscal 1998, PrimaCis issued warrants to investors. At
December 31, 1998 warrants to purchase 300,000 and 35,000 shares of common
stock at exercise prices of $0.06 and $0.40, respectively, were outstanding.
(6) INCOME TAXES
PrimaCis incurred a loss for both financial reporting and tax return
purposes and, as such, there was no current or deferred tax provision for the
year ended December 31, 1998.
The actual income tax expense differs from the expected tax expense
(computed by applying the U.S. federal corporate income tax rate of 34% to net
income (loss) before income taxes) as follows (in thousands):
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Computed expected income tax (benefit) expense.............. (34.0)%
Increase (reduction) in income tax expense (benefit)
resulting from:
State income tax (benefit) expense........................ --
Increase in valuation allowance........................... 34.0
Research and development credits.......................... --
-----
Income tax expense...................................... --%
=====
</TABLE>
F-38
<PAGE>
PRIMACIS HEALTH INFORMATION
TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences and net operating loss
carryforwards which give rise to significant portions of deferred tax assets and
deferred tax liabilities at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss and research and experimentation credit
carryforwards........................................... $ 1,362
-------
Gross deferred tax assets............................... 1,362
Less valuation allowance.................................. (1,362)
-------
Net deferred tax assets................................. $ --
=======
</TABLE>
The net change in the total valuation allowance for the year ended
December 31, 1998 was an increase of $687.
PrimaCis has available federal and state net operating loss carryforwards
for tax purposes of approximately $3,537 which expire through 2018.
Approximately $3,537 of the net operating losses are subject to annual
utilization limitation due to the change in ownership in 1999.
(7) SIGNIFICANT CUSTOMERS
PrimaCis had two customers that accounted for approximately 98% of the total
revenue for the year ended December 31, 1998.
(8) SUBSEQUENT EVENTS
On January 29, 1999, PrimaCis entered into a reorganization and merger
agreement with MedicaLogic, Inc. The purchase price consisted of $2,100 in cash,
the assumption of $1,053 in liabilities and 750,000 shares of MedicaLogic common
stock issued at $4.40 per share.
F-39
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined statement of operations
have been prepared to give effect to the acquisition of PrimaCis Health
Information Technology, Inc. (PrimaCis). The historical financial information
has been derived from the respective historical financial statements of
MedicaLogic, Inc. and PrimaCis, and should be read in conjunction with such
financial statements and the related notes included herein. The unaudited pro
forma condensed combined statements of operations combine MedicaLogic's and
PrimaCis' historical statements of operations and give effect to the
acquisition, including the amortization of goodwill and other tangible assets
resulting from the acquisition, as if it occurred on January 1, 1998 for the
nine month period ended September 30, 1998 and the year ended December 31, 1998.
The unaudited pro forma condensed combined statement of operations for the
period from December 31, 1998 through September 30, 1999 have not been presented
as the results of operations presented for MedicaLogic during this period
include PrimaCis' operating results.
The unaudited pro forma condensed combined information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have actually occurred if the
acquisition had been consummated as of the dates indicated, nor is it
necessarily indicative of the future operating results of the combined
companies. The pro forma adjustments are based upon available information and
certain assumptions that MedicaLogic believes are reasonable under the
circumstances.
F-40
<PAGE>
MEDICALOGIC, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998
--------------------------------------------------------
PRO FORMA PRO FORMA
MEDICALOGIC PRIMACIS ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Licenses................................ $ 6,534 $ 36 $ 6,570
Service and support..................... 4,225 133 4,358
----------- ----------- -----------
Total revenues...................... 10,759 169 10,928
----------- ----------- -----------
Operating expenses:
Cost of licenses........................ 608 8 616
Cost of service and support............. 4,354 86 4,440
Marketing and sales..................... 5,647 109 $1,238 6,994
Research and development................ 5,981 211 6,192
General and administrative.............. 735 905 600 2,240
----------- ----------- -----------
Total operating expenses............ 17,325 1,319 20,482
----------- ----------- -----------
Operating loss...................... (6,566) (1,150) (9,554)
Other income (expense):
Interest expense........................ (145) (72) (217)
Interest income......................... 504 1 505
Other, net.............................. (40) (5) (45)
----------- ----------- -----------
Loss before income taxes............ (6,247) (1,226) (9,311)
Provision for income taxes................ -- -- --
----------- ----------- -----------
Net loss............................ $ (6,247) $ (1,226) $ (9,311)
=========== =========== ===========
Net loss per share:
Basic and diluted....................... $ (0.90) $ (0.11) $ (1.22)
=========== =========== ===========
Shares used in computing net loss per
share:
Basic and diluted....................... 6,881,578 11,111,426 7,631,578
=========== =========== ===========
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.
F-41
<PAGE>
MEDICALOGIC, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------
<S> <C> <C> <C> <C>
PRO FORMA PRO FORMA
MEDICALOGIC PRIMACIS ADJUSTMENTS COMBINED
----------- ----------- ------ -----------
Revenues:
Licenses................................ $ 10,410 $ 70 $ 10,480
Service and support..................... 5,750 178 5,928
----------- ----------- -----------
Total revenues...................... 16,160 248 16,408
----------- ----------- -----------
Operating expenses:
Cost of licenses........................ 939 16 955
Cost of service and support............. 5,815 105 5,920
Marketing and sales..................... 7,882 282 $1,650 9,814
Research and development................ 8,071 454 8,525
General and administrative.............. 1,151 1,063 800 3,014
----------- ----------- -----------
Total operating expenses............ 23,858 1,920 28,228
----------- ----------- -----------
Operating loss...................... (7,698) (1,672) (11,820)
Other income (expense):
Interest expense........................ (187) (116) (303)
Interest income......................... 707 2 709
Other, net.............................. 143 (7) 136
----------- ----------- -----------
Loss before income taxes............ (7,035) (1,793) (11,278)
Provision for income taxes................ -- -- --
----------- ----------- -----------
Net loss............................ $ (7,035) $ (1,793) $ (11,278)
=========== =========== ===========
Net loss per share:
Basic and diluted....................... $ (1.02) $ (0.16) $ (1.48)
=========== =========== ===========
Shares used in computing net loss per
share:
Basic and diluted....................... 6,883,036 11,481,704 7,633,036
=========== =========== ===========
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.
F-42
<PAGE>
MEDICALOGIC, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The unaudited pro forma condensed financial information reflects the
acquisition by MedicaLogic, Inc. of PrimaCis Health Information
Technology, Inc. (PrimaCis) and gives effect to certain reclassifications to the
historical financial statements to conform the presentation of the historical
operations of the merged companies.
The adjustments to the unaudited pro forma condensed combined statement of
operations have been calculated as if the acquisition occurred on January 1,
1998.
Pursuant to the merger agreement, a total of $3,000 in cash and 750,000
shares of MedicaLogic common stock, valued at $4.40 per share, was issued in
connection with the acquisition of PrimaCis in exchange for all outstanding
common shares and vested options of PrimaCis. In addition, MedicaLogic paid $153
in merger related costs which is included in the total purchase price.
The pro forma adjustments to the unaudited pro forma condensed combined
statements of operations are to record the amortization of goodwill of
approximately $3,200 and other intangible assets of approximately $3,300
recorded as a result of the acquisition over four and two years, respectively,
and to reduce depreciation expense to reflect new asset fair values.
F-43
<PAGE>
- ---------------------------------------------------------
- ---------------------------------------------------------
1999
[MEDICALOGIC LOGO]
________ SHARES
----------------------
PROSPECTUS
----------------------
DONALDSON, LUFKIN & JENRETTE
ROBERTSON STEPHENS
U.S. BANCORP PIPER JAFFRAY
---------------
DLJDIRECT INC.
- ---------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations about
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. The information contained in this prospectus is
accurate only on the date of this prospectus, regardless of the time of delivery
of this prospectus or of any sale of the common stock.
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all
dealers that effect transactions in these shares of common stock may be required
to deliver a prospectus. This is in addition to the dealer's obligation to
deliver a prospectus when acting as an underwriter and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts, payable by the Registrant in connection with the offer
and sale of the Common Stock being registered. All amounts are estimates except
the registration fee, the NASD filing fee and the Nasdaq National Market entry
fee.
<TABLE>
<S> <C>
Registration fee............................................ $ 16,680
NASD filing fee............................................. 6,500
Blue Sky fees and expenses (including legal fees)........... 5,000(1)
Nasdaq National Market entry fee............................ 95,000(1)
Accounting fees and expenses................................ 250,000(1)
Other legal fees and expenses............................... 200,000(1)
Transfer agent and registrar fee............................ 5,000(1)
Printing and engraving...................................... 90,000(1)
Miscellaneous............................................... 31,820(1)
--------
Total................................................... $700,000(1)
========
</TABLE>
- ------------------------
(1) Estimated expense.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article IV of the Registrant's 1994 Restated Articles of Incorporation
requires indemnification of current or former directors of the Company to the
fullest extent not prohibited by the Oregon Business Corporation Act. The Oregon
Business Corporation Act permits or requires indemnification of directors and
officers in certain circumstances. The effects of the indemnification provisions
are as follows:
(a) The Indemnification Provisions grant a right of indemnification in
respect of any proceeding (other than an action by or in the right of the
Company), if the person concerned acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
Company, was not adjudged liable on the basis of receipt of an improper personal
benefit and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the conduct was unlawful. The termination of a
proceeding by judgment, order, settlement, conviction or plea of nolo
contendere, or its equivalent, is not, of itself, determinative that the person
did not meet the required standards of conduct.
(b) The Indemnification Provisions grant a right of indemnification in
respect of any proceeding by or in the right of the Company against the expenses
(including attorney fees) actually and reasonably incurred if the person
concerned acted in good faith and in a manner the person reasonably believed to
be in or not opposed to the best interests of the Company, except that no right
of indemnification will be granted if the person is adjudged to be liable to the
Company.
(c) Every person who has been wholly successful, on the merits or otherwise,
in the defense of any proceeding to which the person was a party because of the
person's status as a director or officer is entitled to indemnification as a
matter of right.
(d) Because the limits of permissible indemnification under Oregon law are
not clearly defined, the Indemnification Provisions may provide indemnification
broader than that described in (a) and (b).
II-1
<PAGE>
(e) The Registrant may advance to a director or officer the expenses
incurred in defending any proceeding in advance of its final disposition if the
director or officer affirms in writing in good faith that he or she has met the
standard of conduct to be entitled to indemnification as described in (a) or
(b) above and undertakes to repay any amount advanced if it is determined that
the person did not meet the required standard of conduct.
The Registrant has obtained insurance for the protection of its directors
and officers against any liability asserted against them in their official
capacities. The rights of indemnification described above are not exclusive of
any other rights of indemnification to which the persons indemnified may be
entitled under any bylaw, agreement, vote of shareholders or directors or
otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Within the last three years, the Registrant has issued and sold the
following unregistered securities on the dates and for the consideration
indicated:
In December 1996, the Registrant issued an aggregate of 4,761,907 shares of
Series E Preferred Stock to 24 investors for total consideration $15,000,007.05.
The Series E Preferred Stock was offered and sold by the Registrant in reliance
upon the exemptions from registration pursuant to Section 4(2) of the Securities
Act and Rule 506 of Regulation D promulgated under the Securities Act.
In November 1997, the Registrant issued 2,000,000 shares of Series F
Preferred Stock to one investor for total consideration of $6,800,000. The
shares of Series F Preferred Stock were offered and sold by the Registrant in
reliance upon the exemptions from registration pursuant to Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated under the Securities
Act. In connection with the same transaction, the Registrant granted to the
investor an option to purchase an additional 2,000,000 shares of Series F
Preferred for $3.40 a share and an option to purchase 4,129,665 shares of
Series G Preferred Stock for $3.65 a share. The Registrant also issued to the
investor an option to purchase one share of Series H Preferred Stock, which
option was exercisable upon the failure of the Registrant to reach specific
revenue targets. On March 31, 1998, the investor exercised its option to
purchase 2,000,000 shares of Series F Preferred Stock for a total purchase price
of $6,800,000. The investor and the Registrant agreed to extend the exercise
period for the Series G option agreement to June 1, 1998. The Series G option
has expired and will not be exercised. The Series H option has also expired and
will not be exercised. The Series F Preferred Stock was offered and sold, and
the Series F option, the Series G option and the Series H option were issued
and, in the case of the Series G option, extended by the Registrant, in reliance
upon the exemptions from registration pursuant to Section 4(2) of the Securities
Act and Rule 506 of Regulation D promulgated under the Securities Act.
In January 1998, the Company issued an aggregate of 27,500 shares of Common
Stock at a deemed value of $2.00 a share to Health Outcome Technologies, Inc.
("HOT") in consideration for the acquisition of certain intangible assets of
HOT. These shares of Common Stock were offered and sold by the Registrant in
reliance upon the exemptions from registration pursuant to Section 4(2) of the
Securities Act and Rule 504 of Regulation D promulgated under the Securities
Act.
In March 1998, the Registrant issued 45,000 shares of Common Stock to an
investor for a total purchase price of $13,950, pursuant to the exercise of a
warrant issued in 1994. The Common Stock issued pursuant to the warrant was
offered and sold by the Registrant in reliance upon the exemptions from
registration pursuant to Section 4(2) of the Securities Act.
In August 1998, the Registrant issued an aggregate of 350,000 shares of
Common Stock to Enterprise Partners IV Associates, L.P. and Enterprise Partners
IV, L.P., for a total purchase price of $700,000. In addition, the Registrant
granted an option to purchase 16,000 shares of Common Stock at a price of $2.00
a share to Enterprise Partners IV Associates, L.P. and granted an option to
purchase 184,000 shares of Common Stock at a price of $2.00 a share to
Enterprise Partners IV, L.P. The options
II-2
<PAGE>
were exercised on April 14, 1999. The shares of Common Stock and the options
were offered and sold and issued in reliance upon the exemptions from
registration pursuant to Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated under the Securities Act.
In February 1999, the Registrant issued 1,500,000 shares of Common Stock to
the shareholders of PrimaCis Information Technology, Inc., at a deemed value of
$2.20 a share, as partial consideration for the acquisition of PrimaCis. The
shares of Common Stock were offered and sold by the Registrant in reliance upon
the exemptions from registration pursuant to Section 4(2) of the Securities Act
and Rule 506 of Regulation D promulgated under the Securities Act.
In May 1999, the Registrant issued shares of its Series J Preferred Stock to
four investors. The Registrant offered and sold an aggregate of 7,326,316 shares
of Series J Preferred Stock to the investors at a price of $4.75 a share, for a
total purchase price of $34,800,000. The shares of Series J Preferred Stock were
offered and sold by the Registrant in reliance upon the exemptions from
registration pursuant to Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated under the Securities Act.
In August 1999, the Registrant issued an additional 3,050,527 shares of its
Series J Preferred Stock to 11 investors. The Registrant offered and sold the
shares of Series J Preferred Stock to the investors at a price of $4.75 a share,
for $13,499,998.75 in cash, and services from three of the investors valued at
$990,004.50. The shares of Series J Preferred Stock were offered and sold by the
Registrant in reliance upon the exemptions from registration pursuant to
Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
under the Securities Act.
In September and October 1999, the Registrant issued 345,525 shares of
Common Stock to Baylor College of Medicine pursuant to an agreement described in
the prospectus that provides for the issuance of shares of Common Stock to
Baylor upon certain purchases of LOGICIAN licenses from the Company. The shares
were issued to Baylor as a result of purchases of LOGICIAN licenses by
institutions in Houston, Texas for approximately $1,641,244, and the deemed
value of the shares at the time of issuance was $4.75 a share. The shares of
Common Stock were offered and sold by the Registrant in reliance upon the
exemptions from registration pursuant to Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated under the Securities Act.
OPTIONS, RESTRICTED STOCK AND GRANTS UNDER STOCK INCENTIVE PLAN
As set forth in the chart below, between September 1996 and September 1999
the Registrant granted to employees, consultants and directors stock options
under the Registrant's Stock Incentive Plans in reliance on the exemption from
registration provided by either (i) Section 4(2) of the Securities Act, or
(ii) Rule 701 promulgated under the Securities Act.
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE
SUBJECT TO OPTIONS PRICE
------------------ --------
<S> <C> <C>
September 1, 1996 to October 28, 1998............... 1,901,636 $2.00
October 29, 1998 to May 25, 1999.................... 743,000 $2.20
May 26, 1999 to September 17, 1999.................. 1,719,500 $3.25
September 18, 1999 and thereafter................... 1,300,000 $4.75
</TABLE>
Of the options granted during the period from September 1, 1996 to
October 28, 1998 to purchase 1,901,636 shares of Common Stock, 1,752,189 were
outstanding as of September 10, 1999. Of the options granted during the period
from October 29, 1998 to May 25, 1999 to purchase 743,000 shares of Common
Stock, 742,631 remain outstanding. Of the options granted from May 26, 1999 to
September 17, 1999 to purchase 1,719,500 shares of Common Stock, all were
outstanding as of October 15, 1999. Of the options granted after September 17,
1999 to purchase 1,300,000 shares of Common Stock, all were outstanding as of
October 15, 1999.
II-3
<PAGE>
In the past three years, the Registrant from time to time offered and sold
the following shares of Common Stock as incentive compensation to senior
management of the Registrant, subject to repurchase or performance requirements,
pursuant to Registrant's Stock Incentive Plans. Such restricted Common Stock was
issued in reliance on the exemption from registration provided by either
(i) Section 4(2) of the Securities Act, or (ii) Rule 701 promulgated under the
Securities Act.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF SALE
RESTRICTED COMMON PRICE
------------------- --------
<S> <C> <C>
September 1, 1996 to October 28, 1998............... 500,000 $2.00
October 29, 1998 to May 25, 1999.................... 600,000 $2.20
May 26, 1999 to September 17, 1999.................. 885,000 $3.25
September 18, 1999 and thereafter................... 250,000 $4.75
</TABLE>
In the past three years, the Registrant from time to time has granted shares
of its Common Stock to employees or consultants in exchange for services
rendered to the Registrant, pursuant to the Registrant's Stock Incentive Plans,
as set forth in the table below in reliance upon the exemption from registration
provided by either (i) Section 4(2) of the Securities Act, or (ii) Rule 701
promulgated under the Securities Act.
<TABLE>
<CAPTION>
DEEMED PER SHARE
NUMBER OF SHARES VALUE AT
DATE OF COMMON DATE OF GRANT
- ---- ---------------- ----------------
<S> <C> <C>
September 1, 1996 to October 28, 1998........ 58,700 $2.00
October 29, 1998 to May 25, 1999............. 47,500 $2.20
May 26, 1999 to September 17, 1999........... 70,000 $3.25
September 18, 1999 and thereafter............ 10,000 $4.75
</TABLE>
The foregoing share amounts do not give effect to a one-for-two reverse
stock split to be effected by the Company prior to the offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
3.1(3) 1994 Restated Articles of Incorporation, as amended
3.2(3) Restated Bylaws
4.1(3) See Article II of Exhibit 3.1 and Article V of Exhibit 3.2
4.2 Specimen Stock Certificate
5.1(2) Opinion of Stoel Rives LLP
10.1(3) 1999 Amended and Restated Investor Rights Agreement
10.2(3) 1993 Stock Incentive Plan
10.3(3) 1996 Stock Incentive Plan, as amended
10.4(3) 1999 Stock Incentive Plan
10.5(3) Form of Incentive Stock Option Agreement
10.6 Form of Restricted Stock Purchase Agreement (Performance)
10.7 Form of Restricted Stock Purchase Agreement
10.8 Equipment Financing Agreement between MedicaLogic and GE
Capital Financing dated June 5, 1998
10.8.1 Industrial Business Park Lease between MedicaLogic and
Evergreen Corporate Center LLC dated January 15, 1997, as
amended July 15, 1999
10.8.2(3) Office Lease between 945 Battery LLC, and MedicaLogic, dated
May 9, 1999
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.9(3) Agreement to Issue Shares of Common Stock between
MedicaLogic and Baylor College of Medicine dated as of
February 16, 1999
10.10 Software Deposit Agreement with Fidex Americas Corporation
dated April 15, 1996
10.11(1)(3) Oracle Alliance Agreement between MedicaLogic and Oracle
Corporation dated April 1, 1998, as amended
10.12(3) Employment Agreement between MedicaLogic and Mark Leavitt,
dated August 1, 1985
10.13(2) Employee Stock Purchase Plan
21.1(3) Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2 Consent of KPMG LLP
23.2(2) Consent of Stoel Rives LLP (included in Exhibit 5.1)
24.1(3) Power of Attorney
24.2 Power of Attorney of Neal Moszkowski
27.1 Financial Data Schedule
</TABLE>
- ------------------------
(1) Certain portions of this Exhibit have been omitted based on a request for
confidential treatment; such portions have been filed separately with the
Commission.
(2) To be filed by amendment.
(3) Previously filed.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
II-5
<PAGE>
(2) For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Hillsboro, State of Oregon, on October 27, 1999.
<TABLE>
<S> <C> <C>
MEDICALOGIC, INC.
By /s/ MARK K. LEAVITT, M.D.
------------------------------------------
Mark K. Leavitt, M.D.
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to Registration Statement on Form S-1 has been signed below on
October 27, 1999 by the following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ MARK K. LEAVITT, M.D.
-------------------------------------- Chairman of the Board and Chief Executive Officer
Mark K. Leavitt, M.D. PRINCIPAL EXECUTIVE OFFICER
/s/ DAVID C. MOFFENBEIER*
-------------------------------------- Chief Operating Officer and Director
David C. Moffenbeier PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
/s/ CHARLES D. BURWELL*
-------------------------------------- Director
Charles D. Burwell
/s/ BRUCE M. FRIED*
-------------------------------------- Director
Bruce M. Fried
/s/ RONALD H. KASE*
-------------------------------------- Director
Ronald H. Kase
/s/ NEAL MOSZKOWSKI*
-------------------------------------- Director
Neal Moszkowski
/s/ MARK A. STEVENS*
-------------------------------------- Director
Mark A. Stevens
/s/ RONALD R. TAYLOR*
-------------------------------------- Director
Ronald R. Taylor
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ DAVID W. WROE*
-------------------------------------- Director
David W. Wroe
</TABLE>
<TABLE>
<S> <C> <C>
/s/ MARK K. LEAVITT, M.D.
-----------------------------------------
Mark K. Leavitt, M.D.
*By ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
3.1(3) 1994 Restated Articles of Incorporation, as amended
3.2(3) Restated Bylaws
4.1(3) See Article II of Exhibit 3.1 and Article V of Exhibit 3.2
4.2 Specimen Stock Certificate
5.1(2) Opinion of Stoel Rives LLP
10.1(3) 1999 Amended and Restated Investor Rights Agreement
10.2(3) 1993 Stock Incentive Plan
10.3(3) 1996 Stock Incentive Plan, as amended
10.4(3) 1999 Stock Incentive Plan
10.5(3) Form of Incentive Stock Option Agreement
10.6 Form of Restricted Stock Purchase Agreement (Performance)
10.7 Form of Restricted Stock Purchase Agreement
10.8 Equipment Financing Agreement between MedicaLogic and GE
Capital Financing dated June 5, 1998
10.8.1 Industrial Business Park Lease between MedicaLogic and
Evergreen Corporate Center LLC dated January 15, 1997, as
amended July 15, 1999
10.8.2(3) Office Lease between 945 Battery LLC, and MedicaLogic, dated
May 9, 1999
10.9(3) Agreement to Issue Shares of Common Stock between
MedicaLogic and Baylor College of Medicine dated as of
February 16, 1999
10.10 Software Deposit Agreement with Fidex Americas Corporation
dated April 15, 1996
10.11(1)(3) Oracle Alliance Agreement between MedicaLogic and Oracle
Corporation dated April 1, 1998, as amended
10.12(3) Employment Agreement between MedicaLogic and Mark Leavitt,
dated August 1, 1985
10.13(2) Employee Stock Purchase Plan
21.1(3) Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2 Consent of KPMG LLP
23.3(2) Consent of Stoel Rives LLP (included in Exhibit 5.1)
24.1(3) Power of Attorney
24.2 Power of Attorney of Neal Moszkowski
27.1 Financial Data Schedule
</TABLE>
- ------------------------
(1) Certain portions of this Exhibit have been omitted based on a request for
confidential treatment; such portions have been filed separately with the
Commission.
(2) To be filed by amendment.
(3) Previously filed.
<PAGE>
__________ Shares
MedicaLogic, Inc.
Common Stock
UNDERWRITING AGREEMENT
__________, 1999
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BANCBOSTON ROBERTSON STEPHENS INC.
U.S. BANCORP PIPER JAFFRAY INC.
DLJDIRECT INC.
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Ladies and Gentlemen:
MedicaLogic, Inc., an Oregon corporation (the "Company"), proposes to issue
and sell ____________ shares of its common stock (the "Firm Shares"), to the
several underwriters named in Schedule I hereto (the "Underwriters"). The
Company also proposes to issue and sell to the several Underwriters not more
than an additional _______ shares of its common stock (the "Additional Shares"),
if requested by the Underwriters as provided in Section 2 hereof. The Firm
Shares and the Additional Shares are hereinafter referred to collectively as the
"Shares." The shares of common
1
<PAGE>
stock of the Company to be outstanding after giving effect to the sales
contemplated hereby are hereinafter referred to as the "Common Stock."
SECTION 1. Registration Statement and Prospectus. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated thereunder
(collectively, the "Act"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to Rule
430A under the Act, is hereinafter referred to as the "Registration Statement;"
and the prospectus in the form first used to confirm sales of Shares is
hereinafter referred to as the "Prospectus." If the Company has filed or is
required pursuant to the terms hereof to file a registration statement pursuant
to Rule 462(b) under the Act registering additional shares of Common Stock (a
"Rule 462(b) Registration Statement"), then, unless otherwise specified, any
reference herein to the term "Registration Statement" shall be deemed to include
such Rule 462(b) Registration Statement.
SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements. On the
basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, the Company agrees to issue and sell, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
at a price per share of $______ (the "Purchase Price") the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, up to _______ Additional Shares from the
Company at the Purchase Price. Additional Shares may be purchased solely for the
purpose of covering over-allotments made in connection with the offering of the
Firm Shares. The Underwriters may exercise their right to purchase Additional
Shares in whole or in part from time to time by giving written notice thereof to
the Company within 30 days after the date of this Agreement. You shall give any
such notice on behalf of the Underwriters and such notice shall specify the
aggregate number of Additional Shares to be purchased pursuant to such exercise
and the date for payment and delivery thereof, which date shall be a business
day (i) no earlier than two business days after such notice has been given (and,
in any event, no earlier than the Closing Date (as hereinafter defined)) and
(ii) no later than ten business days after such notice has been given. If any
Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase from the
2
<PAGE>
Company the number of Additional Shares (subject to such adjustments to
eliminate fractional shares as you may determine) which bears the same
proportion to the total number of Additional Shares to be purchased from the
Company as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I bears to the total number of Firm Shares.
The Company hereby agrees not to (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or other securities, in cash
or otherwise), except to the Underwriters pursuant to this Agreement and except
to Baylor College of Medicine pursuant to the Agreement to Issues Shares of
Common Stock between the Company and Baylor College of Medicine dated as of
February 16, 1999, for a period of 180 days after the date of the Prospectus,
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. Notwithstanding the foregoing, during such period, (i) the Company
may grant stock options pursuant to the Company's existing stock option plan and
(ii) the Company may issue shares of Common Stock upon the exercise of an option
or warrant or the conversion of a security outstanding on the date hereof. The
Company also agrees not to file any registration statement with respect to any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for a period of 180 days after the date of the
Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation, except for any registration statement on Form S-8 (or
any successor form). The Company shall have delivered, prior to or concurrently
with the execution of this Agreement, an agreement executed by (i) each of the
directors and officers of the Company and (ii) each shareholder listed on Annex
I hereto to the effect that such person will not, during the period commencing
on the date such person signs such agreement and ending 180 days after the date
of the Prospectus, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation, (A) engage in any of the transactions described
in the first sentence of this paragraph or (B) make any demand for, or exercise
any right with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock.
SECTION 3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose (i) to make a public offering of their respective portions
of the Shares as soon after the execution and delivery of this Agreement as in
your judgment is advisable and (ii) initially to offer the Shares upon the terms
set forth in the Prospectus.
3
<PAGE>
Of the Shares to be offered by the Underwriters, ____________ Shares have
been reserved (the "Reserved Shares") for sale to certain individuals and
entities, including employees, officers and directors of the Company and other
parties associated with the Company and members of their families. The number of
shares available to the general public will be reduced to the extent those
persons or entities purchase, or confirm the purchase (either orally or in
writing) of, Reserved Shares. Any Reserved Shares not so purchased or confirmed
for purchase will be offered in the Offering.
SECTION 4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date or the
applicable Option Closing Date (as defined below), as the case may be. The
Company shall deliver the Shares, with any transfer taxes thereon duly paid by
the Company, to Donaldson, Lufkin & Jenrette Securities Corporation through the
facilities of The Depository Trust Company ("DTC"), for the respective accounts
of the several Underwriters, against payment to the Company of the Purchase
Price therefore by wire transfer of Federal or other funds immediately available
in New York City. The certificates representing the Shares shall be made
available for inspection not later than 9:30 A.M., New York City time, on the
business day prior to the Closing Date or the applicable Option Closing Date, as
the case may be, at the office of DTC or its designated custodian (the
"Designated Office"). The time and date of delivery and payment for the Firm
Shares shall be 9:00 A.M., New York City time, on ________, 1999 or such other
time on the same or such other date as Donaldson, Lufkin & Jenrette Securities
Corporation and the Company shall agree in writing (the "Closing Date"). The
time and date of delivery and payment for any Additional Shares to be purchased
by the Underwriters shall be 9:00 A.M., New York City time, on the date
specified in the applicable exercise notice given by you pursuant to Section 2
or such other time on the same or such other date as Donaldson, Lufkin &
Jenrette Securities Corporation and the Company shall agree in writing (an
"Option Closing Date").
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 8 of this Agreement
shall be delivered at the offices of Perkins Coie LLP, 1211 S.W. Fifth Avenue,
Portland, Oregon and the Shares shall be delivered at the Designated Office, all
on the Closing Date or such Option Closing Date, as the case may be.
SECTION 5. Agreements of the Company. The Company hereby agrees as follows:
(a) To advise you promptly and, if requested by you, to confirm such advice
in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information,
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(ii) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the suspension of
qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish to you four signed copies of the Registration Statement as
first filed with the Commission and of each amendment to it, including all
exhibits, and to furnish to you and each Underwriter designated by you such
number of conformed copies of the Registration Statement as so filed and of each
amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the Commission
within the applicable period specified in Rule 424(b) under the Act; during the
period specified in Section 5(d) below, not to file any further amendment to the
Registration Statement and not to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to which you
shall reasonably object after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or amendment or supplement to the
Prospectus that may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall occur
or condition shall exist as a result of which, in the opinion of counsel for the
Underwriters, it
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becomes necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances when the Prospectus is
delivered to a purchaser, not misleading, or if, in the opinion of counsel for
the Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare and file with the Commission an
appropriate amendment or supplement to the Prospectus so that the statements in
the Prospectus, as so amended or supplemented, will not in the light of the
circumstances when it is so delivered, be misleading, or so that the Prospectus
will comply with applicable law, and to furnish to each Underwriter and to any
dealer as many copies thereof as such Underwriter or dealer may reasonably
request.
(f) Prior to any public offering of the Shares, to cooperate with you and
counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its shareholders as soon as
practicable an earnings statement covering the twelve-month period ending
December 31, 2000 that shall satisfy the provisions of Section 11(a) of the Act,
and to advise you in writing when such statement has been so made available.
(h) During the period of three years after the date of this Agreement, to
furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries as you may reasonably
request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this Agreement,
including: (i) the fees, disbursements and expenses of the Company's counsel and
the Company's accountants in connection with the registration and delivery of
the Shares under the Act
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and all other fees and expenses in connection with the preparation, printing,
filing and distribution of the Registration Statement (including financial
statements and exhibits), any preliminary prospectus, the Prospectus and all
amendments and supplements to any of the foregoing, including the mailing and
delivering of copies thereof to the Underwriters and dealers in the quantities
specified herein, (ii) all costs and expenses related to the transfer and
delivery of the Shares to the Underwriters, including any transfer or other
taxes payable thereon, (iii) all costs of printing or producing this Agreement
and any other agreements or documents in connection with the offering, purchase,
sale or delivery of the Shares, (iv) all expenses in connection with the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states and all costs of printing or
producing any Preliminary and Supplemental Blue Sky Memoranda in connection
therewith (including the filing fees and fees and disbursements of counsel for
the Underwriters in connection with such registration or qualification and
memoranda relating thereto), (v) the filing fees and disbursements of counsel
for the Underwriters in connection with the review and clearance of the offering
of the Shares by the National Association of Securities Dealers, Inc., (vi) all
fees and expenses in connection with the preparation and filing of the
registration statement on Form 8-A relating to the Common Stock and all costs
and expenses incident to the listing of the Shares on the Nasdaq National
Market, (vii) the cost of printing certificates representing the Shares, (viii)
the costs and charges of any transfer agent, registrar and/or depository and
(ix) all other costs and expenses incident to the performance of the obligations
of the Company hereunder for which provision is not otherwise made in this
Section.
(j) To use its best efforts to list for quotation the Shares on the Nasdaq
National Market and to maintain the listing of the Shares on the Nasdaq National
Market for a period of three years after the date of this Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement, at the time of the effectiveness of this
Agreement, does not cover all of the Shares, to file a Rule 462(b) Registration
Statement with the Commission registering the Shares not so covered in
compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
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SECTION 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any Rule
462(b) Registration Statement to be filed by the Company after the effectiveness
of this Agreement); any Rule 462(b) Registration Statement filed after the
effectiveness of this Agreement will become effective no later than 10:00 P.M.,
New York City time, on the date of this Agreement; and no stop order suspending
the effectiveness of the Registration Statement is in effect, and no proceedings
for such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b) Registration
Statement to be filed by the Company after the effectiveness of this Agreement),
when it became effective, did not contain and, as amended, if applicable, will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, (ii) the Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement) and the Prospectus comply and, as amended or supplemented, if
applicable, will comply in all material respects with the Act, (iii) if the
Company is required to file a Rule 462(b) Registration Statement after the
effectiveness of this Agreement, such Rule 462(b) Registration Statement and any
amendments thereto, when they become effective (A) will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
(B) will comply in all material respects with the Act, and (iv) the Prospectus
does not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or omissions
in the Registration Statement or the Prospectus based upon information relating
to any Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration statement
as originally filed or as part of any amendment thereto, or filed pursuant to
Rule 424 under the Act, complied when so filed in all material respects with the
Act, and did not contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representations and warranties set forth
in this paragraph do not apply to statements or omissions in any
8
<PAGE>
preliminary prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
(d) Each of the Company and its subsidiaries has been duly incorporated and
is validly existing as a corporation under the laws of its jurisdiction of
incorporation and has the corporate power and authority to carry on its business
as described in the Prospectus and to own, lease and operate its properties, and
each is duly qualified and is in good standing as a foreign corporation
authorized to do business in each jurisdiction in which the nature of its
business or its ownership or leasing of property requires such qualification,
except where the failure to be so qualified would not have a material adverse
effect on the business, prospects, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole.
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of its subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of its subsidiaries, except as otherwise disclosed in the Registration
Statement.
(f) All the outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid, non-assessable and not
subject to any preemptive or similar rights; and the Shares have been duly
authorized and, when issued and delivered to the Underwriters against payment
therefor as provided by this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be subject to any
preemptive or similar rights.
(g) All of the outstanding shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued and are fully paid and
non-assessable, and are owned by the Company, directly or indirectly through one
or more subsidiaries, free and clear of any security interest, claim, lien,
encumbrance or adverse interest of any nature.
(h) As of the Closing Date, the authorized capital stock of the Company
will conform as to legal matters to the description thereof contained in the
Prospectus.
(i) Neither the Company nor any of its subsidiaries is in violation of its
respective charter or by-laws or in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is material to
the Company and its subsidiaries, taken as a whole, to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound.
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<PAGE>
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any of its subsidiaries or any
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or their respective property is bound, (iii) violate or
conflict with any applicable law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having jurisdiction over
the Company, any of its subsidiaries or their respective property or (iv) result
in the suspension, termination or revocation of any Authorization (as defined
below) of the Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such Authorization.
(k) There are no legal or governmental proceedings pending or threatened to
which the Company or any of its subsidiaries is or could be a party or to which
any of their respective property is or could be subject that are required to be
described in the Registration Statement or the Prospectus and are not so
described; nor are there any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that are not
so described or filed as required.
(l) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws"), any provisions of the
Employee Retirement Income Security Act of 1974, as amended, or any provisions
of the Foreign Corrupt Practices Act, or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate, would
not have a material adverse effect on the business, prospects, financial
condition or results of operation of the Company and its subsidiaries, taken as
a whole.
(m) Each of the Company and its subsidiaries has such permits, licenses,
consents, exemptions, franchises, authorizations and other approvals (each, an
"Authorization") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary
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to own, lease, license and operate its respective properties and to conduct its
business as currently conducted and as proposed to be conducted, except where
the failure to have any such Authorization or to make any such filing or notice
would not, singly or in the aggregate, have a material adverse effect on the
business, prospects, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole. Each such Authorization is valid and in
full force and effect and each of the Company and its subsidiaries is in
compliance with all the terms and conditions thereof and with the rules and
regulations of the authorities and governing bodies having jurisdiction with
respect thereto; and no event has occurred (including, without limitation, the
receipt of any notice from any authority or governing body) which allows or,
after notice or lapse of time or both, would allow, revocation, suspension or
termination of any such Authorization or results or, after notice or lapse of
time or both, would result in any other impairment of the rights of the holder
of any such Authorization; and, except as described in the Registration
Statement, such Authorizations contain no restrictions that are burdensome to
the Company or any of its subsidiaries; except where such failure to be valid
and in full force and effect or to be in compliance, the occurrence of any such
event or the presence of any such restriction would not, singly or in the
aggregate, have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole.
(n) There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
Authorization, any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.
(o) This Agreement has been duly authorized, executed and delivered by the
Company.
(p) KPMG Peat Marwick LLP are independent public accountants with respect
to the Company and its subsidiaries as required by the Act.
(q) The consolidated financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), together
with related schedules and notes, present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
and its subsidiaries on the basis stated therein at the respective dates or for
the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods
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involved, except as disclosed therein; the supporting schedules, if any,
included in the Registration Statement present fairly in accordance with
generally accepted accounting principles the information required to be stated
therein; and the other financial and statistical information and data set forth
in the Registration Statement and the Prospectus (and any amendment or
supplement thereto) are, in all material respects, accurately presented and
prepared on a basis consistent with such financial statements and the books and
records of the Company.
(r) The Company is not and, after giving effect to the offering and sale of
the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
(s) Except as set forth in Schedule 6(s), there are no contracts,
agreements or understandings between the Company and any person granting such
person the right to require the Company to file a registration statement under
the Act with respect to any securities of the Company or to require the Company
to include such securities with the Shares registered pursuant to the
Registration Statement.
(t) The Company and its subsidiaries own or possess, or can acquire on
reasonable terms, all patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), trademarks,
service marks and trade names ("Intellectual Property") currently employed by
them in connection with the business now operated or proposed to be operated by
them except where the failure to own or possess or otherwise be able to acquire
such Intellectual Property would not, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole;
and, except as set forth in the Registration Statement, neither the Company nor
any of its subsidiaries has received any notice of infringement of, or conflict
with, asserted rights of others with respect to any of such Intellectual
Property which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect on the
business, prospects, financial condition or results of operations of the Company
and its subsidiaries, taken as a whole.
(u) No relationship, direct or indirect, exists between or among the
Company or any of its subsidiaries on the one hand, and the directors, officers,
shareholders, customers or suppliers of the Company or any of its subsidiaries
on the other hand, which is required by the Act to be described in the
Registration Statement or the Prospectus which is not so described.
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(v) The pro forma financial statements of the Company and its subsidiaries
and the related notes thereto set forth in the Registration Statement and the
Prospectus (and any supplement or amendment thereto) have been prepared on a
basis consistent with the historical financial statements of the Company and its
subsidiaries, give effect to the assumptions and adjustments used in the
preparation thereof on a reasonable basis and in good faith. Such pro forma
financial statements have been prepared in accordance with the applicable
requirements of Rule 11-02 of Regulation S-X promulgated by the Commission. The
other pro forma financial and statistical information and data set forth in the
Registration Statement and the Prospectus (and any supplement or amendment
thereto) are, in all material respects, accurately presented and prepared on a
basis consistent with the pro forma financial statements.
(w) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries has incurred any
material liability or obligation, direct or contingent.
(x) Each certificate signed by any officer of the Company and delivered to
the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby.
SECTION 7. Indemnification. (a) The Company agrees to indemnify and hold
harmless each Underwriter, its directors, its officers and each person, if any,
who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), from and against any and all losses, claims, damages, liabilities and
judgments (including, without limitation, any legal or other expenses incurred
in connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to
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any Underwriter furnished in writing to the Company by such Underwriter through
you expressly for use therein; provided, however, that the foregoing indemnity
agreement with respect to any preliminary prospectus shall not inure to the
benefit of any Underwriter who failed to deliver a Prospectus, as then amended
or supplemented, (so long as the Prospectus and any amendments or supplements
thereto was provided by the Company to the several Underwriters in the requisite
quantity and on a timely basis to permit proper delivery on or prior to the
Closing Date) to the person asserting any losses, claims, damages, liabilities
or judgments caused by any untrue statement or alleged untrue statement of a
material fact contained in such preliminary prospectus, or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, if
such material misstatement or omission or alleged material misstatement or
omission was cured in the Prospectus, as so amended or supplemented, and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person. In addition to the foregoing, in connection
with the offer and sale of Reserved Shares, the Company agrees, promptly upon a
request in writing, to indemnify and hold harmless the Underwriters from and
against any and all losses, liabilities, claims, damages and expenses incurred
by them as a result of the failure of purchasers of the Reserved Shares
(including eligible directors, officers, employees and parties having business
relationships with the Company) to pay for and accept delivery of the Reserved
Shares that, by the end of the first business day following the date of this
Agreement, were subject to a properly confirmed application to purchase.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent
as the foregoing indemnity from the Company to such Underwriter but only with
reference to information relating to such Underwriter furnished in writing to
the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in respect
of which indemnity may be sought pursuant to Section 7(a) or 7(b) (the
"indemnified party"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "indemnifying party") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 7(a) and 7(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 7(c), but
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may employ separate counsel and participate in the defense thereof, but the fees
and expenses of such counsel, except as provided below, shall be at the expense
of such Underwriter). Any indemnified party shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of the indemnified
party unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in connection with any one
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) for all indemnified parties and all such fees and
expenses shall be reimbursed as they are incurred. Such firm shall be designated
in writing by Donaldson, Lufkin & Jenrette Securities Corporation, in the case
of parties indemnified pursuant to Section 7(a), and by the Company, in the case
of parties indemnified pursuant to Section 7(b). The indemnifying party shall
indemnify and hold harmless the indemnified party from and against any and all
losses, claims, damages, liabilities and judgments by reason of any settlement
of any action (i) effected with its written consent or (ii) effected without its
written consent if the settlement is entered into more than twenty business days
after the indemnifying party shall have received a request from the indemnified
party for reimbursement for the fees and expenses of counsel (in any case where
such fees and expenses are at the expense of the indemnifying party) and, prior
to the date of such settlement, the indemnifying party shall have failed to
comply with such reimbursement request. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement or
compromise of, or consent to the entry of judgment with respect to, any pending
or threatened action in respect of which the indemnified party is or could have
been a party and indemnity or contribution may be or could have been sought
hereunder by the indemnified party, unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability on claims that are or could have been the subject matter of such
action and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 7 is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities
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or judgments referred to therein, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages,
liabilities and judgments (i) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other hand from the offering of the Shares or (ii) if the
allocation provided by clause 7(d)(i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause 7(d)(i) above but also the relative fault of the Company
on the one hand and the Underwriters on the other hand in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or judgments, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other hand shall be deemed to be in the same
proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions, but before deducting expenses) received
by the Company, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 7, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 7(d) are several in
16
<PAGE>
proportion to the respective number of Shares purchased by each of the
Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 7 are not exclusive and shall
not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
SECTION 8. Conditions of Underwriters' Obligations. The several obligations
of the Underwriters to purchase the Firm Shares under this Agreement are subject
to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in this
Agreement shall be true and correct on the Closing Date with the same force and
effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement shall have become effective by 10:00 P.M., New York City time, on the
date of this Agreement; and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been commenced or shall be pending before or contemplated by
the Commission.
(c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by Mark K. Leavitt, in his capacity as Chairman of the
Board and Chief Executive Officer, and David C. Moffenbeier, in his capacity as
Chief Operating Officer of the Company, confirming the matters set forth in
Sections 6(w), 8(a) and 8(b) and that the Company has complied with all of the
agreements and satisfied all of the conditions herein contained and required to
be complied with or satisfied by the Company on or prior to the Closing Date.
(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company and its subsidiaries, taken as
a whole, (ii) there shall not have been any change or any development involving
a prospective change in the capital stock or in the long-term debt of the
Company or any of its subsidiaries and (iii) neither the Company nor any of its
subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 8(d)(i),
8(d)(ii) or 8(d)(iii), in your judgment, is material and adverse and, in your
17
<PAGE>
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(e) You shall have received on the Closing Date an opinion (satisfactory to
you and counsel for the Underwriters), dated the Closing Date, of Stoel Rives
LLP counsel for the Company, to the effect that:
(i) each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation and has the
corporate power and authority to carry on its business as described in
the Prospectus and to own, lease and operate its properties;
(ii) each of the Company and its subsidiaries is duly qualified
and is in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or
its ownership or leasing of property requires such qualification,
except where the failure to be so qualified would not have a material
adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a
whole;
(iii) all the outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid,
non-assessable and not subject to any preemptive or similar rights;
(iv) the Shares have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor as provided by
this Agreement, will be validly issued, fully paid and non-assessable,
and the issuance of such Shares will not be subject to any preemptive
or similar rights;
(v) all of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued
and are fully paid and non-assessable, and are owned by the Company,
directly or indirectly through one or more subsidiaries, free and
clear of any security interest, claim, lien, encumbrance or adverse
interest of any nature;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company;
(vii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
18
<PAGE>
(viii) the Registration Statement has become effective under the
Act and, to such counsel's knowledge, after due inquiry, no stop order
suspending its effectiveness has been issued and no proceedings for
that purpose are pending before or contemplated by the Commission;
(ix) the statements under the captions "Shares Eligible for
Future Sale," "Certain Transactions," "Business-Government Regulation
and Healthcare Reform" and "Description of Capital Stock" in the
Prospectus and Items 14 and 15 of Part II of the Registration
Statement, insofar as such statements constitute a summary of the
legal matters, documents or proceedings referred to therein, fairly
present the information called for with respect to such legal matters,
documents and proceedings;
(x) to the best of such counsel's knowledge, after due inquiry,
neither the Company nor any of its subsidiaries is in violation of its
respective articles of incorporation, as amended, or by-laws, as
amended, and neither the Company nor any of its subsidiaries is in
default in the performance of any obligation, agreement, covenant or
condition contained in any indenture, loan agreement, mortgage, lease
or other agreement or instrument that is material to the Company and
its subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound;
(xi) the execution, delivery and performance of this Agreement by
the Company, the compliance by the Company with all the provisions
hereof and the consummation of the transactions contemplated hereby
will not (A) require any consent, approval, authorization or other
order of, or qualification with, any court or governmental body or
agency (except such as may be required under the securities or Blue
Sky laws of the various states), (B) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
articles of incorporation or by-laws of the Company or any of its
subsidiaries or any indenture, loan agreement, mortgage, lease or
other agreement or instrument known to such counsel that is material
to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company
or any of its subsidiaries or their respective property is bound, (C)
violate or conflict with any applicable law, rule or regulation or, to
such counsel's knowledge, judgment, order or decree of any court or
any governmental body or agency having jurisdiction over the Company,
any of its subsidiaries or their respective property or (D) result in
the suspension, termination or revocation of any Authorization of the
Company or any of its subsidiaries or any other
19
<PAGE>
impairment of the rights of the holder of any such Authorization,
except where the suspension, termination or revocation of any such
Authorization or other impairment of the rights of the holder of such
Authorization would not, individually or in the aggregate, have a
material adverse effect on the business, prospects, financial condition
or results of operations of the Company and its subsidiaries taken as a
whole;
(xii) after due inquiry, such counsel does not know of any legal
or governmental proceedings pending or threatened to which the Company
or any of its subsidiaries is a party or to which any of their
respective property is subject that are required to be described in
the Registration Statement or the Prospectus and are not so described,
or of any statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
that are not so described or filed as required;
(xiii) to the best of such counsel's knowledge, each of the
Company and its subsidiaries has such Authorizations of, and has made
all filings with and notices to, all governmental or regulatory
authorities and self-regulatory organizations and all courts and other
tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and
operate its respective properties and to conduct its business, except
where the failure to have any such Authorization or to make any such
filing or notice would not, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its
subsidiaries, taken as a whole; each such Authorization is valid and
in full force and effect and, to the best of such counsel's knowledge,
each of the Company and its subsidiaries is in compliance with all the
terms and conditions thereof and with the rules and regulations of the
authorities and governing bodies having jurisdiction with respect
thereto; and, to the best of such counsel's knowledge, no event has
occurred (including, without limitation, the receipt of any notice
from any authority or governing body) which allows or, after notice or
lapse of time or both, would allow, revocation, suspension or
termination of any such Authorization or results or, after notice or
lapse of time or both, would result in any other impairment of the
rights of the holder of any such Authorization; and, to the best of
such counsel's knowledge, except as described in the Registration
Statement, such Authorizations contain no restrictions that are
burdensome to the Company or any of its subsidiaries; except where
such failure to be valid and in full force and effect or to be in
compliance, the occurrence of any such event or the presence of any
such restriction would not, singly or in the aggregate, have a
material adverse
20
<PAGE>
effect on the business, prospects, financial condition or results
of operations of the Company and its subsidiaries, taken as a whole;
(xiv) the Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment company" as
such term is defined in the Investment Company Act of 1940, as
amended;
(xv) to the best of such counsel's knowledge after due inquiry,
except as set forth in the Registration Statement, the Company has not
received any notice of infringement of or conflict with asserted
rights of others with respect to any of the Intellectual Property
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect;
(xvi) other than as disclosed on Schedule 8(e)(xvi) attached
hereto, to the best of such counsel's knowledge after due inquiry,
there are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to
any securities of the Company or to require the Company to include
such securities with the Shares registered pursuant to the
Registration Statement; and
(xvii) (A) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for the financial statements
and other financial data included therein as to which no opinion need
be expressed) comply as to form with the Act, (B) nothing has come to
the attention of such counsel that has caused it to believe that at
the time the Registration Statement became effective or on the date of
this Agreement, the Registration Statement and the prospectus included
therein (except for the financial statements and other financial data
as to which such counsel need not express any belief) contained any
untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading and (C) nothing has come to the attention of
such counsel that has caused it to believe that the Prospectus, as
amended or supplemented, if applicable (except for the financial
statements and other financial data, as aforesaid) contains any untrue
statement of a material fact or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In rendering such opinions, such counsel may rely as to matters of fact, to
the extent such counsel deems proper, on certificates of responsible officers of
the Company and its subsidiaries and certificates or other written statements of
public officials.
21
<PAGE>
The opinion of Stoel Rives LLP described in Section 8(e) above shall be
rendered to you at the request of the Company and shall so state therein.
(f) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Perkins Coie LLP, counsel for the Underwriters, as to the
matters referred to in Sections 8(e)(iv), 8(e)(vi), 8(e)(ix) (but only with
respect to the statements under the caption "Description of Capital Stock" and
"Underwriting") and 8(e)(xvii).
In giving such opinions with respect to the matters covered by Section
8(e)(xvii) Stoel Rives LLP and Perkins Coie LLP may state that their opinion and
belief are based upon their participation in the preparation of the Registration
Statement and Prospectus and any amendments or supplements thereto and review
and discussion of the contents thereof, but are without independent check or
verification except as specified.
(g) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you, from KPMG Peat Marwick LLP, independent
public accountants, containing the information and statements of the type
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(h) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(i) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(j) The Company shall not have failed on or prior to the Closing Date to
perform or comply with any of the agreements herein contained and required to be
performed or complied with by the Company on or prior to the Closing Date.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
SECTION 9. Effectiveness of Agreement and Termination. This Agreement shall
become effective upon the execution and delivery of this Agreement by the
parties hereto.
22
<PAGE>
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Company if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority, which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by
either federal or New York State authorities or (vi) the taking of any action by
any federal, state or local government or agency in respect of its monetary or
fiscal affairs which in your opinion has a material adverse effect on the
financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion which
the number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 9 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than
23
<PAGE>
one-tenth of the aggregate number of Firm Shares to be purchased by all
Underwriters and arrangements satisfactory to you and the Company for purchase
of such Firm Shares are not made within 48 hours after such default, this
Agreement will terminate without liability on the part of any non-defaulting
Underwriter and the Company. In any such case which does not result in
termination of this Agreement, either you or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and the
Prospectus or any other documents or arrangements may be effected. If, on an
Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased on such date, the non-defaulting
Underwriters shall have the option to (i) terminate their obligation hereunder
to purchase such Additional Shares or (ii) purchase not less than the number of
Additional Shares that such non-defaulting Underwriters would have been
obligated to purchase on such date in the absence of such default. Any action
taken under this paragraph shall not relieve any defaulting Underwriter from
liability in respect of any default of any such Underwriter under this
Agreement.
SECTION 10. Miscellaneous. Notices given pursuant to any provision of this
Agreement shall be addressed as follows: (i) if to the Company, to MedicaLogic,
Inc., 20500 N.W. Evergreen Parkway, Hillsboro, Oregon 97124 and (ii) if to any
Underwriter or to you, to you c/o Donaldson, Lufkin & Jenrette Securities
Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate
Department, or in any case to such other address as the person to be notified
may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company and the several Underwriters set
forth in or made pursuant to this Agreement shall remain operative and in full
force and effect, and will survive delivery of and payment for the Shares,
regardless of (i) any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter, the officers or directors of any
Underwriter, any person controlling any Underwriter, the Company, the officers
or directors of the Company or any person controlling the Company, (ii)
acceptance of the Shares and payment for them hereunder and (iii) termination of
this Agreement.
If for any reason the Shares are not delivered by or on behalf of the
Company as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 9), the Company agrees to reimburse the several
Underwriters for all out-of-pocket expenses (including the fees and
disbursements of counsel) incurred by them. Notwithstanding any termination of
this Agreement, the Company shall be liable for all expenses that it has agreed
to pay pursuant to Section 5(i) hereof. The Company
24
<PAGE>
also agrees to reimburse the several Underwriters, their directors and officers
and any persons controlling any of the Underwriters for any and all fees and
expenses (including, without limitation, the fees and disbursements of counsel)
incurred by them in connection with enforcing their rights hereunder (including,
without limitation, pursuant to Section 7 hereof).
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Underwriters, the
Underwriters' directors and officers, any controlling persons referred to
herein, the Company's directors and the Company's officers who sign the
Registration Statement and their respective successors and assigns, all as and
to the extent provided in this Agreement, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include a purchaser of any of the Shares from any of the
several Underwriters merely because of such purchase.
This Agreement shall be governed and construed in accordance with the laws
of the State of New York.
This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument.
25
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the several Underwriters.
Very truly yours,
MedicaLogic, Inc.
By:
--------------------------------------------
Name:
Title:
-----------------------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BANCBOSTON ROBERTSON STEPHENS, INC.
U.S. BANCORP PIPER JAFFRAY INC.
DLJDIRECT INC.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By
--------------------------
26
<PAGE>
SCHEDULE I
Number of Firm Shares
Underwriters to be Purchased
- ------------ ---------------
Donaldson, Lufkin & Jenrette Securities Corporation
BancBoston Robertson Stephens Inc.
U.S. Bancorp Piper Jaffray Inc.
DLJdirect Inc.
[Names of other Underwriters]
---------------
Total
<PAGE>
Annex I
[Insert names of shareholders of the Company who will be required to sign lock
ups]
<PAGE>
Schedules 6(s) and 8(e)(xvi)
Registration Rights
[To come]
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
MedicaLogic
Number Shares
MDL _____ ______
<S> <C> <C>
THIS CERTIFICATE SEE REVERSE FOR
IS TRANSFERABLE INCORPORATED UNDER THE LAWS CERTAIN DEFINITIONS
IN NEW YORK, NY OF THE STATE OF OREGON AND A STATEMENT AS
OR RIDGEFIELD TO THE RIGHTS,
PARK, NJ PREFERENCES,
PRIVILEGES AND
RESTRICTIONS ON
SHARES
CUSIP
584642 10 2
</TABLE>
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, NO PAR VALUE, OF
MedicaLogic, Inc.
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the
Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
MEDICALOGIC, INC.
CORPORATE
------
SEAL
1985
* Oregon *
DAVID C. MOFFENBEIER MARK K. LEAVITT
CHIEF OPERATING OFFICER CHAIRMAN AND CHIEF
AND SECRETARY EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
<TABLE>
<S><C>
MedicaLogic, Inc.
A statement of the designations, relative rights, preferences and limitations applicable to each class of
stock or series thereof as established, from time to time, by the Articles of Incorporation of the Corporation and
by any certificate of designation, the number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof on request in writing and without charge from the Secretary of the
Corporation at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed
as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common (Oregon Custodians use the following)
TEN ENT - as tenants by the (Name) CUST UL OREG (Name) MIN--__________________, as Custodian under
entireties the laws of Oregon, for _________________
JT TEN - as joint tenants with a minor
right of survivorship (Name) CUST (Name) (State) UNIF GIFT MIN ACT--_________Custodian_________
and not as tenants in (Cust) (Minor)
common Under _______ Uniform Gifts to Minors Act
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________________________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- ------------------------------------------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------------------------------------------
of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
Attorney
- ---------------------------------------------------------------------------------------------------------- to
transfer the said stock on the books of the within named Corporation will full power of substitution in the
premises.
Dated _________________________________
X __________________________________________________________
X __________________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF
THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By _____________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
</TABLE>
<PAGE>
MEDICALOGIC, INC. STOCK INCENTIVE PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
This Restricted Stock Purchase Agreement ("Agreement") is entered into as
of _________, 1999 between MedicaLogic, Inc., an Oregon corporation (the
"Company"), and ________________ ("Purchaser") and is made pursuant to the
Company's Stock Incentive Plan. In consideration of the mutual agreements
contained in this Agreement, the parties agree as follows:
1. Purchase.
1.1 Purchase Agreement. The Company hereby agrees to sell to
Purchaser, and Purchaser hereby agrees to purchase from the Company, ________
_____________________ (_____) shares of the Company's common stock (the
"Shares") at a purchase price of $_____ per share, all on the terms and subject
to the conditions of this Agreement.
1.2 Payment of Purchase Price. Purchaser shall pay for the Shares by
delivering to the Company a duly executed note (the "Purchase Note"),
substantially in the form of Exhibit A hereto.
1.3 Delivery of Stock. The Company will issue in Purchaser's name, as
promptly after receipt of the Purchase Note as practicable, one or more
certificates representing the Shares. To secure its rights under the Repurchase
Option described in Section 2, the Company will retain the certificate or
certificates representing the Shares. Purchaser will deliver to the Company
executed blank stock powers covering the Shares subject to the Repurchase
Option, substantially in the form of Exhibit B hereto.
2. Repurchase Option.
2.1 Option to Repurchase Upon Occurrence of Certain Events. The
Company shall have the option to repurchase all or a portion of the Shares
("Repurchase Option"), in consideration for the forgiveness of all or a
commensurate portion of the principal balance of and accrued interest on the
Purchase Note, in the event Purchaser voluntarily terminates his/her employment
within two years of the date the Shares were originally granted. The Repurchase
Option shall terminate as of December 31, 1999 in the event all of the following
events have occurred:
a. The Company completes an initial public offering of the
Company's Common Stock;
b. An Internet version of Logician (Logician.net) is released;
and
<PAGE>
c. A consumer patient web property (AboutMyHealth, or other web
site name) is released.
2.2 Exercise of Option. The Repurchase Option shall be exercised by
the Company by delivering to Purchaser (or to Purchaser's executors or
administrators, if applicable) a written notice of exercise. Upon exercise of a
Repurchase Option, the Company shall reduce the amount of principal and accrued
interest then due, if any, on the Purchase Note and the Company shall promptly
pay to Purchaser the balance of the repurchase price, if any. Upon delivery of
such notice and reduction of the amounts due under the Purchase Note, the
Company shall become the legal and beneficial owner of the Shares being
repurchased and all rights and interest therein or related thereto, and the
Company shall have the right to transfer to its own name the number of Shares
being repurchased without further action by Purchaser.
2.3 Exercise Price. The price to be paid by the Company for the Shares
upon exercise of the Repurchase Option shall be $_____ per Share.
2.4 Assignability. The right of the Company under a Repurchase Option
to purchase any part of the Shares may be assigned in whole or in part to any
person or persons designated by the Board of Directors of the Company.
3. Withholding. Upon notification of the amount due, if any, and prior to
or concurrently with delivery of the certificates representing the Shares,
Purchaser shall pay to the Company amounts necessary to satisfy any applicable
federal, state, and local withholding tax requirements. If additional
withholding becomes required beyond any amount deposited before delivery of the
certificates, Purchaser shall pay such amount to the Company on demand. If
Purchaser fails to pay any amount demanded, the Company shall have the right to
withhold such amount from other amounts payable by the Company to Purchaser,
including salary, subject to applicable law.
4. Limitations on Transfer.
4.1 While Subject to Repurchase Option. Without the written consent of
the Company, Purchaser shall not sell, assign, encumber, dispose of or transfer
(including transfer by operation of law) any interest in any Shares that have
not been released from the Repurchase Option.
4.2 Stock Transfer Agreement. Upon release from the Repurchase Option,
the Shares shall be subject to the terms of any shareholders agreement then in
effect, including any amendments or supplements thereto, among the Company and
any of its shareholders (a "Shareholders Agreement"), including the transfer
restrictions contained therein, and Purchaser agrees that the transfer
restrictions and purchase options of any such Shareholders Agreement shall apply
to the Shares and agrees to be bound from the date of this Agreement onward by
all of the terms and conditions of any such Shareholders Agreement.
2
<PAGE>
5. Investment Intent; Restricted Securities. Purchaser represents, warrants
and covenants to the Company that the Shares are being acquired by Purchaser for
investment for Purchaser's own account only and not with a view to, or resale in
connection with, any distribution thereof within the meaning of the Securities
Act of 1993, as amended (the "Act"). Purchaser understands and acknowledges that
the sale of the Shares has not been registered under the Act or applicable state
securities laws, that the Shares must be held indefinitely unless subsequently
registered under the Act and applicable state securities laws or unless an
exemption from such registration requirement is available, that the Company is
under no obligation to register the Shares, and that the certificate or
certificates representing the Shares will be stamped with legends substantially
in the form specified in Section 7 of this Agreement. Purchaser agrees to comply
with the transfer restrictions specified in the legends set forth in Section 7
and on the Share Certificates.
6. Acknowledgment of Access to Information. Purchaser acknowledges that he,
through his position with the Company, has had access to sufficient information
regarding the Company's business and financial condition to enable him to make
an investment decision regarding the purchase of the Shares. Purchaser
acknowledges that he has been provided an opportunity to ask questions of, and
receive answers from, the Company concerning the terms and conditions of this
offering and to obtain additional information concerning the Company and this
offering.
7. Legend. All certificates representing the Shares shall be endorsed with
legends substantially in the following form, in addition to any other legends
required by law:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN A
RESTRICTED STOCK PURCHASE AGREEMENT BETWEEN THE CORPORATION AND THE
REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF
THE CORPORATION."
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED
FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR LAWS OR AN
OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION
IS NOT REQUIRED."
"TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS RESTRICTED
BY A SHAREHOLDERS AGREEMENT AMONG THE CORPORATION AND ITS SHAREHOLDERS,
WHICH AGREEMENT BY THIS REFERENCE, IS INCORPORATED HEREBY AND MADE A PART
HEREOF AS IF FULLY SET FORTH, AND WHICH AGREEMENT, BY ACCEPTANCE OF
DELIVERY OF THIS CERTIFICATE, IS ACCEDED TO BY THE HOLDER HEREOF. A COPY OF
THE
3
<PAGE>
SHAREHOLDERS AGREEMENT IS ON FILE WITH THE SECRETARY OF THE
CORPORATION."
8. Specific Performance. Purchaser acknowledges and agrees that the Company
will suffer irreparable harm if Purchaser fails to comply with the terms of this
Agreement, and that monetary damages will be inadequate to compensate the
Company for such failure. Accordingly, Purchaser agrees that this Agreement may
be enforced by specific performance or other injunctive relief, in addition to
any other remedies available at law or in equity.
9. Notices. Any required or permitted notice shall be given in writing and
shall be deemed given upon personal delivery or upon deposit in the United
States mail by registered or certified mail, postage prepaid. Any notice to
Purchaser shall be addressed to Purchaser at Purchaser's address shown on the
corporate records of the Company, and any notice to the Company shall be
addressed to the Company at its registered office.
10. No Right to Employment. Nothing in the Company's Stock Incentive Plan
or in this Agreement shall confer upon Purchaser any right to be continued in
the employment of the Company or to interfere in any way with the right of the
Company to terminate Purchaser's employment at any time for any reason.
11. Entire Agreement; Amendment. This Agreement constitutes the entire
agreement of the parties with regard to the subject matter hereof and may be
amended only by written agreement between the Company and Purchaser.
12. Successors of Company. This Agreement shall be binding upon and shall
inure to the benefit of any successor or successors of the Company and, subject
to the restrictions on transfer of this Agreement, shall be binding upon and
shall inure to the benefit of Purchaser's heirs, executors, administrators,
successors and assigns.
13. Governing Law, Severability. This Agreement shall be governed by and
construed in accordance with the laws of Oregon, without regard to the choice of
law rules applied in the courts of such state. If any provisions or provision of
this Agreement are found to be unenforceable, the remaining provisions shall
nevertheless be enforceable and shall be construed as if the unenforceable
provisions were deleted.
14. Further Action. The parties agree to execute such further instruments
and to take such actions as may reasonably be necessary to carry out the intent
of this Agreement.
4
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date written above.
THE COMPANY: MEDICALOGIC, INC.
By: _____________________________________
Title: __________________________________
Address: 20500 NW Evergreen Parkway
Hillsboro, OR 97124
PURCHASER: _________________________________________
Address: ________________________________
_________________________________________
5
<PAGE>
Exhibit A
$__________
NON-NEGOTIABLE PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned ________________ ("Maker") hereby
promises to pay to MedicaLogic, Inc., an Oregon corporation ("Payee"), at
Payee's offices at 20500 NW Evergreen Parkway, Hillsboro, OR 97124, or at such
other place Payee may designate in writing from time to time, the principal sum
of __________________________________________________________ Dollars
($_________), plus accrued and unpaid interest thereon, in lawful money of the
United States of America, on or before the date five years after the date
hereof.
1. Interest. Interest shall accrue on the unpaid principal balance
outstanding hereunder at the rate of six percent (6%) per annum from the date of
this Note until such principal balance is paid in full. Interest shall be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
Interest shall be payable quarterly in arrears.
2. Prepayment. Maker may prepay all or any portion of this Note at any time
without penalty. Any such prepayment shall be applied first to pay interest
accrued to the date of prepayment and second to reduce the principal balance
hereof.
3. Costs of Collection. Maker agrees to pay any and all costs, including
without limitation attorneys' fees, costs and expenses (in addition to any
statutory costs) at trial, or on any appellate review, incurred by Payee or any
holder of this Note in enforcing this Note and collecting sums due under this
Note.
4. Waiver of Suretyship Defenses. The undersigned and all persons liable or
to become liable on this Note waive presentment, protest and demand and notice
of protest, demand, dishonor or nonpayment of this Note.
5. Waiver Only in Writing. Payee shall not be deemed, by any act or failure
to act, to have waived any of its rights or remedies hereunder unless such
waiver is in writing and signed by Payee, and then only to the extent
specifically set forth in writing.
6. Usury. It is the specific intent of the Maker and Payee that this Note
bear a lawful rate of interest, and if any court of competent jurisdiction
should determine that the rate herein provided for exceeds that which is
statutorily permitted for the type of transaction evidenced hereby, the interest
rate shall be reduced to the highest rate permitted by applicable law, with any
excess interest theretofore collected being applied against principal or, if
such principal has been fully repaid, returned to Maker on demand.
7. Governing Law. This Note shall be construed in accordance with Oregon
law, regardless of choice of law rules.
MAKER:
-----------------------------------------
<PAGE>
Exhibit B
IRREVOCABLE STOCK POWER
KNOW ALL MEN BY THESE PRESENTS, that I, ________________, for value
received, have bargained, sold, assigned, and transferred, and by these presents
do hereby bargain, sell, assign, and transfer unto __________________________,
_________________________ (_____) shares of the Common Stock of MedicaLogic,
Inc., an Oregon corporation, standing in my name on the books of said
corporation, represented by Certificate No. ___, and that I do hereby
irrevocably constitute and appoint ____________________________ my true and
lawful attorney to sell, assign, transfer, and set over all or any part of the
said stock, and for that purpose to make and execute all necessary acts of
assignment and transfer thereof, and to substitute one or more persons with like
full power, hereby ratifying and confirming all that said attorney or substitute
or substitutes shall lawfully do by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand as of this ____ day of
_________, 1999.
-----------------------------------------
<PAGE>
Variable - Performance (3 criteria) Restricted Stock
Middleton, Blackford
Field, Guy
Samco, Rick
Leavitt, Mark K.
Moffenbeier, David
Watson, Thomas M.
Anderson, Harvey J.
<PAGE>
MEDICALOGIC, INC. STOCK INCENTIVE PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
This Restricted Stock Purchase Agreement ("Agreement") is entered into as
of _____, 1999 between MedicaLogic, Inc., an Oregon corporation (the "Company"),
and _______ ("Purchaser") and is made pursuant to the Company's Stock Incentive
Plan. In consideration of the mutual agreements contained in this Agreement, the
parties agree as follows:
1. Purchase.
1.1 Purchase Agreement. The Company hereby agrees to sell to
Purchaser, and Purchaser hereby agrees to purchase from the Company, ______
(______) shares of the Company's common stock (the "Shares") at a purchase price
of $____ per share, all on the terms and subject to the conditions of this
Agreement.
1.2 Payment of Purchase Price. Purchaser shall pay for the Shares by
delivering to the Company a duly executed note (the "Purchase Note"),
substantially in the form of Exhibit A hereto.
1.3 Delivery of Stock. The Company will issue in Purchaser's name, as
promptly after receipt of the Purchase Note as practicable, one or more
certificates representing the Shares. To secure its rights under the Repurchase
Option described in Section 2, the Company will retain the certificate or
certificates representing the Shares. Purchaser will deliver to the Company
executed blank stock powers covering the Shares subject to the Repurchase
Option, substantially in the form of Exhibit B hereto.
2. Repurchase Option.
2.1 Option on Termination of Employment. If Purchaser ceases to be
employed by the Company for any reason, other than a termination by the
Company without cause (as defined herein) (a "Termination"), the Company
shall have an irrevocable, exclusive option (the "Repurchase Option") for a
period of 60 days from the date of Termination to purchase all or any portion
of the Shares held by Purchaser on the date of the Termination that have not
been released from the Repurchase Option as provided in Section 2.3. The
right of the Company under the Repurchase Option to purchase any part of the
Shares may be assigned in whole or in part to any person or persons
designated by the Board of Directors of the Company.
2.2 Exercise of Option. The Repurchase Option shall be exercised by
the Company by delivering to Purchaser (or to Purchaser's executors or
administrators, if applicable) a written notice of exercise and a check in the
amount of the exercise price set forth in Section 2.4. Notwithstanding the
foregoing, the Company may, at its option, elect to reduce
1
<PAGE>
the amount payable to Purchaser (or Purchaser's estate, if applicable) upon
exercise of a Repurchase Option by an amount not in excess of sum of the
unpaid principal, if any, and the accrued but unpaid interest, if any, then
due on the Purchase Note. Upon delivery of such notice and payment of the
exercise price, the Company shall become the legal and beneficial owner of
the Shares being repurchased and all rights and interest therein or related
thereto, and the Company shall have the right to transfer to its own name the
number of Shares being repurchased without further action by Purchaser.
2.3 Release from Repurchase Option. The Shares shall be released from
the Repurchase Option ratably over a period of 36 months beginning on the date
six months from _____________ (the "Vesting Reference Date"), so that on sixth
(1/6) of the Shares will be released from the Repurchase Option on the sixth
month anniversary of the Vesting Reference Date and the remaining five sixths
(5/6) of the Shares shall be released from the Repurchase Option ratably over a
period of 30 months beginning on the seventh month anniversary of the Vesting
Reference Date so that 1/36 of the Shares under the Option shall vest on each
monthly anniversary of the Vesting Reference Date beginning on the date seventh
month after the Vesting Reference Date; provided, however, that all Shares shall
be released immediately from the Repurchase Option in the event (a) Optionee's
employment with the Company is terminated by the Company without cause
including, without limitation, termination resulting from a reduction in the
workforce of the Company, or (b) a Change of Control (as defined below) occurs.
For purposes of the preceding paragraph, the circumstances in which the
Company will have cause to terminate Optionee shall include, without limitation,
(i) any misappropriation by Optionee of funds or property of the Company; (ii)
the conviction of or plea of guilty or nolo contendere by Optionee of a felony
or any crime involving moral turpitude; (iii) Optionee's engagement in illegal,
immoral or similar conduct tending to place Optionee or the Company, by
association with Optionee, in disrepute; and (iv) Optionee's nonperformance or
gross dereliction of duty which continues after notice from the Company and a
reasonable opportunity to cure. For purposes of the preceding paragraph, "Change
of Control" means the occurrence of any of the following: (i) the sale,
conveyance, or other disposition of all or substantially all of the property or
business of the Company, (ii) the merger or consolidation of the Company with
any other entity (other than a wholly-owned subsidiary corporation), or the
completion of any other transaction or series of related transactions not
involving a public offering, in which more than fifty percent (50%) of the
voting power of the Company is disposed of, or (iii) the first day on which a
majority of the members of the Board of Directors of the Company are not
Continuing Directors. For purposes of this provision, "Continuing Directors"
means, as of any date of determination, any member of the Board of Directors of
the Company who (a) was a member of such Board of Directors on the date of this
agreement or (b) was nominated for election or elected or appointed to such
Board of Directors by the Board of Directors at a time when a majority of the
Board consisted of Continuing Directors.
2
<PAGE>
As Shares are released from the Repurchase Option, the Company shall
deliver to Purchaser a certificate representing the Shares released;
provided, however, that the parties agree that for administrative convenience
the Company shall deliver certificates representing the Shares in increments
of __________ Shares; and provided, further, that in the event that (i) one
or more Shares but fewer than ___________ Shares have been released from the
Repurchase Option and (ii) it is expected that no more Shares will be
released from the Repurchase Option, then the Company shall deliver to
Purchaser one or more certificates representing all Shares then released from
the Repurchase Option but for which certificates have not been delivered. If,
during the time the Company is holding certificates to secure its rights
under the Repurchase Option, the outstanding shares of common stock of the
Company are increased or decreased or changed into or exchanged for a
different number or kind of shares or other securities of the Company or of
another corporation, by reason of any reorganization, merger, consolidation,
plan of exchange, recapitalization, reclassification, stock split,
combination of shares, or dividend payable in shares, appropriate adjustment
shall be made by the Board of Directors of the Company in the number and kind
of shares the Company shall deliver to Purchaser as Shares are released from
the Repurchase Option.
2.4 Exercise Price. The price to be paid by the Company for the Shares
upon exercise of the Repurchase Option shall be $_______ per Share.
3. Withholding. Upon notification of the amount due, if any, and prior to
or concurrently with delivery of the certificates representing the Shares,
Purchaser shall pay to the Company amounts necessary to satisfy any applicable
federal, state, and local withholding tax requirements. If additional
withholding becomes required beyond any amount deposited before delivery of the
certificates, Purchaser shall pay such amount to the Company on demand. If
Purchaser fails to pay any amount demanded, the Company shall have the right to
withhold such amount from other amounts payable by the Company to Purchaser,
including salary, subject to applicable law.
4. Limitations on Transfer.
4.1 While Subject to Repurchase Option. Without the written consent of
the Company, Purchaser shall not sell, assign, encumber, dispose of or transfer
(including transfer by operation of law) any interest in any Shares that have
not been released from the Repurchase Option.
4.2 Stock Transfer Agreement. Upon release from the Repurchase Option,
the Shares shall be subject to the terms of any shareholders agreement then in
effect, including any amendments or supplements thereto, among the Company and
any of its shareholders (a "Shareholders Agreement"), including the transfer
restrictions contained therein, and Purchaser agrees that the transfer
restrictions and purchase options of any such Shareholders Agreement shall apply
to the Shares and agrees to be bound from the date of this Agreement onward by
all of the terms and conditions of any such Shareholders Agreement.
3
<PAGE>
5. Investment Intent; Restricted Securities. Purchaser represents, warrants
and covenants to the Company that the Shares are being acquired by Purchaser for
investment for Purchaser's own account only and not with a view to, or resale in
connection with, any distribution thereof within the meaning of the Securities
Act of 1993, as amended (the "Act"). Purchaser understands and acknowledges that
the sale of the Shares has not been registered under the Act or applicable state
securities laws, that the Shares must be held indefinitely unless subsequently
registered under the Act and applicable state securities laws or unless an
exemption from such registration requirement is available, that the Company is
under no obligation to register the Shares, and that the certificate or
certificates representing the Shares will be stamped with legends substantially
in the form specified in Section 7 of this Agreement. Purchaser agrees to comply
with the transfer restrictions specified in the legends set forth in Section 7
and on the Share Certificates.
6. Acknowledgment of Access to Information. Purchaser acknowledges that he,
through his position with the Company, has had access to sufficient information
regarding the Company's business and financial condition to enable him to make
an investment decision regarding the purchase of the Shares. Purchaser
acknowledges that he has been provided an opportunity to ask questions of, and
receive answers from, the Company concerning the terms and conditions of this
offering and to obtain additional information concerning the Company and this
offering.
7. Legend. All certificates representing the Shares shall be endorsed with
legends substantially in the following form, in addition to any other legends
required by law:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE SUBJECT TO
CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET
FORTH IN A RESTRICTED STOCK PURCHASE AGREEMENT BETWEEN THE CORPORATION
AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF THE CORPORATION. "
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT
OR LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT
SUCH REGISTRATION IS NOT REQUIRED."
"TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED BY A SHAREHOLDERS AGREEMENT AMONG THE CORPORATION AND ITS
SHAREHOLDERS, WHICH AGREEMENT BY THIS REFERENCE, IS INCORPORATED
HEREBY AND MADE A PART
4
<PAGE>
HEREOF AS IF FULLY SET FORTH, AND WHICH AGREEMENT, BY ACCEPTANCE OF
DELIVERY OF THIS CERTIFICATE, IS ACCEDED TO BY THE HOLDER HEREOF. A COPY OF
THE SHAREHOLDERS AGREEMENT IS ON FILE WITH THE SECRETARY OF THE
CORPORATION."
8. Specific Performance. Purchaser acknowledges and agrees that the Company
will suffer irreparable harm if Purchaser fails to comply with the terms of this
Agreement, and that monetary damages will be inadequate to compensate the
Company for such failure. Accordingly, Purchaser agrees that this Agreement may
be enforced by specific performance or other injunctive relief, in addition to
any other remedies available at law or in equity.
9. Notices. Any required or permitted notice shall be given in writing and
shall be deemed given upon personal delivery or upon deposit in the United
States mail by registered or certified mail, postage prepaid. Any notice to
Purchaser shall be addressed to Purchaser at Purchaser's address shown on the
corporate records of the Company, and any notice to the Company shall be
addressed to the Company at its registered office.
10. No Right to Employment. Nothing in the Company's Stock Incentive Plan
or in this Agreement shall confer upon Purchaser any right to be continued in
the employment of the Company or to interfere in any way with the right of the
Company to terminate Purchaser's employment at any time for any reason.
11. Entire Agreement; Amendment; Counterparts. This Agreement constitutes
the entire agreement of the parties with regard to the subject matter hereof and
may be amended only by written agreement between the Company and Purchaser. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed to be an original, but all of which together shall constitute but one and
the same instrument.
12. Successors of Company. This Agreement shall be binding upon and shall
inure to the benefit of any successor or successors of the Company and, subject
to the restrictions on transfer of this Agreement, shall be binding upon and
shall inure to the benefit of Purchaser's heirs, executors, administrators,
successors and assigns.
13. Governing Law, Severability. This Agreement shall be governed by and
construed in accordance with the laws of Oregon, without regard to the choice of
law rules applied in the courts of such state. If any provisions or provision of
this Agreement are found to be unenforceable, the remaining provisions shall
nevertheless be enforceable and shall be construed as if the unenforceable
provisions were deleted.
14. Further Action. The parties agree to execute such further instruments
and to take such actions as may reasonably be necessary to carry out the intent
of this Agreement.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
written above.
THE COMPANY: MEDICALOGIC, INC.
By:
-------------------------------------
Title:
----------------------------------
Address: 20500 NW Evergreen Parkway
Hillsboro, OR 97124
PURCHASER:
-----------------------------------------
Address:
--------------------------------
--------------------------------
6
<PAGE>
Exhibit A
$__________
NON-NEGOTIABLE PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned ________________ ("Maker") hereby
promises to pay to MedicaLogic, Inc., an Oregon corporation ("Payee"), at
Payee's offices at 20500 NW Evergreen Parkway, Hillsboro, OR 97124, or at such
other place Payee may designate in writing from time to time, the principal sum
of __________________________________________________________ Dollars
($_________), plus accrued and unpaid interest thereon, in lawful money of the
United States of America, on or before the date five years after the date
hereof.
1. Interest. Interest shall accrue on the unpaid principal balance
outstanding hereunder at the rate of six percent (6%) per annum from the date of
this Note until such principal balance is paid in full. Interest shall be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
Interest shall be payable quarterly in arrears.
2. Prepayment. Maker may prepay all or any portion of this Note at any time
without penalty. Any such prepayment shall be applied first to pay interest
accrued to the date of prepayment and second to reduce the principal balance
hereof.
3. Costs of Collection. Maker agrees to pay any and all costs, including
without limitation attorneys' fees, costs and expenses (in addition to any
statutory costs) at trial, or on any appellate review, incurred by Payee or any
holder of this Note in enforcing this Note and collecting sums due under this
Note.
4. Waiver of Suretyship Defenses. The undersigned and all persons liable or
to become liable on this Note waive presentment, protest and demand and notice
of protest, demand, dishonor or nonpayment of this Note.
5. Waiver Only in Writing. Payee shall not be deemed, by any act or failure
to act, to have waived any of its rights or remedies hereunder unless such
waiver is in writing and signed by Payee, and then only to the extent
specifically set forth in writing.
6. Usury. It is the specific intent of the Maker and Payee that this Note
bear a lawful rate of interest, and if any court of competent jurisdiction
should determine that the rate herein provided for exceeds that which is
statutorily permitted for the type of transaction evidenced hereby, the interest
rate shall be reduced to the highest rate permitted by applicable law, with any
excess interest theretofore collected being applied against principal or, if
such principal has been fully repaid, returned to Maker on demand.
7. Governing Law. This Note shall be construed in accordance with Oregon
law, regardless of choice of law rules.
MAKER:
-----------------------------------------
<PAGE>
Exhibit B
IRREVOCABLE STOCK POWER
KNOW ALL MEN BY THESE PRESENTS, that I, ________________, for value
received, have bargained, sold, assigned, and transferred, and by these presents
do hereby bargain, sell, assign, and transfer unto __________________________,
_________________________ (_____) shares of the Common Stock of MedicaLogic,
Inc., an Oregon corporation, standing in my name on the books of said
corporation, represented by Certificate No. ___, and that I do hereby
irrevocably constitute and appoint ____________________________ my true and
lawful attorney to sell, assign, transfer, and set over all or any part of the
said stock, and for that purpose to make and execute all necessary acts of
assignment and transfer thereof, and to substitute one or more persons with like
full power, hereby ratifying and confirming all that said attorney or substitute
or substitutes shall lawfully do by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand as of this ____ day of
_________, 1999.
-----------------------------------------
<PAGE>
MedicaLogic, Inc. Page: 1
STOCK OPTIONS GRANTED File: Granted
FROM 1/1/93 TO 10/26/99 Date: 10/26/99
Option Type is equal to RSP Time: 1:34:46 PM
STATUS -
Fixed Vesting Restricted Stock
Field, Guy
Middleton, Blackford
Watson, Thomas M.
Anderson, Harvey J.
Spina, Frank J.
<PAGE>
MetLife Capital Loan and Security Agreement
THIS LOAN AND SECURITY AGREEMENT entered into as of the 5th day of June, 1998,
by and between MetLife Capital Corporation, a Delaware corporation, whose
address is 10900 NE 4th Street, Suite 500, Bellevue, WA 98004 ("Lender") and
MedicaLogic, Inc., an Oregon Corporation, whose address is 20500 NW Evergreen
Parkway, Hillsboro, OR 97124 ("Borrower").
WHEREAS, Lender has agreed to make a commercial loan or loans to Borrower;
and
WHEREAS, as a condition to making the loans, and in order to secure the
repayment thereof, Lender has required Borrower to execute and deliver to Lender
this Loan and Security Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Borrower and Lender agree as follows:
1. Creation of Security Interest. As security for the due and punctual
payment of any and all of the present and future obligations of the Borrower to
Lender, whether direct or contingent or joint or several, Borrower hereby
conveys, assigns and grants to Lender a continuing security interest in all of
Borrower's rights, title and interests in and to the equipment described in the
Supplemental Security Agreement(s) entered into pursuant to this Loan and
Security Agreement from time to time ("Equipment") including all present and
future additions, attachments and accessories thereto, all substitutions
therefor and replacement thereof and all proceeds thereof, including all
proceeds of insurance (such Equipment and property hereinafter called
"Collateral").
2. The Loans. (a) Subject to the terms and conditions of this Loan and
Security Agreement, Lender agrees to make a loan or loans to Borrower. The
maximum principal amount of any loan or loans to be made by Lender to Borrower
shall be within Lender's discretion, subject to the exercise of Lender's
reasonable business judgment, and shall be as stated in the loan commitment
letter issued by Lender to Borrower, or in the event a commitment letter is not
issued by Lender, in Lender's internal credit approval (each such loan or loans
shall be referred to as the "Loan Amount").
(b) The Loan Amount shall be repaid by Borrower as a term loan or term
loans ("Term Loan"). The Term Loan shall be evidenced by a promissory
note or notes in the form attached hereto as Exhibit "A" ("Term
Note"). The payment provisions of each Term Note shall be stated
therein.
(c) If requested by Borrower, and in accordance with the terms and
conditions of Section 3 hereof, Lender shall make interim fundings to
Borrower of a Term Loan as partial advances of the Loan Amount
("Interim Loans"). The Interim Loans shall either be for the payment
of the acquisition cost of any items of Equipment delivered and
accepted by Borrower prior to the expiration date of Lender's loan
commitment to Borrower ("Commitment Expiration Date") or to fund
progress payments to the vendor or manufacturer of the Equipment, if
the making of progress payments was agreed to by Lender in its
commitment or approval to make the loan or loans to Borrower. The
Interim Loans shall be evidenced by promissory notes in the form
attached hereto as Exhibit "B" ("Interim Note"). Interest on all
Interim Loans shall be payable as provided therein. The principal
amount due under the Interim Loans shall be due as provided in the
Interim Notes, at which time, provided no Event of Default hereunder
has occurred and is continuing or event which with the passing of time
or giving of notice or both would become an Event of Default hereunder
has occurred and is continuing, Lender shall consolidate all Interim
Loans and convert them to a Term Loan evidenced by a Term Note or
Notes. Whether or not a Term Loan is evidenced by one or more Term
Notes shall be as agreed between Lender and Borrower, or in the
absence of such an agreement, as decided by Lender, in the exercise of
its reasonable business judgment.
(d) In the event that the amount loaned pursuant to the Interim Loans is
less than the Loan Amount, subject to Borrower's compliance with the
terms and conditions of this Loan and Security Agreement (including
the satisfaction of the conditions of borrowing set forth in Section 7
of this Loan and Security Agreement, including but not limited to
providing Lender with a description of the items of Equipment), Lender
shall disburse to Borrower the balance of the Loan Amount on the same
date that the Interim Loans are converted into a term loan.
3. Method For Borrowing On Interim Loan. Borrower shall give Lender at
least five (5) business days written notice of a request for the disbursement of
an Interim Loan ("Request"), specifying the date on which the Interim Loan is to
be disbursed. Such Request shall be in the form attached hereto as Exhibit "C".
Such Request shall be accompanied by an original copy of the invoice or invoices
to be paid from the Interim Loan. Such Request shall constitute a representation
and warranty by the Borrower that (i) as of the date of the Request no Event of
Default or event which with the passing of time or the giving of notice or both
would constitute an Event of Default hereunder has occurred and is continuing
and (ii) in the event items of Equipment have been delivered to the Borrower,
Borrower has unconditionally accepted the Equipment from the vendor thereof.
Subject to the conditions of this Loan and Security Agreement, Lender shall
disburse the Interim Loan to the invoicing party, or if Borrower shall have paid
the amount of such invoice, Lender shall reimburse Borrower, upon receipt of
proof of payment from Borrower.
4. Cross Collateral/Cross Default. All Collateral shall secure the payment
and performance of all of Borrower's liabilities and obligations to Lender
hereunder and under any of the loan documents relating hereto including, but not
limited to, all Interim Notes and all Term Notes (the Loan and Security
Agreement, the Interim Notes, the Term Notes, the Supplemental Security
Agreement(s) and all other loan documents may be referred to herein collectively
as the "Loan Documents"). Lender's security interest in the Collateral shall not
be terminated until and unless all of Borrower's obligations to Lender under any
of the Loan Documents are fully paid and performed. The occurrence of an event
of default under any other of the Loan Documents shall be deemed to be an Event
of Default hereunder and an Event of Default hereunder shall be deemed to be an
event of default under any other of the Loan Documents.
5. Representations And Warranties. Borrower hereby represents and warrants
as follows:
(a) Power and Authorization. Borrower has the full power and (corporate)
authority to execute, deliver and perform Borrower's obligations under
the Loan Documents. The execution and delivery of the Loan Documents
have been authorized by all requisite corporate (or partnership)
action on the part of Borrower. The execution, delivery and
performance of the Loan Documents have not constituted and will not
constitute a breach, default, or violation of or under Borrower's
articles of incorporation, bylaws (partnership agreement), or any
other agreement, indenture, contract, lease, law, order, decree,
judgment, or injunction to which Borrower is a party or may be bound
and have not resulted and will not result in the creation of any lien
upon the Equipment pursuant to any agreement, indenture, lease,
contract or other instrument to which Borrower is a party, except the
lien created by this Loan and Security Agreement.
(b) Existence. If Borrower is a corporation, Borrower (i) is duly
incorporated, validly existing and in good standing under the laws of
its state of incorporation, (ii) has all corporate powers and all
governmental licenses, authorizations, consents and approvals required
to carry on its business as now conducted, and (iii) is duly qualified
to transact business as a foreign corporation in each jurisdiction
where the Equipment will be located and in the jurisdiction where its
principal place of business is located. If Borrower is a partnership,
Borrower (i) has been duly formed as a (limited or general)
partnership under the laws of the state of its organization, (ii) is
comprised of the general partner(s) listed on the Schedule of Partners
attached to this Loan and Security Agreement, and (iii) is in good
standing under the laws of the state of its formation.
<PAGE>
(c) Binding Effect. This Loan and Security Agreement constitutes the valid
and binding agreement of the Borrower; the Interim Notes and the Term
Note, when executed and delivered, will constitute the valid and
binding obligations of the Borrower; and the Loan Documents are
enforceable in accordance with their terms except as (i) the
enforceability thereof may be limited by the bankruptcy laws, and (ii)
rights of acceleration and the availability of equitable remedies may
be limited by equitable principles of general applicability.
(d) Litigation. There is no action, suit or proceeding pending against, or
to the knowledge of the Borrower, threatened against or affecting the
Borrower, before any court or arbitrator or any governmental body,
agency or official which has not been previously disclosed to the
Lender in writing and in which there is a reasonable possibility of an
adverse decision which could materially adversely affect the business,
financial condition or results of operations of the Borrower or which
would in any manner draw into question the validity of any of the Loan
Documents.
(e) Filing of Tax Returns. The Borrower has filed all tax returns required
to have been filed and has paid all taxes shown to be due and payable
on such returns, including interest and penalties, and all other taxes
which are payable by it, to the extent the same have become due and
payable. The Borrower knows of no proposed tax assessment against it
and all tax liabilities of the Borrower are adequately provided for.
(f) Title. The Borrower has or shall have at the time it executes the Term
Note good and indefeasible title to the Collateral free and clear of
all liens other than the Lender's lien.
(g) Compliance with Law. The business and operations of the Borrower have
been and are being conducted in accordance with all applicable laws,
rules and regulations, other than violations which could not (either
individually or collectively) have a material adverse effect on the
financial condition or operations of the Borrower.
(h) Full Disclosure. All documents, records, instruments, certificates,
statements (including, but not by way of limitation, financial
statements of Borrower) and information provided to Lender by Borrower
in connection with this Loan and Security Agreement are true and
accurate in all material respects and do not contain any untrue
statement, or fail to contain any statement of a material fact
necessary to make the statements contained herein or therein not
misleading. There is no fact known to the Borrower that Borrower has
not disclosed in writing which could materially and adversely affect
the financial condition or operations of Borrower.
(i) Security Interest. The security interest granted to Lender hereunder
is a valid, first priority security interest in the Collateral and has
been or promptly after the execution of the Supplemental Security
Agreement describing the Collateral will be, perfected in accordance
with the requirements of all states in which any item of the
Collateral is located.
(j) Personal Property. Under the laws of the state(s) in which the
Collateral is to be located, the Collateral is deemed to consist
solely of personal property.
(k) Pollution and Environmental Control. Borrower has obtained all
permits, licenses and other authorizations which are required under,
and is in material compliance with, all federal, state, and local laws
and regulations relating to pollution, reclamation, or protection of
the environment, including laws relating to emissions, discharges,
releases or threatened releases of pollutants, contaminants, or
hazardous or toxic materials or wastes into air, water, or land, or
otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, or handling of pollutants,
contaminants or hazardous or toxic materials or wastes. Borrower shall
maintain all such permits, licenses, and authorizations current.
6. Covenants. Borrower hereby agrees and covenants as follows:
(a) Payment. Borrower shall pay the indebtedness secured hereby as
provided herein and in the Interim Notes and Term Notes.
(b) Location of Collateral. Borrower will keep the Collateral located at
the location or locations stated on the Supplemental Security
Agreements, provided, however, that Borrower may change the location
of the collateral with Lender's prior written consent.
(c) No Liens. Except for the security interest granted hereby or under any
other agreement under which Lender is the secured party, whether as
mortgagee, beneficiary or otherwise, Borrower shall keep the
Collateral free and clear of any security interest, lien or
encumbrance of any kind and Borrower shall not sell, assign (by
operation of law or otherwise) exchange or otherwise dispose of any of
the Collateral.
(d) Insurance. Borrower shall procure and continuously maintain and pay
for (a) all risk physical damage and property insurance covering loss
or damage to the equipment for not less than the full replacement
value thereof naming Lender as loss payee and (b) bodily injury and
property damage combined single limit liability insurance, all in such
amounts and against such risks and hazards as are reasonably required
by Lender, with insurance companies and pursuant to contracts or
policies and with deductibles satisfactory to Lender. All contracts
and policies shall include provisions for the protection of Lender
notwithstanding any act or neglect of or breach or default by
Borrower, shall provide for payment of insurance proceeds to Lender,
shall provide that they may not be modified, terminated or cancelled
unless Lender is given at least thirty (30) days' advance written
notice thereof, and shall provide that the coverage is "primary
coverage" for the protection of Borrower or Lender notwithstanding any
other coverage carried by Lender protecting against similar risks.
Borrower shall promptly notify any appropriate insurer and Lender of
each and every occurrence, which may become the basis of a claim or
cause of action against the insured and provide Lender with all data
pertinent to such occurrence. Borrower shall furnish Lender with
certificates of such insurance or copies of policies upon request and
shall furnish Lender with renewal certificates not less than thirty
(30) days prior to the renewal date. Proceeds of all insurance are
payable first to Lender to the extent of its interest.
(e) Financing Statements. At the request of Lender, Borrower will join
Lender in executing one or more financing statements pursuant to the
Uniform Commercial Code and other documents deemed necessary by Lender
under applicable law to record or perfect its security interest in the
Collateral, including continuation statements, in form satisfactory to
Lender and will pay the cost of filing the same in all public offices
wherever filing is deemed by Lender to be necessary or desirable.
Borrower hereby authorizes Lender, in such jurisdictions where such
action is authorized by law, to effect any such recordation or filing
of financing statements or other documents without Borrower's
signature thereto.
(f) Change of Name or Address. Borrower will immediately notify Lender in
writing of any change in its place of business or the adoption or
change of any tradename or fictitious business name, and will upon
request of Lender, execute any additional financing statements or
other similar documents necessary to perfect or maintain its security
interest.
(g) Use of Equipment, Maintenance. Borrower will cause the Equipment to be
used in a careful and proper manner, will comply with and conform to
all governmental laws, rules and regulations relating thereto, and
will cause the Equipment to be operated in accordance with the
manufacturer's or supplier's instructions or manuals and only by
competent and duly qualified personnel. Borrower will cause the
Equipment to be kept and maintained in good repair, condition and
working order and will furnish all parts, replacements, mechanisms,
devices and servicing required therefor so that the value, condition
and operating efficiency thereof will at all times be maintained and
preserved, normal wear and tear excepted. All such repairs, parts,
mechanisms, devices and replacements shall immediately, without
further act, become part of the Equipment and subject to the security
interest created by this Loan and Security Agreement. Borrower will
not make any improvement, change, addition or alteration to the
Equipment if such improvement, change, addition or alteration will
impair the originally intended function or use of the Equipment or
impair the value of the Equipment as it existed immediately prior to
such improvement, change, addition or alteration. Any part added to
the Equipment in connection with any improvement, change, addition or
alteration shall immediately, without further act, become part of the
Equipment and subject to the security interest created by this Loan
and Security Agreement.
(h) Inspection. Lender may at any reasonable time or times inspect the
Equipment and may at any reasonable time or times inspect the books
and records of Borrower.
(i) Taxes. Borrower shall promptly pay, when due, all charges, fees,
assessments and taxes (excluding all taxes measured by Lender's
income) which may now or hereafter be imposed upon the ownership,
leasing, possession, sale or use of the Collateral.
(j) Performance by Lender. If Borrower fails to perform any agreement or
obligation contained herein, Lender may itself perform, or cause the
performance of such agreement or obligation. Borrower will pay, or
reimburse Lender, on demand, for any and all fees, including
attorneys' fees, costs and expenses of whatever kind or nature
incurred by Lender in connection with (i) the creation, preservation
and protection of Lender's security interest in the Collateral,
including, without limitation, all fees and taxes in connection with
the recording or filing of instruments and documents in public
offices, (ii) payments or discharge of any taxes or liens upon or in
respect of the Collateral, (iii) premiums for insurance with respect
to the Equipment and (iv) this Loan and Security Agreement and with
protecting, maintaining or preserving the Collateral and Lender's
interests therein, whether through judicial proceedings or otherwise,
or in connection with defending or prosecuting any actions, suits or
proceedings arising out of or related to the Loan and Security
Agreement and the Loan Documents or in connection with any debt
restructuring, loan workout negotiations or bankruptcy or insolvency
case or proceedings. All such amounts shall constitute obligations of
Borrower secured by the
<PAGE>
Collateral. In the event that Borrower fails to perform any of its
agreements contained herein, Borrower will, on demand, reimburse
Lender for all such expenditures, together with interest thereon from
the date of such expenditure until fully reimbursed at the rate of two
percent (2%) per month on the outstanding balance of such expenditures
or the highest rate permitted by law, whichever is less.
(k) Power of Attorney. Borrower hereby irrevocably appoints Lender
Borrower's attorney-in-fact, with full authority in the place and
stead of Borrower and in the name of Borrower or otherwise, from time
to time in the Lender's discretion, to take any action and to execute
any instrument which Lender may deem necessary or advisable to
accomplish the purposes of this Loan and Security Agreement,
including, without limitation: (i) to obtain compromise and adjust
insurance required to be paid to Lender; (ii) to ask, demand, collect,
sue for, recover, receive, and give acquittance and receipts for
moneys due and to become due under or in respect of any of the
Collateral; (iii) to receive, endorse, and collect any drafts or other
instruments, documents, and chattel paper in connection with clause
(i) or (ii) above; and (iv) to file any claims or take any action or
institute any proceedings which Lender may deem necessary or desirable
for the collection of any of the Collateral or otherwise to enforce
the rights of Lender with respect to any of the Collateral.
(l) No Duties. The powers conferred on Lender hereunder are solely to
protect its interest in the Collateral and shall not impose any duty
upon it to exercise any such powers. Except for the safe custody of
any Collateral in its possession and the accounting for moneys
actually received by it hereunder, Lender shall have no duty as to any
Collateral or as to the taking of any necessary steps to preserve
rights against prior parties or any other rights pertaining to any
Collateral.
(m) Financial Data. Borrower will furnish to Lender and will cause any
guarantor of Borrower's obligations to furnish to Lender on request
(i) annual balance sheet and profit and loss statements prepared in
accordance with generally accepted accounting principles and practices
consistently applied and, if Lender so requires, accompanied by the
annual audit report of an independent certified public accountant
reasonably acceptable to Lender, and (ii) all other financial
information and reports that Lender may from time to time reasonably
request, including, if Lender so requires, income tax returns of
Borrower and any guarantor of Borrower's obligations hereunder.
7. Conditions of Borrowing. Lender shall not be obligated to make any loan
hereunder unless:
(a) The Interim Notes or Term Notes evidencing such loan shall have been
duly executed and delivered to Lender;
(b) Borrower shall have executed and delivered to Lender the Supplemental
Security Agreement describing the Collateral and stating, except with
respect to progress payment fundings, the location thereof;
(c) Except with respect to progress payment fundings, Lender shall have
received evidence (as described in Section 6d hereof) that insurance
has been obtained in accordance with the provisions of this Loan and
Security Agreement;
(d) Lender shall have received any and all third party consents, waivers
or releases deemed necessary or desirable by it in connection with the
loan and the Collateral being financed, including, without limitation,
Uniform Commercial Code lien releases and the consent and waiver, in
form and substance satisfactory to Lender, of each and every realty
owner, landlord and mortgagee holding an interest in or encumbrance on
the real property where any of the Collateral is to be located;
(e) All filings, recordings and other actions deemed necessary or
desirable by Lender in order to establish, protect, preserve and
perfect its security interest in the Collateral being financed by such
loan as a valid perfected first priority security interest shall have
been duly effected, including, without limitation, the filing of
financing statements and the recordation of landlord (owners) and/or
mortgagee waivers or disclaimers, all in form and substance
satisfactory to Lender, and all fees, taxes and other charges relating
to such filings and recordings shall have been paid by Borrower.
(f) The representations and warranties contained in this Loan and Security
Agreement shall be true and correct in all respects on and as of the
date of the making of any loan hereunder with the same effect as the
date of the making of any loan hereunder with the same effect as if
made on and as of such date;
(g) In the sole judgment of Lender, there shall have been no material
adverse change in the financial condition, business or operations of
Borrower from the earliest date of any financial statement, credit
report, business report or similar document submitted to Lender for
its review;
(h) All Loan Documents shall be satisfactory to Lender's attorneys; and
(i) Lender shall have received, in form and substance satisfactory to
Lender, such other documents as Lender shall require including, but
not limited to a Request, proof of payment, vendor invoices and
certificates of authority and incumbency.
8. Default. The occurrence of any of the following events, following the
giving of any required notice and/or the expiration of any applicable period of
grace, shall constitute an event of default ("Event of Default") hereunder:
(a) Borrower's default in payment of any installment of the principal of
or interest on any Interim Note or Term Note when and after the same
shall become due and payable, whether at the due date thereof or by
acceleration or otherwise, which default shall continue unremedied for
ten (10) days; or
(b) The failure by Borrower to make payment of any other amount payable
hereunder or under any Interim Note or Term Note, and the continuance
of such failure for more than ten (10) days after written notice
thereof by Lender to Borrower; or
(c) The failure by Borrower to perform or observe any covenant, condition,
obligation or agreement to be performed or observed by it hereunder,
which failure shall continue unremedied for thirty (30) days after
written notice thereof by Lender to Borrower; or
(d) The occurrence of a default described in Section 4 hereof; or
(e) Any warranty, representation or statement made or furnished with
respect to the Borrower or the Collateral to Lender by or on behalf of
Borrower, in connection with this Loan and Security Agreement, or the
indebtedness secured hereby, shall prove to have been false in any
adverse, material respect when made or furnished; or
(f) Borrower shall become insolvent or bankrupt or make an assignment for
the benefit of creditors or consent to the appointment of a trustee or
receiver; or a trustee or a receiver shall be appointed for Borrower
or for a substantial part of its property without its consent and
shall not be dismissed for a period of sixty (60) days; or bankruptcy,
reorganization, liquidation, insolvency or dissolution proceedings
shall be instituted by or against Borrower and, if instituted against
Borrower, shall be consented to or be pending and not dismissed for a
period of sixty (60) days; or any execution or writ of process shall
be issued under any action or proceeding against Borrower in such
capacity whereby any of the Collateral may be taken or restrained;
Borrower shall cease doing business as a going concern; or, without
the prior written consent of Lender, Borrower shall sell, transfer or
dispose of all or substantially all of its assets or property; or
(g) The liquidation, merger, consolidation, reorganization, conversion to
an "S" status or dissolution, if Borrower is a corporation or
partnership, of Borrower, if in Lender's reasonable opinion, such act
shall materially and adversely affect Borrower's ability to perform
under any of the Loan Documents; or
(h) Any item of Collateral is seized or levied on under legal or
governmental process or for any reason Lender deems itself insecure.
Lender shall be entitled to deem itself insecure when some event
occurs, fails to occur or is threatened or some objective condition
exists or is threatened which significantly impairs the prospects that
any of Borrower's obligations to Lender will be paid when due, which
significantly impairs the value of the Collateral to Lender or which
significantly affects the financial or business condition of Borrower.
The occurrence of an Event of Default shall terminate any
commitment or obligation by Lender to make any of the loans
contemplated by this Loan and Security Agreement.
9. Remedies Upon Default. Upon the occurrence of an Event of Default
hereunder, Lender may, at its option, do any one or more of the following:
(a) Declare all obligations of Borrower to Lender to be immediately due
and payable, whereupon all unpaid principal of and interest on said
indebtedness and other amounts declared due and payable shall be and
become immediately due and payable;
(b) Take possession of all or any of the Collateral and exclude therefrom
Borrower and all others claiming under Borrower, and thereafter hold,
store, use, operate, manage, maintain and control, make repairs,
replacements, alterations, additions and improvements to and exercise
all rights and powers of Borrower in respect to the Collateral or any
part thereof. In the event Lender demands, or attempts to take
possession of the Collateral in the exercise of any rights under this
Loan and Security Agreement, Borrower promises and agrees to promptly
turn over and deliver complete possession thereof to Lender;
(c) Require Borrower to assemble the Collateral, or any portion thereof,
at a place designated by Lender and reasonably convenient to both
parties, and promptly to deliver such Collateral to Lender, or an
agent or representative designated by it;
(d) Sell, lease or otherwise dispose of the Collateral at public or
private sale, without having the Collateral at the place of sale, and
upon terms and in such manner as Lender may determine (and Lender may
be a purchaser at any sale); and
(e) Exercise any remedies of a secured party under the Uniform Commercial
Code as adopted in the state where the Collateral is located or any
other applicable law.
Except as to portions of the Collateral which are perishable or
threaten to decline speedily in value or are of a type customarily
sold on a recognized market, Lender shall give Borrower at least ten
(10)
<PAGE>
days' prior written notice of the time and place of any public or
private sale of the Collateral or other intended disposition thereof
to be made. Such notice may be mailed to Borrower at the address set
forth in the first paragraph of this Loan and Security Agreement.
Borrower hereby specifically agrees (to the extent that applicable law
and public policy allows it to effectively do so) that any public or
private sale held in accordance with the terms of this Loan and
Security Agreement shall, for the purpose of the Uniform Commercial
Code as adopted in the state where the Collateral is located and for
all other purposes, be deemed to have been conducted in a commercially
reasonable manner and in good faith.
The proceeds of any sale under Section 9(d) shall be applied as
follows:
(i) To the repayment of the costs and expenses of retaking,
holding and preparing for the sale and the selling of the
Collateral (including legal expenses and attorneys' fees)
and the discharge of all assessments, encumbrances, charges
or liens, if any, on the Collateral prior to the lien hereof
(except any taxes, assessments, encumbrances, charges or
liens subject to which such sale shall have been made);
(ii) To the payment of the whole amount then due and unpaid of
the indebtedness of Borrower to Lender;
(iii) To the payment of other amounts then secured hereunder; and
(iv) The surplus, if any, shall be paid to the Borrower or to
whomsoever may be lawfully entitled to receive the same.
Lender shall have the right to enforce one or more remedies
hereunder, successively or concurrently, and such action shall not
operate to estop or prevent Lender from pursuing any further remedy
which it may have, and any repossession or retaking or sale of the
Collateral pursuant to the terms hereof shall not operate to release
Borrower until full payment of any deficiency has been made in cash.
10. Limitation on Interest: It is the intent of the parties to this Loan
and Security Agreement to contract in strict compliance with applicable usury
laws from time to time in effect. In furtherance thereof, the parties stipulate
and agree that none of the terms and provisions contained in the Loan Documents
shall ever be construed to create a contract to pay for the use, forbearance or
detention of money at a rate in excess of the maximum interest rate permitted to
be charged by applicable law from time to time in effect.
11. Personal Property/Tags. No item of Equipment will be attached or
affixed to realty or any building without Lender's prior knowledge and written
consent and waiver of the landlord and the mortgagee, if any, of the real
property. If so requested by Lender, Borrower will affix tags supplied by
Lender, reflecting Lender's security interest in the Equipment.
12. Loss and Damage. Borrower shall bear the risk of damage, loss, theft,
or destruction, partial or complete of the Equipment, whether or not such loss
or damage is covered by insurance, except that while Borrower is not in default,
Lender agrees to apply toward payment of obligations of Borrower insurance
proceeds payable to Lender by reason of such damage, loss, theft, or
destruction. In the event of any damage, loss, theft, or destruction, partial or
complete, of any item of Equipment, Borrower shall promptly notify Lender in
writing and at the option of Lender (a) repair or restore the Equipment to good
condition and working order, or (b) replace the Equipment with similar equipment
in good repair, condition and working order, or (c) pay Lender, in cash, an
amount equal to the unamortized equipment cost for the item or if the Equipment
was not purchased with the loan proceeds, the pro rata portion of the
outstanding principal balance due under the Interim Note or Term Note, as the
case may be, and all other amounts relating to that item of Equipment then due
and owing hereunder, and upon payment of that amount, Lender's lien shall be
terminated with respect to that item of Equipment only, and Lender will release
its interest in that item of Equipment.
13. Assignment. Borrower may not assign or transfer any rights under this
Loan and Security Agreement or to the Collateral without Lender's prior written
consent.
14. Indemnification. Borrower shall indemnify and hold harmless Lender from
and against any and all claims, losses, liabilities, causes of action, costs and
expenses (including the fees of Lender's attorneys) ("Claims") in any way
relating to or arising out of this Loan and Security Agreement, the other Loan
Documents or the Collateral, except for any Claims resulting solely and directly
from Lender's gross negligence or willful misconduct.
15. Notices. Whenever Borrower or Lender shall desire to give or serve any
notice, demand, request or other communication with respect to this Loan and
Security Agreement, each such notice, demand, request or communication shall be
in writing and shall be effective only if the same is physically delivered or is
by certified mail, postage prepaid, return receipt requested, or by overnight
courier, postage prepaid, mailed to the parties at the addresses set forth in
the first paragraph of this Loan and Security Agreement, with a copy to Lender's
Vice President of Credit. Any party hereto may change its address for such
notices by delivering or mailing to the other parties hereto, as aforesaid, a
notice of such change.
16. No Waiver by Lender. By exercising or failing to exercise any of its
rights, options or elections hereunder, Lender shall not be deemed to have
waived any breach or default on the part of Borrower or to have released
Borrower from any of the obligations secured hereby, unless such waiver or
release is in writing and is signed by Lender. In addition, the waiver by Lender
of any breach hereof for default in payment of an indebtedness secured hereby
shall not be deemed to constitute a waiver of any succeeding breach or default.
17. Further Agreements. From time to time, Borrower will execute such
further instruments as Lender may reasonably require, in order to protect,
preserve, and maintain the security interest granted hereby.
18. Binding upon Successors. All agreements, covenants, conditions and
provisions of this Loan and Security Agreement shall apply to and bind the
successors and assigns of all parties hereto.
19. Governing Laws. This Loan and Security Agreement shall be governed by
the laws of the State of Washington.
20. Amendment. This Loan and Security Agreement can be modified or
rescinded only by a writing expressly referring to this Loan and Security
Agreement, signed by both of the parties hereto.
21. Invalidity of Provisions. Every provision of this Loan and Security
Agreement is intended to be severable. In the event that any term or provision
hereof is declared by a court to be illegal or invalid for any reason
whatsoever, such illegality or invalidity shall not affect the balance of the
terms and provisions hereof, which terms and provisions shall remain binding and
enforceable, then to the extent possible all of the other provisions shall
nonetheless remain in full force and effect.
IN WITNESS WHEREOF, Borrower and Lender have duly executed this Loan and
Security Agreement the day and year first above written.
Lender: MetLife Capital Corporation Borrower: MedicaLogic, Inc.
---------------------------- ----------------------------
By: MITCHELL J. STEVENS By: GUY E. FIELDS
-------------------------------- ----------------------------------
(Print Name): Mitchell J. Stevens (Print Name): Guy E. Fields
---------------------- ------------------------
Title: Vice President Title: Vice President of Finance
----------------------------- -------------------------------
Social Security Number: _______________
(If Borrower is an individual)
Federal Tax Identification
Number: 930890696
-----------------------------
<PAGE>
EXHIBIT "A"
No. ______________________ TERM PROMISSORY NOTE
$ ______________________ ___________________, 19 _____
FOR VALUE RECEIVED, the undersigned, _____________________
("Maker"), promises to pay to the order of MetLife Capital Corporation
("Payee"), at its office at 10900 N.E. 4th St., Suite 500, Box C - 97550,
Bellevue, Washington 98009, the principal sum of ($_____________) Dollars
together with interest on unpaid principal from the date of disbursement of
such principal amount until payment in full at a rate of _________________
percent (_______%) per annum ("Rate") computed on the basis of a 360 day year
of twelve consecutive thirty day months. Interest hereunder shall be paid on
the unpaid principal, together with principal, in ____________ (___)
installments of _______________________________ ($________) Dollars
commencing on _______________ and monthly thereafter until
__________________________ on which date the entire balance of principal and
interest unpaid shall be due and payable. It is agreed that each installment,
when paid, shall be applied by the holder hereof, first so much as shall be
required to the payment of interest accrued as specified hereto, and the
balance thereof to the repayment of the principal sum.
Except as may be otherwise expressly provided herein, this Note may not
be prepaid in whole or in part, except with the prior written consent of Payee.
Maker shall have the privilege of prepaying all (but not part) of the then
outstanding balance under this Note on ______________ or on any installment due
date thereafter, subject to giving thirty (30) days prior written notice to
Payee specifying the date of prepayment and further subject to payment of a
prepayment premium equal to the amount, if any, required to offset the adverse
impact to Payee of any decline in interest rates. The prepayment premium is
determined by (i) calculating the decrease, expressed in basis points (but not
less than zero) in the current weekly average yield for ___________ (____) year
U.S. Treasury Constant Maturities as published in Federal Reserve Statistical
Release H.15(519) (the "Index") from the weekly average yield of ____________ as
of _________________________ to the Friday (or, if Friday is not a business day,
the last business day) of the week immediately preceding the prepayment date
(ii) dividing the difference by 100, (iii) multiplying the result by the
applicable "Premium Factor" set forth below, and (iv) multiplying the product by
the principal to be prepaid. Any prepayment shall be applied first to the
prepayment premium, if any, next to accrued interest and late charges (if any),
and thereafter to the principal then outstanding. The Premium Factor shall be
the amount shown on the following chart for the month in which prepayment
occurs.
Number of Months Remaining (Years) Premium Factor
18 - 13 (2)
12 - 1 (1)
In the event the Federal Reserve Board ceases to publish Statistical Release
H.15(519), then the decrease in _____________ (____) - Year U.S. Treasury
Constant Maturities will be determined from another source designated by Payee.
If Maker shall have given to Payee notice of Maker's intention to so
prepay, Maker shall not then be entitled to withdraw such notice, and the
indebtedness proposed to be prepaid in such notice together with the aforesaid
prepayment fee, if applicable, shall be due and payable upon the date specified
for such prepayment in such notice. Upon the occurrence of an Event of Default
and acceleration of payment of indebtedness evidenced hereby during a period
open to prepayment, Maker shall pay to Payee, in addition to any and all other
sums due and payable hereunder, as liquidated damages for the loss of Payee's
investment and not as a penalty, an amount equal to the prepayment fee which
would have been payable hereunder on such date of acceleration in the event of a
voluntary prepayment. Maker and Payee agree that the foregoing amounts do not
constitute penalties but rather constitute reasonable calculations of the
investment loss that would be sustained by Payee in the event of such
prepayment.
It is specifically understood and agreed by Maker that, in the event of
a default under this Note or under any instrument securing the Note, a tender of
payment of the unpaid principal and accrued interest then outstanding shall be
deemed a prepayment, and, accordingly, said tender must include the premium
herein above required, or if said tender is made prior to the time this
privilege is operative, then said tender must include a premium equal to six (6)
months' interest at the Rate computed on the principal amount so tendered. It is
further understood and agreed by Maker that Payee shall not be obligated to
accept said tender, and said tender shall for all purposes be deemed ineffectual
and deficient, unless said tender shall include the premium herein above
required.
In the event that Payee does not receive any payment on the date due,
Maker will pay Payee a late charge of five percent (5%) of the payment
outstanding together with the payment and, provided said sum is received within
ten (10) days of the date due, Payee agrees not to demand immediate payment of
the whole sum of principal and interest as otherwise permitted herein.
If, from any circumstances whatsoever, payment of any obligation due
under this Note at the time such performance shall be due shall involve
exceeding the maximum amount currently prescribed by any applicable usury
statute or any other applicable law, then such obligation shall be reduced to
such maximum amount, so that in no event shall any payment be possible under
this Note, or under any other instrument evidencing or securing the indebtedness
evidenced hereby, that is in excess of such maximum amount.
In the event that an Event of Default shall occur under the Loan and
Security Agreement (as hereinafter defined) or any other instrument now or
hereafter securing repayment hereof, following any required notice and/or the
expiration of any applicable period of grace, then, and in such event, the
principal indebtedness evidenced hereby, and any other sums advanced hereunder,
together with all unpaid interest accrued thereon, shall, at the option of
Payee, at once become due and payable and may be collected forthwith, regardless
of the stipulated date of maturity. TIME IS OF THE ESSENCE WITH RESPECT TO THIS
NOTE. Interest shall accrue on the outstanding principal for so long as such
default continues, regardless of whether or not there has been an acceleration
of the indebtedness evidenced hereby as set forth herein, at the rate equal to
the lesser of fifteen percent (15%) per annum or the maximum rate allowable
under law. All such interest shall be paid at the time of and as a condition
precedent to the curing of any such default should Payee, at its sole option,
allow such default to be cured. In the event this Note, or any part thereof, is
collected by or through an attorney-at-law, Maker agrees to pay all costs of
collection including, but not limited to, reasonable attorneys' fees, whether or
not suit is filed.
This Note is one of the notes referred to in and is secured by the Loan
and Security Agreement dated June 5, 1998 between Maker and Payee. The terms of
the Loan and Security Agreement are incorporated herein by reference.
Maker waives any right of exemption and waives presentment, protest and
demand and notice of protest, demand and of dishonor and nonpayment of this
Note, and consents that any holder hereof shall have the right, without notice,
to grant any extension or extensions of time for payment of this Note or any
part thereof or any other indulgences or forbearances whatsoever, or may release
any of the security for this Note without in any way affecting the liability of
any other party for the payment of this Note.
<PAGE>
The due payment and performance of Maker's obligations hereunder shall
be without regard to any counterclaim, right of offset, or any other
counterclaim whatsoever which Maker may have against Payee and without regard to
any other obligations of any nature whatsoever which Payee may have to Maker,
and no such counterclaim or offset shall be asserted by Maker in any action,
suit or proceeding instituted by Payee for payment of Maker's obligations
hereunder.
This Note and the Loan and Security Agreement shall be governed by and
construed in accordance with the laws of the State of Washington.
Maker acknowledges that there is no presumption that the value of the
property securing this Note is equal to the face amount of the Note, and that a
deficiency judgment may be necessary in proceedings taken for enforcement
hereof.
No amendment to this Note shall be binding upon Payee unless it is in
writing and duly signed by Payee.
IN WITNESS WHEREOF, the Maker has caused these presents to be duly
signed the date first above written.
Borrower: ___________________________
By: ___________________________
Witness: ___________________________ (Print Name) ___________________________
Title: ___________________________
2
<PAGE>
EXHIBIT "B"
No. ______________________ INTERIM PROMISSORY NOTE NO. ONE
$ ______________________ ___________________, 19 _____
FOR VALUE RECEIVED, the undersigned, _____________________ ("Maker"), promises
to pay to the order of MetLife Capital Corporation ("Payee"), at its office at
10900 N.E. 4th St., Suite 500, ___________, Bellevue, Washington 98004, the
principal sum of ____________________________________ ($_____________) together
with interest on unpaid principal from the date of disbursement of such
principal amount until payment in full at a rate per annum equal to ________
percent (_______%) (the "Reference Rate"). The Reference Rate shall be adjusted
as of the date of any announced change thereto. Interest shall be computed on
the basis of a 360 day year and actual days elapsed. Interest shall accrue on
the unpaid principal, commencing on the date that funds are advanced to Maker by
Payee hereunder and shall be payable on the fifteenth (15) day of each month
until _______________ on which date the entire balance of principal and interest
unpaid shall be due and payable.
In the event that Payee does not receive any monthly payment on the
date due, Maker will pay Payee a late charge of five percent (5%) of the monthly
payment outstanding together with the monthly payment and, provided said sum is
received within ten (10) days of the date due. Payee agrees not to demand
immediate payment of the whole sum of principal and interest as otherwise
permitted herein.
If, from any circumstances whatsoever, payment of any obligation due
under this Note at the time such performance shall be due shall involve
exceeding the maximum amount currently prescribed by any applicable usury
statute or any other applicable law, then such obligation shall be reduced to
such maximum amount, so that in no event shall any payment be possible under
this Note, or under any other instrument evidencing or securing the indebtedness
evidenced hereby, that is in excess of such maximum amount.
In the event that an Event of Default shall occur under the Loan and
Security Agreement (as hereinafter defined) or any other instrument now or
hereafter securing repayment hereof, following any required notice and/or the
expiration of any applicable period of grace, then, and in such event, the
principal indebtedness evidenced hereby, and any other sums advanced hereunder,
together with all unpaid interest accrued thereon, shall, at the option of
Payee, at once become due and payable and may be collected forthwith, regardless
of the stipulated date of maturity. TIME IS OF THE ESSENCE WITH RESPECT TO THIS
NOTE. Interest shall accrue on the outstanding principal for so long as such
default continues, regardless of whether or not there has been an acceleration
of the indebtedness evidenced hereby as set forth herein, at the rate equal to
the lesser of fifteen percent (15%) per annum or the maximum rate allowable
under law. All such interest shall be paid at the time of and as a condition
precedent to the curing of any such default should Payee, at its sole option,
allow such default to be cured. In the event this Note, or any part thereof, is
collected by or through an attorney-at-law, Maker agrees to pay all costs of
collection including, but not limited to, reasonable attorneys' fees, whether or
not suit is filed.
This Interim Note is one of the notes referred to in and is secured by
the Loan and Security Agreement dated ___________________ between Maker and
Payee. The terms of the Loan and Security Agreement are incorporated herein by
reference.
Maker waives any right of exemption and waives presentment, protest and
demand and notice of protest, demand and of dishonor and nonpayment of this
Interim Note, and consents that any holder hereof shall have the right, without
notice, to grant any extension or extensions of time for payment of this Interim
Note or any part thereof or any other indulgences or forbearances whatsoever, or
may release any of the security for this Interim Note without in any way
affecting the liability of any other party for the payment of this Interim Note.
The due payment and performance of Maker's obligations hereunder shall
be without regard to any counterclaim, right of offset, or any other
counterclaim whatsoever which Maker may have against Payee and without regard to
any other obligations of any nature whatsoever which Payee may have to Maker,
and no such counterclaim or offset shall be asserted by Maker in any action,
suit or proceeding instituted by Payee for payment of Maker's obligations
hereunder.
This Interim Note and the Loan and Security Agreement shall be governed
by and construed in accordance with the laws of the State of Washington.
Maker acknowledges that there is no presumption that the value of the
property securing this Interim Note is equal to the face amount of the Interim
Note, and that a deficiency judgment may be necessary in proceedings taken for
enforcement hereof.
No amendment to this Interim Note shall be binding upon Payee unless it
is in writing and duly signed by Payee.
IN WITNESS WHEREOF, the Maker has caused these presents to be duly
signed the date first above written.
Maker: ___________________________
By: ___________________________
(Print Name) ___________________________
Title: ___________________________
Address: ___________________________
___________________________
<PAGE>
EXHIBIT "C"
LOAN # REQUEST FOR ADVANCE OF
NO. LOAN PROCEEDS
In accordance with the Loan and Security Agreement dated ______________, the
undersigned, as Borrower, hereby requests Lender to make a disbursement of the
Loan Amount in the amount of $___________. To the extent that any item of
Equipment has been delivered to Borrower, Borrower represents and warrants that
it has inspected and accepted such item of Equipment and that such item has been
duly assembled and is in good working order.
[ ] The undersigned further authorizes and directs Lender to disburse the
proceeds of this Loan in payment of the following invoices, copies of
which are attached herein.
or
[ ] The undersigned has previously paid the following invoices and requests
MetLife Capital Corporation to disburse the proceeds of this Loan to
the undersigned. Copies of the invoices and proof of such payment are
attached hereto:
VENDOR INVOICE NO. AMOUNT
- --------------------------------------------------------------------------------
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
TOTAL ___________________________
DATE: _____________________________
(Borrower): _____________________________
By: _____________________________
(Print Name): _____________________________
Title: _____________________________
<PAGE>
Standard Form of INDUSTRIAL/BUSINESS PARK LEASE Developed by
PORTLAND METROPOLITAN ASSOCIATION OF BUILDING OWNERS AND MANAGERS
INDUSTRIAL/BUSINESS PARK LEASE
(NNN)
1.1 BASIC LEASE TERMS.
a. REFERENCE DATE: January 15, 1997
b. TENANT: MedicaLogic, Inc., an Oregon corporation
20500 NW Evergreen Parkway
Address (Leased Premises): Hillsboro, OR 97124
Address (For Notices): MedicaLogic, Inc.
15400 NW Greenbrier Parkway, Suite 400
Beaverton, OR 97006
c. LANDLORD: Evergreen Corporate Center LLC, an Oregon
limited liability company
Address (For Notices): 111 SW Columbia Street, Suite 1380
Portland, OR 97201
d. TENANT'S USE OF PREMISES: General Office Purposes
e. PREMISES AREA: Approximately 75,010 Square Feet in
Evergreen Corporate Center RIDER NO. 1
f. RIDER NO. 2
g.
h. TERM OF LEASE: Anticipated Commencement Date: December 15, 1997
Expiration: December 14, 2007 RIDER
NO. 3
Number of Months: 120
i. BASE MONTHLY RENT:
j.
Time Period Base Monthly Rent
----------- -----------------
Commencement Date through 12th month $60,000
13th month through 24th month $67,500
25th month through 60th month $78,750
61st month through 120th month $87,000
k. ANNUAL EXPENSES:
Note: See Section 4.3 below for the method of computing Expenses. The
number set forth above for Annual Expenses is only an estimate. The
actual Annual Expenses shall be determined pursuant to Section 4.3c
below.
l. PREPAID RENT: $60,000
m. TOTAL SECURITY DEPOSIT: $87,000
n. BROKER(S): Melvin Mark Brokerage Company, representing Landlord, and
Norris, Beggs & Simpson, representing Tenant
2.1 PREMISES. Landlord leases to Tenant the premises described in Section 1.1
and in Exhibit A (the "Premises"), located in the project described on
Exhibit B (the "Project"). Landlord shall modify Tenant's percentage of the
Project as set forth in Section 1.1 if the Project size is increased or
decreased, as the case may be, through the development of additional
property or the deletion of a portion of the Project. RIDER NO. 2 Landlord
shall give Tenant notice when the Premises are ready for occupancy. RIDER
NO. 4 Within five (5) days after Tenant receives Landlord's notice that the
Premises are ready for occupancy, Landlord and Tenant shall inspect the
Premises and prepare a "punchlist" of items to be completed. The existence
of "punchlist" items shall not postpone the commencement date of this Lease
Agreement. By taking occupancy of the Premises, Tenant acknowledges that it
has examined the Premises and accepts the Premise in their then present
condition, subject only to any work which Landlord has agreed to perform as
set forth on the "punchlist." RIDER NO. 5
(1) Landlord shall deliver the Premises to Tenant clean and free of debris
on the commencement date and Landlord warrants to Tenant that the
Premises shall be in good operating condition on the commencement
date. In the event that it is determined that this warranty has been
violated, then it shall be the obligation of Landlord, after receipt
of written notice from Tenant setting
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Landlord Tenant
<PAGE>
forth with specificity the nature of the violation, to promptly, at
Landlord's sole cost, rectify such violation. Tenant's failure to give
such written notice to Landlord with sixty (60) days after the
commencement date shall be deemed that Landlord has complied with all
of Landlord's obligations hereunder.
(2) Landlord warrants to Tenant that the Premises, in the state existing
on the date that the term commences, but without regard to the use for
which Tenant will occupy the Premises, does not violate any covenants
or restrictions of record, or any applicable Laws (as hereinafter
defined) in effect on RIDER NO. 6. In the event it is determined that
this warranty has been violated, then it shall be the obligation of
the Landlord, after written notice from Tenant, to promptly, at
Landlord's sole cost and expense, rectify any such violation. In the
event Tenant does not give to Landlord written notice of the violation
of this warranty within 180 days from the date the term commences, the
correction of same shall be the obligation of the Tenant at Tenant's
sole cost. RIDER NO. 7
3.1 TERM The term of this Lease is for the period set forth in Section 1.1,
commencing on the date in Section 1.1. If Landlord, for any reason, cannot
deliver possession of the Premises to Tenant upon the scheduled
commencement date set forth in Section 1.1, this Lease shall not be void or
voidable, nor shall Landlord be liable to Tenant for any loss or damage
resulting from such delay. In that event, however, Landlord shall deliver
possession of the Premises as soon as practicable and the commencement date
shall be the date of such delivery with the term of the Lease remaining
unchanged, and all other terms and conditions of this Lease remaining in
full force and effect. However, if Landlord is delayed in delivering
possession to Tenant for any reason attributable to Tenant, this Lease
(including the obligation to pay all rents) shall commence RIDER NO. 8
4.1 RENT Base Monthly Rent. Tenant shall pay to Landlord base monthly rent in
the initial amount in Section 1.1 which shall be payable monthly in advance
on the first day of each and every calendar month ("Base Monthly Rent");
provided, however, the Base Monthly Rent for the first month of the term
shall be paid upon the Commencement Date. All charges and sums due from
Tenant to Landlord hereunder shall be deemed rent.
4.2 RENT ADJUSTMENT If Section 1.1j is applicable, Base Monthly Rent shall be
increased periodically to the amounts and at the times set forth in Section
1.1j.
4.3 EXPENSES The purpose of this Section is to ensure that Tenant bears a share
of all Expenses reasonably related to the use, maintenance, ownership,
repair or replacement, and insurance of the Project. Accordingly, beginning
on the commencement date, Tenant shall commence the payment of Expenses.
(1) Expenses Defined The term "Expenses" shall mean all costs and expenses
reasonably incurred by Landlord with respect to the ownership,
operation, maintenance, repair or replacement, and insurance of the
Project, including without limitation, the following costs:
a. All supplies, materials, labor, equipment, and utilities used in
or related to the operation and maintenance of the Project;
b. All management, janitorial, legal, accounting, insurance, and
service agreement costs related to the Project; RIDER NO. 9
c. All maintenance, replacement and repair costs relating to the
areas within or around the Project, including, without
limitation, air conditioning systems, sidewalks, landscaping,
service areas, driveways, parking areas (including resurfacing
and restriping parking areas) walkways, building exteriors
(including painting), signs and directories, repairs and
replacing roofs, walls and other structural elements of the
Premises, the Building and the Project. RIDER NO. 10
d. Amortization (along with reasonable financing charges) of capital
improvements over the useful life of such capital improvements
made to the Project which may be required by any government
authority or which will improve the operating efficiency of the
Project
e. All Real Property Taxes, which shall mean and include all taxes,
assessments (general and special) and other impositions or
charges which may be taxed, charged, levied, assessed or imposed
upon all or any portion of or in relation to the Project or any
portion thereof, any leasehold estate in the Premises or measured
by rent from the Premises, including any increase caused by the
transfer, sale or encumbrance of the Project or any portion
thereof. "Real Property Taxes" shall also include any form of
assessment, levy, penalty, charge or tax (other than estate,
inheritance, net income or franchise taxes) imposed by any
authority having a direct or indirect power to tax or charge,
including, without limitation, any city, county, state, federal
or any improvement or other district, whether such tax is (1)
determined by the area of the Project or the rent or other sums
payable under this lease; (2) upon or with respect to any legal
or equitable interest of Landlord in the Project or any part
thereof; (3) upon this transaction or any document to which
Tenant is a party creating a transfer in any interest in the
Project; (4) in lieu of or as a direct substitute in whole or in
part of or in addition to any real property taxes on the Project;
(5) based on any parking spaces or parking facilities provided in
the Project; (6) in consideration for services, such as police
protection, fire protection, street, sidewalk and roadway
maintenance, refuse removal or other services that may be
provided by any governmental or quasi-governmental agency from
time to time which were formerly provided without charge or with
less charge to property owners or occupants. "Real Property
Taxes" shall also include all assessments under recorded
covenants or master plans and/or by owner's associations. RIDER
NO. 11
RIDER NO. 12
(2) Annual Estimate of Expenses On the commencement date or as soon
thereafter as practical, Landlord shall estimate Tenant's portion of
Expenses for the remainder of the calendar year based on the Tenant's
portion of the Project Area set forth in Section 1.1. At the
commencement of each calendar year thereafter or as soon thereafter as
practical, Landlord shall estimate Tenant's portion of Expenses for
the coming year based on the Tenant's portion of the Project Area set
forth in Section 1.1.
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Landlord Tenant
<PAGE>
(3) Monthly Payment of Expenses RIDER NO. 13 As soon as practical
following each calendar year, Landlord shall prepare an accounting of
actual Expenses incurred during the prior calendar year and such
accounting (the "Notice") shall reflect Tenant's share of Expenses. If
the additional rent paid by Tenant under this Section during the
preceding calendar year was less than the actual amount of Tenant's
share of Expenses, Landlord shall so notify Tenant and Tenant shall
pay such amount to Landlord within 30 days of receipt of such Notice.
Such amount shall be deemed to have accrued during the prior calendar
year and shall be due and payable from Tenant even though the term of
this Lease has expired or this Lease has been terminated prior to
Tenant's receipt of this Notice. Tenant shall have RIDER NO. 13a
contest the amount due; failure to so notify Landlord shall represent
final determination of Tenant's share of expenses. If Tenant's
payments were greater than the actual amount, then such overpayment
shall be credited by Landlord to all present rent due under this
Section or if this Lease has terminated, said amount shall be paid
directly to Tenant. RIDER NO. 14
(4) Rent Without Offset and Late Charge All rent shall be paid by Tenant
to Landlord monthly in advance on the first day of every calendar
month, at the address shown in Section 1.1, or such other place as
Landlord may designate in writing from time to time. All rent shall be
paid without prior demand or notice and without any deduction or
offset whatsoever. All rent shall be paid in lawful currency of the
United States of America. All rent due for any partial month shall be
prorated at the rate of 1/30th of the total monthly rent per day.
Tenant acknowledges that late payment by Tenant to Landlord of any
rent or other sums due under this Lease will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of such costs
being extremely difficult and impracticable to ascertain. Such costs
include, without limitation, processing and accounting charges and
late charges that may be imposed on Landlord by the terms of any
encumbrance or note secured by the Premises. Therefore, if any rent or
other sum due from Tenant is not received RIDER NO. 15 due, Tenant
shall pay to Landlord an additional sum equal to 5% of such overdue
payment. Landlord and Tenant hereby agree that such late charge
represents a fair and reasonable estimate of the costs that Landlord
will incur by reason of any such late payment and that the late charge
is in addition to any and all remedies available to the Landlord and
that the assessment and/or collection of the late charge shall not be
deemed a waiver of any default. Additionally, all such delinquent rent
or other sums, plus this late charge, shall bear interest at the prime
rate of Key Bank of Oregon or its successor, plus 2%, on a fully
floating basis (herein the "Default Rate"), from the date first due
until the date paid in full. Any payments of any kind returned for
insufficient funds will be subject to an additional handling charge of
$25.00, and thereafter, Landlord may require Tenant to pay all future
payments of rent or other sums due by money order or cashier's check.
5.1 PREPAID RENT On the Commencement Date, Tenant shall pay to Landlord the
prepaid rent set forth in Section 1.1, and if Tenant is not in default of
any provisions of this Lease, such prepaid rent shall be applied toward the
Base Monthly Rent due for the first month of the term (or the first month
following any Base Monthly Rent abatement period, if applicable). Upon a
default by Tenant prior to such application, Landlord shall have the right,
without waiver of the default or prejudice to other remedies, to use the
prepaid rent or any of it to cure the default or to compensate Landlord for
all or any damages resulting from the default. Landlord's obligations with
respect to the prepaid rent are those of a debtor and not of a trustee, and
landlord can commingle the prepaid rent with Landlord's general funds.
Landlord shall not be required to pay Tenant interest on the prepaid rent.
Landlord shall be entitled to immediately endorse and cash Tenant's prepaid
rent; however, such endorsement and cashing shall not constitute Landlord's
acceptance of this Lease. In the event Landlord does not accept this Lease,
Landlord shall return said prepaid rent.
6.1 DEPOSIT Upon execution of this Lease, Tenant shall deposit the security
deposit set forth in Section 1.1 with Landlord as security for the
performance by Tenant of the provisions of this Lease. Upon a default by
Tenant, Landlord shall have the right, without waiver of the default or
prejudice to other remedies, to use the security deposit or any portion of
it to cure the default or to compensate Landlord for any damages resulting
from Tenant's default. Upon demand, Tenant shall immediately pay to
Landlord a sum equal to the portion of the security deposit expended or
applied by Landlord to maintain the security deposit in the amount
initially deposited with Landlord. In no event will Tenant have the right
to apply any part of the security deposit to any rent or other sums due
under this Lease. If Tenant is not in default at the expiration or
termination of this Lease, Landlord shall return the entire security
deposit to Tenant, except for the portion designated in Section 1.1, if
any, which Landlord shall retain as a non-refundable cleaning fee.
Landlord's obligations with respect to the deposit are those of a debtor
and not of a trustee, and Landlord can commingle the security deposit with
Landlord's general funds. Landlord shall not be required to pay Tenant
interest on the deposit. Landlord shall be entitled to immediately endorse
and cash Tenant's security deposit; however, such endorsement and cashing
shall not constitute Landlord's acceptance of this Lease. In the event
Landlord does not accept this Lease, Landlord shall return said security
deposit. If Landlord sells its interest in the Premises during the term
hereof and deposits with or credits to the purchaser the unapplied portion
of the security deposit, thereupon Landlord shall be discharged from any
further liability or responsibility with respect to the security deposit.
7.1 USE OF PREMISES AND PROJECT FACILITIES Tenant shall use the Premises solely
for the purposes set forth in Section 1.1 and for no other purpose without
obtaining the prior written consent of Landlord. Tenant acknowledges that
neither Landlord nor any agent of Landlord has made any representation or
warranty with respect to the Premises or with respect to the suitability of
the Premises or the Project for the conduct of Tenant's business, nor has
Landlord agreed to undertake any modification, alteration or improvement to
the Premises or the Project, except as provided in writing in this Lease.
RIDER NO. 16 Tenant acknowledges that Landlord may from time to time, at
its sole discretion, make such modifications, alterations, deletions or
improvements to the Project as Landlord may deem necessary or desirable,
without compensation or notice to Tenant. RIDER NO. 17 Tenant shall
promptly and at all times comply with all federal, state and local
statutes, laws, ordinances, orders and regulations affecting the Premises
and the Project (herein "Laws"), as well as all master plans, restrictive
covenants, and also any rules and regulations that Landlord may adopt from
time to time. RIDER NO. 18 Tenant shall not do or permit anything to be
done in or about the Premises or bring or keep anything in the Premises
that will in any way increase the premiums paid by Landlord on its
insurance related to the Project or which will in any way increase the
premiums for fire or casualty insurance carried by other tenants in the
Project. Tenant will not perform any act or carry on any practices that may
injure the Premises or the Project; that may be a nuisance or menace to
other tenants in the Project; or that shall in any way interfere with the
quiet enjoyment of such other tenants. Tenant shall not use the Premises
for sleeping, washing
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clothes, cooking or the preparation, manufacture or mixing of anything that
might emit any objectionable odor, noises, vibrations or lights onto such
other tenants. If sound insulation is required to muffle noise produced by
Tenant on the Premises, Tenant at its own cost shall provide all necessary
insulation. Tenant shall not do anything on the Premises which will
overload any existing parking or service to the Premises. Pets and/or
animals of any type shall not be kept on the Premises.
8.1 SIGNAGE All signage shall comply with rules and regulations set forth by
Landlord as may be modified from time to time. Current rules and
regulations relating to signs are described on Exhibit F. Tenant shall
place no window covering (e.g., shades, blinds, curtains, drapes, screens
or tinting materials), stickers, signs, lettering, banners or advertising
or display material on or near exterior windows or doors if such materials
are visible from the exterior of the Premises, without Landlord's prior
written consent. Similarly, Tenant may not install any alarm boxes, foil
protection tape or other security equipment on the Premises without
Landlord's prior written consent. Any material violating this provision may
be destroyed by Landlord without compensation to Tenant.
9.1 PERSONAL PROPERTY TAXES Tenant shall pay before delinquency all taxes,
assessments, license fees and public charges levied, assessed or imposed
upon its business operations as well as upon all trade fixtures, leasehold
improvements, merchandise and other personal property in or about the
Premises.
10.1 PARKING Landlord grants to Tenant and Tenant's customers, suppliers,
employees and invitees, a nonexclusive license to use the designated
parking areas in the Project for the use of motor vehicles during the term
of this Lease. RIDER NO. 19 Landlord reserves the right at any time to
grant similar nonexclusive use to other tenants, to make rules and
regulations relating to the use of such parking areas, including reasonable
restrictions on parking by tenants and employees, to designate specific
spaces for the use of any tenant and to make changes in the parking layout
from time to time. RIDER NO. 20
11.1 UTILITIES Tenant shall pay for all water, gas, heat, light, power, sewer,
electricity, telephone, garbage or other service metered, chargeable or
provided to the Premises. RIDER NO. 21
12.1 MAINTENANCE RIDER NO. 22 electrical, plumbing and sewerage systems lying
outside the Premises ; provided, however, the cost of all such maintenance
shall be considered "Expenses" for purposes of Section 4.3. Except as
provided above, Tenant shall maintain the Premises in good condition,
including, without limitation, maintaining and repairing all walls, floors,
ceilings, interior doors, exterior and interior windows and fixtures as
well as damage caused by Tenant, its agents, employees or invitees. RIDER
NO. 23 Upon expiration or termination of this Lease, Tenant shall surrender
the Premises to Landlord in the same condition as existed at the
commencement of the term, except for reasonable wear and tear or damage
caused by fire or other casualty . Nothing herein shall excuse Tenant from
financial responsibility for property damage caused by Tenant or Tenant's
agents. RIDER NO. 24
13.1 ALTERATIONS
(1) Tenant shall not make any alterations to the Premises without
Landlord's prior written consent in each instance. If Landlord gives
its consent to such alterations, Landlord may post notices in
accordance with the laws of the state in which the Premises are
located. Any alterations made shall remain on and be surrendered with
the Premises upon expiration or termination of this Lease, except that
Landlord may, within 30 days before or 30 days after the expiration or
termination of this Lease or the termination of Tenant's right of
possession, elect to require Tenant to remove any alterations which
Tenant may have made to the Premises. RIDER NO. 25 If Landlord so
elects, at its own cost Tenant shall restore the Premises to the
condition designated by Landlord in its election, before the last day
of the term or within 30 days after notice of its election is given,
whichever is later.
(2) Any request for Landlord's consent to alterations shall be made at
least thirty (30) days before any work may be commenced and shall be
accompanied by (i) detailed and costed plans and specifications for
all alterations, and (ii) Tenant's written agreement to provide, upon
completion of work, a complete set of as-built plans and
specifications. Landlord may withhold consent, in its reasonable
discretion and may issue such consent subject to conditions. All
alterations shall be constructed only after obtaining Landlord's prior
written consent and only in conformity with all Laws. The issuance of
Landlord's consent shall not be a waiver of Tenant's obligation to
comply with all Laws, nor Landlord's opinion that such alterations are
in compliance with all Laws.
(3) Should Landlord consent in writing to Tenant's alteration of the
Premises, Tenant shall contract with a contractor approved by Landlord
for the construction of such alterations, shall secure all appropriate
governmental approvals and permits, and shall complete such
alterations with due diligence in compliance with the plans and
specifications approved by Landlord. All such construction shall be
performed in a manner which will not interfere with the quiet
enjoyment of other tenants of the Project.
(4) Tenant shall pay all costs for construction of alterations and shall
keep the Premises and the Project free and clear of all liens which
may result from work by third parties authorized by Tenant. If any
such lien is filed, the same shall be an event of default hereunder if
Tenant fails to remove such lien within ten (10) days of the filing
thereof.
14.1 RELEASE AND INDEMNITY As material consideration to Landlord, Tenant agrees
that Landlord and Landlord's partners, shareholders, officers, directors,
employees and agents (collectively, the "Protected Parties") shall not be
liable to Tenant for any damage to Tenant or Tenant's property from any
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cause, RIDER NO. 26 and Tenant waives all claims against Landlord for
damage to persons or property arising for any reason, except for damage
resulting directly from Landlord's breach of its express obligations under
this Lease which Landlord has not cured within a reasonable time after
receipt of written notice of such breach from Tenant. Tenant shall defend,
indemnify and hold Landlord and all other Protected Parties harmless from
all claims, losses, causes of action, costs and expenses, and damages
arising out of (a) any damage to any person or property occurring in, on or
about the Premises, (b) use by Tenant or its agents of the Premises and/or
the Project or other properties of Landlord, and/or (c) Tenant's breach or
violation of any term of this Lease. RIDER NO. 27
15.1 INSURANCE Tenant, at its cost, shall maintain public liability and property
damage insurance and products liability insurance with a single combined
liability limit of $1,000,000, insuring against all liability of Tenant and
its authorized representatives arising out of or in connection with
Tenant's use or occupancy of the Premises. Public liability insurance,
products liability insurance and property damage insurance shall insure
performance by Tenant of the indemnity provisions of Section 14.1. Landlord
shall be named as an additional insured and the policy shall contain
cross-liability endorsements. On all its personal property, at its cost,
Tenant shall maintain a policy of standard fire and extended coverage
insurance with vandalism and malicious mischief endorsements and "all risk"
coverage on all Tenant's improvements and alterations in or about the
Premises, to the extent of at least 100% of their full replacement value.
The proceeds from any such policy shall be used by Tenant for the
replacement of personal property and the restoration of Tenant's
improvements or alterations. All insurance required to be provided by
Tenant under this Lease shall release Landlord and the other Protected
Parties from any claims for damage to any person or the Premises and the
Project, and to Tenant's fixtures, personal property, improvements and
alterations in or on the Premises or the Project, caused by or resulting
from risks insured against under any insurance policy carried by Tenant and
in force at the time of such damage. All insurance required to be provided
by Tenant under this Lease: (a) shall be issued by insurance companies
authorized to do business in the state in which the Premises are located;
(b) be reasonably acceptable to Landlord; (c) shall be issued as a primary
policy; and (d) shall contain an endorsement requiring at least 30 days
prior written notice of cancellation to Landlord and Landlord's lender,
before cancellation or change in coverage, scope or amount of any policy.
Tenant shall deliver a certificate or copy of such policy together with
evidence of payment of all current premiums to Landlord within 10 days of
execution of this Lease. Tenant's failure to provide evidence of such
coverage to Landlord may, in Landlord's sole discretion, constitute a
default under this Lease. RIDER NO. 28
16.1 DESTRUCTION If during the term, the Premises or Project is more than 25%
destroyed (based upon replacement cost) from any cause, or rendered
inaccessible or unusable from any cause, Landlord may, in its sole
discretion, terminate this Lease by delivery of notice to Tenant within 30
days of such event without compensation to Tenant. If Landlord does not
elect to terminate this Lease, and if, in Landlord's estimation, the
Premises cannot be restored within 270 days following such destruction,
RIDER NO. 29 then Landlord shall commence to restore the Premises in
compliance with then existing laws and shall complete such restoration with
due diligence. In such event, this Lease shall remain in full force and
effect, but there shall be an abatement of Base Monthly Rent between the
date of destruction and the date of completion of restoration, based on the
extent to which destruction interferes with Tenant's use of the Premises;
provided, there shall be no abatement if such damage is the result of
Tenant's negligence or wrongdoing. Tenant shall not be entitled to any
damages or compensation for loss of use or any inconvenience occasioned by
damage or any repair or restoration.
17.1 CONDEMNATION
(1) Definitions. The following definitions shall apply: (1) "Condemnation"
means (a) the exercise of any governmental power of eminent domain,
whether by legal proceedings or otherwise by condemnor and (b) the
voluntary sale or transfer by landlord to any condemnor either under
threat of condemnation or while legal proceedings for condemnation are
proceeding; (2) "Date of Taking" means the date the condemnor has the
right to possession of the property being condemned; (3) "Award" means
all compensation, sums or anything of value awarded, paid or received
on a total or partial condemnation; and (4) "Condemnor" means any
public or quasi-public authority, or private corporation or
individual, having a power of condemnation.
(2) Obligations to Be Governed by Lease. If during the term of the Lease
there is any taking of all or any part of the Premises or the Project,
the rights and obligations of the parties shall be determined pursuant
to this Lease.
(3) Total or Partial Taking. If the Premises are totally taken by
condemnation, this Lease shall terminate on the Date of Taking. If any
portion of the Premises is taken by Condemnation, this Lease shall
terminate as to the part so taken as of the Date of Taking, but shall
in all other respects remain in effect, except that Tenant can elect
to terminate this Lease if the remaining portion of the Premises is
rendered unsuitable for Tenant's continued use of the Premises. If
Tenant elects to terminate this Lease, Tenant must exercise its right
to terminate by giving notice to Landlord within 30 days after the
nature and extent of the Condemnation have been finally determined. If
Tenant elects to terminate this Lease, Tenant shall also notify
Landlord of the date of termination, which date shall not be earlier
than 30 days nor later than 90 days after Tenant has notified Landlord
of its election to terminate; except that this Lease shall terminate
on the Date of Taking if the Date of Taking falls on a date before the
date of termination as designated by Tenant. If any portion of the
Premises is taken by condemnation and this Lease remains in full force
and effect, on the Date of Taking the Base Monthly Rent shall be
reduced by an amount in the same ratio as the total number of square
feet in the Premises taken bears to the total number of square feet in
the Premises immediately before the Date of Taking.
(4) Landlord's Election. Notwithstanding anything herein to the contrary,
if the Project or any portion thereof is taken by Condemnation and the
portion taken does not, in Landlord's sole judgment, feasiblely permit
the continuation of the operation of the Project by Landlord, then
landlord shall have the right to terminate this Lease by written
notice given within thirty (30) days following the Date of Taking.
RIDER NO. 30
(5) Award. Tenant shall have no right or claim to all or any portion of
the Award; provided this shall not limit Tenant's right to seek and to
receive compensation for relocation expenses or the value of its
personal property taken, so long as receipt of such compensation does
not decrease the Award otherwise payable to Landlord.
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18.1 ASSIGNMENT OR SUBLEASE Tenant shall not assign or encumber its interest in
this Lease or the Premises or sublease all or any part of the Premises or
allow any other person or entity (except Tenant's authorized
representatives, employees, invitees, or guests) to occupy or use all or
any part of the Premises without first obtaining Landlord's consent. RIDER
NO. 31 Any assignment, encumbrance or sublease without Landlord's written
consent shall be voidable and at Landlord's election, shall constitute a
default. If Tenant is a partnership, a withdrawal or change, voluntary,
involuntary or by operation of law of any partner, or the dissolution of
the partnership, shall be deemed a voluntary assignment. If Tenant consists
of more than one person, a purported assignment, voluntary or involuntary
or by operation of law from one person to the other or to a third party
shall be deemed a voluntary assignment. If Tenant is a corporation, any
dissolution, merger, consolidation or other reorganization of Tenant, or
sale or other transfer of a controlling percentage of the capital stock of
Tenant, or the sale of at least 25% of the value of the assets of Tenant
shall be deemed a voluntary assignment. The phrase "controlling percentage"
means ownership of and right to vote stock possessing at least 50% of the
total combined voting power of all classes of Tenant's capital stock
issued, outstanding and entitled to vote for election of directors. RIDER
NO. 32 The preceding two sentences shall not apply to corporations the
stock of which is traded through an exchange or over the counter. RIDER NO.
33 All rent received by Tenant from its subtenants in excess of the rent
payable by Tenant to Landlord under this Lease (allocated on a square
footage basis in cases of partial subleasing) shall be paid to Landlord,
and any sums to be paid by an assignee to Tenant in consideration of the
assignment of this Lease shall be paid to Landlord. If Tenant requests
Landlord to consent to a proposed assignment or subletting, Tenant shall
pay to Landlord, whether or not consent is ultimately given, $100 or
Landlord's reasonable attorneys' fees incurred in connection with such
request, whichever is greater. No interest of Tenant in this Lease shall be
assignable by involuntary assignment through operation of law (including
without limitation the transfer of this Lease by testacy or intestacy).
Each of the following acts shall be considered an involuntary assignment:
(a) if Tenant is or becomes bankrupt or insolvent, makes an assignment for
the benefit of creditors, or institutes proceedings under the Bankruptcy
Act in which Tenant is the bankrupt; or if Tenant is a partnership or
consists of more than one person or entity, if any partner of the
partnership or other person or entity is or becomes bankrupt or insolvent,
or makes an assignment for the benefit of creditors; or (b) if a writ of
attachment or execution is levied on this Lease; or (c) if in any
proceeding or action to which Tenant is a party, a receiver is appointed
with authority to take possession of the Premises. An involuntary
assignment shall constitute a default by Tenant and landlord shall have the
right to elect to terminate this Lease, in which case this Lease shall not
be treated as an asset of Tenant.
19.1 DEFAULT The occurrence of any of the following shall constitute a default
by Tenant: (a) A failure to pay rent or other charge RIDER NO. 34
20.1 LANDLORD'S REMEDIES
(1) Landlord shall have the following remedies if Tenant is in default.
These remedies are not exclusive; they are cumulative and in addition
to any remedies now or later allowed by law. Landlord may terminate
this Lease and/or Tenant's right to possession of the Premises at any
time. No act by Landlord other than giving notice to Tenant shall
terminate this Lease. Acts of maintenance, efforts to relet the
Premises, or the appointment of a receiver on Landlord's initiative to
protect Landlord's interest under this lease shall not constitute a
termination of this Lease. Upon termination of this Lease or of
Tenant's right to possession, Landlord has the right to recover from
Tenant: (1) The worth of the unpaid rent that had been earned at the
time of such termination; (2) The worth of the amount of the unpaid
rent that would have been earned after the date of such termination;
and (3) Any other amount, including court, attorney and collection
costs, necessary to compensate Landlord for all detriment proximately
caused by Tenant's default. "The Worth," as used for Item 20.1(1) in
this Paragraph is to be computed by allowing interest at the Default
Rate. "The Worth" as used for Item 20.1(2) in this Paragraph is to be
computed by discounting the amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of termination of Tenant's
right of possession. RIDER NO. 35
(2) All covenants and assignments to be performed by Tenant under any of
the terms of this Lease shall be performed by Tenant at Tenant's sole
cost and expense and without any abatement of rent. If Tenant shall
fail to pay any sum of money owed to any party other than Landlord,
for which it is liable hereunder, or if Tenant shall fail to perform
any other act on its part to be performed hereunder, and such failure
shall continue for RIDER NO. 36 Landlord may, without waiving such
default or any other right or remedy, but shall not be obligated to,
make any such payment or perform any such other act to be made or
performed by Tenant. All sums so paid by Landlord and all necessary
incidental costs, together with interest thereon at the Default Rate
from the date of expenditure by Landlord, shall be payable to Landlord
on demand.
21.1 ENTRY ON PREMISES Landlord and its authorized representatives shall have
the right to enter the Premises at all reasonable times RIDER NO. 37 for
any of the following purposes: (a) To determine whether the Premises are in
good condition and whether Tenant is complying with its obligations under
this Lease; (b) To do any necessary maintenance and to make any restoration
to the Premises or the Project that Landlord has the right or obligation to
perform; (c) To post "for sale" signs at any time during the term, to post
"for rent" or "for lease" signs during the last 90 days of the term, or
during any period while Tenant is in default; (d) To show the Premises to
prospective brokers, agents, buyers, tenants or persons interested in
leasing or purchasing the Premises, at any time during the term; or (e) To
repair, maintain or improve the Project and to erect scaffolding and
protective barricades around and about the Premises but not so as to
prevent entry to the Premises and to do any other act or thing necessary
for the safety or preservation of the Premises or the Project. Landlord
shall not be liable in any manner for any inconvenience, disturbance, loss
of business, nuisance or other damage arising out of Landlord's entry onto
the Premises as provided in this Section. Landlord shall conduct its
activities on the Premises as provided herein in a manner that will cause
the least inconvenience, annoyance or disturbance to Tenant. For each of
these purposes, Landlord shall at all times have and retain a key with
which to unlock all the doors in, upon and about the Premises, excluding
Tenant's vaults and safes. Tenant shall not alter any lock or install a new
or additional lock or bolt on any door of the Premises without prior
written consent of Landlord. If Landlord gives its consent, Tenant shall
furnish Landlord with a key for any such lock.
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22.1 SUBORDINATION Without the necessity of any additional document being
executed by Tenant for the purpose of effecting a subordination, and at the
election of Landlord or any mortgagee or any beneficiary of a Deed of Trust
with a lien on the Project or any ground lessor with respect to the
Project, this Lease shall be subject and subordinate at all time to (a) all
ground leases or underlying leases which may now exist or hereafter be
executed affecting the Project, and (b) the lien of any mortgage or deed of
trust which may now exist or hereafter be executed in any amount for which
the Project, ground leases or underlying leases, or Landlord's interest or
estate in any of said items is specified as security. In the event that any
ground lease or underlying lease terminates for any reason or any mortgage
or Deed of Trust is foreclosed or a conveyance in lieu of foreclosure is
made for any reason, Tenant shall, notwithstanding any subordination,
attorn to and become the Tenant of the successor in interest to Landlord,
at the option of such successor in interest. Tenant covenants and agrees to
execute and deliver, upon demand by Landlord and in the form requested by
Landlord any additional documents evidencing the priority or subordination
of this Lease with respect to any such ground lease or underlying leases or
the lien of any such mortgage or Deed of Trust. Tenant hereby irrevocably
appoints Landlord as attorney-in-fact of Tenant to execute, deliver and
record any such document in the name and on behalf of Tenant. RIDER NO. 38
Tenant, within ten days from notice from Landlord, shall execute and
deliver to Landlord, in recordable form, certificates stating that this
Lease is not in default, is unmodified and in full force and effect, or in
full force and effect as modified, and stating the modifications. This
certificate should also state the amount of current monthly rent, the dates
to which rent has been paid in advance, the amount of any security deposit
and prepaid rent, and such other matters as Landlord may request. In
addition, in connection with any sale or financing involving the Premises,
Tenant shall deliver to Landlord, within twenty (20) days of request by
Landlord, a current audited financial statement of Tenant and of each
guarantor. RIDER NO. 39
23.1 NOTICE Any notice, demand, request, consent, approval or communication
desired by either party or required to be given, shall be in writing and
either served personally or sent by prepaid certified first class mail,
addressed as set forth in Section 1.1. RIDER NO. 40 Either party may change
its address by notification to the other party. Notice shall be deemed to
be communicated 48 hours from the time of such mailing, or upon the time of
service as provided in this Section.
24.1 WAIVER No delay or omission in the exercise of any right or remedy by
Landlord shall impair such right or remedy or be construed as a waiver. No
act or conduct of Landlord, including without limitation, acceptance of the
keys to the Premises, shall constitute an acceptance of the surrender of
the Premises by Tenant before the expiration of the term. Only written
notice from Landlord to Tenant shall constitute acceptance of the surrender
of the Premises and accomplish termination of the Lease. Landlord's consent
to or approval of any act by Tenant requiring Landlord's consent or
approval shall not be deemed to waive or render unnecessary Landlord's
consent to or approval of any subsequent act by Tenant. Any waiver by
Landlord of any default must be in writing and shall not be a waiver of any
other default concerning the same or any other provision of the Lease.
25.1 SURRENDER OF PREMISES; HOLDING OVER Upon expiration of the term or the
termination of this Lease or of Tenant's right of possession, Tenant shall
surrender to Landlord the Premises and all tenant improvements and
alterations (except alterations which Tenant has the right or obligation to
remove) in good condition, except for ordinary wear and tear. RIDER NO. 41
Tenant shall remove all personal property including, without imitation, all
wallpaper, paneling and other decorative improvements or fixtures and shall
perform all restoration made necessary by the removal of any alterations or
Tenant's personal property before the expiration of the term, including for
example, restoring all wall surfaces to their condition prior to the
commencement of this Lease. RIDER NO. 42 Landlord can elect to retain or
dispose of in any manner Tenant's personal property not removed from the
Premises by Tenant prior to the expiration of the term. Tenant waives all
claims against Landlord for any damage to Tenant resulting from Landlord's
retention or disposition of Tenant's personal property. Tenant shall be
liable to Landlord for Landlord's costs for storage, removal or disposal of
Tenant's personal property. If Tenant fails to surrender the Premises upon
the expiration of the term, or upon the termination of this Lease or of
Tenant's right of possession, Tenant shall defend, indemnify and hold
Landlord harmless from all resulting loss or liability, including without
limitation, any claim made by any succeeding tenant founded on or resulting
from such failure.
If Tenant, with Landlord's consent, remains in possession of the Premises
after expiration of this Lease, such possession by Tenant shall be deemed
to be a month-to-month tenancy terminable on written 30-day notice at any
time, by either party. All provisions of this Lease, except those
pertaining to term and rent, shall apply to the month-to-month tenancy.
Tenant shall pay Base Monthly Rent in an amount equal to 150% of the Base
Monthly Rent for the last full calendar month during the regular term plus
100% of said last month's estimate of Tenant's share of Expenses pursuant
to Section 4.3(3).
26.1 LIMITATION OF LIABILITY In consideration of the benefits accruing
hereunder, Tenant agrees that, regarding any claim against Landlord and/or
any other Protected Party, including in the event of any actual or alleged
failure, breach or default by Landlord:
a. The sole and exclusive remedy of Tenant shall be against the interest
of Landlord in the Project, and neither Landlord nor any other
Protected Party shall have any other liability whatsoever.
b. If Landlord is a partnership, the following provisions of this item b.
shall also apply: (i) No partner of Landlord shall be sued or named as
a party in any suit or action; (ii) No service of process shall be
made against any partner of Landlord (except as may be necessary to
secure jurisdiction of the partnership); (iii) No partner of Landlord
shall be required to answer or otherwise plead to any service or
process; (iv) No judgement may be taken against any partner of
Landlord; (v) Any judgment taken against any partner of Landlord may
be vacated and set aside at any time without hearing; and (vi) No writ
of execution will ever be levied against the assets of any partner of
Landlord.
c. These covenants and agreements contained in this Section are
enforceable both by Landlord and also by any other Protected Party.
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d. Tenant agrees that each of the foregoing provisions shall be
applicable to any and all liabilities, claims and causes of action
whatsoever, including those based on any provision of this Lease, any
implied covenant, and/or any statute or common law principle.
27.1 MISCELLANEOUS PROVISIONS
(1) Time of Essence. Time is of the essence of each provision of this
Lease.
(2) Successor. This Lease shall be binding on and inure to the benefit of
the parties and their successors, except as provided in Section 18.1
herein.
(3) Landlord's Consent. Any consent required by Landlord under this Lease
must be granted in writing. No such consent shall be unreasonably
withheld, but any consent may be issued subject to reasonable
conditions. As a condition to any consent, Landlord may require that
any other party or parties with a right of consent issue such consent
on terms acceptable to Landlord.
(4) Commissions. Each party represents that it has not had dealings with
any real estate broker, finder or other person with respect to this
Lease in any manner, except for the broker identified in Section 1.1,
who shall be compensated by Landlord.
(5) Other Charges. If Landlord becomes a party to any litigation
concerning this lease, the premises or the project, by reason of any
act or omission of Tenant or any agent, guest or invitee of Tenant,
Tenant shall be liable to Landlord for all attorneys fees and costs
incurred by Landlord in connection with such litigation, including any
appeal or review.
In the event of litigation RIDER NO. 43 between Tenant and Landlord
and/or any other Protected Party, the prevailing party shall be
entitled to recover from the losing party all costs and attorneys fees
incurred both at and in preparation for trial and any appeal or
review. If Landlord employs a collection agency to recover delinquent
charges, Tenant agrees to pay all collection agency and attorneys'
fees charged to Landlord in addition to rent, late charges, interest
and other sums payable under this Lease. Tenant shall pay a charge of
$75 to Landlord for preparation of a demand for delinquent rent.
(6) Landlord's Successors. In the event of a sale or conveyance by
Landlord of the Project or a portion thereof including the Premises,
or of Landlord's interest in the foregoing, the same shall operate to
release Landlord from any liability under this Lease, and in such
event Landlord's success in interest shall be solely responsible for
all obligations of Landlord under this Lease.
(7) Interpretation. This Lease shall be construed and interpreted in
accordance with the laws of the state in which the Premises are
located. This Lease constitutes the entire agreement between the
parties with respect to the Premises and the Project, except for such
guarantees or modifications as may be executed in writing by the
parties from time to time. When required by the content of this Lease,
the singular shall include the plural, and the masculine shall include
the feminine and/or neuter. "Party" shall mean Landlord or Tenant. If
more than one person or entity constitutes Tenant, the obligations
imposed on Tenant shall be joint and several. The enforceability,
invalidity or illegality of any provision shall not render the other
provisions unenforceable, invalid or illegal.
(8) Third Parties. The Protected Parties shall have the right to enforce
the provisions of this Lease which reference them. Except for the
foregoing, there are no third parties benefitted hereby, this Lease
being intended solely for the benefit of Landlord and Tenant.
Notwithstanding the foregoing, the beneficiary under a trust deed, or
a mortgagee, holding a security interest in the Project shall be a
third party beneficiary of the Tenant's obligations set forth in
Sections 30.1 and 31.1 hereof and shall have the right to enforce such
provisions.
(9) Survival. The release and indemnity covenants of Tenant, the right of
Landlord to enforce its remedies hereunder, the attorneys fees
provisions hereof, the provisions of Section 26.1 hereof, as well as
all provisions of this Lease which contemplate performance after the
expiration or termination hereof or the termination of Tenant's right
to possession hereunder, shall survive any such expiration or
termination.
28.1 EMISSIONS Tenant shall not:
a. Discharge, emit or permit to be discharged or emitted, any liquid,
solid or gaseous matter, or any combination thereof, into the
atmosphere, the ground or any body of water, which matter, as
reasonably determined by Lessor or any governmental entity does, or
may, pollute or contaminate the same, or is, or may become,
radioactive or does, or may, adversely affect the (1) health or safety
of persons, wherever located, whether on the Premises or anywhere
else, (2) condition, use or enjoyment of the Premises or any other
real or personal property, whether on the Premises or anywhere else,
or (3) Premises or any of the improvements thereto, or thereon
including buildings, foundations, pipes, utility lines, landscaping or
parking areas;
b. Produce, or permit to be produced, any intense glare, light or heat
except within an enclosed or screened area and then only in such
manner that the glare, light or heat shall not be discernible from
outside the Premises;
c. Create, or permit to be created, any sound pressure level which will
interfere with the quiet enjoyment of any real property outside the
Premises; or which will create a nuisance or violate any Law, rule,
regulation or requirement;
d. Create, or permit to be created, any ground vibration that is
discernible outside the Premises;
e. Transmit, receive or permit to be transmitted or received, any
electromagnetic, microwave or other radiation which is harmful or
hazardous to any person or property in, on or about the Premises, or
anywhere else.
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28.2 STORAGE AND USE
(1) Storage. Subject to the uses permitted and prohibited to Tenant under
this lease, Tenant shall store in appropriate leak proof containers
all solid, liquid, or gaseous matter, or any combination thereof,
which matter, if discharged or emitted into the atmosphere, the ground
or any body of water, does or may (1) pollute or contaminate the same,
or (2) adversely affect the (i) health or safety of persons, whether
on the Premises or anywhere else, (ii) condition, use or enjoyment of
the Premises or any real or personal property, whether on the Premises
or anywhere else, or (iii) Premises or any of the improvements thereto
or thereon.
(2) Use. In addition, without Landlord's prior written consent, Tenant
shall not use, store or permit to remain on the Premises any solid,
liquid or gaseous matter which is, or may become, radioactive. If
Landlord does give its consent, Tenant shall store the materials in
such a manner that no radioactivity will be detectable outside a
designated storage area and Tenant shall use the materials in such a
manner that (1) no real or personal property outside the designated
storage area shall become contaminated thereby or (2) there are and
shall be no adverse effects on the (i) health or safety of persons,
whether on the Premises or anywhere else, (ii) condition, use or
enjoyment of the Premises or any real or personal property thereon or
therein, or (iii) Premises or any of the improvements thereto or
thereon.
28.3 DISPOSAL OF WASTE
(1) Refuse Disposal. Tenant shall not keep an trash, garbage, waste or
other refuse on the Premises except in sanitary containers and shall
regularly and frequently remove same from the Premises. Tenant shall
keep all incinerators, containers or other equipment used for the
storage or disposal of such materials in a clean and sanitary
condition.
(2) Sewage Disposal. Tenant shall properly dispose of all sanitary sewage
and shall not use the sewage system (1) for the disposal of anything
except sanitary sewage or (2) in excess of the lesser of the amount
(a) reasonably contemplated by the uses permitted under this Lease or
(b) permitted by any governmental entity. Tenant shall keep the sewage
disposal system free of all obstructions and in good operating
condition.
(3) Disposal of Other Waste. Tenant shall properly dispose of all other
waste or other matter delivered to, stored upon, located upon or
within, used on, or removed from, the premises in such a manner that
it does not, and will not, adversely affect the (1) health or safety
of persons, wherever located, whether on the Premises or elsewhere,
(2) condition, use or enjoyment of the Premises or any other real or
personal property, wherever located, whether on the Premises or
anywhere else, or (3) Premises or any of the improvements thereto or
thereon including buildings, foundations, pipes, utility lines,
landscaping or parking areas.
29.1 COMPLIANCE WITH LAW Notwithstanding any other provision in the Lease to the
contrary, Tenant shall comply with all Laws in complying with its
obligations under this Lease, and in particular, Laws relating to the
storage, use and disposal of hazardous or toxic matter.
30.1 INDEMNIFICATION Tenant shall defend, indemnify and hold Landlord, the other
Protected Parties, the Project and the beneficiary under a trust deed, or
mortgagee, holding a security interest in the Project harmless from any
loss, claim, liability or expense, including, without limitation, attorneys
fees and costs, at trial and/or on appeal and review, arising out of or in
connection with its failure to observe or comply with the provisions of
this Section. This indemnity shall survive the expiration or earlier
termination of the term of the Lease or the termination of Tenant's right
to possession and be fully enforceable thereafter.
31.1 ADDITIONAL PROVISIONS The following covenants and agreements shall in no
way diminish or limit the foregoing provisions of this Section. No use may
be made of, on or from the Premises relating to the handling, storage,
disposal, transportation or discharge of Hazardous Substances (as defined
below). All of such use which does occur shall be in strict conformance
with all Laws. Tenant shall give prior written notice to Landlord of any
use, whether incidental or otherwise, of Hazardous Substances on the
Premises, or of any notice of any violation of any Law with respect to such
use. Landlord and any ground lessor or master lessor of the Premises and/or
the Project shall have the right to request and to receive information with
respect to use of Hazardous Substances on the Premises in writing.
In addition to the indemnity obligations contained elsewhere herein, Tenant
shall indemnify, defend and hold harmless Landlord, the other Protected
Parties, the Premises, the Project, and the beneficiary under a trust deed,
or a mortgagee, holding a security interest in the Project, from and
against all claims, losses, damages, costs, response costs and expenses,
liabilities, and other expenses caused by, arising out of, or in connection
with, the generation, release, handling, storage, discharge,
transportation, deposit or disposal in, on, under or about he Premises by
Tenant or any of Tenant's Agents of the following (collectively referred to
as "Hazardous Substances"): hazardous materials, hazardous substances,
toxic wastes, toxic substances, pollutants, petroleum products, underground
tanks, oils, pollution, asbestos, PCB's, materials, or contaminants, as
those terms are commonly used or as defined by federal, state and/or local
law or regulation related to protection of health or the environment,
including but not limited to, the Resource Conservation and Recovery Act
(RCRA) (42 U.S.C. ss. 6901 et seq.); the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA) (42 U.S.C.ss. 9601, et
seq.); the Toxic Substances Control Act (15 U.S.C. ss. 2601, et seq.); the
Clean Water Act (33 U.S.C. ss. 1251, et seq.); the Clean Air Act (42 U.S.C.
ss. 7401, et seq.); and ORS Chapters 453, 465 and 466 as any of the same
may be amended from time to time, and/or by any rules and regulations
promulgated thereunder. Such damages, costs, liabilities, and expenses
shall include such as are claimed by any regulating and/or administering
ground lessor or master lessor of the Project, the holder of any Mortgage
or Deed of Trust on the Project, and/or any successor of the Landlord named
herein. This indemnity shall include (a) claims of third parties, including
governmental agencies, for damages, fines, penalties, response costs,
monitoring costs, injunctive or other relief; (b) the costs, expenses or
losses resulting from any injunctive relief, including preliminary or
temporary injunctive relief; (c) the expenses, including fees of attorneys
and experts, of reporting the existence of Hazardous Substances to an
agency of the State of Oregon or of the United States as required by
applicable laws and regulations; (d) any and all expenses or obligations,
including attorney's and paralegal fees, incurred
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<PAGE>
at, before and after any trial or appeal therefrom or review thereof, or an
administrative proceeding or appeal therefrom or review thereof, whether or
not taxable as costs, including, without limitation, attorney's fees,
paralegal fees, witness fees (expert and otherwise), deposition costs,
photocopying and telephone charges and other expenses related to the
foregoing, all of which shall be paid by Tenant to Landlord when such
expenses are accrued. This indemnity shall survive the expiration or
earlier termination of the term of the Lease or the termination of Tenant's
right to possession and be fully enforceable thereafter. RIDER NO. 44
32.1 INFORMATION Tenant shall provide Landlord with any and all information
regarding Hazardous Substances in the Premises, including contemporaneous
copies of all filings and reports to governmental entities, and any other
information requested by Landlord. In the event of any accident, spill or
other incident involving Hazardous Substances, Tenant shall immediately
report the same to Landlord and supply Landlord with all information and
reports with respect to the same. All information described herein shall be
provided to Landlord regardless of any claim by Tenant that it is
confidential or privileged.
33.1
RIDER NO. 45
Tenant: MEDICALOGIC, INC., an Oregon corporation
MARK LEAVITT GUY E. FIELD
--------------------------------------------------
By: Mark K. Leavitt Guy E. Field
By: President Controller
Landlord: EVERGREEN CORPORATE CENTER LLC, an Oregon limited
liability company
By: Marzer Venture, an Oregon general partnership
By: MELVIN MARK
---------------------------------------------------
Its: Partner
--------------------------------------------------
By: Schnitzer Investment Corp., an Oregon corporation
By: KEN NOVACK
---------------------------------------------------
Its:
--------------------------------------------------
Exhibits
- --------
A - Premises A-1 Measurement Standards for each floor
B - Project
C - Landlord's Work Plans
D - Work Agreement
E - Rules and Regulations
F - Sign Regulations
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Landlord Tenant
<PAGE>
[MAP SHOWING LOCATIONS OF BUILDINGS 1, 2, 3, 4 and 5, STREETS AND TREES OMITTED]
The location, size, and number of
improvements except for Building 1 EXHIBIT A
and Building 2 are conceptual at
this time and are subject to change. Premises are cross-hatched
Site Plan
Evergreen Corporate Center
at Tanasbourne Commerce Center
Melvin Mark Development Company
June 19, 1996 Zimmer Gunsul Frasca
<PAGE>
EXHIBIT A-1
MEASUREMENT STANDARDS FOR EACH FLOOR
AREA STANDARD
NATIONAL ASSOCIATION OF INDUSTRIAL AND OFFICE PARKS (NAIOP)
INTRODUCTION
The purpose of the NAIOP area standard is to permit communication and
computation on a clear and understandable basis. Another important purpose is to
allow comparison of values on the basis of a generally agreed upon unit of
measurement. The result is a unit of measurement that is most typically used by
building owners, managers, tenants, appraisers, architects, lending
institutions, and others to compute the floor area of a building.
It should be noted that this standard can be used to measure space in old, as
well as new, buildings. It is applicable to any architectural design or type of
construction. Generally, this type of area computation has been used for single
or multiple tenant industrial/commercial facilities. If the areas are leased,
the leases are typically provided in a "triple net" format.
AREA
The area is defined as the amount of space allocated to a particular occupant or
tenant. This space can be provided in two forms:
1. the basic space allocated/occupied, and
2. common spaces allocated/occupied or provided for use by two or more
occupants or tenants of a building.
Basic Space
Basic space area is computed by measuring from the outside surface of
exterior walls or permanent extensions/projections to the middle of
interior walls which may separate one space from another. See Figures 1-4.
Common Space
Common space area is calculated in the same manner as basic space. This
area is then prorated and added to the basic space area of those spaces or
tenants which the common space serves. See Figures 5 and 6.
<PAGE>
[GRAPHIC FLOOR PLAN OMITTED]
FLOOR PLAN
FIGURE 3
[GRAPHIC FLOOR PLAN OMITTED]
SECTION B-B
FIGURE 4
<PAGE>
[GRAPHIC FLOOR PLAN OMITTED]
FLOOR PLAN
FIGURE 5
BASIC AREA
FOR ELECTRICAL ROOM
TENANT A 2000 SQ. FT. 2000/4800 = 41.67%
TENANT B 2800 SQ. FT. 2800/4800 = 58.33%
------------ ------
SUBTOTAL 4800 SQ. FT. 100.00%
COMMON AREA (ELECTRICAL ROOM = 200 SQ. FT.)
TENANT A 200 (.4167) = 83.34 SQ. FT.
TENANT B 200 (.5833) = 116.66 SQ. FT.
--------------
SUBTOTAL 200.00 SQ. FT.
LEASED AREA
TENANT A BASIC 2000.00 TENANT B BASIC 2800.00
COMMON 83.34 COMMON 116.66
------- -------
TOTAL 2083.34 TOTAL 2916.66
GRAND TOTAL 5,000.00 SQ. FT.
<PAGE>
[GRAPHIC FLOOR PLAN OMITTED]
FLOOR PLAN
FIGURE 6
BASIC AREA
FOR ELECTRICAL ROOM FOR DOCK
TENANT A 4750 48.72% 4750 65.52%
TENANT B 2500 25.64% 2500 34.48%
TENANT C 2500 25.64% 0.00%
------------------------ -----------
SUBTOTAL 9750 100.00% 7250 100.00%
COMMON AREA (ELECTRICAL ROOM 250 SQ. FT.; DOCK 553 SQ. FT.)
FOR ELECTRICAL ROOM FOR DOCK SUBTOTAL
TENANT A [250(.4872) = 121.8] + [553(.6552) = 362.33] = 484.13 SQ. FT.
TENANT B [250(.2564) = 64.1] + [553(.3448) = 190.67] = 254.77 SQ. FT.
TENANT C [250(.2564) = 64.1] + 0 = 64.10 SQ. FT.
----- ------ ------
250.0 553.00 = 803.00 SQ. FT.
<TABLE>
<CAPTION>
LEASED AREA
<S> <C> <C> <C>
TENANT A: BASIC 4750.00 TENANT B: BASIC 2500.00 TENANT C: BASIC 2500.00
COMMON 484.13 COMMON 254.77 COMMON 64.10
------- ------- -------
TOTAL 5234.13 TOTAL 2754.77 TOTAL 2564.10
GRAND TOTAL 10,553 SQ. FT.
</TABLE>
<PAGE>
[GRAPHIC FLOOR PLAN OMITTED]
FLOOR PLAN
FIGURE 1
BUILDING SECTION A-A
FIGURE 2
<PAGE>
[MAP SHOWING LOCATIONS OF BUILDINGS 1, 2, 3, 4 and 5, STREETS AND TREES OMITTED]
The location, size, and number of
improvements except for Building 1 EXHIBIT B
and Building 2 are conceptual at THE PROJECT
this time and are subject to change.
Site Plan
Evergreen Corporate Center
at Tanasbourne Commerce Center
Melvin Mark Development Company
June 19, 1996 Zimmer Gunsul Frasca
<PAGE>
EXHIBIT C
LANDLORD'S WORK PLANS
SCOPE NARRATIVE
Medicalogic
Building Design
and
Material
Building
Exterior The building exterior will be a combination of brick and glass.
The brick is a special ECC blend which has a rich and complex
range of colors from dark red to Orange. The glass used will be an
insulated glass with a light green tint, matching the other
exterior glass used in the park (PacifiCare). allowing for
excellent energy characteristics with maximum outward visibility.
Energy
Systems The building is designed for large, efficient, easily maintained
HVAC systems. Roof top AHUs with VAV and DDC electronic controls.
Elevator The building includes one hydraulic passenger elevator with a 2500
lb capacity and speed of 100 feet per minute. The elevator will
contain a sheet metal hood which will allow for an 8 foot height
in approximately one half of the cab when removed.
Materials Brick is the predominant exterior material providing a modern
high-quality, long-term, low maintenance exterior surface. It will
be hand laid with a rich, textured pattern.
1
<PAGE>
Medicalogic
Building Technical
Systems Description
1. Site Work
1.1 Work in Public Right-of-Way
The project will comply with all requirements of government agencies.
1.2 Walks, Ramps, and Stairs - (Work within 5' of building face).
(a) Constructed of concrete, brick or similar material.
(b) Finish to minimize slipping.
(c) Slope or crown for drainage.
(d) Concrete minimum thickness 4 inches.
(e) Provide handrails where required by code and safety requirements.
(f) Curbs adjacent to sidewalks shall be cast monolithically with
sidewalks.
1.3 Landscaping - (Work within approximately 5' of building face.)
(a) All landscape areas to have time clock operated irrigation
system.
(b) Planting areas to be graded to avoid ponding.
(c) Six inch minimum topsoil throughout with additional topsoil or
planting mix at trees or shrubs. Topsoil to be free from weeds,
boulders, roots, etc.
(d) Planting materials will be selected with respect to:
i. Appropriateness to area and exposure.
ii. Size to provide visual impact within one year period.
iii. Ease of maintenance.
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iv. Minimizing root damage to adjacent areas.
1.4 Site Lighting - (Work within 5' of building face.)
(a) Lighting will be provided at all stairs and walkways.
(b) Specialty lighting will be provided at exterior building main
entrances and building identification
1.5 Signs
(a) Exterior signing for building address or designation and
directional will be included.
(b) All other exterior and interior tenant signage is at tenant's
expense and must meet landlord's standards.
1.6 Paving shall comply with the standards of Project Release No. 1 (Phase
1 Site Work) together with such design revisions as may be required to
accommodate the Tenant of Building 2.
1.7 Trash enclosure to be located and sized to accommodate use by the
Tenant of Building 2.
2. Structural Design Guidelines
2.1 Codes and Standards
(a) American Concrete Institute, "Building Code Requirements for
Reinforced Concrete," ACI 318-83.
(b) American Institute of Steel Construction, "Specification for the
Design, Fabrication and Erection of Structural Steel for
Buildings," Eighth Edition of Manual of Steel Construction.
(c) Uniform Building Code as in effect in Oregon ("UBC").
2.2 Design Load Criteria
(a) Floor Live Load: 50 psf plus 20 psf partition load
(b) Floor Dead Load: 55 psf
(c) Roof live load: 25 psf
(d) Roof dead load: 20 psf
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<PAGE>
(e) Wind load: 80 mph, exposure C
(f) Seismic Zone: UBC zone 3
(g) Mechanical equipment pads sufficient to support equipment
required by mechanical design
2.3 Materials
(a) Concrete
4000 psi minimum at 28 days for structural concrete.
2500 psi minimum at 28 days for sidewalk and backfill concrete
(b) Reinforcing Steel
i. Bars
ASTM A615, deformed, Grade 60
ii. Welded Wire
ASTM A185
(c) Structural Steel
ASTM A36; ASTM A572; Grade 42 or Grade 50; or ASTM A588; Grade 50
2.4 Structural System Analysis Approach
(a) Floor System: Structural steel columns supporting an open web
joist and girder system. Metal decking with a 5.5" composite
concrete slab.
(b) Lateral Force Resisting System: shear walls.
(c) Foundation System
Design will be based on the recommendation of the geotechnical
consultant. Recommendations will include design criteria for
foundation system(s) best suited to project; design criteria and
pressures for the design of slabs. To be conventional spread
footings bearing on native soils.
3
<PAGE>
(d) Slab on grade to be 4" unreinforced concrete
2.5 Exterior Wall System
Design will be in accordance with applicable building codes and
standards.
2.6 Testing and Inspection
(a) Testing and inspection of building structural elements will be
provided in accordance with building department requirements.
(b) Testing and inspections to be undertaken by independent agency.
3. Exterior Enclosure
3.1 Building Facade
(a) General
i. Comply with state energy code.
ii. Designed for wind and seismic loading and lateral movement.
iii. Provide one year guarantee against water leakage. Provide a
consultant to inspect design and construction of facade and
roof.
3.2 Cladding System
(a) ECC brick blend.
(b) Glazing System
i. Insulated glass required. To have butt glazed exterior glass
similar in color to PacifiCare.
ii. Butt glazing system to comply with Oregon Energy Codes.
(c) Miscellaneous
i. Provide Sealants, flashings, vapor barriers, insulation as
required for a complete installation.
ii. Glass to be cleaned prior to the time of occupancy.
4
<PAGE>
3.3 Environmental Protection
(a) Roofing
i. Fifteen year bondable.
ii. Closed cell rigid insulation to meet energy code.
iii. Roofing system to be a built-up roofing with cap sheet.
iv. Provide roof access, roof hatch and ladder.
(b) Membrane Waterproofing
i. Fluid type with insulation and protection board.
3.4 Exterior Entrances
(a) Main Entries
i. Entries will be in compliance with the ADA.
(b) Service Entries, Exits, Etc.
Painted hollow metal galvanized.
(c) Loading Dock and Parking Access
Manually operated insulated vertical rolling door.
4. Interior Materials & Finishes
4.1 Tenant Office Space
(a) Ceilings
i. Exposed T bar grid at approximately 9' above finished floor.
ii. 2x4 ceiling tile to be tegular "second-look" style, scored
to look like 2x2
(b) Walls
i. Core walls to extend and seal to structure.
ii. Gypsum wallboard taped, sanded, primed and painted with
finish coat, ready for occupancy.
5
<PAGE>
iii. Window sill to be finished sheet rock.
iv. Reinforce ceiling above window for window covering.
(c) Floors
i. Concrete with sealer prepared to receive carpet.
ii. Carpet, furnish and install: allowance of $20/square yard.
(d) Window Coverings
i. Exterior window blinds similar to PacifiCare
(e) Doors and hardware
i. Full Height doors (up to 9')
ii. Schlage Schedule "D" lever-action passage and lock sets
4.2 Typical Floor Elevator Lobby
(a) Ceiling and walls.
Painted gypsum board.
(b) Floor: Carpet at furnish and install allowance of $20/square
yard.
4.3 Toilet Rooms
(a) Ceiling
i. Painted gypsum wallboard
ii. Fluorescent lighting.
(b) Walls
Ceramic tile selected by Landlord on wet walls to 4'6"
(c) Floor
Ceramic tile selected by Landlord
(d) Miscellaneous
i. Lavatories to be mounted in counter with mirror above.
6
<PAGE>
ii. Recessed paper towel and waste receptacles.
iii. Ceiling hung toilet partitions with coat hooks. Purse
shelves in women's toilet room.
iv. Toilet seat cover dispenser and rolled toilet paper holder
at each water closet.
v. Sanitary napkin waste disposal at each women's water closet.
vi. Two coat hooks in each toilet room.
vii. Refrigerated drinking fountain adjacent to toilet rooms.
viii. Wall-mounted soap dispenser by each lavatory.
ix. Shower stalls will be prefabricated fiberglass.
4.4 Janitor's Closets
(a) Walls
Painted gypsum wallboard.
(b) Floor
Vinyl tile selected by Landlord with rubber base.
(c) Miscellaneous
i. Janitor sink.
ii. Plastic laminate wainscoting at janitor sink.
iii. Shelf and hooks for supplies.
4.5 Building Lobby and Main Floor Elevator Lobby
(a) Ceiling
i. Building standard ceiling per building standard
specification 4.1.
ii. Building standard lighting per building standard
specifications 7.2(a)(ii), 7.2(b).
7
<PAGE>
(b) Walls
i. Painted gypsum board per building standard 4.1(b).
(c) Floor
i. Carpet at furnish and install allowance of $20/square yard.
4.6 Exit Stairwells
(a) Ceilings
Painted exposed construction.
(b) Walls
Painted.
(c) Floors
i. Concrete sealed.
4.7 Electrical/Telephone Rooms, Elevator Machine Rooms, etc.
(a) Ceilings
Exposed construction, unpainted or gypsum wallboard taped and
primed.
(b) Walls
Exposed construction or gypsum wallboard taped and primed.
(c) Floors
i. Sealed.
4.8 Furnishings and casework.
(a) The Work does not include any furniture, appliances, partitions,
computer equipment, telephones, cabling, or any other furniture,
furnishings, or equipment, even if shown on any plan or drawing.
(b) The Work shall include the following casework as an allowance
item. The stated allowance will be applied against both design
and construction of the following items. The allowance will be
calculated on an actual per-lineal foot basis, with a fixed
per-unit
8
<PAGE>
cost, except for the reception area counter, which portion of the
allowance shall be fixed at $7500. In the event the cost of
design and construction of the following exceeds the total
allowance, the excess cost shall be added to the Cost of the Work
(it being the understanding that such extra cost shall be paid
for by Tenant).
<TABLE>
<CAPTION>
Casework
Estimated
Quantity Unit Unit Cost Cost
<S> <C> <C> <C> <C>
Plastic Laminate Counters at Toilet Rooms 84 If $ 75.00 $ 6,300
Coffee Bar (Upper & Lowers) 48 If $ 250.00 $12,000
Catering Kitchen Casework (Upper & Lowers) 30 If $ 250.00 $ 7,500
Lounge Casework (Upper & Lowers) 21 If $ 250.00 $ 5,250
Counter at Reception Area (Allowance) Is $7,500.00 $ 7,500
Credenzas at Main Conference & Training 32 If $ 350.00 $11,200
Est. Total $49,750
</TABLE>
4.9 Miscellaneous Requirements
(a) A general interior building signing system for the following will
be provided: Code/ADA required signage.
5. Vertical Transportation
5.1 Elevator
(a) Hydraulic passenger elevator with 1500 lb capacity and speed of
100 fpm.
6. HVAC/Mechanical
6.1 Quality Assurance
(a) Equipment Areas
Coordinate mechanical equipment spaces and other space
requirements with architectural arrangement.
(b) Pressure Ratings
Provide components subject to system pressure with pressure
ratings that exceed maximum system pressure at location of
components. Such components include piping, fittings, valves,
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piping specialties, tanks, coils, equipment and air handling and
distribution devices.
(c) Noise
With each system in normal operation simultaneously, mechanical
systems will meet the following criteria:
i. Noise Criteria Standard (NG)
Maximum noise criteria levels:
Offices 35
Meeting Rooms 35
Cafeteria 40
Lobbies 40
Corridors 40
Toilets 40
Storage 50
(d) Vibration
Mechanical systems not to result in vibration in excess of
industry standards for Class-A office space.
6.2 Heating, Ventilating and Air Conditioning - Design Criteria
(a) Will Comply with Oregon Energy Code.
(b) Other: see ASHRAE Handbooks, latest applicable volumes.
(c) Electrical Loads.
Base final design on data provided by Landlord's Design
Electrical Engineer and assumptions made under these plans and
specifications.
(d) Minimum Outside Ventilation Air.
Typically 20 CFM per occupant (assumes one occupant per cubicle
or office per space plan) or 0.2 CFM per square foot, whichever
is greater.
(e) Minimum Total Air Circulation Rates:
i. Office Spaces: Typically 0.80 CFM per SF interior, 1.0 CFM
per SF perimeter.
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ii. Toilets: Typically 2 CFM per SF
iii. Other: As required by good design practice.
(f) Air Drafts
Air motion not to exceed 50 FPM in any portion of occupied spaces
from floor up to 6'6" above floor.
(g) Air Handling Equipment includes for the three major zones of the
building totaling 195 tons:
i. East Wing
65 nominal ton VAV units (1)
2nd floor fan powered boxes (5)
2nd floor cooling only VAV boxes (5)
1st floor fan powered boxes (4)
1st floor cooling only VAV boxes (7)
Electric room exhaust fans (2)
Perimeter slot diffusers (15)
T-bar supply diffusers (70)
T-bar return grilles with sound boots (10)
T-bar return air grilles without boots (32)
Exhaust grilles (2)
Fire/smoke dampers (9)
ii. Central Wing
65 nominal ton VAV units (1)
2nd floor fan powered boxes (7)
2nd floor cooling only VAV boxes (8)
1st floor fan powered boxes (7)
1st floor cooling only VAV boxes (8)
Electric room exhaust fans (2)
Toilet/kitchen exhaust fan (1)
Perimeter slot diffusers (28)
T-bar supply diffusers (82)
T-bar return air grilles with sound boots (14)
T-bar return air grilles without boots (36)
Exhaust grilles (9)
Fire/smoke dampers (11)
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iii. West Wing
65 nominal ton VAV units (1)
2nd floor fan powered boxes (5)
2nd floor cooling only VAV boxes (5)
1st floor fan powered boxes (5)
1st floor cooling only VAV boxes (5)
Electric room exhaust fans (2)
Toilet/kitchen exhaust fan (1)
Perimeter slot diffusers (10)
T-bar supply diffusers (66)
T-bar return air grilles with sound boots (8)
T-bar return air grilles without boots (32)
Exhaust grilles (10)
Fire/smoke dampers (4)
(h) Room Thermostats
i. Provide and connect each temperature control zone.
ii. Install per code:
(1) Where rooms and walls are constructed in their final
forms, install thermostats on wall.
(2) Where areas are subject to addition of walls, locate
thermostat at ceiling with five feet of wire control
tubing.
6.3 Controls
(a) Complete system of direct digital (DDC) temperature controls and
computerized energy management.
i. Air side economizer cycle.
ii. Warm-up cycle.
iii. Night set-back.
iv. Automatic stop and start.
(b) VAV box will be integrated with the DDC system.
(c) Freeze Protection for Mechanical Systems.
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6.4 Heating, Ventilating and Air Conditioning Systems Description.
(a) Mechanical system to be rooftop packaged multiple-zoned VAV units
complete with DDC controls. VAV boxes to be straight VAV or fan
powered VAV combination with electric heat at perimeter and
cooling only at interior. Ductwork to be medium pressure spiral
round duct. Returns to be via ceiling plenum.
(b) No fiberglass to be used in the air stream other than at the
following locations: (i) the first 20 feet of supply and return
mains downstream of the rooftop equipment and (ii) return air
grilles in private offices shall have acoustically lined sound
boots.
6.5 Plumbing - Design Criteria
(a) Utilities:
i. Connections: Connect to utility mains for water, gas, storm,
and sanitary sewers at 5' outside of building face.
ii. Regulations: Comply with requirements of utility companies
and agencies.
(b) Domestic Water
i. Pressure Range at Fixtures
(1) Minimum: 25 PSIG
(2) Maximum: 70 PSIG
ii. Lavatories
(1) Office Spaces:
105 degrees F, single faucet.
(2) Kitchen Areas:
140 degrees F hot water and cold water.
(3) Shower: 105 degrees F.
iii. Water coolers per plan.
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(c) Natural Gas
For gas fired equipment.
(d) Sanitary Waste and Vents
i. Fixtures
Per architectural drawings.
ii. Mechanical Systems
As required by design.
(e) Storm Drains
For roofs, planters, and exterior areas.
6.6 Plumbing - System Description
(a) Fixtures and Drains
Wall hung, flush valve water closets and urinals.
(b) Tenant Sink Provisions as shown the plans.
(c) Domestic Water.
i. Water heaters as designed by Landlord.
ii. Piping distribution systems for cold and hot water to
fixtures and equipment.
iii. Valves, piping specialties, vibration isolation and
insulation.
(d) Sanitary Waste and Vent
i. Piping collection system from fixtures, drains and
equipment.
(e) Storm Drains
i. Piping collection system from drains for roofs. Include roof
overflow drains with discharge nozzles.
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(f) Landlord will pay sewer equalization charges and any other permit
or connection fees for number of sewer units needed for fixtures
shown on plans.
6.7 Fire Protection - Design Criteria
(a) Site Utilities
i. Connections
Connect to utility mains at 5' from building face.
ii. Regulations
Comply with requirements of utility company or agency.
iii. Coordination
(1) With utility company or agency.
(2) For locations, rooms, vaults, boxes, meters valves, and
visible items.
(b) Fire Sprinklers
i. Provide for entire building.
ii. Per NFPA 13.
6.8 Fire Protection - Systems Descriptions
(a) Piping Distribution
Combined system for sprinkler and standpipes.
(b) Fire Department Pumper Connections
At locations per code enforcing agency.
(c) Sprinkler Heads -- per code.
(d) Fire Extinguishers
In cabinets where indicated on architectural drawings and per
code.
(e) Other Components
Per code.
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7. Electrical/Communication
7.1 Quality Assurance
(a) Equipment Areas
i. Coordinate electrical equipment rooms and other space
requirements with Architect.
(b) Noise and Vibration
With each system in normal operation simultaneously, electrical
systems shall meet following criteria:
i. Noise
Maximum Noise Criteria (NC) levels:
Offices 35
Meeting Rooms 35
Cafeteria 40
Lobbies 40
Corridors 40
Toilets 40
Storage 50
ii. Vibration
System not to exceed the following:
(1) Less than 16 Hz: 0.004 inch per second vibration
velocity.
(2) 16 Hz or Greater: 0.001 g rms acceleration as analyzed
by 1/3 octave bands or for single frequency components.
7.2 Design Criteria
(a) Lighting Levels; Minimum Average Maintained Foot-Candles
i. Offices: 60 in open landscaped offices
ii. Lobbies: 25
iii. Corridors: 20
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iv. Other Areas: Consistent with task, but not to exceed 60.
(b) Lighting Fixture Type: 2'x4' Two-lamp parabolic with a T-8
ballast by Columbia or Lithonia.
(c) Lighting Circuiting - to be determined by Landlord.
(d) Lighting Switching
Open areas/no more than 1,000 sq. ft. will be controlled by one
light switch
(e) Power Distribution
In switchboards, distribution panelboards, branch circuit
panelboards and feeders and busways allow for:
i. HVAC, plumbing, fire protection, elevator and lighting
loads.
ii. Minimum 25% spare capacity (over the fully built out
building), in feeders, including breaker spaces in
panelboards.
iii. In electrical riser room on each floor provide sleeves in
floor for future systems; include routing space from
switchboard room to lowest typical floor electrical room.
(f) Office Area Receptacle and Communications Outlets
i. average of one per 285 square feet of premises area, and
three electrical circuits for each workstation cluster (8
units).
ii. Ten percent of the total circuit count for outlets is to be
dedicated.
iii. Distribution shall be by means other than power poles.
(g) Other Power Outlet Requirements
i. Maintenance Outlets in Corridors
20A, 120V, duplex outlets, maximum 90 feet apart.
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ii. Electrical Closets
Minimum one 20A, 120V, duplex outlet.
iii. Toilets
One duplex receptacle 20A, 120V, at lavatory counter as
directed.
iv. At Telephone Backboard
Mounting height 7 feet on separate circuit in each closet.
v. Drinking Fountains
Single receptacles of proper voltage and ampere ratings for
water chiller equipment at locations as required by plans.
vi. Elevator Pit
20A, 120V
7.3 Systems Description
(a) Power Supply - Building Services
277/480 volt, 3-phase
(b) Transformer Pad
(c) Main Switchboard
(d) Normal Power Distribution
i. Utility Metering
ii. Building Power Distribution
(e) Telephone System Conduit
i. Empty conduits to, and riser conduit sleeves in, telephone
riser closets with plywood backboards located on each floor.
(f) Fire Detection and Alarm Systems As Required By Code
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LISTS OF PLANS
Electrical Plans dated December 27, 1996, prepared by
Christenson Electric, pp. E-1 and E-2, for Evergreen Corporate
Center--MedicaLogic.
Partition Plans dated December 3, 1996, prepared by ZGF
Partnership, 2 pp, for Evergreen Corporate Center--MedicaLogic.
Preliminary Facade Design dated November 7, 1996, prepared
by ZGF Partnership, for Evergreen Corporate Center - MedicaLogic.
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NOTES ON SCOPE OF WORK
1. Site Work. The Landlord's Work includes completion of the following around
the Building: curbs, sidewalks, irrigation and landscaping, all building
utilities (sufficient to complete connections to the building shell when
built), transformer and pad, and landscaping to screen the transformer from
view, recycling and garbage storage area for building, asphalt, landscape,
and utility repairs and additions as needed ("collectively, Building Site
Work").
2. Miscellaneous.
2.1 The scope of the Work also includes the following:
(a) Insulated glass at locations designed by Landlord's Architect on
the exterior perimeter of the building. Building facade will
include brick and glass on all sides generally consistent with
the preliminary facade design dated November 7, 1996.
(b) Roof will be high enough to allow Tenant to build a 9 foot clear
interior ceiling above the slab with sufficient space above the
proposed interior ceiling grid to allow for HVAC ductwork and
miscellaneous mechanical and electrical systems. The top of
exterior perimeter glazing will be approximately 9 feet above the
finished floor.
(c) Provision of roof screening for installed mechanical equipment
screening all of Tenant's mechanical equipment.
(d) Infrastructure for sprinkler distribution system. (Drops and
finish items and the installation thereof are part of the
Tenant's responsibility and are not included in the Work.)
(e) Fifteen-year standard roof warranty, in the form provided by the
manufacturer.
(f) One-year "water tight" guarantee, in the form provided by the
manufacturer.
(g) One-year standard HVAC warranty in the form provided by the
manufacturer.
(h) One-year standard elevator warranty in the form provided by the
manufacturer.
(i) One-year standard glazing system warranty in the form provided by
the manufacturer.
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(j) Roof and foundation drainage.
(k) Two four-inch conduits from the street to the telephone equipment
room in the Premises.
(l) The items in the quantities listed on the attached Schedule C-1;
provided, however, the Schedule's sole purpose is to provide
detailed information on quantities and items to be provided by
Landlord. If any item listed on such Schedule is also included in
this Exhibit C, the quantities shown on such Schedule shall be
illustrative only of what is described in this Exhibit C and not
added to what is described in this Exhibit C.
3. Design Costs. Landlord shall be responsible for the cost of design and
engineering of the Landlord's Work, to the extent necessary to prepare
Landlord's Work Plans sufficient for permitting. Tenant shall be
responsible for design and engineering costs resulting from (i) any Tenant
details or Tenant's program requirements, other than details necessary to
prepare plans sufficient to obtain permits for the Scope of Work described
herein; (ii) any Tenant-requested changes or further clarifications to any
plans; (iii) any Additional Work; and (iv) any work outside the scope of
Landlord's Work, including without limitation plans for design of Tenant's
furnishings, equipment, electrical, communications, and computer systems,
and integration and connection of the same to Landlord's Work. Tenant shall
engage and pay for its own architect, pursuant to Section 2.1 of Exhibit D,
for any plans described in clauses (iii) or (iv).
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SCHEDULE C-1
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
BAUGH CONSTRUCTION OREGON, INC.
Project: Medicalogic Tenant Improvement Architect: ZGF
Location: Hillsboro, Oregon Estimator: B. Jensen
- --------------------------------------------------------------------------------
Description Quantity* Unit
<S> <C> <C>
Loading Dock
Excavation 1 ls
Wall Footings 95 lf
Dock Ramp Walls 475 sf
Dock Leveler Pit 1 ls
Dock Ramp Slab 600 sf
Guardrails 80 lf
Overhead Door - 12' x 9' 1 ea
Hollow Metal Doors 1 pr
Dock Leveler/Bumpers/Seal 1 ls
Area Drain 1 ea
Storm Drain Lateral 100 lf
Casework (See Allowance per lease)
Doors & Relites
Prefinished 8'-6" Oak Drs/Timely Frms/HW 79 ea
Prefinished 8'-6" Oak Drs/Timely Frms/HW/Pr 3 ea
Relites 2' x 8'-6" 25 ea
Larger Relites 160 sf
Accordian Door and Support 79 lf
Walls
Gypboard at Exterior Walls 8,766 sf
Pluming Chase 952 sf
Toilet Room Walls w/ Sound Insulation 6,636 sf
Full Height Walls 10,262 sf
Office Walls 17,154 sf
Column Wraps 73 ea
Fascia at Lobby Opening 54 lf
Architectural Railing System 85 lf
Ceilings
Gypboard Ceilings at Toilets/Showers/Kitchen 2,556 sf
Ceiling Coves at Toilet Rooms 200 lf
Acoustical Ceilings - 2 x 4 Second Look 66,039 sf
Sound Insulation on Ceiling @ Office Walls 15,248 sf
Painting & Wallcovering
Paint Walls - Enamel 64,931 sf
Paint Walls & Ceilings - Epoxy 2,556 sf
Floorcovering
Ceramic Tile Floors at Toilets/Showers 2,332 sf
Ceramic Tile Base 444 lf
Ceramic Tile Wet Wall 1,776 sf
Page 1 of 2
<PAGE>
<CAPTION>
- --------------------------------------------------------------------------------
BAUGH CONSTRUCTION OREGON, INC.
Project: Medicalogic Tenant Improvement Architect: ZGF
Location: Hillsboro, Oregon Estimator: B. Jensen
- --------------------------------------------------------------------------------
Description Quantity* Unit
<S> <C> <C>
Sheet Vinyl Flooring at Kitchen 224 sf
Anti Static Flooring at Network 398 sf
Glue Down Loop Carpet 7,065 sy
Rubber Base 7,475 lf
Concrete Floor Sealer at Warehouse 2,118 sf
Accessories
Fire Extinguishers & Cabinets 6 ea
Interior Building Signage 1 ls
Toilet Partitions 28 ea
Urinal Screens 8 ea
Grab Bars 16 ea
Toilet Paper Holders 28 ea
Soap Dispensers 14 ea
Sanitary Napkin Disposal 20 ea
Sanitary Napkin Vendor 4 ea
Paper Towel Dispenser/Disposal 10 ea
Seat Cover Dispensers 28 ea
Prefabricated Shower Units 4 ea
Mirrors 420 sf
Window Coverings at Exterior Windows 9,094 sf
Lockers - 12" x 36" 30 ea
Mechanical & Electrical
Plumbing
HVAC
Fire Protection 75,312 sf
Electrical
</TABLE>
Page 2 of 2
<PAGE>
EXHIBIT D
WORK AGREEMENT
1. CHANGES TO LANDLORD'S WORK AND ADDITIONAL WORK PROVIDED AT TENANT'S EXPENSE
All Additional Work (as defined in Section 7.1 of the Lease and Rider
No. 16), if any, shall first be approved in writing by Landlord pursuant to
Section 2 of this Work Agreement and the costs, fees and expenses thereof shall
be paid by Tenant as provided in this Work Agreement, in Section 7.1 of the
Lease and Rider No. 16, and in Section 36.1 of the Lease. If a change to
Landlord's Work specifically requested by Tenant and agreed to by Landlord
directly results in actual savings to Landlord, Tenant shall receive a credit
for such actual savings.
2. DESIGN AND CONSTRUCTION OF THE ADDITIONAL WORK
2.1 In the event Tenant desires any Additional Work, as defined in Section
1 of this Work Agreement, Tenant shall retain the services of Zimmer Gunsul
Frasca ("ZGF") or other qualified architect, approved in advance by Landlord, to
prepare the necessary drawings, including without limitation basic space plans
and complete detailed working plans for any of the Additional Work (individually
and collectively, the "Plans for Additional Work"). All Plans for Additional
Work shall be prepared at Tenant's expense and shall be subject to the prior
written approval of Landlord.
2.2 ZGF (at Tenant's cost) shall determine that the work shown on the Plans
for Additional Work is compatible with the basic Building plans and that
necessary basic Building modifications are included in the Plans for Additional
Work.
2.3 Tenant shall be responsible for delays and additional costs in
completion of Landlord's Work caused by changes made to Landlord's Work or by
the work described in the Plans for Additional Work, by inadequacies in any of
the Plans for Additional Work, or by delays in delivery of special materials
requiring long lead times.
2.4 Upon completion of the Plans for Additional Work and at the request of
Tenant, Landlord and its contractor shall provide to Tenant in writing an
estimate of the cost of improvements to be provided at Tenant's expense. Within
five days after Tenant's receipt of such estimated cost, Tenant shall delete any
items which Tenant elects not to have constructed and shall authorize
construction of the balance of the improvements. In the absence of such written
authorization, Landlord shall not be obligated to commence or continue work on
the Premises, as the case may be, and Tenant shall be responsible for any costs
due to any resulting delay in completion of the Premises.
2.5 Prior to commencement of construction of the Additional Work described
in the Plans for Additional Work, Tenant shall either (i) deposit with Landlord
cash in an amount equal to the estimated cost of the improvements to be
installed at Tenant's expense pursuant to
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Section 1 of this Work Agreement; or (ii) provide Landlord with other evidence
or assurance, such as a bond or letter of credit, satisfactory to Landlord of
Tenant's ability to pay the estimated cost of such improvements. Landlord's
contractor shall then complete the Additional Work in accordance with the Plans
for Additional Work. Any additional amounts payable by Tenant for the actual
cost of the improvements shall be paid on or before the Commencement Date of the
Lease, or upon receipt of the final accounting. If cash is deposited by Tenant
as provided above in this Section 2.5, any excess paid by Tenant over the actual
cost of the improvements shall be promptly refunded to Tenant by Landlord.
2.6 If Tenant desires any change to the Plans for Additional Work, Tenant
shall submit a written request for such change to Landlord, together with all
plans and specifications necessary to show and explain changes from the approved
the Plans for Additional Work. Any such change shall be subject to Landlord's
approval.
2.7 If any work is to be performed in the Premises by Tenant or by Tenant's
contractor (which contractor must first be approved in writing by Landlord),
such work shall conform to the following requirements:
2.7.1 Such work shall proceed only upon Landlord's written approval of
the public liability and property damage insurance carried by Tenant's
contractor. Landlord shall have the right to require Tenant's contractor to post
a payment or performance bond in an amount equal to the estimated cost of the
work to be performed by such contractor. Tenant shall supply Landlord with the
name, address, and emergency telephone number for Tenant's contractor and all
subcontractors retained by Tenant's contractor.
2.7.2 All such work shall be done in conformity with a valid building
permit when required, a copy of which shall be furnished to Landlord before such
work is commenced, and in any case, all such work shall be performed in
accordance with all applicable governmental regulations and all applicable
safety regulations established by Landlord or its contractor for the Center
generally. Notwithstanding any failure by Landlord to object to any such work,
Landlord shall have no responsibility for Tenant's failure to comply with all
applicable governmental regulations.
2.7.3 Landlord may require that all such work be performed by union
labor in accordance with any union labor agreements applicable to the trades
being employed at the Center.
2.7.4 All such work shall be scheduled through Landlord and Landlord's
contractor and shall be performed in a manner and at times which do not impede
or delay any work on the Premises being performed by Landlord's contractor.
2.7.5 Tenant's contractor shall store any materials only in the
Premises or in such other space as may be designated by Landlord or its
contractor from time to time. All trash and surplus construction materials shall
also be stored within the Premises and shall be promptly removed from the
Center.
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2.8 Tenant's entry into the Premises for any purpose, including without
limitation inspection or performance of work by Tenant or Tenant's contractor,
prior to the Commencement Date, shall be subject to all the terms and conditions
of the Lease, including without limitation the provisions of the Lease relating
to the maintenance of insurance and indemnification by Tenant, but excluding the
provisions of the Lease relating to the payment of Rent. Tenant's entry shall
mean entry by Tenant, its officers, contractors, subcontractors, licensees,
agents, servants, employees, guests, invitees, or visitors (collectively, the
"Tenant Related Parties").
2.9 Tenant shall indemnify and hold harmless Landlord from and against any
and all claims, losses, liabilities, and expenses (including without limitation
reasonable attorneys' fees) arising out of or in any way related to the
activities of Tenant or the Tenant Related Parties in the Premises or the
Center. Without limiting the generality of the foregoing, Tenant shall promptly
reimburse Landlord upon demand for any extra expense incurred by Landlord as a
result of faulty work done by Tenant or the Tenant Related Parties, any delays
caused by such work, or inadequate clean-up. If Tenant's delays cause Landlord's
Work to be substantially completed later than on December 15, 1997, Tenant's
obligation to pay Base Rent and Tenant's share of Expenses shall commence one
day earlier than the date of substantial completion of Landlord's Work for each
Tenant Delay Day.
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EXHIBIT E
CENTER RULES AND REGULATIONS
1. No sign, placard, picture, name, advertisement or notice, visible from the
exterior of leased premises shall be inscribed, painted, affixed, installed
or otherwise displayed by any tenant either on its premises or any part of
any building or any part of the Center without the prior written consent of
Landlord, and Landlord shall have the right to remove any such sign,
placard, picture, name, advertisement, or notice in violation of this rule
without notice to and at the expense of the tenant. All approved signs or
lettering on doors and walls shall be printed, painted, affixed or
inscribed at the expense of the tenant by a person approved by Landlord.
2. No curtains, draperies, blinds, shutters, shades, screens or other
coverings, awnings, hangings or decorations shall be attached to, hung or
placed in, or used in connection with, any window or door on any premises
without the prior written consent of Landlord which consent shall not be
unreasonably withheld. No articles shall be placed or kept on the window
sills so as to be visible from the exterior of the building. No articles
shall be placed against glass partitions or doors which might appear
unsightly from outside the tenant's premises.
3. Each tenant shall see that the doors of its premises are closed and
securely locked and must observe strict care and caution that all water
faucets or water apparatus are entirely shut off before the tenant or its
employees leave its premises, and that all utilities shall likewise be
carefully shut off, so as to prevent waste or damage. For any default or
carelessness, Tenant shall repair all damage sustained by other tenants or
occupants of the Center or by Landlord.
4. No tenant shall use, keep or permit to be used or kept in its premises any
foul or noxious gas or substance or permit or suffer such premises to be
occupied or used in a manner offensive or objectionable to Landlord or
other occupants of the Center by reason of noise, odors and/or vibrations
or interfere in any way with other tenants or those having business in the
Center, nor shall any animals or birds be brought or kept in or about any
premises of the Center.
5. No cooking shall be done or permitted by any tenant on its premises, except
that use by the tenant of Underwriters' Laboratory approved equipment for
the preparation of coffee, tea, hot chocolate and similar beverages, and
heating of food by conventional microwave ovens, for tenants and their
employees shall be permitted, provided that such equipment and use is in
accordance with all applicable federal, state and city laws, codes,
ordinances, rules and regulations.
6. No premises shall be used for lodging.
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7. Except with the prior written consent of Landlord, no tenant shall sell, or
permit the sale, of newspapers, magazines, periodicals, theater tickets or
any other goods or merchandise in or on any part of the Center, nor shall
any tenant carry on, or permit or allow any employee or other person to
carry on, the business of stenography, typewriting or any similar business
in or from any premises for the service or accommodation of occupants of
any other portion of the Center, nor shall the premises of any tenant be
used for the storage of merchandise or for manufacturing of any kind, or
the business of a public barber shop, beauty shop, beauty parlor, nor shall
the premises of any tenant be used for any improper, immoral or
objectionable purpose, or any business or activity other than that
specifically provided for in such tenant's lease.
8. No tenant shall install any radio or television antenna, loudspeaker or any
other device on the exterior walls or the roof of the Center. No tenant
shall interfere with radio or television broadcasting or reception from or
in the Center or elsewhere.
9. Business machines and mechanical equipment belonging to a tenant which
cause noise or vibration that may be transmitted to the structure of the
building or to any space therein to such a degree as to be objectionable to
Landlord or to any tenants in the Center shall be placed and maintained by
the tenant, at the tenant's expense, on vibration eliminators or other
devices sufficient to eliminate noise or vibration.
10. No tenant shall place a load upon any floor of its premises which exceeds
its load per square foot which such floor was designed to carry.
11. Each tenant shall store all its trash and garbage within the interior of
its premises. No material shall be placed in the trash boxes or receptacles
if such material is of such nature that it may not be disposed of in the
ordinary and customary manner of removing and disposing of trash and
garbage in the city without violation of any law or ordinance governing
such disposal. All trash, garbage and refuse disposal shall be made only
through entryways for such purposes.
12. Canvassing, soliciting, distribution of handbills or any other written
material, and peddling in the Center are prohibited and each tenant shall
cooperate to prevent the same. No tenant shall make room-to-room
solicitation of business from other tenants in the Center.
13. Landlord shall have the right, exercisable without notice and without
liability to any tenant to change the name and address of the Center.
14. Each tenant assumes any and all responsibility for protecting its premises
from theft, robbery, and pilferage, which includes keeping doors locked and
other means of entry to the premises closed.
15. Landlord may waive any one or more of these Rules and Regulations for the
benefit of any particular tenant or tenants, but no such waiver by Landlord
shall be construed as a
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waiver of such Rules and Regulations in favor of any other tenant or
tenants, nor prevent Landlord from thereafter enforcing any such Rules and
Regulations against any or all tenants in the Center.
16. Landlord reserves the right to make such other and reasonable rules and
regulations as in its judgment from time to time be needed for safety and
security, for care and cleanliness of the Center and for the preservation
of good order in the Center. Tenant agrees to abide by all such Rules and
Regulations and any additional rules and regulations which are adopted.
17. Landlord reserves the right to designate and regulate the use of the
parking spaces at the Center.
18. Each tenant and each tenant's guests shall park between designated parking
lines only, and shall not occupy two parking spaces with one car. Vehicles
in violation of the above shall be subject to tow-away, at the vehicle
owner's expense.
19. Vehicles parking at the Center overnight without prior written consent of
Landlord shall be deemed abandoned and shall be subject to tow-away at the
vehicle owner's expense.
20. Each tenant shall be responsible for the observance of all of the foregoing
Rules and Regulations by such tenants employees, agents, clients,
customers, invitees and guests.
21. These Rules and Regulations are in addition to, and shall not be construed
to in any way modify, alter or amend, in whole or in part, the terms,
covenants, agreements and conditions of any lease of premises in the
Center.
3
<PAGE>
EXHIBIT F
EXTERIOR SIGN REGULATIONS
These regulations have been established for the purpose of maintaining the
overall appearance of Evergreen Corporate Center. Compliance will be strictly
enforced. All Tenant signs must be approved by Landlord. Any sign installed
without the approval of Landlord will be brought into conformity at the expense
of Tenant.
Tenant shall submit a sketch of its proposed sign to Landlord for its approval.
The approved sketch will be delivered by Landlord to the sign company. Tenant is
responsible for the cost of the sign, and Landlord will bill Tenant to recover
the cost. Tenant shall be responsible for the fulfillment of all requirements in
accordance with this Exhibit F.
General Requirements
1. Signs will be permitted only for the purpose of identifying the name and
business conducted in a Building. Tenant shall place no more than one sign
on a side wall of the Building.
2. Tenant may select the style and color of the individual company's lettering
and logo, subject to Landlord's approval as provided above.
3. All signs shall conform to all applicable ordinances, codes, and the
covenants, conditions, and restrictions of Tanasbourne Commerce Center, and
shall be compatible with the park-like environment of the Center.
4. Placement of the sign and method of attachment to the Building will be as
directed by Landlord.
5. Upon removal of any sign, any damage to the Building must be repaired by
Tenant at its expense. All signs are the property of Landlord.
6. Except as provided herein, no advertising placards, banners, pennants,
names, insignias, trademarks, or other descriptive material shall be
affixed or maintained upon the glass panes or exterior walls of the
Building, or the landscaped areas, streets, or parking areas.
7. No audible signs will be permitted.
Tenant Exterior Sign Standards
1. Signs shall not be larger than 5 percent of the total square footage of the
face of the Building and shall not exceed 80 square feet.
2. The Building sign shall not extend above the eave of the sidewall of the
Building.
3. Signs may be illuminated. Lighting shall be standard for all buildings
in the Center. Specification will be provided by Landlord.
<PAGE>
4. Lettering and/or the Company logo shall be brushed aluminum.
<PAGE>
ADDENDUM TO LEASE
DATED: January 15, 1997
BETWEEN: EVERGREEN CORPORATE CENTER LLC,
an Oregon limited liability company ("Landlord")
AND: MEDICALOGIC, INC., an Oregon corporation ("Tenant")
The following modifications and insertions, numbered Rider No. 1 to
and including Rider No. 45, are hereby incorporated into the Lease and shall be
deemed made at the respective places indicated throughout the Lease. Any
reference to the Lease in the following provisions of this Addendum shall be
deemed to include this Addendum, unless otherwise specified in such reference.
The capitalized terms used in this Addendum which are defined in the Lease shall
have the meanings given to them in the Lease.
Rider No. 1. Insert Section 1.1(e), Page 1:
- ------------------------------------------
The Premises will be in a two story building to be constructed by
Landlord and are outlined on the attached Exhibit A. Both floors in the Premises
shall be measured in accordance with Portland NAIOP measurement standards, a
copy of which is attached as Exhibit A-1.
Rider No. 2. Insert Section 1.1(f), Page 1:
- ------------------------------------------
At the time this Lease is executed, the Project is under construction.
The current conceptual plan for the Project is attached as Exhibit B. The
location and size of the buildings shown on Exhibit B may change from time to
time. Also, the total amount of square footage in the Project shall vary over
the Term of the Lease. Tenant's percent of the Project for purposes of
determining Tenant's share of Expenses pursuant to Section 4.3 of the Lease
shall be determined by multiplying the Expenses by a fraction, the numerator of
which shall be the number of square feet in the Premises from time to time
(initially 75,010) and the denominator which shall be the total number of square
feet of completed and leasable space in the Project from time to time. The
remaining development of the Project shall be compatible with that portion of
the Project which is constructed as of the date of this Lease and the portion to
be constructed as provided in this Lease. That is, the structures, landscaping
and parking shall be similar and no special or materially different amenities in
the common areas (such as water fountains, for example) are contemplated and, if
Landlord constructs such a special or materially different amenity in the common
area, the costs thereof shall not be included in Expenses payable by Tenant
unless Tenant first consents to the construction of such amenity.
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Rider No. 3. Insert Section 1.1(h), Page 1:
- ------------------------------------------
The term of the Lease (the "Term") shall commence on the earlier of
(a) the date on which Tenant first takes occupancy of the Premises; or (b) the
date on which Landlord's Work (as defined below) is substantially completed as
certified by Landlord's architect, a temporary certificate of occupancy is
received, access to the Premises is completed as required by Laws, and parking
areas are completed consistent with the provisions of Section 10.1 (the
"Commencement Date"). The Term shall expire, unless sooner terminated or
extended pursuant to the provisions of the Lease, 120 months after the
Commencement Date. If the Lease is fully executed and delivered by January 17,
1997 and all information and approvals as requested by Landlord regarding
details, colors, finishes or other issues relating to Landlord's Work (as
defined below) are received by Landlord in writing from Tenant on or before
March 15, 1997, then the anticipated substantial completion date of Landlord's
Work shall be December 15, 1997, subject to delays caused by Tenant, delays
caused by Tenant's requested changes to any plans related to Landlord's Work, or
to delays caused by forces and events outside of Landlord's control, such as
delays caused by abnormally adverse weather, labor dispute, strike, civil
commotion, rebellion, hostilities, military or other usurped power, sabotage,
governmental regulations or controls, delay in issuance of any permit beyond 30
days after an application therefor (which is, to the best of Landlord's
knowledge, a completed application) is submitted, inability, due to reasons
beyond Landlord's control, to obtain labor, services or materials, or acts of
God (collectively, "Force Majeure"). If substantial completion of Landlord's
Work is delayed past March 31, 1998, as extended, day for day, for days of delay
caused by Tenant, by Tenant's requested changes to any plans related to
Landlord's Work, or by Force Majeure, then for each day of delay in substantial
completion of Landlord's Work beyond March 31, 1998 except for days of delay
caused by Tenant, by Tenant's requested changes to any plans related to
Landlord's Work, or by delays caused by Force Majeure, Tenant shall receive a
credit against Base Rent payable under this Lease in an amount equal to $653.47
per day. Tenant hereby accepts the Landlord's Work Plans (defined below) as
complete and as comprising the totality of Landlord's Work. Tenant shall be
permitted to enter the Premises approximately 45 days prior to the Commencement
Date for the purpose of rough-wiring Tenant's telephone, alarm, and data systems
to perimeter walls. Such work shall be in compliance with the provisions of
Section 2.7, 2.8 and 2.9 of the Work Agreement attached as Exhibit D. Tenant
shall provide promptly upon Landlord's request information regarding details,
colors, finishes and other issues relating to Landlord's Work so that Landlord
may apply for applicable permits by March 15, 1997.
Rider No. 4. Insert Section 2.1, Page 1:
- ---------------------------------------
Landlord shall give Tenant notice when the Premises are ready
for occupancy.
Rider No. 5. Insert Section 2.1, Page 1:
- ---------------------------------------
, and subject to latent defects but only to the extent the costs of
correction of such latent defects are paid for under any applicable guaranty,
warranty or contractual commitment provided by Baugh Construction Oregon, Inc.
(the "Contractor"). Landlord agrees to use commercially reasonable efforts to
enforce applicable guaranties, warranties and the construction
2
<PAGE>
contract with the contractor (the "Construction Contract") related to correction
of latent defects at Tenant's cost and expense. The limitation on Landlord's
liability in this Lease related to the Building and Landlord's Work shall not
limit the Contractor's liability. The Construction Contract shall contain
substantially the same warranty as that which is set forth in AIA Form A201-1976
or terms more favorable to landlord. "Punchlist items" shall mean minor items
which do not interfere with Tenant's use of the Premises for its intended
purpose. Landlord shall complete all punchlist items within 60 days of the date
of Tenant's and Landlord's agreement as to the items on the punchlist, subject
to additional time needed to complete warranty items and delays due to Force
Majeure including additional time needed to obtain materials.
Rider No. 6. Insert Section 2.1(2), Page 2:
- ------------------------------------------
the date on which the building permits for Landlord's Work are issued.
Rider No. 7. Insert Section 2.1(2), Page 2:
- ------------------------------------------
However, Landlord agrees to use commercially reasonable efforts to
enforce any applicable guaranties, warranties or Construction Contract claims
related to the correction of the violation at Tenant's cost and expense.
Landlord represents to Tenant that the Premises are zoned MP by the City of
Hillsboro, which zoning designation permits office use.
Rider No. 8. Insert Section 3.1, Page 2:
- ---------------------------------------
one day earlier than the date of substantial completion of Landlord's
Work for each day of delay caused by any reason attributable to Tenant (each a
"Tenant Delay Day"). Tenant acknowledges that Landlord shall not be obligated to
engage overtime labor in order to reduce delay due to Force Majeure unless
Tenant requests such overtime labor and pays for such overtime labor.
Rider No. 9. Insert Section 4.3(1)(b), Page 2:
- ---------------------------------------------
excluding janitorial costs related to the interior of buildings in the
Project;
Rider No. 10. Insert Section 4.3(1)(c), Page 2:
- ----------------------------------------------
; provided, however, that Expenses shall not include maintenance,
replacement or repair costs relating to individual tenant premises which
maintenance, replacement or repair is in excess of the type of maintenance,
replacement or repair required to be provided by Landlord to Tenant under this
Lease.
Rider No. 11. Insert Section 4.3(1)(e), Page 2:
- ----------------------------------------------
Real Property Taxes shall not include assessments (such as local
improvement districts) for construction of improvements in the initial
development of the Project but Real Property Taxes will include ad valorem taxes
assessed on such improvements.
3
<PAGE>
Rider No. 12. Insert Section 4.3(1), Page 2:
- -------------------------------------------
The term "Expenses" shall not include the following:
(i) Ground lease rental.
(ii) Amortization and interest pay1ments on Landlord's mortgage
financing.
(iii) Depreciation.
(iv) Costs incurred in the initial development and construction of the
Project.
(v) The costs of correcting defects in construction which are paid by
enforcement of applicable guaranties or warranties.
(vi) The cost of tenant improvements provided inside buildings.
(vii) Leasing commissions or brokerage commissions.
(viii) Legal expenses for disputes with other tenants.
(ix) Legal, auditing, and consulting fees other than those incurred in
connection with operation, maintenance, repair or replacement of the Project.
(x) Costs incurred in performing maintenance and repairs or furnishing
services for individual tenants which work or services is in excess of the type
of maintenance and repair or services required to be provided by Landlord to
Tenant under this Lease.
(xi) Expenses incurred in leasing transactions or procuring new
tenants.
(xii) Expenses for repair or replacement paid by proceeds of
condemnation awards and costs due to casualty (other than commercially
reasonable deductible amounts under insurance policies which shall be included
in Expenses).
(xiii) Wages, costs and salaries associated with offsite employees of
Landlord other than services provided by such employees which would otherwise be
provided by outside persons, and wages, costs and salaries attributable to
persons above the level of property manager; provided, however, that Tenant
acknowledges the right of Landlord to charge (a) a management fee not to exceed
four percent of gross rents and revenues of the Project, (b) construction
management fees not to exceed ten percent of the costs, fees and expenses in
connection with construction, and (c) an additional charge on costs of labor and
personnel not to exceed fifteen percent thereof.
(xiv) Any costs representing an amount paid to any entity related to
Landlord which is in excess of the amount which would have been paid in the
absence of such relationship subject to the proviso regarding the fees and
charges set forth in paragraph (xiii) above.
4
<PAGE>
(xv) Damages payable by Landlord due to a default by Landlord under
any lease or fines, penalties or interest charged by a governmental entity
arising from Landlord's violation of any governmental laws, rules, regulations,
or ordinances applicable to the Project.
Rider No. 13. Insert Section 4.3(3), Page 3:
- -------------------------------------------
Tenant shall pay its annual share of estimated Expenses in monthly
installments of one-twelfth (1/12) each beginning on the Commencement Date and
continuing thereafter on the first day of each calendar month, in advance,
throughout the Term. Landlord may revise its estimate of Tenant's share of
Expenses from time to time. When Landlord revises its estimate of Tenant's share
of Expenses, and Landlord gives written notice to Tenant of such revised
estimate, Tenant shall make revised payments of Expenses pursuant to such notice
commencing on the first day of the calendar month following Landlord's notice of
the revised estimate and continuing on the first day of each calendar month
until the estimated payments are again revised.
Rider No. 13a. Insert Section 4.3(3), Page 3:
- --------------------------------------------
until the earlier of (a) 365 days following the date of receipt of the
Notice, or (b) the date Landlord issues its accounting for Expenses for the next
succeeding calendar year (the "Objection Deadline") to
Rider No. 14. Insert Section 4.3(3), Page 3:
- -------------------------------------------
No later than on the Objection Deadline, Tenant's employee or Tenant's
authorized representative (which must be a certified public accountant paid on
an hourly basis and not on a contingent fee basis) may, at Tenant's expense,
after reasonable prior notice to Landlord, and at a reasonable time, audit
Landlord's books and records for the calendar year pertaining to the Notice for
the purpose of verifying Landlord's calculation of the Expenses for the year in
question. If such audit reveals any errors, and if Landlord does not dispute the
audit, appropriate adjustments shall be made. If Landlord disputes the results
of the audit and Landlord and Tenant are unable to agree on the appropriate
adjustment to be made, if any, then the dispute shall be resolved by a
nationally recognized accounting firm not then employed by Landlord or Tenant
selected by Tenant from a list of three names given by Landlord to Tenant (the
"Arbitrator"). The decision by the Arbitrator shall be binding on the parties
and any adjustment required by the Arbitrator's decision shall promptly be made
after receipt of the Arbitrator's decision. The parties shall share equally the
cost of the Arbitrator. Tenant shall give Landlord a copy of the audit results.
The fact of the audit itself, the results of the audit, and any adjustments made
to Expenses shall be kept confidential by Tenant.
Rider No. 15. Insert Section 4.3(4), Page 3:
- -------------------------------------------
within five days after it is
5
<PAGE>
Rider No. 16. Insert Section 7.1, Page 3:
- ----------------------------------------
Landlord shall build the base building in which the Premises are
located (the "Building") and Landlord shall provide certain tenant improvements
in the Premises, all as specifically described in the scope narrative, the
plans, and the specifications prepared by Zimmer Gunsul Frasca, the partition
plan, and the electrical plan, all attached as Exhibit C (collectively, the
"Landlord's Work Plans"). Landlord shall obtain all permits and approvals
required for Landlord's Work. Landlord shall perform all of Landlord's Work in a
good and workmanlike manner using new materials. The work specified in the
Landlord's Work plans is collectively referred to in this lease as "Landlord's
Work". All other improvements, alterations, and modifications to the Premises,
additional finish items, all changes to Landlord's Work, and all changes to
Landlord's Work plans, if any (collectively and individually, the "Additional
Work") shall be first approved in writing by Landlord and the costs, fees, and
expenses thereof, including without limitation, the costs, fees, and expenses of
obtaining all necessary permits and approvals of design, construction, and
installation thereof, together with supervision fees by the manager of the
Project and any costs, fees, or expenses incurred due to corresponding changes
to other items of Landlord's Work required as a result thereof (collectively,
the "Additional TI Costs") shall be paid in full by Tenant prior to the
Commencement Date of the Lease (except to the extent payable by Tenant as a
First TI Loan or a Second TI Loan pursuant to Section 36.1 of the Lease). The
Work Agreement attached as Exhibit D is incorporated in this Lease by this
reference.
Rider No. 17. Insert Section 7.1, Page 3:
- ----------------------------------------
; provided, however, that (unless required by any Laws) no such
modifications, alterations, deletions, or improvements shall reduce the parking
ratio for the Project below the ratio set forth in Section 10.1 or materially
adversely restrict access to the Premises from N.W. Evergreen Parkway.
Rider No. 18. Insert Section 7.1, Page 3:
- ----------------------------------------
The current rules and regulations pertaining to the Project with which
Tenant shall comply are attached to this Lease as Exhibit E.
Rider No. 19. Insert Section 10.1, Page 4:
- -----------------------------------------
Tenant shall not park nor allow its employees, invitees, and customers
collectively to park in excess of four automobiles for every 1,000 square feet
leased by tenant in the center at any point in time.
Rider No. 20. Insert Section 10.1, Page 4:
- -----------------------------------------
; provided, however, that (unless required by any laws), landlord
shall not have the right to reduce the parking available to tenant below the
ratio set forth in this Section.
6
<PAGE>
Rider No. 21. Insert Section 11.1, Page 4:
- -----------------------------------------
Tenant shall pay its share of utilities used in or related to the
operation and maintenance of the Project as part of Expenses as described in
Section 4.3(1).
Rider No. 22. Insert Section 12.1, Page 4:
- -----------------------------------------
Landlord shall maintain, in good condition, the structural parts of
the building which shall include only the foundation, the structural parts of
the bearing and exterior walls (excluding glass), the structural parts of the
subflooring and the structural portions of the roof (excluding skylights), and
the unexposed portions of the
Rider No. 23. Insert Section 12.1, Page 4:
- -----------------------------------------
Except as expressly set forth in the first sentence of Section 12.1
and below in this paragraph, from and after the Commencement Date, Tenant shall
be fully responsible for the maintenance, repair, replacement, and operation, in
good operating order and condition, of the interior and exterior of the
Building, and its systems and equipment including without limitation the
heating, ventilating and air conditioning systems and equipment ("HVAC"), the
roof, and the elevator. Landlord's sole obligations are set forth in the first
sentence of Section 12.1. However, so long as (a) Landlord's designated Project
property manager ("Landlord's Property Manager") manages the maintenance and
repair of the Building and its systems pursuant to a written property management
contract between Tenant and Landlord's Property Manager containing a scope of
work reasonably satisfactory to Landlord, and (b) such contract is in full force
and effect, then Landlord agrees to be responsible to maintain, repair, and
replace the roof and any leaking windows. As of the date of this Lease, Melvin
Mark Brokerage Company is Landlord's Property Manager. Tenant shall provide its
own janitorial services and, in all respects, maintain the Building in good and
clean operating condition throughout the Term of the Lease. Tenant shall provide
regular service and maintenance of the HVAC, the elevator, the electrical
system, and all other Building systems and equipment, and regular pest control
services throughout the Term using contractors first approved by Landlord, which
approval shall not be unreasonably withheld. Landlord shall also have the right
to approve the scope of work to be provided under each such contract so that
Landlord is reasonably satisfied that the Building and its systems and equipment
will be properly maintained and inspected throughout the Term.
Rider No. 24. Insert Section 12.1, Page 4:
- -----------------------------------------
Landlord shall use its commercially reasonable efforts to enforce on
Tenant's behalf and at Tenant's expense all applicable construction and
equipment warranties.
Rider No. 25. Insert Section 13.1, Page 4:
- -----------------------------------------
either without Landlord's permission or alterations as to which
Landlord required removal in connection with Landlord's approval of the
alteration. Whenever Tenant requests Landlord's consent to any alteration,
Tenant shall also request Landlord's decision at that time whether Landlord will
require the alteration in question to be removed at the end of the Term. If
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<PAGE>
Tenant does not request such decision at that time, or if Landlord responds to
such request with a requirement that Tenant remove the alteration in question,
then Landlord shall be free to require Tenant to remove such alteration at the
end of the Term as provided in this Section 13.1.
Rider No. 26. Insert Section 14.1, Page 5:
- -----------------------------------------
(except as expressly provided below)
Rider No. 27. Insert Section 14.1, Page 5:
- -----------------------------------------
Landlord shall indemnify, defend, and hold Tenant harmless from all
claims, losses, causes of action, costs and expenses, and damages arising out of
(a) Landlord's or its agents' negligence or willful misconduct and/or (b)
Landlord's default or violation of any term of this Lease which is not corrected
within a reasonable time after Tenant's notice to Landlord thereof. However,
Landlord shall never be liable for consequential damages such as lost profits.
Rider No. 28. Insert Section 15.1, Page 5:
- -----------------------------------------
Neither party shall be liable to the other party for any loss or
damage caused by any of the risks covered by "all risk" insurance coverage, and
there shall be no subrogated claim by one party's insurance carrier against the
other party arising out of any such loss.
Rider No. 29. Insert Section 16.1, Page 5:
- -----------------------------------------
Then Landlord shall give Tenant a notice as to Landlord's estimate of
the time period reasonably required to complete the restoration (the "Damage
Assessment"). If the Damage Assessment shall state that the reconstruction shall
require more than 270 days to complete following receipt of governmental
approvals required therefor, then this Lease may be terminated by Landlord or
Tenant by its giving to the other party written notice of such termination
within 30 days after Tenant's receipt of the Damage Assessment. In the event of
the giving of such notice of termination, this Lease shall expire as of the date
of such notice given in accordance with the terms of this paragraph, with the
same effect as if such date were the Expiration Date. In the event that Landlord
fails to substantially complete the repairs by the date specified in the Damage
Assessment, Tenant shall have the right to terminate this Lease with written
notice given no later than 15 days after the date specified in the Damage
Assessment if Landlord's failure to complete such repairs on the date specified
in the Damage Assessment is not caused in whole or in part by delays due to
Force Majeure or delays caused by Tenant. If the Lease is not terminated
pursuant to this Section 16.1,
Rider No. 30. Insert Section 17.1(4), Page 5:
- --------------------------------------------
; provided, however, Landlord shall not use this termination provision
in bad faith.
8
<PAGE>
Rider No. 31. Insert Section 18.1(4), Page 6:
- --------------------------------------------
Which consent shall not be unreasonably withheld or delayed. Landlord
may condition its consent on reasonable conditions. Should Landlord withhold its
consent to a proposed assignment or subletting or any other transfer of Tenant's
rights under this Lease (each a "Transfer") for any of the following reasons,
the withholding of consent shall be deemed reasonable: (A) conflict or
incompatibility of the proposed use with uses appropriate in a professional
business park; (b) financial inadequacy of the proposed transferee as reasonably
determined by Landlord; (c) any proposed change in use which would diminish the
professional nature of the Project or of the other businesses located in the
Project; (d) the proposed use would adversely impact the use of the common
facilities by other tenants of the Project; (5) Tenant is then in default of the
Lease beyond any applicable cure period; and (6) any other reasonable criteria.
Landlord shall not be required to consent to a Transfer to any person or entity
with whom Landlord or its agents is then negotiating the terms of a lease of any
other portion of the Project; provided, however, that with respect to a sublease
of no more than 30 percent of the Premises entered into during the initial two
years of the Term, (x) Landlord shall not be allowed to withhold its consent to
the sublease to a person or entity based solely on the fact that Landlord or its
agents is then negotiating the terms of a lease of another portion of the
Project with that same person or entity, and (y) Landlord shall not use
financial ability of the proposed subtenant as a criterion for withholding its
consent to the sublease. Landlord shall not be required to consent to any
Transfer at any time to an existing tenant or occupant of the Project. No
Transfer shall result in Tenant being released from any obligation under this
Lease. As a condition to Landlord's prior written consent as provided in this
Section 18.1, the transferee shall agree in writing to comply with and be bound
by all of the terms, covenants, conditions, provisions, and agreements of this
Lease and Tenant shall deliver to Landlord promptly after execution an executed
copy of all agreements of such compliance by each transferee.
Rider No. 32. Insert Section 18.1, Page 6:
- -----------------------------------------
; provided, however, if the net worth of Tenant after the transfer at
issue would be less than either (x) the net worth of Tenant as of the date of
this Lease, or (y) the net worth of Tenant prior to the transfer, then Landlord
may refuse its consent to the transfer at issue.
Rider No. 33. Insert Section 18.1, Page 6:
- -----------------------------------------
or to transfers to shareholders of record on the date of this Lease or
to transfers by shareholders of record on the date of this Lease to family
members or trusts for the benefit of family members of such shareholders. Tenant
shall have the right to assign this Lease or sublease all or part of the
Premises to any entity which is controlled by, under the control of, or under
common control with Tenant, or any corporation into which Tenant may be merged
or consolidated, or which purchases all or substantially all of the assets of
Tenant (each an "Affiliate of Tenant"); provided, however, (a) Tenant shall not
be released from its obligations under this Lease, (b) Landlord shall be given
at least 15 days prior written notice of the assignment or sublease, (c)
Landlord shall be given a copy of the document effecting the assignment or
sublease at least 15 days prior to the date on which the assignment or sublease
9
<PAGE>
shall occur, and (d) from and after the date of the assignment or sublease,
Tenant shall be jointly and severally liable with the Affiliate of Tenant with
respect to all obligations of Tenant under this Lease.
Rider No. 34. Insert Section 19.1, Page 6:
- -----------------------------------------
within ten days after written notice that it is due; provided,
however, that Landlord shall not be obligated to give a ten day notice and
opportunity to cure more than once during any single twelve-month period. If
Tenant fails to pay rent or any other charge on the date it is due a second time
within any twelve-month period, such failure to pay rent or other charge shall
be an automatic event of default at Landlord's option without need for further
notice or opportunity to cure;
(b) failure to comply with Laws which failure materially affects the
operations or quality of the Project or may result in a claim, fine or penalty
against Landlord, failure to carry the insurance required of Tenant under this
Lease, or the failure of Tenant to deliver a subordination agreement or estoppel
certificate within the time required by Section 22.1 of this Lease within five
days after written notice by Landlord. No notice and no opportunity to cure
shall be required if Landlord has previously given Tenant notice of failure to
comply with the same provision of this Lease;
(c) failure to comply with the provisions of Section 10.1 of the Lease
within five days after written notice by Landlord; provided, however, that
Landlord shall not be obligated to give a five day notice and opportunity to
cure more than once during any single twelve-month period. If Tenant fails to
comply with the provisions of Section 10.1 of the Lease a second time within any
twelve-month period, such failure to comply shall be an automatic event of
default at Landlord's option without need for further notice or opportunity to
cure;
(d) failure of Tenant to comply with any other term or condition of
this Lease or to fulfill any other obligation of this Lease within 30 days after
written notice from Landlord specifying the nature of the failure or, if such
failure cannot be cured within such 30 day period, Tenant shall not be in
default if, promptly after Landlord's notice to Tenant, Tenant begins its cure
of the failure and diligently prosecutes such cure to completion. Landlord shall
not be obligated to give written notice for the same type of failure more than
once during any single twelve-month period; at Landlord's option, a failure to
perform an obligation again after the first notice during any twelve-month
period shall be an automatic event of default, without notice or any opportunity
to cure.
Rider No. 35. Insert Section 20.1, Page 6:
- -----------------------------------------
Notwithstanding any provisions in this Section to the
contrary, Landlord shall have the duty to exercise its reasonable efforts to
mitigate damages in accordance with Oregon law.
10
<PAGE>
Rider No. 36. Insert Section 20.1, Page 6:
- -----------------------------------------
after notice thereof by Landlord beyond the cure period set forth in
Section 19.1,
Rider No. 37. Insert Section 21.1, Page 6:
- -----------------------------------------
after reasonable oral notice in non-emergency situations
Rider No. 38. Insert Section 22.1, Page 7:
- -----------------------------------------
Landlord shall deliver to Tenant within 30 days after execution of
this Lease or such additional time as may be reasonably required by Landlord to
obtain such agreement, a nondisturbance agreement in form and substance
reasonably acceptable to Tenant from any existing mortgagee or beneficiary of a
deed of trust with a lien on the Project or any existing ground lessor with
respect to the Project. The commencement of Tenant's obligation to pay rent
shall be contingent upon Landlord's compliance with the terms of this Section
22.1. Tenant's subordination to any future mortgage, trust deed or ground lease
shall be contingent upon the delivery of a non-disturbance agreement in form and
substance reasonably acceptable to Tenant from any future mortgagee, beneficiary
or ground lessor.
Rider No. 39. Insert Section 22.1, Page 7:
- -----------------------------------------
Tenant's obligation under the last sentence of this section 22.1 shall
be to deliver its most recent audited financial statement (which shall be
current at least to the most recently ended fiscal year) and its most recent
unaudited financial statement which shall be current at least to the most
recently ended calendar quarter of tenant's fiscal year. Landlord agrees to keep
confidential any such financial statements which are not already public
information except that landlord may disclose all financial statements to its
advisors, prospective and current lenders, and prospective and current
purchasers.
Rider No. 40. Insert Section 23.1, Page 7:
- -----------------------------------------
In order for any notices given to Landlord to be effective, such
notices must be addressed to Landlord and delivered to the following addresses
(or to such other addresses as Landlord may designate in writing from time to
time in accordance with the notice provisions of Section 23.1 of the Lease):
Melvin Mark Companies
Attn: Mr. Daniel J. Petrusich
Suite 1380
111 SW Columbia Street
Portland, OR 97201
11
<PAGE>
With a copy to:
Schnitzer Investment Corp.
Attn: Mr. Kenneth M. Novack
3200 NW Yeon Street
Portland, OR 97210
Rider No. 41. Insert Section 25.1, Page 7:
- -----------------------------------------
and damage by fire or other casualty
Rider No. 42. Insert Section 25.1, Page 7:
- -----------------------------------------
to the extent required pursuant to the provisions of Section 13.1 of
this Lease. Restoration of wall surfaces shall not include repainting of wall
surfaces but shall include patching and preparing such wall surfaces for paint
Rider No. 43. Insert Section 25.1(5), Page 8:
- --------------------------------------------
concerning this Lease, the Premises or the Project
Rider No. 44. Insert Section 31.1, Page 10:
- ------------------------------------------
Landlord represents and warrants to Tenant that, to the best of
Landlord's actual and present knowledge, without inquiry except for the review
of a Phase I Environmental Property Assessment prepared by PBS Environmental
dated December 1995, no hazardous substances have been generated, released,
handled, stored, discharged, transported, deposited or disposed in, on, or under
or about the Premises or the Project.
Rider No. 45. Insert Page 10: The following provisions are hereby added to the
- ----------------------------
Lease:
33.1 Option to Extend.
----------------
33.1.1 If the Lease is not then in default and if Tenant has not
assigned the Lease or subleased more than 50% of the Premises, Tenant shall have
the right to extend the term of the Lease for two successive periods of five
years each (the "Options to Extend"). Tenant shall exercise each Option to
Extend by delivering written notice of such exercise not less than 365 days
prior to the last day of the then expiring Term. The giving of such notice shall
be sufficient to make the Lease binding on the parties for the extended term in
question without further action of the parties. The extended term shall commence
on the day following the date of expiration of the immediately preceding term.
The terms and conditions of the Lease for the extended term shall be identical
to the immediately preceding term except for Base Monthly Rent. During the
extended term, Base Monthly Rent shall be adjusted to equal the greater of
(a) the Base Monthly Rent in effect at the end of the immediately preceding
term, or (b) the fair market rental value of the premises for the extended term,
determined as hereinafter provided. Within 30 days after the exercise of an
Option to Extend, Landlord shall notify Tenant of its determination of the fair
market rental value. Within 30 days after the effective date of such notice,
Tenant shall either
12
<PAGE>
(x) notify Landlord of Tenant's acceptance of Landlord's determination of the
fair market rental value, in which event Base Monthly Rent for the extended term
shall be as so determined by Landlord; or (y) notify Landlord of Tenant's
rejection of Landlord's determination of the fair market rental value, in which
event the fair market rental value shall be determined in accordance with
Section 33.1.2 below. The failure of Tenant to give any notice within the
required time period shall be deemed an acceptance by Tenant of Landlord's
determination of the fair market rental value.
33.1.2 Within ten days after Tenant's rejection of Landlord's
determination of fair market rental value as provided in Section 33.1.1 above,
each party shall designate a representative who is either an Oregon licensed MAI
appraiser skilled in determining rental rates for office buildings in western
suburban areas of Portland, Oregon, or a real estate broker experienced in
leasing office space in office buildings located in the western suburbs of
Portland, Oregon. If the two representatives cannot agree within 30 days after
their selection on the fair market rental value, then the two representatives so
chosen shall select an arbitrator having the above qualifications or, if they
cannot agree, the presiding judge of the Circuit Court of Multnomah County or
Washington County, Oregon, shall, upon application by either party, select an
arbitrator having the above qualifications. Within 90 days prior to the
commencement of the extended term, each party's representative shall submit to
the arbitrator a written report stating such representative's opinion of the
fair market rental value of the Premises for the extended term in question,
based on a consideration of all factors appropriate to determining fair market
rental value for the extended term in question including without limitation
rental rates then being charged (under the most recently executed leases) in
space comparable to the Premises in buildings comparable to the Building and
concessions available to comparable tenants for comparable space. Within 30 days
after receipt of such reports, the arbitrator shall accept one or the other of
the reports. The determination of the fair market rental value in the report so
accepted shall be binding on the parties; provided, however, that Base Monthly
Rent during any extended term shall not in any event be less than Base Monthly
Rent payable during the immediately preceding term. The cost of the
determination of the fair market rental value pursuant to this Section 33.1.2
shall be shared equally by Landlord and Tenant. If the arbitrator does not
decide the fair market rental value prior to the commencement date of the
renewal term in question, Base Monthly Rent shall continue to be payable in the
amount previously in effect, and retroactive adjustment shall be made when the
arbitrator reaches a decision.
34.1 Satellite Dish
--------------
34.1.1 Grant of License. Landlord hereby grants Tenant a
nonexclusive license to install on the roof of the building a satellite dish of
no more than three feet in diameter and the nonexclusive right to run connecting
lines to such satellite dish from the Premises (such satellite dish and such
connecting lines and equipment are herein referred to as the "Equipment").
Tenant shall not penetrate the roof in connection with any installation or
reinstallation of the Equipment if such penetration may void or adversely affect
any applicable guaranty or warranty. The plans and specifications for all the
Equipment shall be approved by Landlord in writing prior to any installation.
Tenant shall be responsible for any damage to the roof or conduit systems as a
result of Tenant's installation, maintenance and/or removal of the Equipment.
13
<PAGE>
34.1.2 Location. The location of the satellite dish and the rest
of the Equipment shall be subject to Landlord's prior written approval. Tenant
shall not change the location of, or alter or install additional Equipment or
paint the satellite dish or the other Equipment without Landlord's prior written
consent.
34.1.3 Compliance with Law. Tenant, at Tenant's sole expense,
shall comply with all Laws regarding the installation, construction, operation,
maintenance and removal of the Equipment and shall be solely responsible for
obtaining and maintaining in force all permits, licenses and approvals necessary
for such operations.
34.1.4 Taxes. Tenant shall be responsible for and promptly shall
pay when due all taxes, assessments, charges, fees and other governmental
impositions levied or assessed on the Equipment or based on the operation
thereof.
34.1.5 Relocation. Landlord may require Tenant to relocate the
Equipment during the term of the Lease to a location approved by Tenant, which
approval shall not be unreasonably withheld or delayed. Landlord shall reimburse
Tenant for any direct third party expenses reasonably incurred by Tenant in so
relocating the Equipment upon receipt of invoices evidencing Tenant's incurring
of such expenses.
34.1.6 Interference. Operation of the Equipment shall not
interfere in any manner with equipment systems or utility systems of other
tenants, including without limitation, telephones, dictation equipment,
lighting, heat and air conditioning, computers, electrical systems, and
elevators. If operation of the Equipment causes such interference, Tenant
immediately shall suspend operation of the Equipment until such interference is
eliminated.
34.1.7 Maintenance and Repair. Tenant shall maintain the
Equipment in good condition and repair, at Tenant's cost and expense. Landlord
may from time to time require that Tenant repaint the satellite dish at Tenant's
expense to keep the same in an attractive condition.
34.1.8 Indemnity and Insurance. Tenant shall indemnify, defend,
protect and hold harmless Landlord pursuant to the Lease from and against any
and all claims related to the Equipment or operation of the same as if the
Equipment were located wholly within the Premises. Tenant shall provide evidence
satisfactory to Landlord that Tenant's property and liability insurance policies
required under the Lease include coverage for the Equipment and any claim, loss,
damage, or liability relating to the Equipment.
34.1.9 No Landlord Responsibility. Landlord shall have no
responsibility or liability whatsoever relating to (i) maintenance or repair of
the Equipment; (ii) damage to the Equipment; (iii) damage to persons or property
relating to the Equipment or the operation thereof; or (iv) interference with
use of the Equipment arising out of utility the interruption or any other cause.
Upon installation of the Equipment, Tenant shall accept the area where the
Equipment is located in its "as is" condition. Tenant acknowledges that the roof
location of the Equipment is suitable for Tenant's needs, and acknowledges that
Landlord shall have no
14
<PAGE>
obligation whatsoever to improve, maintain or repair the area in which the
Equipment will be installed.
34.1.10 Use. Tenant shall use the Equipment solely for operations
within the Premises and shall not use or allow use of the Equipment, for
consideration or otherwise, for the benefit of other tenants in the project or
any other person or entity.
34.1.11 Removal. Tenant shall, at Tenant's sole expense, remove
the satellite dish and such other portions of the Equipment as Landlord may
designate, and restore the affected areas to their condition prior to
installation of the Equipment (i) immediately upon request of Landlord, if
Tenant fails to perform any of its obligations under this Section 34.1, (ii)
immediately if such removal is required by any governmental agency having
jurisdiction over the Equipment, and (iii) in any event, no later than 30 days
after expiration or earlier termination of the Lease. If Tenant fails to remove
the Equipment when and as required under this Section 34.1, Landlord reserves
the right to do so, and the expense of the same shall be immediately due and
payable from Tenant to Landlord as additional rent, together with interest and
late charges as provided in the Lease.
34.1.12 Survival. The covenants, obligations and indemnities of
Tenant under this Section 34.1 shall survive expiration or earlier termination
of the Lease for any reason.
35.1 Communication Regarding Available Expansion.
-------------------------------------------
In the event Tenant informs Landlord that Tenant desires to lease
additional space in the Project, Landlord shall inform Tenant of the available
space, if any, which is not subject to prior rights held by other tenants or
prospective tenants of the Project and of the terms under which Landlord would
be willing to lease such available space to Tenant.
36.1 Tenant Improvement Loans.
------------------------
36.1.1 First Tenant Improvement Loan. As provided in Section 7.1,
Rider 16, and the Work Agreement, Tenant is required to pay the Additional TI
Costs in full prior to the Commencement Date of this Lease. If Tenant desires to
borrow funds from Landlord for such excess amount, Landlord agrees to loan funds
to Tenant in an amount not to exceed $75,010.00 solely for costs, fees, and
expenses to design and construct improvements in the Premises (the "First TI
Loan"). The First TI Loan shall accrue interest at the rate of 11 percent per
annum. Tenant shall repay the First TI Loan with monthly payments sufficient to
amortize the First TI Loan over the ten year term of the Lease beginning on the
Commencement Date and ending on the expiration date of the initial term of the
Lease, taking into account interest at the rate of 11 percent per annum.
Payments on the First TI Loan will begin on the Commencement Date and shall
continue on the first day of each month throughout the remainder of the initial
term of the Lease and shall be paid in full on or before the expiration date of
the initial term of the Lease or any earlier termination date. Landlord shall
inform Tenant of the monthly amount to be paid under the First TI Loan as soon
as practicable after substantial completion of the Tenant improvements. If the
amount is not determined prior to the Commencement Date, then Tenant's first
payment under the First TI Loan shall be sufficient to pay the monthly payments
15
<PAGE>
due from the Commencement Date to the date on which Tenant is informed of the
monthly payment amount. At Landlord's option, Landlord may prepare a promissory
note which Tenant shall execute and deliver to Landlord, setting forth the terms
of Tenant's obligation to repay the First TI Loan.
36.1.2 Second Tenant Improvement Loan. Landlord further agrees to
loan additional funds to be applied toward the Additional TI Costs in an amount
not to exceed $75,010.00 solely for costs, fees, and expenses to design and
construct improvements in the Premises (the "Second TI Loan"). The Second TI
Loan shall accrue interest at the rate of 11 percent per annum. Tenant shall
repay the Second TI Loan with monthly payments sufficient to amortize the Second
TI Loan over the initial two years of the Term beginning on the Commencement
Date and ending on the last day of the 24th month of the Term, taking into
account interest at the rate of 11 percent per annum. Payments on the Second TI
Loan will begin on the Commencement Date and shall continue on the first day of
each month thereafter and shall be paid in full on or before the end of the 24th
month of the Term or any earlier lease termination date. Landlord shall inform
Tenant of the monthly amount to be paid under the Second TI Loan as soon as
practicable after substantial completion of the Tenant improvements. If the
amount is not determined prior to the Commencement Date, then Tenant's first
payment under the Second TI Loan shall be sufficient to pay the monthly payments
due from the Commencement Date to the date on which Tenant is informed of the
monthly payment amount. At Landlord's option, Landlord may prepare a promissory
note which Tenant shall execute and deliver to Landlord, setting forth the terms
of Tenant's obligation to repay the Second TI Loan.
37.1 Force Majeure.
-------------
Whenever a period of time is prescribed in this Lease for action to be
taken by Landlord or for performance of any obligation of Landlord under this
Lease, Landlord shall not be responsible for, and there shall be excluded from
the computation of such period of time, any delays due to Force Majeure.
Whenever a period of time is prescribed in this Lease for action to be taken by
Tenant (except for the obligation to pay rent and other expenses or charges) or
for performance of any obligation of Tenant under this Lease (except for the
obligation to pay rent and other expenses or charges), Tenant shall not be
responsible for, and there shall be excluded from the computation of such period
of time, any delays due to Force Majeure.
38.1 Publicity.
---------
Neither Landlord nor Tenant will issue a press release regarding this
Lease without the prior written consent of the other party.
39.1 Authority.
---------
The person signing this Lease by Tenant represents that he has been
duly authorized by Tenant's board of directors to execute and deliver this Lease
which shall be binding on Tenant.
16
<PAGE>
Effect of Addendum. The Lease is modified only in the specific
respects set forth in this Addendum. Except as expressly modified, the Lease
remains in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Addendum as part of
the Lease as of the date first set forth above.
LANDLORD: EVERGREEN CORPORATE CENTER LLC
By: Marzer Venture, an Oregon general
partnership
By: Mark Group Partnership No. 4
By: MELVIN MARK
---------------------------
Title: Partner
------------------------
By: Schnitzer Investment Corp., an
Oregon corporation
By: KEN NOVACK
---------------------------
Title: President
------------------------
TENANT: MEDICALOGIC, INC., an Oregon corporation
By: MARK K. LEAVITT GUY E. FIELD
-------------------------------------
Title: President Controller
----------------------------------
17
<PAGE>
AMENDMENT TO LEASE
DATED: July 15, 1999
BETWEEN: EVERGREEN CORPORATE CENTER LLC,
an Oregon limited liability company ("Landlord")
AND: MEDICALOGIC, INC., an Oregon corporation ("Tenant")
A. Landlord and Tenant are parties to an Industrial Business Park
Lease dated January 15, 1997 (the "Lease Agreement"), as amended by an Addendum
to Lease dated January 15, 1997 (the "Addendum"). The Lease Agreement and the
Addendum are collectively referred to in this Amendment to Lease (the
"Amendment") as the "Lease." The capitalized terms used in this Amendment which
are defined in the Lease shall have the meanings given to them in the Lease.
B. After the Lease was executed, the Project was reconfigured.
Attached, as Exhibit A, is a current site plan of the Project. Landlord and
Tenant desire to expand the Premises by adding to them approximately 27,652
square feet in Building 3 (20540 N.W. Aloclek), as described in this Amendment.
NOW, THEREFORE, in consideration of the mutual promises of the parties
set forth in this Amendment, Landlord and Tenant agree as follows:
1. Expansion. Commencing on September 1, 1999, approximately 27,652 square
feet of space in Building 3 in the area which is crosshatched on the attached
Exhibit B (the "Expansion Space") shall be added to the Premises for the Term.
Commencing on September 1, 1999, and continuing throughout the Term, the
Expansion Space shall be a part of the Premises and subject to all terms and
conditions of the Lease except as otherwise provided in this Amendment. The
Expansion Space was measured in accordance with Portland NAIOP measurement
standards, a copy of which is attached as Exhibit A-I to the Lease Agreement.
2. Rent. Commencing on September 1, 1999, and continuing throughout the
Term, Base Monthly Rent shall increase by the following amounts in accordance
with the following schedule:
Time Period Monthly Base Rent Increase
----------- --------------------------
September 1, 1999 through February 28, 2000 $0
March 1, 2000 through April 30, 2000 $21,569.00
May 1, 2000 through April 30, 2003 $28,482.00
1
<PAGE>
Time Period Monthly Base Rent Increase
----------- --------------------------
May 1, 2003 through April 30, 2006 $31,045.00
May 1, 2006 through December 14, 2007 $33,839.00
3. Additional Rent. Commencing on May 1, 2000, and continuing throughout
the Term, Tenant's percent of the Project for purposes of determining Tenant's
share of Expenses pursuant to Section 4.3 of the Lease Agreement shall be
increased. In addition to the Expenses Tenant pays for the Premises, Tenant
shall also pay Tenant's share of Expenses for the Expansion Space which shall be
a fraction of the Expenses, the numerator of which shall be 27,652, and the
denominator of which shall be the total number of square feet of completed and
leasable space in the Project from time to time.
4. Improvements to Expansion Space. The provisions of Rider No. I through
Rider No. 6 of the Addendum, Rider No. 8 of the Addendum, Rider No. 16 of the
Addendum, Rider No. 36.1 of the Addendum, Exhibit C to the Lease and Exhibit D
to the Lease shall not apply to the Expansion Space. The provisions of this
Section 4 shall control the condition of the Expansion Space and Landlord's work
in the Expansion Space. The Expansion Space shall be leased in its AS IS
condition except for the work to be performed pursuant to the Work Agreement
attached as Exhibit C to this Amendment (the "Expansion Space Work Agreement").
5. Security Deposit. Contemporaneously with the execution of this
Amendment, Tenant shall pay Landlord $33,839.00 as an increased security deposit
which shall be held and disbursed in accordance with the provisions of Section
6.1 of the Lease Agreement.
6. First Opportunity to Lease. Throughout the Term, so long as Tenant is
not in default of the Lease, Tenant shall have the right of first offer to lease
the remainder of space in Building 3 (the "First Offer Space'), in accordance
with the terms of this Section 6. In the event that Landlord desires to make a
written offer (the "Offer) to a third party to lease all or any portion of the
First Offer Space, Landlord shall first present the Offer to Tenant and give
Tenant three business days within which to determine whether Tenant will accept
the Offer. If Tenant gives Landlord written notice within such three business
day period that Tenant elects to accept the Offer, then Tenant shall be bound to
enter into a written lease agreement in accordance with the terms of the Offer.
If Tenant does not give Landlord such written notice within the three business
day period, then Landlord shall be free to lease the First Offer Space to any
party on the terms of the Offer or on substantially similar terms. If Landlord
does not so lease the First Offer Space, Tenant's right of first offer with
respect to the First Offer Space shall revive and continue throughout the Term.
7. Brokerage Commissions. Landlord agrees to pay Tenant's broker, Norris
Beggs & Simpson Northwest Limited Partnership ("NBS") a fee in the amount
described in a letter addressed to NBS from Melvin Mark Brokerage Company dated
June 18, 1999. One half of the commission shall be payable upon full execution
of this Amendment by Landlord and Tenant, and the remainder shall be paid when
Tenant begins paying rent for the Expansion Space at the rate of $1.03 per
square foot.
2
<PAGE>
8. Effect of Amendment. The Lease is modified only in the specific respects
set forth in this Amendment. Except as expressly modified, the Lease remains in
full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as part
of the Lease as of the date first set forth above.
LANDLORD: EVERGREEN CORPORATE CENTER LLC
By: Marzer Venture, an Oregon general partnership
By: Mark Group Partnership No. 4
By: MELVIN MARK
----------------------------------------
Title: Partner
-------------------------------------
By: Schnitzer Investment Corp., an Oregon
corporation
By: KENNETH NOVACK
----------------------------------------
Title: President
-------------------------------------
TENANT: MEDICALOGIC, INC., an Oregon corporation
By: GUY E. FIELD
-------------------------------------------------------
Its: VP Finance
--------------------------------------------------
3
<PAGE>
EXHIBIT A
(Current Site Plan)
[Map of site plan showing buildings 1, 2, 3, 4 and 5 with trees and roads]
<PAGE>
EXHIBIT B
(Expansion Space)
[Map of floor plan for expansion space in Evergreen Corporate Center Building
Three]
<PAGE>
EXHIBIT C
EXPANSION SPACE WORK AGREEMENT
------------------------------
SECTION 1 GENERAL
1.1 Landlord agrees to provide certain improvements in the Expansion Space
in accordance with this Expansion Space Work Agreement. Landlord shall pay up to
$774,256.00 ($28.00 per square foot in the Expansion Space) (the "TI Allowance")
towards the cost of designing and constructing the improvements in the Expansion
Space subject to and in accordance with the terms and conditions of this
Expansion Space Work Agreement. At least $553,040.00 ($20.00 per square foot in
the Expansion Space) of the TI Allowance must be used for improvements made to
the Expansion Space on or before May 31, 2000 (the "Initial Improvements") or
else the TI Allowance shall be reduced as follows. If $553,040.00 is not spent
for improvements made to the Expansion Space on or before May 31, 2000, the TI
Allowance shall be reduced by the difference between $774,256.00, and the amount
spent for improvements made to the Expansion Space on or before May 31, 2000.
Tenant acknowledges that the availability of the TI Allowance is conditioned on
Tenant accepting Landlord's work in the Expansion Space on or before May 31,
2000, as described in the certificate attached as Exhibit D (the "Teachers
Certificate") to be executed and delivered by Tenant on or before May 31, 2000.
If such conditions are fulfilled then, on or before May 31, 2000, Tenant shall
execute the Teachers Certificate and send the original and a copy thereof to
Landlord. If at least $553,040.00 of the TI Allowance is spent for improvements
made to the Expansion Space on or before May 31, 2000, then any remaining amount
of the TI Allowance may be spent at any time during the Term.
1.2 All costs, fees, and expenses in connection with the design and
construction of the improvements in the Expansion Space in excess of the TI
Allowance paid in accordance with Section 1. 1 shall be paid for by Tenant
within twenty (20) days after billing therefor. If Tenant desires to borrow
funds from Landlord for such excess amount, Landlord agrees to loan funds to
Tenant in an amount not to exceed $138,260.00 ($5.00 per square foot in the
Expansion Space) solely for costs, fees, and expenses to design and construct
improvements in the Expansion Space (the "Expansion TI Loan"). The Expansion TI
Loan shall accrue interest at the rate of 11 percent per annum, commencing on
the date of the first advance on the Expansion TI Loan (the "First Advance
Date') and continuing until such time as the entire Expansion TI Loan and all
accrued interest are paid in full. Tenant shall repay the Expansion TI Loan with
monthly payments sufficient to amortize the Expansion TI Loan over the period of
time beginning on the first Advance Date and ending on December 14, 2007, taking
into account interest at the rate of 11 percent per annum. Payments on the
Expansion TI Loan will begin on the first day of the first calendar month
following the First Advance Date and shall continue on the first day of each
month through December 1, 2007 and shall be paid in full on or before December
1, 2007 or any earlier termination date of the Lease. Landlord shall inform
Tenant of the monthly amount to be paid under the Expansion TI Loan as soon as
practicable after substantial completion of the tenant improvements for which
the Expansion TI Loan is used. If the amount is not determined
1
<PAGE>
prior to May 1, 2000, then Tenant's first payment under the Expansion TI Loan
shall be sufficient to pay the monthly payments due from May 1, 2000 to the date
on which Tenant is informed of the monthly payment amount. Upon Landlord's
request, Tenant shall execute and deliver to Landlord a promissory note, setting
forth the terms of Tenant's obligation to repay the Expansion TI Loan, in the
form attached as Exhibit E.
1.3 Throughout the process of design and construction of the Tenant
improvements, Patty Sullivan ("Tenant's Construction Representative") shall be
available for onsite and telephone consultations and decisions as necessary.
Tenant's Construction Representative's address is 20500 N.W. Evergreen Parkway,
Hillsboro, Oregon 97124 and her telephone number is 531-7000. Tenant's
Construction Representative shall have the authority to bind Tenant as to all
matters relating to the tenant improvements.
SECTION 2 DESIGN OF TENANT IMPROVEMENTS
2.1 Landlord shall retain the services of a space planner or architect (the
"Planner") to prepare the necessary drawings, including without limitation Basic
Plans and Working Plans as described below for construction of the tenant
improvements (the "Pl1ans"). Promptly after the Planner's requests, Tenant's
Construction Representative will meet with the Planner to provide information to
the Planner as needed to prepare the Plans and to modify the Plans, as provided
in this Expansion Space Work Agreement.
2.2 Within ten business days after Landlord delivers to Tenant a copy of
the Basic Plans, Tenant shall either approve the Basic Plans or shall set out
the revisions requested by Tenant to the Basic Plans. Also, Tenant shall, within
such ten business day period, clearly identify and locate on the Basic Plans (i)
any equipment requiring special plumbing or mechanical systems, areas subject to
above normal loads, special openings in the floor, ceiling, or walls, and other
major or special features; and (ii) locations of telephone and electrical
receptacles, outlets, and other items requiring electrical power (for special
conditions and equipment, power requirements, and manufacturer's model numbers
must be included)
2.3 Landlord shall review any revisions made to the Basic Plans and shall,
in writing within five business days after receipt, either approve the revised
Basic Plans or reject them, in which case Landlord shall specify in reasonable
detail the deficiencies in the Basic Plans as submitted. If the Basic Plans are
rejected, Tenant shall resubmit required changes to the Basic Plans as soon as
practicable until Landlord's approval has been obtained. Following Landlord's
approval of the Basic Plans, the Planner shall produce full working drawings for
construction sufficient to obtain all necessary permits and with sufficient
detail to construct the improvements, including specifications for every item
included thereon (the "Working Plans"). Landlord shall have the right to stop
the design process at any point and terminate the Lease if it appears to
Landlord that the cost, timing, or some other issue related to the tenant
improvements will not be resolved between the parties.
2.4 Tenant must approve the Working Plans for the Initial Improvements to
the Premises no later than on December 31, 1999. Tenant shall be responsible for
delays and additional costs in completion of the design and construction of
Tenant's improvements caused
2
<PAGE>
by delays in approving the Working Plans, by changes made to the Working Plans
after Landlord delivers them to Tenant or by delays in delivery of special
materials requiring long lead times. For any construction of improvements other
than the Initial Improvements in the Premises, the Working Plans for such
improvements must be completed and approved by Landlord and Tenant at least five
months prior to the anticipated substantial completion date of such
improvements.
SECTION 3 CONSTRUCTION OF TENANT IMPROVEMENTS
3.1 Upon completion of the Working Plans and at the request of Tenant,
Landlord and its contractor shall provide to Tenant in writing an estimate of
the cost of improvements to be provided at Tenant's expense pursuant to Section
1 of this Expansion Space Work Agreement. Within five days after Tenant's
receipt of such estimated cost, Tenant shall delete any items which Tenant
elects not to have constructed. Landlord and Tenant shall work together to
establish a construction budget reasonably acceptable to both parties. Tenant
shall authorize in writing the agreed upon construction budget. In the absence
of such written authorization, Landlord shall not be obligated to commence work
on the Expansion Space and Tenant shall be responsible for any costs due to any
resulting delay in completion of the Expansion Space.
3.2 If Tenant desires any change to its improvements, Tenant shall submit a
written request for such change to Landlord, together with all plans and
specifications necessary to show and explain changes from the approved Working
Plans. Any such change shall be subject to Landlord's approval. Landlord or
Landlord's contractor shall notify Tenant in writing of the amount, if any,
which will be charged or credited to Tenant to reflect the cost of such change.
3.3 Tenant's entry into the Expansion Space for any purpose, prior to
September 1, 1999, shall be subject to all the terms and conditions of the
Lease, including without limitation the provisions of the Lease relating to the
maintenance of insurance, but excluding the provisions of the Lease relating to
the payment of rent. Tenant's entry shall mean entry by Tenant, its officers,
contractors, licensees, agents, servants, employees, guests, invitees, or
visitors (the "Tenant Parties"). Tenant shall indemnify and hold harmless
Landlord from and against any and all claims, losses, liabilities, and expenses
(including without limitation attorneys' fees) arising out of or in any way
related to the activities of Tenant or the Tenant Parties in the Expansion Space
or the Project.
3
<PAGE>
EXHIBIT D
STATEMENT OF TENANT IN RE: LEASE
--------------------------------
Date: May 31, 2000
Teachers Insurance and Annuity
Association of America
730 Third Avenue
New York, New York 100 17
Attn: ______________________
RE: TIAA Appl. #OR- 108
TIAA Mtge. #000447000
Name of Project: Evergreen Corporate Center
Address: 20540 NW Aloclek
Hillsboro, Oregon 97124
Ladies and Gentlemen:
It is our understanding that you have a mortgage upon the subject premises
and as a condition precedent thereof have required this certification of the
undersigned.
The undersigned, as tenant, under that certain lease dated January 15,
1997, as amended by an Amendment to Lease dated July 15, 1999, made with
Evergreen Corporate Center LLC, as landlord, hereby ratifies said lease and
certifies that:
1. the "Commencement Date" of said lease is December 15, 1997; and
2. the undersigned is presently solvent and free from reorganization and/or
bankruptcy; and
3. the operation and use of the premises do not involve the generation,
treatment, storage, disposal or release of a hazardous substance or a
solid waste into the environment other than to the extent necessary to
conduct its ordinary course of business in the premises and in
accordance with all applicable environmental laws, and that the premises
are being operated in accordance with all applicable environmental laws,
zoning ordinances and building codes; and
4. the current base rental payable pursuant to the terms of said lease is
$107,232 per month; and further, additional rental pursuant to said
lease is payable as provided in the Lease; and
5. said lease is in full force and effect and has not been assigned,
modified, supplemented or amended in any way (except as set forth above)
and the undersigned is not in default thereunder; and
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6. the lease described above represents the entire agreement between the
parties as to the leasing of the premises; and
7. the term of said lease expires on December 14, 2007; and
8. Landlord has spent at least $553,040 of the TI Allowance, as defined in
the Amendment to Lease, and the work performed by landlord to date in
the Expansion Space is acceptable to the undersigned.
9. no rental has been paid in advance and no security (except the security
deposit in the amount of $120,839) has been deposited with landlord; and
10. tenant's floor area is 102,662 rentable square feet; and
11. the most recent payment of current basic rental was for the payment due
on May 1, 2000, and all basic rental and additional rental payable
pursuant to the terms of the lease have been paid up to said date; and
12. the undersigned acknowledges notice that landlord's interest under the
lease and the rent and all other sums due thereunder will be assigned to
you as part of the security for a mortgage loan by you to landlord. In
the event that Teachers Insurance and Annuity Association of America, as
lender, notifies the undersigned of a default under the mortgage and
demands that the undersigned pay its rent and all other sums due under
the lease to lender, tenant agrees that it shall pay its rent and all
such other sums to lender.
Very truly yours,
MEDICALOGIC, INC.
By: GUY E. FIELD
-------------------------------------
Its: VP Finance
------------------------------------
2
<PAGE>
EXHIBIT E
PROMISSORY NOTE
---------------
$__________ __________, 1999
Portland, Oregon
FOR VALUE RECEIVED, the undersigned, MEDICALOGIC, Inc., an Oregon
corporation ("Borrower"), promises to pay to the order of EVERGREEN CORPORATE
CENTER LLC, an Oregon limited liability company, at 111 SW Columbia Street,
Suite 1380, Portland, Oregon 97201, or such other place as may be designated
from time to time in writing by the holder of this Note ("Holder"), the
principal sum of ________________________________ Dollars ($____________) in
lawful money of the United States of America, plus interest and other charges as
provided herein.
1 . Interest Rate. Interest shall accrue on the unpaid principal balance of
this Note, from ________________ until paid in full, at a fixed rate of eleven
percent (11%) per annum.
2. Payment Schedule. Commencing on _____________________ and continuing on
the first day of each calendar month thereafter until and through December 1,
2007 (the "Maturity Date"), Borrower shall make constant equal monthly payments
of principal and interest sufficient to amortize fully the principal balance of
this Note over a period of time from the date of this Note to December 14, 2007,
taking into account interest at the rate of 11 percent per annum. Such payments
shall equal $_______ per month. The entire principal balance of and all unpaid
accrued interest on this Note shall be due and payable on the Maturity Date.
3. Prepayment. The indebtedness evidenced by this Note may be prepaid in
whole or in part at any time without penalty.
4. Time of Essence. Time is of the essence of the performance of Borrower's
obligations under this Note. If Borrower fails to make any payment required
hereunder within five days after written notice that such payment is due, or if
Borrower is in default of its lease between Holder and Borrower dated January
15, 1997, as amended (the "Lease"), such event shall constitute an event of
default (an "Event of Default"). Upon the occurrence of an Event of Default, the
entire unpaid principal balance of and all unpaid accrued interest on this Note
shall become immediately due and payable at Holder's option. Holder's failure to
exercise or delay in exercising such option, or any other remedy provided
herein, shall not constitute a waiver of the right to do so upon the occurrence
of any subsequent Event of Default.
5. Late Fee. If any payment required under this Note is not received by
Holder within ten (10) days after the date such payment was due, Borrower shall
pay to Holder on demand a late charge in an amount equal to five percent (5%)
of the overdue payment. Borrower and Holder agree that the late charge is
intended to be a reasonable approximation of actual damages incurred by such
overdue payment, which damages are difficult to estimate. The
1
<PAGE>
imposition or collection of a late charge is in addition to and not in lieu of
any other rights or remedies Holder may have as a result of late payment.
6. Application of Payments. All payments on this Note shall be applied
first to the payment of attorneys' fees, costs, and other charges to the extent,
if any, provided herein; then to interest accruing hereon; and then to
principal. The unpaid principal balance of this Note shall continue to bear
interest until and including the date of collection.
7. Attorneys' Fees. If either Holder or Borrower shall institute legal or
other proceedings to interpret or enforce this Note, the prevailing party shall
recover from the nonprevailing party all costs, attorneys' fees, and expenses
incurred by it in connection with such proceedings, whether at trial, on appeal,
or on review, in addition to all other amounts allowed by law.
8. Default Interest. All late payments shall bear interest at the Default
Rate (as defined in the Lease) from the due date of such payment until paid in
full.
9. Miscellaneous. In any provision of this Note is held invalid by a court
of competent jurisdiction, the remainder of this Note shall not be affected
thereby and shall remain in full force and effect. Borrower hereby waives
presentment, demand for payment, notice of dishonor, protest, and notice of
protest.
BORROWER: MEDICALOGIC, INC., an Oregon corporation
By:
------------------------------------
Its:
-----------------------------------
2
<PAGE>
FIDEX AMERICAS CORPORATION
ONE-TO-MANY
SOFTWARE DEPOSIT AGREEMENT
1. FIDEX AMERICAS CORPORATION ("FIDEX"), an Idaho corporation, agrees to allow
MedicaLogic, Inc. ("DEVELOPER") to DEPOSIT for potential delivery to certain
third parties ("LICENSEES"), the Software, Documentation and/or Other Material
deposited herewith, subject to DEVELOPER meeting and continuing to meet all the
terms in this Agreement. "LICENSEE" shall be used throughout this Agreement to
refer to each LICENSEE who becomes a third party beneficiary of this agreement
by meeting the terms and conditions for becoming one. FIDEX and DEVELOPER, IN
EXCHANGE FOR THE MUTUAL CONSIDERATION CONTAINED HEREIN, AGREE AS FOLLOWS:
2. LIMITED SCOPE OF AGREEMENT. This Agreement only defines the responsibility of
FIDEX relative to the Software deposited and the disposition thereof, and does
not define any other terms between LICENSEE and DEVELOPER, and does not waive
any rights, legal or otherwise, LICENSEE and DEVELOPER may have against one
another.
3. THIRD PARTY BENEFICIARIES. It is contemplated that there will be one or more
third party beneficiaries to this Agreement, referred to herein as LICENSEE.
Possession by a third party of a copy of this agreement bearing the notarized
signatures of both DEVELOPER and FIDEX shall be sufficient proof that said third
party participates in this agreement as LICENSEE.
4. "SOFTWARE" AND "DOCUMENTATION". The Software is the source code and related
computer files (such as executable program files, compiler, linker, third-party
libraries, etc.) used by DEVELOPER to create the software deposited herewith and
further identified in Exhibit A, and the Documentation is all documentation
agreed to between the parties as necessary to utilize and understand the
Software, and as described in Exhibit A. The Software is the proprietary and
confidential information of DEVELOPER and DEVELOPER desires to protect such
ownership and confidentiality.
5. INSPECTION. FIDEX will allow the inspection of the Software, Documentation
and other Materials (other than withdrawal of the Software, Documentation, and
other Materials in accordance with the terms hereof) only upon written
authorization from DEVELOPER, including the authorization set forth in paragraph
11 of this Agreement, or as otherwise directed by the final order of a court of
competent jurisdiction.
6. VERIFICATION. DEVELOPER will be entitled, at reasonable times during normal
business hours and upon reasonable notice to FIDEX during the term of this
agreement, to inspect the records of FIDEX with respect to the physical status
and condition of the Software, Documentation and other Materials.
7. RECEIPT BY FIDEX. DEVELOPER will furnish to FIDEX, at the time of deposit of
any Software, a packing list describing all Software, Documentation, or other
Materials deposited hereunder. FIDEX will issue a receipt for all Software,
Documentation, or other Materials deposited and forward copies of such receipts
and packing lists to DEVELOPER.
8. INITIATION OF DELIVERY OF THE SOFTWARE/DOCUMENTATION. In order for the
Software and/or Documentation to be delivered by FIDEX to LICENSEE in executable
or source code form, each of the following must occur: (1) Receipt by FIDEX of
written notification that an event causing delivery has occurred, explaining in
detail the basis for the assertion that such an event has occurred; (2) FIDEX
confirming that an event causing delivery has occurred; and (3) Prepayment of
Fidex's release processing fees. No delivery will occur until FIDEX can confirm
to its satisfaction that an event has occurred.
9. RELEASE PROCESSING FEES. The release processing fee is currently $750 when
the release is made at LICENSEE's request, and $100 when release is made at
DEVELOPER's request. If release is made at
Fidex Americas Corporation Escrow #000-877 Software Deposit Agreement, Page 1
<PAGE>
LICENSEE's request the fee also includes referral to programmers competent with
regards to both the programming language and type of application. The release
fee is not subject to change during the first three years of the escrow account.
10. RIGHTS LICENSEE RECEIVES WITH SOFTWARE DELIVERED. DEVELOPER and LICENSEE
agree that when and if FIDEX delivers the Software to LICENSEE, LICENSEE only
obtains the following rights in the Software, and nothing more: (1) if the
Software is delivered in executable form, DEVELOPER grants and LICENSEE receives
a complete copy of the Software in executable form, and receives the same
license and right to use or otherwise deal with the Software as it had with the
original Software it received from DEVELOPER, (2) if the Software is delivered
as source code, DEVELOPER hereby grants and LICENSEE receives the license and
right to utilize the source code only to maintain and update the Software
licensed under the original license/agreement between LICENSEE and DEVELOPER.
11. EVENTS CAUSING DELIVERY OF SOFTWARE Upon occurrence of one or more of the
following events ("Release Events"), FIDEX agrees and is hereby specifically
authorized and instructed to provide the Software, Documentation, or other
Materials to LICENSEE upon written instruction by DEVELOPER or request by
LICENSEE. Prior to such request, however (i) LICENSEE must have given written
notice to FIDEX of the occurrence of the Release Event (the "Notice of Release
Event"); (ii) FIDEX or LICENSEE must have transmitted a copy of the Notice of
Release Event to DEVELOPER; and (iii) fifteen (15) days must have elapsed after
receipt of Notice of Release Event by DEVELOPER. The following are release
events:
11.1 DEVELOPER agrees in writing to the delivery.
11.2 DEVELOPER cannot be located by LICENSEE or by FIDEX as described in
paragraph 12 of this Agreement.
11.3 DEVELOPER is unwilling or unable to support the SOFTWARE pursuant to
the terms of a valid and existing license agreement with LICENSEE.
11.4 DEVELOPER files for protection under Chapter 7 of the U.S. Bankruptcy
Code and such proceeding has not been dismissed within sixty (60)
days after it has begun.
Notwithstanding the foregoing, the acquisition, merger or reorganization of
DEVELOPER shall not be deemed a Release Event provided the successor to
DEVELOPER assumes the obligations of DEVELOPER under the License Agreement and
this Agreement.
12. DEVELOPER'S DUTY AS TO WHEREABOUTS. It is DEVELOPER'S burden to keep FIDEX
fully and timely apprised of its current telephone, telefacsimile and mailing
address. Failure to do so may result in a proper transfer of the Software under
paragraph 11.2, above, if DEVELOPER cannot be located by FIDEX. Should LICENSEE
request delivery of the Software, FIDEX shall immediately attempt to contact
DEVELOPER by telephone, telefacsimile, overnight express, and certified mail,
return receipt requested. Should FIDEX be unable to contact DEVELOPER within 30
days of notice by certified mail, DEVELOPER will be considered to have ceased to
do business for the purposes of this agreement.
13. DISPUTES BETWEEN DEVELOPER AND LICENSEE. If at any time during the life of
this escrow any dispute shall arise between DEVELOPER and LICENSEE, FIDEX or any
other entity, as to the delivery by FIDEX of the Software, Documentation and
other Materials deposited hereunder or as to the ownership or right of
possession thereto, FIDEX shall not release the Software, Documentation, and
other Materials until: (a) both parties agree to such a release; or (b) a court
of competent jurisdiction orders FIDEX to release the Software, Documentation,
and other Materials. FIDEX may hold and retain in its possession without
liability, any or all of the Software, Documentation and other Materials
referred to in this Agreement, until such dispute shall have been settled, or it
may at its option, deposit the Software, Documentation and other Materials with
the Clerk of the District Court Bonner County Idaho, under the appropriate
statutory provisions for interpleader, and thereupon,
Fidex Americas Corporation Escrow #000-877 Software Deposit Agreement, Page 2
<PAGE>
FIDEX shall be relieved of all liability with respect thereto. FIDEX shall be
entitled to all reasonable costs and attorneys' fees incurred therein from
LICENSEE and/or DEVELOPER.
14. LICENSE TO FIDEX. DEVELOPER hereby grants to FIDEX the following rights and
license to the Software Documentation and other Materials: For any and all
purposes consistent with this Agreement, including, without limitation, to copy,
use and display the Software and the Documentation: to copy the source code; to
use the Software to produce executable copies of the Software; to provide
verification services; to deliver copies of the Software (source code and/or
executable copies) and/or Documentation and other Materials, to the LICENSEE,
consistent with the terms of this Agreement.
14.1 CERTAINTY. If FIDEX is uncertain of its duties or rights hereunder, it
will refrain from taking any action other than to retain the Software,
Documentation, and other Materials safely until it is directed otherwise in
writing by DEVELOPER and LICENSEE jointly or by final order of a court of
competent jurisdiction. Except as expressly provided in this agreement,
FIDEX agrees that it will not divulge or disclose or otherwise make
available to third parties whatsoever, or make any use whatsoever, of the
Software or of any information deposited with it by DEVELOPER in connection
with this Agreement, without the express prior written consent of
DEVELOPER.
14.2 RESTRICTION ON ACCESS. Except as required to carry out its duties
hereunder, FIDEX shall not permit any FIDEX employee, LICENSEE or any other
person access to the Software, Documentation, and other Materials unless
consented to in writing by DEVELOPER. FIDEX shall use its best efforts to
avoid unauthorized access to the Software by its employees or any other
person.
15. LICENSEE BEARS RISK OF DEFICIENT DEPOSIT. LICENSEE agrees that FIDEX makes
no representations or warranties as to what it receives and performs no testing
or verification to determine what it has received, whether what it received is
what DEVELOPER says it is, or anything other than it has received something from
DEVELOPER. Between LICENSEE and FIDEX, LICENSEE bears the entire risk that the
escrowed Software is what LICENSEE expects it to be.
16. LICENSEE'S RESPONSIBILITY TO LICENSE THIRD-PARTY FILES. FIDEX, DEVELOPER,
and LICENSEE agree that if the escrowed Software includes copyrighted computer
files which are not the property of DEVELOPER, such as compiler, linker, and
third-party programming libraries, FIDEX shall not release said copyrighted
computer files to LICENSEE until one of the following occurs: (1) LICENSEE
demonstrates to FIDEX'S satisfaction that LICENSEE or LICENSEE'S agent is
licensed to use said copyrighted computer files, or (2) LICENSEE demonstrates to
FIDEX'S satisfaction that LICENSEE is unable to obtain said license because the
owner of said copyrighted computer files cannot be located.
17. DEVELOPER REPRESENTATIONS/WARRANTIES. DEVELOPER represents and warrants: (a)
It is depositing with FIDEX the exact Software, Documentation and other
Materials stated in Exhibit A; and (b) To DEVELOPER'S knowledge, there is
nothing in the deposited Software which will in any way disable, hinder or
interfere with its use by LICENSEE should it later have to be delivered to
LICENSEE.
18. PAYMENT/COMPLIANCE. DEVELOPER or LICENSEE agree to pay FIDEX all fees and
charges at the rates in effect at the time of the service or charge, including
applicable sales tax. DEVELOPER and LICENSEE understand and agree that the
applicable fees and charges may be changed by FIDEX from time to time. FIDEX'S
costs, expenses, charges and attorney's fees in connection with this Agreement
are hereby made a first and paramount lien upon: the Software, Documentation and
other Materials deposited. All of FIDEX'S obligations are all strictly
conditioned upon FIDEX being paid its fees.
19. FIDEX NOT PART OF ANY TRANSACTION. DEVELOPER and LICENSEE agree that FIDEX
HAS NO INVOLVEMENT OR LIABILITY RELATING TO ANY UNDERLYING SOFTWARE LICENSING
AGREEMENTS, SERVICE CONTRACTS OR ANY OTHER AGREEMENT BETWEEN DEVELOPER AND
LICENSEE, OR ANY OTHER ENTITY. DEVELOPER and LICENSEE further agree that this
Fidex Americas Corporation Escrow #000-877 Software Deposit Agreement, Page 3
<PAGE>
Agreement creates no obligation on the part of FIDEX, other than to receive,
hold, and release the Software, Documentation and other Materials as agreed
herein.
20. DISCLAIMER AND LIMITATION OF FIDEX LIABILITY. DEVELOPER and LICENSEE agree
that FIDEX shall not be liable: (a) For its acts or omissions in good faith not
resulting from gross negligence; (b) For any indirect, special or consequential
damages, including, without limitation, lost business or profits; (c) For any
direct damages in excess of the amount paid by DEVELOPER or LICENSEE, to FIDEX
for the deposit or maintenance fees for the Software in question. Without
limiting the foregoing, FIDEX shall not be liable for any of the following: Any
obligations between LICENSEE and DEVELOPER; The correctness, completeness or
sufficiency of Software, Documentation or other Materials held pursuant to this
Agreement; For failure to notify any party of non-payment or declaration of
default in any of the terms set forth herein; For the deposit, procurement or
renewal of insurance policies or any riders or additional clauses; For payment
of insurance premiums or taxes of any kind; or For the performance of any act
not expressly set forth in this Agreement even though contained in the documents
or materials deposited.
21. TERMINATION. FIDEX may terminate this Agreement at any time for any reason,
with 30 days written notice, and without further obligation or liability, by
sending DEVELOPER and LICENSEE notice of termination and a pro-rated refund of
annual fees. No other fees will be refunded. DEVELOPER may terminate this
agreement upon termination of DEVELOPER'S mainenance obligations. Even if
terminated, DEVELOPER remains liable to FIDEX for all fees, charges and services
provided up to the time of termination. In the event of termination of this
Agreement, FIDEX agrees to redeliver to DEVELOPER all Software, Documentation
and other Materials deposited hereunder and this agreement will thereupon
terminate.
22. DISCHARGE OF FIDEX. FIDEX may be discharged by DEVELOPER at any time for any
reason, with thirty (30) days written notice specifying a date when such
discharge will take effect. Prior to the effective date of such termination of
this Agreement, DEVELOPER will arrange for the services of a new escrow agent
reasonably acceptable to LICENSEE. DEVELOPER and LICENSEE agree to execute and
deliver another escrow agreement with such new escrow agent having substantially
the same terms as this agreement. Upon DEVELOPER'S notifying FIDEX of the name
and address of the new escrow agent, FIDEX, agrees to forward the Software,
Documentation and other Materials to such new escrow agent.
23. COSTS, ATTORNEYS' FEES. That if any party has to enforce any terms of this
Agreement, the prevailing party shall be entitled to all costs and disbursements
incurred by that party, including reasonable attorneys' fees.
24. INDEMNIFICATION. DEVELOPER and LICENSEE jointly and severally agree to fully
indemnify, defend and hold FIDEX harmless if FIDEX incurs any damage or loss of
any kind, as a result of DEVELOPER'S or LICENSEE's conduct, and in the event
FIDEX must in any way become involved in a dispute between them. This
indemnification includes all FIDEX' damages and losses of any kind, including
all costs and attorneys' fees.
25. ARBITRATION/APPLICABLE LAW/JURISDICTION/VENUE. If a dispute arises which
involves FIDEX, it is agreed that the exclusive method to resolve the dispute
shall be by arbitration in accordance with the State of Idaho's Arbitration Act,
unless later agreed in writing by FIDEX. The laws of the State of Idaho shall
govern the construction and interpretation of this Agreement and all disputes
between the parties, and each party agrees that the trial/arbitration of all
disputes involving FIDEX shall be in the State of Idaho, County of Bonner and
each agrees to the jurisdiction of the Idaho courts. Each may conduct discovery
pursuant to Idaho civil rules. Any action against FIDEX must be brought within
one year from the event or action disputed, or it is forever barred.
Notwithstanding the foregoing, any party to this agreement may seek injunctive,
including preliminary, relief in the U.S. District Court for Eastern Washington,
in Spokane, Washington, or in the First District Court of the State of Idaho in
Sandpoint, Idaho. Anything other than injunctive relief is subject to the
limitations of this section regarding arbitration, applicable law, jurisdiction,
and venue if FIDEX is a party to the dispute.
26. MODIFICATION, COMPLETE AGREEMENT. This Agreement contains the entire and
final agreement
Fidex Americas Corporation Escrow #000-877 Software Deposit Agreement, Page 4
<PAGE>
involving FIDEX (not necessarily between LICENSEE and DEVELOPER) and supersedes
all prior discussions, negotiations, correspondence and discussion of any kind,
and can only be modified in a writing signed by the party against whom
enforcement is sought. However, the FIDEX Current Prices and Charges are subject
to subsequent unilateral modification by FIDEX with thirty (30) days prior
written notice.
27. HEADINGS/TITLES NOT GOVERNING. The headings and titles used herein are for
descriptive purposes only and should not be used to construe or interpret the
meaning of any paragraphs, sentences or statements made herein.
28. SIGNATURE IN PARTS. This agreement may be executed in several parts and its
validity if so executed shall be the same as if all signatures were to appear on
one sheet.
29. DEVELOPER AND LICENSEE HAVE FULLY READ AND UNDERSTAND THE TERMS OF THIS
AGREEMENT AND AGREE TO BE BOUND BY ALL OF THEM.
DATED this 15th day of April, 1996.
SOFTWARE DEVELOPER: FIDEX AMERICAS CORPORATION:
MedicaLogic, Inc.
STEVEN OLSON
GUY E. FIELD ----------------------------------
- ---------------------------------- Authorized Signature
Authorized Signature Name (Printed): Steven Olson
Name (Printed): Guy E. Field -------------------
------------------ Position: President
Position: Controller -------------------------
------------------------
Notice Address: STATE OF IDAHO )
------------------ COUNTY OF BONNER ) ss.
Telephone: ( )
---------------------- On this 23 day of April , 19 96 ,
Telefacsimile: ( ) before me, a Notary Public in and
------------------- for said state, personally appeared
Steven Olson, who, being by me
STATE OF OR ) first duly sworn, declared that he
-------------- is the President of Fidex Americas
COUNTY OF WASH ) ss. Corporation, that he signed the
------------- foregoing document as President of
the corporation, and that the
On this 15 day of April, 1996, statements contained therein are
before me, a Notary Public in and true.
for said state, personally appeared
Guy E. Field , who, being by me JENNIFER FAUBEOTHER, Notary Public
first duly sworn, declared that he -------------------
is the of , that he signed the Residing at 11121 Cedar, ID
foregoing document as Controller of ---------------
the corporation, and that the My commission expires 11/15/00
statements contained therein are --------
true.
MARY EVERS ZOUCHA, Notary Public
- -----------------
Residing at Beaverton, OR
-------------
My commission expires 3/27/99.
-------
OFFICIAL SEAL
[SEAL] MARY EVERS ZOUCHA
NOTARY PUBLIC - OREGON
COMMISSION NO. 042533
MY COMMISSION EXPIRES MARCH 27, 1999
Exhibits: Exhibit A: Description of Software and Documentation Submitted for
Escrow
Exhibit B: LICENSEE registration and signature page.
Fidex Americas Corporation Escrow #000-877 Software Deposit Agreement, Page 5
<PAGE>
EXHIBIT A
DESCRIPTION OF SOFTWARE AND DOCUMENTATION
SUBMITTED FOR ESCROW
Software Program Name: Logician version 4.6.1_7
E&M Advisor
Merge/Delete Patient
Encounter Form Editor version 1.6.3
Software Developer MedicaLogic, Inc.
20500 NW Evergreen Parkway
Hillsboro, OR 97124
Brief Description of Program: Package of Electronic Medical Record (EMR)
products, including scheduling (ScheduLogic),
data exchange (LinkLogic), and EMR (Logician)
Programming Language and Tools: Compiler, Linker, Import Library Manager,
Resource Compiler, Make, Debugger:
Microsoft C++
version 4.2b
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Database: Multi User Server: Oracle
version 7.3
Oracle Corporation
500 Oracle Pkwy
Redwood City, CA 94065
Single User Server: Watcom
version 4.0
Sybase, Inc.
6475 Christie Avenue
Emeryville, CA 94608
Client Network Interface:
SQLNet SPX/IPX for Windows
SQLNET TCP/IP for Windows
version 2.3
Oracle Corporation
500 Oracle Pkwy
Redwood City, CA 94065
Client: Windows Libraries
version 7.1
Oracle Corporation
500 Oracle Pkwy
Redwood City, CA 94065
DB Admin Tools: SQLPLUS
version 3.1
Revised 3/4/99
<PAGE>
Oracle Corporation
500 Oracle Pkwy
Redwood City, CA 94065
Single User Admin Tools: ISQL
version 3.2
Sybase, Inc.
6475 Christie Avenue
Emeryville, CA 94608
Schema Tools: S-Designer
version 4.1
Sybase, Inc.
6475 Christie Avenue
Emeryville, CA 94608
Installation: Installation Software: InstallShield
version 3
InstallShield Corporation
P.O. Box 74904
Chicago, IL 60675-4904
Third-Party Libraries: Database Driver: Watcom ODBC Driver
version 3.2
Sybase, Inc.
6475 Christie Avenue
Emeryville, CA 94608
Database Driver: ODBC Driver Manager
version 2.0
Microsoft Corporation
One Microsoft Way
Redmond, WA 98052-6399
Report Software: Crystal Reports Print Engine
version 4.0
Crystal A. Seagate Software Company
1095 West Pender St., 4th Floor
Vancouver, B.C., V6E 2M6 Canada
Spell Checker: Visual Spell Checker
version 1.01
VisualTools, Inc.
15721 College Blvd.
Lenexa, KS 66219
Memory Management: Smartheap
version 3.0
MicroQuill Software Publishing Inc.
10500 Valley View Rd.
Bothell, WA 98011
Charting/Graphics: ChartFX
version 3.0
SoftwareFX, Inc.
7100 West Camino Real, Ste 117
Boca Raton, FL 33433
Imaging: Image Gear
Accusoft Corp.
Revised 3/4/99
<PAGE>
2 Westborough Business Park
Suite 3013
Westborough, MA 01581
Third-Party Data: HealthLogic Patient Educational Handouts
version: updated annually
Clinical Reference Systems
7100 E. Belleview Ave, Suite 208
Greenwood Village, CO 80111
ICD9, CPT4 Coding Superhelp
version: updated annually
Context Software Systems, Inc.
241 Sourth Frontage Road, Suite 38-39
Burr Ridge, IL 60521
Pharmacologic Medications, Interactions, Drug
Handouts
version: update quarterly
Medi-Span
8425 Woodfield Crossing Blvd.
P.O. Box 40930
Indianapolis, IN 46240-0930
SNOMED Coding Superhelp
version: updated semi-annually
College of American Pathologists
325 Waukegan Road
Northfield, IL 60093-2750
Source Code Revision Control:
MKS RCS
version 2.0
Mortice Kern Systems, Inc.
35 King Street
North Waterloo, ONT, N2J 2W9 Canada
Documentation: Using Logician Manual
Managing Logician Manual
Learning Logician Manual
LinkLogic Interface Developer's Manual
QA Tools: QA Partner
version 4.0
Seque Software, Inc.
1320 Center St.
Newton Centre, MA 02159
Winrunner
version 4.01
Mercury Interactive Corp.
470 Potrero Ave.
Sunnyvale, CA 94086
Revised 3/4/99
<PAGE>
EXHIBIT B
SIGNATURE OF LICENSEE
and
ACCEPTANCE OF TERMS SOFTWARE DEPOSIT AGREEMENT
for
Logician
The undersigned LICENSEE has fully read and understands the terms of the
attached Software Deposit Agreement #000-877 between Fidex Americas Corporation
(FIDEX), MedicaLogic, Inc. ("DEVELOPER") and certain third parties
("LICENSEES"), of which this Exhibit is a part, and has carefully reviewed the
description of the software deposited, and (1) fully intends to participate in
this Agreement as LICENSEE, and (2) agrees to be bound by all the terms of the
Agreement.
SOFTWARE LICENSEE:
__________________________________
Business Name
__________________________________
Authorized Signature
Name (Printed): __________________
Position: ________________________
Notice Address: __________________
__________________________________
Telephone: (___) _________________
Telefacsimile: (___) _____________
[NOTARY BLOCK NOT TYPED]
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
MedicaLogic, Inc.:
We consent to the use of our "Form of Independent Auditors' Report," dated
October 22, 1999, except as to note 13(d) which is as of November __, 1999,
relating to the consolidated balance sheets of MedicaLogic, Inc. as of December
31, 1997 and 1998, and September 30, 1999 and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for each
of the years in the three-year period ended December 31, 1998 and for the nine-
month period ended September 30, 1999 which form of report is included in the
Registration Statement and Prospectus, dated October 28, 1999, of MedicaLogic,
Inc., and to the reference to our firm under the heading "Experts" in the
Prospectus.
/s/ KPMG LLP
Portland, Oregon
October 28, 1999
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
PrimaCis Health Information
Technology, Inc.:
We consent to the use of our report on the financial statements of PrimaCis
Health Information Technology, Inc. as of December 31, 1998 and for the year
then ended included herein and to the reference to our firm under the heading
"Experts" in the Prospectus.
/s/ KPMG LLP
Portland, Oregon
October 28, 1999
<PAGE>
EXHIBIT 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Mark K. Leavitt and David C. Moffenbeier
his true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign any amendments (whether pre-effective or
post-effective) to this registration statement for the same offering that is to
be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, and to file the same with all exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission, granting unto
each of said attorney-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that each of said
attorney-in-fact and agents, or their substitute or substitutes, may do or cause
to be done by virtue hereof.
Signature Title Date
--------- ----- ----
NEAL MOSZKOWSKI Director September 17, 1999
-------------------------
Neal Moszkowski
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,081
<SECURITIES> 38,059
<RECEIVABLES> 5,772
<ALLOWANCES> (1,235)
<INVENTORY> 0
<CURRENT-ASSETS> 51,708
<PP&E> 15,637
<DEPRECIATION> (4,784)
<TOTAL-ASSETS> 67,727
<CURRENT-LIABILITIES> 8,557
<BONDS> 0
97,825
0
<COMMON> 15,793
<OTHER-SE> (56,357)
<TOTAL-LIABILITY-AND-EQUITY> 67,727
<SALES> 9,620
<TOTAL-REVENUES> 14,992
<CGS> 813
<TOTAL-COSTS> 5,724
<OTHER-EXPENSES> 23,306
<LOSS-PROVISION> 405
<INTEREST-EXPENSE> 180
<INCOME-PRETAX> (13,096)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,096)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,096)
<EPS-BASIC> (1.61)
<EPS-DILUTED> (1.61)
</TABLE>
