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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-26390
SUMMIT MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1545493
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10900 RED CIRCLE DRIVE
MINNETONKA, MINNESOTA 55343
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 939-2200
_________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (X) No ( )
The aggregate market value of the common stock held by non-affiliates of
the registrant at March 25, 1997 was $27,961,433.50 based on the last sale price
for the Common Stock as quoted on the Nasdaq National Market on that date.
At March 25, 1997, 10,347,696 shares of the registrant's common stock were
outstanding.
Documents Incorporated by Reference: Pursuant to General Instruction G(3),
-----------------------------------
the responses to Items 10, 11, 12 and 13 of Part III of this report are
incorporated herein by reference from the Company's definitive proxy statement
for its 1997 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission on or before April 30, 1997.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
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PART I
ITEM 1. BUSINESS.
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GENERAL
Summit Medical Systems, Inc. (the "Company" or "Summit") is a leading
provider of clinical information systems and consulting services to the
healthcare industry. The Company's database software enables healthcare
providers to record, analyze and report detailed data on clinical, economic and
patient-reported outcomes of medical procedures, disease treatments and other
medical interventions. The Company also aggregates clinical data into national
databases that provide valuable benchmarks of national practice patterns and
clinical outcomes. The Company's customers include specialty physicians,
hospitals, physician and hospital networks, managed care organizations and other
healthcare payors, and pharmaceutical and medical device firms. These customers
use the outcomes data captured by the Company's software and services to profile
healthcare provider performance, demonstrate quality of care, identify cost-
effective clinical practices and monitor cost factors. Customers also use the
outcomes data for contracting with third party payors and managed care
organizations, establishing quality assurance programs and complying with the
informational demands of regulatory and accreditation agencies. The Company also
offers provider management consulting, regulatory consulting and clinical trial
management services.
The Company currently offers database products primarily on two technology
platforms: Crescendo!(TM) and Vista(TM). The Crescendo! platform is a
Windows(TM)-based client/server, relational database application that
facilitates point-of-care collection and retrieval of clinical information. The
Crescendo! platform is designed for use in hospital cardiac catheterization and
cardiovascular surgery programs. The Company introduced, in the second half of
1996, a Crescendo! Forte product, a comprehensive information database for use
in high volume hospital cardiac catheterization and cardiovascular surgery
centers, including medical research centers. The Company also is developing a
standard Crescendo! product ("Crescendo! Basic") for medium and lower volume
cardiac catheterization and cardiovascular centers that desire to collect a core
set of outcomes measurements. To date, the Company has installed Crescendo!
Forte in four sites. The Company intends to establish the Crescendo! platform as
the Company's sole technology platform and to develop products using the
Crescendo! platform for additional medical specialties after the Crescendo!
platform has been fully developed for the cardiovascular market.
The Vista platform is a Windows-based, flat file application, covering a
product line of over 40 database software modules that is primarily used in
five medical specialties: cardiac and thoracic surgery, cardiology,
ophthalmology, urology and orthopaedics. The Company also has certain products
on a DOS platform, which the Company intends to discontinue. Although the
Company intends to continue to support the Vista platform, the Company will seek
to migrate customers using Vista or DOS products to Crescendo! products as these
products become available in each medical specialty.
The Company offers a range of support services for its database products.
Through its Continuous Quality Service ("CQS") package, the Company offers to
customers of its cardiovascular products a combined three year software license
and a program of implementation, training, data management and consulting
services that is designed to increase the value obtained by the customer from
the Company's database software. Company customers of products for other medical
specialties may purchase implementation, training, support and data management
services. The Company provides a range of consulting services through its
subsidiaries, The BSM Consulting Group ("BSM"), a national healthcare consulting
firm, and C. L. McIntosh & Associates, Inc. ("CLMA"), a provider of regulatory
affairs consulting and clinical trial management services. The Company's
consulting services are offered directly by these subsidiaries or in combination
with sales of the Company's database software products.
In late 1996, the Company introduced registry services related to the use
of a particular medical device or therapeutic agent. These registries are
designed to collect and report clinical information through Crescendo! platform
software utilizing the world-wide web ("WWW"). Each registry will be sponsored
by one or more medical device or pharmaceutical companies with an interest in
the use of the particular device or drug.
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RECENT DEVELOPMENTS
RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS. The financial
statements included in this Annual Report reflect restatements of previously
reported financial position and results of operations for the years 1994 and
1995 and the nine months ended September 30, 1996. The restatements are based on
an investigation by the Company's management, auditors and outside counsel of
the Company's accounting practices after concerns were brought to the attention
of senior management and the Company's Board of Directors by a new chief
financial officer on February 27, 1997. The restatements primarily involve
revenue recognition practices related to certain sales of software licenses and
related services including revenue recognized based on purchase commitments made
by certain corporate marketing partners but prior to actual shipment of product
("partner commitments"), and revenue recognized in advance of actual shipment of
product in other contexts ("pre-shipment recognition"). In addition, with
respect to products first introduced in the second half of 1996, revenue had
been recognized under CQS and Crescendo! contracts involving unfulfilled
obligations, including commitments for future delivery of additional product
features and performance of implementation and consulting services, and on a
database development program based on negotiations with a prospective customer
that were not finalized. Negotiations for this database development program were
subsequently discontinued without an order.
Consequently, the Company's financial statements have been restated to
recognize revenue in the appropriate periods and defer revenue recognition on
certain contracts until the conditions for such recognition have been satisfied.
Corresponding adjustments to expenses associated with revenues have been made to
cost of sales and operating expenses (primarily sales commissions) in each
affected period as appropriate.
These restatements had the net effect of reducing revenue for 1994, 1995
and the nine months ended September 30, 1996 by $1,052,000, $2,214,000 and
$1,782,000, respectively. See Note 2 in Notes to Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Quarterly Results of Operations." On a full year basis
for 1996, using the Company's February 26, 1997 earnings announcement as a
baseline, revenues for 1996 were reduced by $2,372,000. Of the cumulative
revenue reductions of $5,638,000 through December 31, 1996, approximately $1.9
million related to partner commitments, $1.3 million to pre-shipment
recognition, $1.7 million to CQS and Crescendo! contracts, $500,000 to the
database development program and $200,000 to an increase in the reserve for
customer returns and allowances. As to the partner commitments, revenue will be
recognized in the future at time of shipment. The amount and timing of shipments
under these partner commitments is uncertain and depends, in part, on the market
demand for Vista products that are currently the only products covered by these
commitments, the effect on demand for Vista products of the Company's decision
to focus its development efforts on Crescendo! products, and the ability of the
Company to enter into satisfactory arrangements with its marketing partners
regarding the scope of database products and services to be sold under these
arrangements. See "Sales and Marketing." As to pre-shipment recognition,
shipments representing approximately $300,000 of these cumulative adjustments
have occurred through March 31, 1997, and a significant portion of the remaining
balance of $1.0 million is likely not to be realized.
The following table summarizes the restatement of revenues for the three
years ended December 31, 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Quarterly Results of
Operations -- Restatement of Previously Issued Financial Statements" for further
information on the restatements by quarter.
SUMMARY OF RESTATEMENT OF REVENUE
<TABLE>
<CAPTION>
Year Ended Three Months Ended, Year Ended Three Months Ended, Year Ended
-------------------------------- ----------------------------------
Dec 31, March 31 June 30 Sep 30 Dec 31 Dec 31, March 31 June 30 Sept 30 Dec 31 Dec 31,
1994 1995 1995 1995 1995 1995 1996 1996 1996 1996 1996(1)
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue before restatement:
Software and service $ 8,420 $ 2,158 $ 2,494 $ 3,373 $ 3,950 $11,976 $ 3,383 $ 4,575 $3,350 $2,133 $13,441
Consulting 3,905 1,407 1,467 1,325 1,521 5,720 1,547 1,457 1,531 1,568 6,103
------ ----- ----- ----- ----- ------ ----- ----- ----- ----- ------
Total revenue before
restatement $12,325 $ 3,565 $ 3,961 $ 4,698 $ 5,471 $17,696 $ 4,930 $ 6,032 $4,881 $3,701 $19,543
====== ===== ===== ===== ===== ====== ===== ===== ===== ===== ======
Revenue after restatement:
Software and service $ 7,368 $ 1,790 $ 2,473 $ 2,430 $ 3,069 $ 9,762 $ 3,142 $ 3,887 $2,497 $1,543 $11,069
Consulting 3,905 1,407 1,467 1,325 1,521 5,720 1,547 1,457 1,531 1,568 6,103
------ ----- ----- ----- ----- ------ ----- ----- ----- ----- ------
Total revenue after
restatement $11,273 $ 3,197 $ 3,940 $ 3,755 $ 4,590 $15,482 $ 4,689 $ 5,344 $4,028 $3,111 $17,172
====== ===== ===== ===== ===== ====== ===== ===== ===== ===== ======
</TABLE>
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<TABLE>
<CAPTION>
Three Years Ended
December 31, 1996
-----------------
<S> <C>
Revenue before restatement:
Software and service $33,837
Consulting 15,728
------
Total revenue before
restatement $49,565
======
Revenue after restatement:
Software and service $28,199
Consulting 15,727
------
Total revenue after
restatement $43,926
======
</TABLE>
(1) Represents adjustments to revenue as reported in the Company's February
26, 1997 earnings announcement.
The Company's policies for recognizing revenue in the restated
financial statements contained herein, and its policies for recognizing
revenue in the future, are as follows:
SOFTWARE LICENSES AND UPGRADES. The Company recognizes
revenue from sales of software licenses upon shipment,
provided that no significant vendor and post-contract
support obligations remain outstanding and that
collections of resulting receivables are probable.
SUPPORT AND SERVICE. Periodic agreements for customer
support and service are recognized over the agreement
period using the straight-line method. All other service
revenue, including training, implementation and consulting
fees, are recognized upon performance of the applicable
services.
SOFTWARE LICENSE WITH OTHER SIGNIFICANT VENDOR OBLIGATIONS.
The Company will recognize revenue under agreements
requiring significant vendor obligations such as
installation, testing interface, and systems integration
when all of the following obligations have been satisfied:
(i) delivery has occurred; (ii) system installation,
testing, integration and on-site consulting assistance has
been completed; (iii) customer acceptance has been received;
and (iv) collectibility is probable. If a significant
portion of the revenue is due beyond twelve months of the
date of the agreement, revenue will be recognized as each
annual payment becomes due. In addition, certain contracts
may require revenue recognition under contract accounting
rules, whereby revenue is recognized on a percentage of
completion basis, subject to probability of collection.
The Company has retained outside counsel, with the assistance of
independent accounting advice, to investigate on behalf of the Company the facts
and circumstances surrounding the restatements. The investigation is continuing
under the direction of the Audit Committee of the Company's Board of Directors.
The Board of Directors has appointed W. Hudson Connery, Jr., as Interim Chairman
of the Board of Directors, with the responsibility for overseeing the
preparation and filing of this Annual Report and the preparation of the
restatements. In addition, the Company hired Richard Willemin as Interim Chief
Financial Officer on March 17, 1997. The Board of Directors has established that
Mr. Willemin reports directly to Mr. Connery with respect to filings with the
Securities and Exchange Commission (the "Commission") and financial statement
matters.
The Company has been named as a defendant in three federal court
securities putative class actions captioned Jong E. Lee v. Summit Medical
-----------------------------
Systems, Inc., Mathias Faue, George E. and Patricia E. Faue, Janice
- ------------- ----------------------------------------------------
Mc Quiston v. Summit Medical Systems, Inc., Edward F. Sweeney, Kevin R. Green,
- -----------------------------------------------------------------------------
Anthony W. Rees, Kent J. Thiry, Dennis M. Powers, John M. Nehra, and Judith Anne
- --------------------------------------------------------------- -----------
Jacobson v. Summit Medical Systems, Inc., each filed in United States District
- ---------------------------------------
Court of the District of Minnesota on March 10, 1997, March 26, 1997, and March
31, 1997, respectively. Each action alleges, in essence, that the Company made
misleading public disclosures relating to its financial statements. In each
action, the plaintiffs seek a declaration that the action be certified as a
class action and compensatory damages for losses incurred as a result of each
alleged misleading public disclosures. The Company believes these actions are
without merit and intends to defend against them vigorously.
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The Company has been informed by the Division of Enforcement of the
Commission, through service of a subpoena on March 25, 1997, that the Commission
is conducting an investigation of the Company, relating to the Company's
restatement of certain financial statements. The Company is cooperating fully
with the Commission and its investigation.
The Company expects to incur significant legal and accounting fees in
connection with the investigation of the Company's revenue recognition
practices, the Commission's investigation and the three shareholder class
actions filed on March 10, 1997, March 26, 1997, and March 31, 1997. These fees
will be included in operating expenses as incurred in the first quarter of 1997
and subsequent quarters.
CQS PACKAGE. In September 1996, the Company began to offer its CQS package
primarily to customers of cardiovascular database software products. The CQS
package is intended to position the Company with the customer as an on-going
provider of clinical information services rather than focusing on a single
software sale to the customer. Under this program, the customer purchases a
three-year license for the Company's cardiovascular database software and a
series of related services that are designed to increase the value obtained by
the customer from the database software. These services include an initial six-
month regimen of on-site installation, operational training and system
integration support. Additional services provided under the CQS package include
semi-annual advanced training, data quality assurance reviews and data analysis
by the Company's healthcare consultants. The CQS package also provides software
updates during the term of the license as new technologies become available.
ACQUISITION OF C. L. MCINTOSH & ASSOCIATES, INC. On December 31, 1996, the
Company acquired CLMA in a stock-for-stock merger, accounted for as a pooling of
interests. CLMA is a provider of regulatory affairs consulting and clinical
trial management services, primarily focused on assisting healthcare companies
obtain and maintain Food and Drug Administration ("FDA") approval to market
medical devices and biological and pharmaceutical products. CLMA designs and
manages clinical trials for manufacturers, which includes providing statistical
analysis and reporting clinical study results. CLMA also assists clients to
develop appropriate regulatory strategies for product submissions and to prepare
these submissions. CLMA also assists clients to obtain and maintain necessary
manufacturing and quality certifications and to respond to adverse audit reports
from the FDA. In addition, CLMA provides customized quality and regulatory
training programs for clients' employees who are involved in meeting FDA
regulatory requirements. The acquisition of CLMA is intended to expand the
Company's capabilities as a provider of healthcare information services by
providing an entry into the clinical research organization market. The Company
also believes that its database technologies may enhance the development of
CLMA's clinical research business by offering more efficient means to collect,
aggregate and analyze clinical data. The success of the CLMA acquisition will
depend on a number of factors that are subject to uncertainties and risks. See
"Services-C. L. McIntosh & Associates, Inc."
ACQUISITION OF JOINT VENTURE INTERESTS. During the past two years, the
Company has invested approximately $13 million in cash, warrants, and stock
options in two transactions to acquire client/server database technology
developed at Duke University ("Duke Technology"). This technology has been the
basis for the Company's Crescendo! platform. On December 29, 1995 the Company
entered into a software license agreement for the Duke Technology and formed a
joint venture limited liability company, Cordillera L.L.C. ("Cordillera"), with
Duke University ("Duke") and three nationally recognized Duke cardiologists,
Drs. Donald Fortin, Robert Califf and Harry Phillips. On December 31, 1996, the
Company entered into a reorganization agreement (the "Reorganization Agreement")
pursuant to which the Company acquired the outstanding equity interests and
all options to acquire equity interests in Cordillera, which were not held by
the Company. Under Dr. Fortin's leadership, Cordillera has been engaged in the
development of the Crescendo! platform and WWW technologies to be employed in
the Company's registries. In conjunction with the Reorganization Agreement, Dr.
Fortin joined the Company as Vice President and Chief Scientific Officer and
Drs. Califf and Phillips continued as consultants to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments." The success of the Cordillera acquisition will
depend on a number of factors that are subject to uncertainties and risks. See
"Products."
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CONSOLIDATION OF TECHNOLOGY PLATFORM AND MIGRATION STRATEGY. Upon the
appointment of Dr. Donald Fortin as Chief Scientific Officer of the Company, in
January 1997, the Company accelerated its review of its technology strategies.
This review was based, in part, on the Company's belief that customers in the
health information systems market increasingly demand client/server technologies
and that these technologies provide improved product performance. The review
also considered the costs associated with the Company's product development
projects in process at the end of the year and the length of time required to
complete these projects. Following this review, in February 1997, the Company
adopted a new technology strategy to focus its future development efforts and
business on client/server and WWW technologies developed by its Cordillera
subsidiary. As a consequence, the Company ended its project to develop Vista
Elite, a Vista-platform product with additional decision support modules, which
had incurred substantial development costs in 1996. The Company believes that
the consolidation of its products on a single technology platform will enable
the Company to control development costs and sales and support expenses
associated with the operation of multiple technology platforms to introduce new
products more quickly, and to focus the Company's products and services on
technologies that the Company believes more closely match market requirements.
The adoption of this technology strategy involves product development and market
risks that may cause the Company's actual results to differ significantly from
its current estimates. See "Products."
The Company has introduced the Crescendo! platform in the cardiovascular
markets and intends to adapt this platform for other medical specialties. As the
Crescendo! platform products become available, the Company will seek to migrate
its Vista customers to these products. During this development period, the
Company intends to support its current Vista customers by continuing to provide
its existing Vista products and services and by releasing a new version of Vista
in 1997. In addition, as the Company discontinues its DOS products, it will seek
to migrate these customers to either the Crescendo! or Vista platforms, as
appropriate, during the next twelve months.
COST REDUCTION PROGRAM AND SEVERANCE PAYMENTS. In March 1997, the Company
established a cost reduction program to reduce the number of employees
throughout the Company, except at BSM and CLMA, and closed the operations of
Medical Information Systems Company, Inc. ("MIS"), the Company's subsidiary
located near Boston. Twenty-nine positions were eliminated, reducing the number
of employees from 208 at December 31, 1996 to 179 at March 25, 1997. This staff
reduction relates primarily to the Company's decision to end the Vista Elite
development program and to control development costs in general by focusing on a
single technology platform. The cost reduction program and the closing of MIS
will result in a charge in the first quarter of 1997 for severance and other
related expenses.
REGISTRY AGREEMENT. On February 3, 1997, the Company entered into an
agreement with Eli Lilly and Company ("Eli Lilly") to participate in a pilot
program for a registry to collect, analyze and report on the use of a platelet
aggregation inhibitor (the "Inhibitor") during coronary interventions, which is
marketed by Eli Lilly. Under the pilot program, the Company will collect from
ten participating cardiac catheterization laboratories data on the use of the
Inhibitor including patient selection criteria and protocols, clinical outcomes,
costs and resource utilization and patient-reported outcomes (satisfaction with
treatment as well as restoration of quality of life). The registry will provide
longitudinal data by collecting data at the time of the initial intervention and
at follow-up patient encounters. Data will be entered by the participants on-
site at the cardiac catheterization laboratories primarily through an on-line
system using WWW pages. The on-line system will use digital signatures and file
encryption to insure safe transmission of information to the database
repository. Participating laboratories will receive aggregated information from
the registry on a monthly basis, including cost, utilization and outcomes
analyses regarding Inhibitor treatments and benchmark data with respect to
Inhibitor use at other laboratories. The registry is a pilot program subject to
significant product development and market acceptance risks. See "Products-
Registries."
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AAOS VENDOR AGREEMENT. In March 1997, the Company entered into an
agreement with the American Academy of Orthopaedic Surgeons ("AAOS") to be a
certified vendor of AAOS' MODEMS(TM) (Musculoskeletal Outcomes Data Evaluation
Management System) Program. The MODEMS Program is designed to compile data on
clinical outcomes related to specific orthopaedic medical procedures and
interventions that will be aggregated into a national database. The MODEMS
Program measures patient functionality and quality of life factors through
patient questionnaires in four categories: lower limb, upper extremity,
pediatrics and spine. The Company is or will be one of approximately six vendors
certified by AAOS to market the MODEMS Program. Under the agreement, the Company
will pay AAOS an initial fee of $27,500, and an annual fee equal to 10% of sales
that exceed $200,000 in the applicable year. The agreement does not and will not
restrict the Company's activities regarding its orthopaedic clinical outcomes
programs.
LINK MEDICAL LETTER OF UNDERSTANDING. Under a Letter of Understanding
("LOU") dated February 6, 1997, between the Company and Link Medical, Inc.
("Link"), the Company has agreed to use Link's LINKTools(TM) integration
software and related programming services to interface the Company's various
software products with medical devices and computer systems of its customers.
The LOU requires the Company to use LINKTools for all interfaces for the
Company's Vista software product, unless LINKTools is not reasonably adequate
with respect to a particular installation. The Company may, at its option, use
LINKTools with other Company products, such as Crescendo!, under the terms set
forth in the LOU. Under the arrangement contemplated by the LOU, the Company
will pay a royalty only on each copy of LINKTools activated, with activation
occurring when an interface is actually activated at a customer's location. The
LOU has a term of three years and the parties are required to renegotiate a new
agreement six months prior to its scheduled termination. The Company and Link
anticipate that a formal agreement incorporating the terms of, and replacing,
the LOU will be executed within 60 days after the execution of the LOU.
PRODUCTS
INTRODUCTION. The Company offers Crescendo! Forte, a comprehensive
information database application for use in high volume hospital cardiac
catheterization and cardiovascular surgery centers, including medical research
centers. The Company is also developing Crescendo! Basic for medium and lower
volume cardiac catheterization and cardiovascular centers that desire to collect
a core set of outcomes measurements. These Crescendo! products are marketed and
sold by the Company's direct sales force and telesales staff. The Company also
offers its Vista product line of over 40 database software modules that is
primarily used in five medical specialties: cardiac and thoracic surgery,
cardiology, ophthalmology, urology and orthopaedics. The Vista products are
marketed and sold by the Company's telesales staff and national vendors of
healthcare products under joint marketing arrangements. See "Sales and
Marketing."
GENERAL. The Company's software is designed to capture and organize the
clinical data that healthcare providers require to compete effectively in
today's healthcare market. The software includes analytical tools for reviewing
the data of healthcare providers, enabling them to improve their clinical
efficiency and quality of medical care. Company customers can use the data
reports to profile healthcare provider performance, demonstrate quality of care,
identify cost-effective clinical practices and monitor cost factors. Using the
report generating functions of the software, customers can communicate their
analysis of outcomes data to patients, managed care organizations and regulatory
and accreditation agencies, as well as internal peer review and quality
assurance committees and organizations. The Company also aggregates, manages and
reports the data generated by its customers into national databases for certain
medical specialties to provide national benchmarks of national practice patterns
and clinical outcomes for comparison with the data generated by individual
customers.
The software includes analytical tools that organize the information
collected in the healthcare provider's database and provide meaningful
measurements of such provider's clinical outcomes data. The software affords
convenient access to the information in the database, allowing
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patient records to be searched by data field, and includes functions for
generating patient listings, frequency tables, cross tabulations and statistical
analyses from the healthcare provider's database.
The Company's software features enable efficient and accurate data
collection. Data from a healthcare provider's other information system or
certain diagnostic equipment can be accessed by the software. The software's
automatic data entry function enables the healthcare provider to enter data
efficiently by calling up only the screens required for further data entry. In
addition, the software can calculate the entry of certain data fields that can
be derived from data already entered in the database. The software provides for
automatic validity checks for certain data fields that prompt a review of an
entry if it falls outside certain parameters or is inconsistent with another
entry. The software's data collection features include an on-screen help system
that provides guidance on the use of the software, as well as data entry menus
and field definitions that give assistance in making the correct data entries.
The edit feature of the software allows healthcare providers to customize their
software to add data fields that they consider relevant or that payors or other
organizations require them to collect. To protect the confidentiality of patient
data, the software contains an extensive security system that, among other
features, allows physicians in a group practice or hospital to access only the
records of each individual physician's patients.
The software enables healthcare providers to communicate their clinical
outcomes effectively and efficiently. Specifically, the software includes a
graphics package for charting and graphically displaying clinical outcomes using
bar charts, pie charts and three-dimensional charts. The graphics package also
allows healthcare providers to record digitized images from diagnostic tests,
such as an angioplasty report, in their databases. In addition, the document
processing functions can streamline the production of referring physician
letters, operative notes and discharge summaries.
Company customers who choose to participate in a national database can
receive reports from such national databases that contain information on trends
in procedure utilization and outcomes (including, but not limited to, mortality
and morbidity), as well as information on statistical analyses of the
relationship between medical risk factors and outcomes. The information
provided by the national databases can be used with the information contained in
the healthcare provider's database to compare the healthcare provider's practice
patterns and clinical outcomes to national benchmarks. These comparisons can be
used by healthcare providers to compete for contracts based on outcomes and to
establish or enhance clinical or operational practices.
CRESCENDO! The Crescendo! platform is a Windows-based client/server,
relational database application that facilitates point-of-care collection and
retrieval of clinical information. The platform is intended to be scaleable to
function in a range of configurations depending on the customer's requirements.
The Company intends to establish the Crescendo! platform as the Company's sole
technology platform and to develop products using the Crescendo! platform for
additional medical specialties after this platform has been fully developed for
the cardiovascular market. The Crescendo! platform is designed to allow multiple
users access to accurate clinical, economic and patient-reported information and
to reduce the overall cost of data acquisition. The platform uses a point-of-
care design, in which data entry follows the care process to allow concurrent
data collection and analysis. To reduce redundant data entry and increase the
accuracy of data, the Crescendo! platform interfaces with hemodynamic equipment
and other clinical equipment and communicates with the healthcare provider's
hospital information systems utilizing industry standard protocols. This
platform provides longitudinal tracking of outcomes data. The Crescendo!
platform employs a standard word processing program, Microsoft Word for Windows
7.0(TM), to generate detailed, chart ready reports. In addition, the Crescendo!
platform runs a number of predefined reports, including outcomes reports,
population reports, profiling reports and productivity reports, as well as ad-
hoc queries to further assist in a healthcare provider's analysis of outcomes
data.
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The client application of the Crescendo! platform conforms to Windows
95(TM) standards and incorporates many of the features common in the Windows
operating environment. The Crescendo! platform provides database and interface
utilities that permit the customer to customize the database selections and user
interface. The platform uses Microsoft SQL Server for Windows NT(TM) as the
relational database engine for distributed client/server computing.
The Crescendo! platform is presently designed for use in hospital cardiac
catheterization and cardiovascular surgery programs. In the second half of 1996,
the Company introduced a comprehensive information database product, called
Crescendo! Forte, for use in high-volume, hospital cardiac catheterization and
cardiovascular surgery centers, including medical research centers. The
Crescendo! Forte product includes clinical modules on cardiac catheterization
(diagnostic and interventional), adult cardiac surgery, in-hospital quality
assurance, patient history and physical examinations. In addition, the Company
is developing electrophysiology, echocardiography, stress testing and nuclear
testing modules. The Company anticipates offering these additional modules to
customers in late 1997. Moreover, the Company is developing Crescendo! Basic, a
database system for medium and lower volume cardiac catheterization and
cardiovascular centers that desire to collect a core set of outcome
measurements.
The Company has limited operating experience with the Crescendo! products.
There can be no assurance that these products will achieve market acceptance or
that the failure to do so will not have a material adverse effect on the
Company's business, financial condition and results of operations. These
products, when first released by the Company, may also contain undetected
difficulties or defects that, despite testing by the Company, are discovered
only after they have been installed by customers. There can be no assurance that
such difficulties of defects will not be discovered in the future, causing
significant customer relations issues, delays in product introduction and
shipments, or requiring design modifications that could adversely affect the
Company's competitive position, business, financial condition and results of
operations.
VISTA. The Company offers its Vista-platform database software for use
primarily in five medical specialties: cardiac and thoracic surgery, cardiology,
ophthalmology, urology, and orthopaedics. The Vista products includes over 40
database software modules in these medical specialty markets. On the Vista-
platform, the Company also offers additional database software modules for
selected medical specialties that measure cost, health status and patient
satisfaction and inventory control.
The Vista database modules may be bundled within a certain medical
specialty to form an integrated software solution that compiles data on clinical
outcomes for certain medical procedures, as well as data on costs and patient
health status and satisfaction. The cost containment module is designed to
provide cardiac catheterization laboratories and cardiac surgery centers with
the ability to analyze costs and reimbursements by margins, patient, physician
or diagnostic related group. This module combines both clinical and financial
information for comparison of resource utilization trends among patients with
similar medical profiles. Healthcare providers can analyze practice patterns,
including choice of technology, device and drug costs and labor usage, to
improve operational efficiency. In addition, the hospital, group practice or
physician can use the cost containment module to project cost outcomes by
modeling different clinical pathways. The health status and patient satisfaction
module bundles two patient-derived outcomes measurement tools: (i) a quality of
life application, incorporating the SF-36 health status survey, and (ii) one of
three patient satisfaction surveys measuring the patient's satisfaction with the
medical care received from the healthcare provider. The SF-36 health status
surveys can be completed by patients both prior to, and at selected intervals
following, a course of treatment. The application identifies changes in a
patient's general health and functional status due to either a diagnostic
treatment, particular procedure or therapeutic treatment. The patient
satisfaction surveys may be administered to patients on a routine basis to
identify levels of, and changes in, patient satisfaction. The inventory control
module is designed to be used in conjunction with the Company's cardiology
modules in hospitals. This module allows tracking of inventory using bar coding
technology along with a database which shares information with the Company's
cost containments and procedure modules.
The Vista platform is a Windows-based, flat file application, that operates
on IBM or IBM-compatible personal computers. The platform format also includes
an automatic document processor, multi-tasking features, user-defined
customization, embedded medical images and a security system. The Vista platform
is capable of operating on a network, thereby allowing concurrent access to a
database from several locations. The Company has developed interfaces between
its Vista platform and the hemodynamic equipment of leading manufacturers and a
majority of the information systems of major vendors for healthcare facilities.
These interfaces enable the Company's Vista modules to import data directly from
a hospital's or practice group's existing information systems. Although the
Company intends to continue to support the Vista platform, the Company will seek
to migrate its customers using the Vista platform to products on the Crescendo!
platform as they become available in each medical specialty. The Company's
operating results may be adversely affected by a continued deterioration of
Vista product sales and by a failure of the Company to implement successfully
its strategy to migrate its Vista product customers to Crescendo! products.
DOS. Prior to 1994, all of the Company's modules operated in a DOS
environment, and a significant number of the Company's installed base is
comprised of DOS modules. Since the Company currently offers all of its
procedure modules in its Windows format, the Company is offering software
upgrades to its DOS customers to migrate to the Windows-based Vista or
Crescendo! products for a separate fee. During this migration period, the
Company intends to continue to provide support for its DOS modules.
WELLCAST R.O.I. Wellcast R.O.I. is a decision-support product line in a
Windows-based environment. Wellcast R.O.I. models the financial return on
investment in health promotion. Specifically, Wellcast R.O.I. calculates both
the future medical costs of specific diseases and the economic impact of
temporary or permanent loss of employment due to such disease. Wellcast R.O.I.
modules allow the customer to forecast the results of prevention programs prior
to incurring costs
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associated with preventative activities. Wellcast R.O.I. customers include
hospitals, wellness centers, managed care organizations, pharmaceutical
manufacturers and payors.
REGISTRIES. In late 1996, the Company introduced registries that employ
the Crescendo! technology and on-line systems using WWW technologies to collect
and report clinical information related to the use of a particular medical
device or a specific therapeutic agent at a specific site. A registry may be
sponsored by one or more medical device manufacturer or pharmaceutical companies
who would pay for the development and ongoing maintenance of the registry. A
registry may focus on capturing a limited set of data elements necessary to
review the clinical efficacy and economic implications of a device or drug and
to identify the clinical practices associated with such device or drug. Factors
tracked by a registry may include: patient demographics, patient risk profiles,
healthcare provider demographics, clinical protocols, complications and outcomes
of interventions, costs and economic indicators and long-term patient follow-up.
The collection technologies and minimum data sets intended for the registries
will be designed to provide the sponsors, healthcare providers and payors with
insights into efficient clinical practices while minimizing the data collection
burden on the healthcare provider. The data compiled through specific on-site
reporting can be aggregated into a national database to be used by other
healthcare providers.
On February 3, 1997, the Company entered into an agreement with Eli Lilly
to participate in a pilot program for a registry to collect, analyze and report
on the use of a platelet aggregation inhibitor marketed by Eli Lilly during
coronary interventions. See "Recent Developments-Registry Agreement." The
Company's program with Eli Lilly for registry services is in the development
stage and, in general, the Company has limited operating experience with
registry products. There can be no assurance that the Company's registry
products will achieve market acceptance.
SERVICES
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CQS PACKAGE. The Company offers its CQS package to customers of its
cardiovascular database software products, which consists of an array of
arrangements and services intended to position the Company with the customer as
an on-going provider of clinical information services rather than focusing on a
single software sale to the customer. Under the CQS package, the customer
purchases a three-year license for the Company's cardiovascular database and a
series of related services that are designed to increase the value obtained by
the customer from the database software. These services include an initial six
month regimen of on-site installation of, and operational training in the use
of, the software as well as system integration support. Additional services
provided under the CQS package include initial and subsequent semi-annual
advanced training, data quality assurance reviews and data analysis by the
Company's healthcare consultants. During the term of the license, the CQS
package also includes software updates as such become available.
The Company provides to customers a comprehensive implementation and
training process under the CQS package. This process includes pre-installation
profiling of the customers' requirements, system configuration and development
of an implementation plan. The Company provides on-site implementation and
training services in which the software is installed and tested by the Company,
comprehensive system training, including data capture, data entry and basic
reporting, and workflow assessment services. During the applicable installation
period, the Company conducts monthly status calls with the customer to review
progress on the implementation plan and address any customer issues. After
software installation, the Company provides an on-site assessment, including a
data quality assurance check and advanced training in reporting and use of data.
As part of the CQS package, the Company contracts with the customer to conduct
standardized analysis and interpretation of the customer's outcomes data,
including analyses of practice patterns, referral patterns, payor profiles,
resource utilization and procedure profitability. The Company also provides
consulting services in payor contracting, such as contract analysis and
capitation strategies, RFP responses and accreditation and certification
processes.
CUSTOMER SERVICES. Although the Company offers the CQS package to its
cardiovascular customers, the Company also offers to other customers a range of
other support and services, including the following support and services.
Implementation Services. The Company offers implementation services at the
time of a software purchase, for which the Company charges an additional fee.
These services include a survey of the customer's existing information systems
and an analysis of the hardware, interface, networking, data conversion and
personnel needs of the customers. The implementation services also include
advanced training for the customer's personnel.
Customer Training. All of the Company's customers are encouraged to attend
the Summit Training Institute, or schedule on-site training for those
individuals managing a Company-provided database, for which the Company charges
a fee. Instruction is provided on a continuous schedule at the Company's
headquarters or as specified by the customer for on-site training. The Company
also offers advanced training for existing customers.
Customer Service and Support. The Company usually provides basic customer
services and support for six months after installation of the software and
thereafter, the Company charges an annual fee for these customer services and
support. Included in the basic customer services are: access to a toll-free hot
line to answer questions ranging from installing the software to creating
customized reports; technical assistance on software and hardware; and format
designs and migration of data from the healthcare provider's information systems
into the Company's database.
Data Management Services. In addition to its standard customer service,
the Company provides assistance to users requiring data management services,
including assistance in gathering and analyzing data from their files and the
national databases. These additional data analyses and more in-depth analyses
are provided on a fee-for-service basis. The Company intends to expand its data
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analyses services to assist healthcare providers in specialized analysis for
presentations or negotiations with managed healthcare organizations, other third
party payors and accreditation and regulatory agencies.
CONSULTING SERVICES. The Company provides a range of consulting services
through its subsidiaries, BSM, a national healthcare consulting firm, and CLMA,
a provider of regulatory consulting and clinical trial management services.
The BSM Consulting Group. BSM is a national healthcare consulting firm,
providing consulting services to healthcare providers, pharmaceutical and
medical device firms. BSM offers a range of advisory services to its clients for
effectively competing in health care environments, including strategic planning,
data analysis and presentation for marketing to payors and negotiation skills
training. BSM also assists healthcare providers in forming integrated healthcare
provider networks and mergers and acquisitions. The Company intends to develop
products which integrate the use of its clinical outcomes software and BSM's
related consulting services. After the Company's software has been installed at
a healthcare provider site, opportunities exist to consult with a healthcare
provider on the uses of the data from the database, the packaging of the data
for external reporting and the management of the data for internal quality
assurance. The Company believes that creating this ongoing relationship also
enhances the opportunities for the sale of additional and new products and
services in a healthcare organization. The above discussion includes forward
looking statements designed to provide investors with an overview of the
Company's strategy to integrate and leverage BSM's business. There can be no
assurance that the Company will be able to integrate successfully BSM's business
with the Company's software business or obtain the expected benefits of BSM.
C. L. McIntosh & Associates, Inc. CLMA is a provider of regulatory affairs
consulting and clinical trial management services, primarily focused on
assisting medical companies obtain and maintain Food and Drug Administration
("FDA") approval to market medical devices, and biological and pharmaceutical
products. CLMA also designs and manages clinical trials for manufacturers,
including statistical analysis and reporting of clinical study results. CLMA
assists clients to develop appropriate regulatory strategies for product
submissions and to prepare regulatory submissions. CLMA also assists clients to
obtain and maintain necessary manufacturing and quality certifications and to
respond to adverse audit reports from the FDA. In addition, CLMA provides
customized quality and regulatory training programs for clients' employees who
are involved in meeting FDA regulatory requirements. The Company's success will
depend, in part, on its ability to integrate CLMA into the Company's operations.
There can be no assurance that the anticipated benefits from the acquisition of
CLMA will be realized or that the Company will be able to effectively market the
services of CLMA.
NATIONAL DATABASES
The Company maintains and manages national databases for two national
medical associations, the Society of Thoracic Surgeons ("STS"), and the American
Society of Cataract and Refractive Surgery ("ASCRS"), for cardiac and thoracic
surgery and ophthalmology, respectively. In addition, the Company has an
agreement with the American College of Cardiology ("ACC") to become a certified
software vendor to participants in the ACC National Database. These databases
provide valuable benchmarks of national practice patterns and clinical outcomes
against which individual healthcare providers can compare their own performance.
The affiliations with STS, ASCRS and ACC are also valuable marketing
relationships that provide the Company with access to the membership of these
associations. The Company pays royalties or fees to each of these medical
association, and has the right to use of the name and logo of these
associations.
STS National Database. The procedure modules for cardiac and thoracic
surgery have been developed under a contract with STS. STS is a leading medical
specialty society representing cardiac and thoracic surgeons, with approximately
3,000 members in the United States and Canada, including an estimated 70% of
cardiac and thoracic surgeons in the United States. The Company uses STS's name
and logo in promoting the STS-sponsored procedure modules, while STS promotes
the Company's software and national databases in publications of STS and by
other means. The information collected from these programs is included in STS-
sponsored national databases, which currently include patient
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records for approximately 700,000 procedures in cardiac and thoracic surgery.
The Company produces and distributes an annual report on the national database,
as well as up to three special analyses per quarter for each participant.
The Company's agreement with STS was originally executed in April 1990 and
is effective through December 31, 1998. The Company is the copyright owner of
the software, documentation and other materials created pursuant to the
agreement, while STS is the copyright owner of the remaining data in the
associated national database, the information format design used in the software
and all reports and information derived by either the Company or STS from the
national database. As a result of STS's ownership and certain other rights, the
Company may not use any data submitted to the national database to develop
commercial applications other than for the Company's cardiac and thoracic
surgery procedure modules, without the consent, licensing or similar agreement
of STS. The STS database is open to allow participants to enter data in the
national database using the software of other vendors provided the data conforms
to the standard definitions and format of the national database created by the
Company and STS. In the event the Company's agreement with STS is terminated by
the Company or by STS due to the Company's material breach of the agreement or
inability to fulfill the agreement, the Company must assign its rights in the
software, documentation and materials, including source code, that are created
pursuant to the agreement, and must deliver copies of this source code, to STS.
Upon termination of the Company's agreement with STS under any other
circumstance or if STS chooses not to extend the agreement, the Company will
retain all ownership rights to the software associated with STS-sponsored
procedure modules, and STS would be required independently to develop, either
directly or through a substitute vendor, the software necessary to continue the
national database.
ASCRS National Database. The ophthalmology modules have been developed
under a contract with ASCRS. ASCRS is a subspecialty medical association
representing ophthalmology subspecialists. The Company uses ASCRS's name and
logo in promoting ASCRS-sponsored module, while ASCRS promotes the software and
national database in publications of ASCRS and by other means. The information
collected from these modules is included in the ASCRS-sponsored national
database, which currently contains patient records for approximately 40,000
ophthalmology procedures.
The Company's agreement with ASCRS was originally executed in February 1994
and is effective until February 18, 1999, and will automatically renew for
another five year period unless either party provides notice 180 days prior to
February 18, 1999. The Company is the copyright owner of the software,
documentation and other materials created pursuant to the agreement, and the
Company and ASCRS are the co-owners of the copyright for the data in the
associated national database and all reports based thereon. Upon termination of
the agreement, ASCRS has the right to purchase the Company's interest in the
ASCRS national database; however, in the event of an offer by ASCRS, the Company
first has a right to purchase the interest of ASCRS in the national database on
the same terms as the ASCRS offer.
ACC National Database. The Company executed an agreement with ACC in
March 1997, which replaces the parties' February 1991 agreement for the ACC
National Database. Under the March 1997 agreement, ACC will maintain the
database containing the ACC National Database, by collecting, analyzing and
reporting on the data provided to it by participants. The Company has the
non-exclusive right to develop and implement software to enable participants to
enter data into the ACC National Database in the format, and using the
transmission specifications, required by ACC. The Company has six months from
the effective date of the agreement to demonstrate to ACC that the Company's
software meets such requirements, and thereafter, on an annual basis, ACC will
review such software to ensure that it complies with the then-current ACC
National Database format and ACC specifications. Upon ACC's approval of the
Company's software, the Company will be deemed a certified vendor of
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ACC entitled, among other things, to use the ACC trademark and the "ACC-
certified" designation in its promotion of the software. If the Company updates
its software, during the time that the Company's software is under review by
ACC, the Company may only indicate that ACC approval of such version is pending.
At such time as the software is certified by ACC, the Company intends to
offer its Crescendo! products for use by its customers who desire to participate
in the ACC National Database. The Company's Vista customers, who elect to
continue to participate in the ACC National Database will be required to migrate
to the Crescendo! products to provide data to ACC National Database. The
participation agreements currently in effect between the Company, ACC and
participants in the ACC National Database will continue to be honored during
their term, and the Company will not be required to perform any obligations
under the agreement that conflict with the terms and conditions of such
participation agreements.
ACC is the owner of all rights in the ACC National Database including the
national database, its data formats, definitions, file specifications, file
transfer protocols, procedural guides, and all publications and reports it
develops in support of the operations of the ACC National Database. The Company
is the owner of all rights in the software and related documentation and
training materials it develops pursuant to the agreement. The Company is
expressly permitted to develop cardiovascular data repositories that are
independent of ACC for the collection and aggregation of cardiovascular clinical
data, so long as ACC is provided with 45 days prior notice of the commercial
release of such repositories. Thus, the Company may use the data submitted by
participants to the ACC National Database in any data repositories it creates
that are independent of ACC. However, if the Company uses materials owned by ACC
in its independent data repositories, it is required to pay royalties to ACC for
such use. In addition, the Company may offer to its customers who are
participants services similar to the ACC National Database so long as
participants are not required to purchase such services in order to participate
in the ACC National Database.
The term of the agreement ends on January 4, 1999, and it may only be
terminated earlier by ACC if the Company fails to initially deliver acceptable
software, or fails an annual software review thereafter. In addition, either
party may terminate the agreement if the other party fails to cure a material
breach within 60 days after receipt of notice of such breach. At the request of
ACC, the parties are required to conduct good faith negotiations, beginning no
later than July 1, 1998, to enter into a new agreement to become effective upon
the expiration of the March 1997 agreement. Upon any termination of the
agreement, the parties shall retain their respective ownership of materials, and
the Company will no longer be deemed an ACC-certified vendor. The agreement is
not assignable by either party.
Data Collection and Integrity. Healthcare providers are requested to
complete entries of their patient records to the Company in order to receive
reports on the national databases or software upgrades for risk stratification
tools based on a national database. Hospitals and physicians typically provide
their data to the Company electronically or on disks using the Company's
software, although members of the medical associations may submit manual data
forms for a fee-per-form. The national databases contain measures to protect
patient and healthcare provider confidentiality. To date, no information which
could identify the patient or physician is included in the data submitted to the
Company. The Company uses several methods to test the validity of the data
included in the national databases. Before a submission of data is entered into
a database, the Company samples the file for missing data. The Company also
samples the data for clinical consistency and appropriateness to determine
whether an entry in one part of the patient record is consistent with entries in
other parts of the record. The Company returns data to a healthcare provider if
it finds an unacceptable level of missing data fields or clinical
inconsistencies.
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SALES AND MARKETING
DIRECT SALES. The Company's direct sales force primarily focuses on sales
of Crescendo! products to hospitals, other healthcare providers and wellness
centers. In conjunction with its direct sales of Crescendo! products, the
Company also sells its CQS package directly to cardiovascular customers. The
Company does not focus its direct sales force on sales of Vista products but
rather sells Vista products primarily through telesales and corporate joint
marketing arrangements. See "Corporate Joint Marketing."
The Company's direct sales force in the United States currently consists of
seven area managers and three national sales managers who are responsible for
pursuing direct sale prospects. The area managers are located in Minneapolis and
other key cities in the United States (Chicago, Philadelphia, San Francisco, San
Diego and Tampa) and are responsible for targeted sales activities within a
geographic region. The Company has one National Sales Manager dedicated
exclusively in the United States to Crescendo! Forte, to focus and coordinate
sales to academic medical centers and hospitals.
The Company began an in-house telesales and marketing program in late 1996.
The program now consists of seven telesales representatives and one managing
director, who is also responsible for the Company's telephone based customer
service call center. The telesales unit works in concert with the field sales
force and is primarily responsible for sales of the Company's Vista products to
non-hospital office-based providers.
The Company's area managers also coordinate sales activities with the
Company's corporate marketing partners and work with the sales representatives
of the corporate marketing partners to identify potential customers for its
Vista products. Once a sales representative of a corporate marketing partner has
identified an opportunity, the area manager provides the sales representative
with appropriate technical information and product specifications. The area
managers work with the sales representative of the Corporate Marketing Partners
(defined herein) to complete the sale to a customer.
Direct sales leads are generated via telemarketing, focused mailing
campaigns, trade show displays, advertising and customer referral
recommendations. Mailings are targeted to members of the various medical
associations and identify the growing need for the physician to maintain a
quality database. Sales representatives are responsible for completing sales to
targeted direct sales prospects.
The Company markets and sells its products in European markets through its
subsidiary, Summit Medical Europe S.A.R.L.
CORPORATE JOINT MARKETING. The Company seeks to leverage its
distribution through joint marketing relationships with national vendors of
healthcare products ("Corporate Marketing Partners"). The Company currently
markets Vista products through these joint marketing arrangements.
The Company has established a joint marketing arrangement with SciMed Life
Systems, Inc. ("SciMed"), a subsidiary of Boston Scientific Corporation ("Boston
Scientific"), a worldwide developer, manufacturer and marketer of medical
devices and four Boston Scientific divisions: Microvasive Urology, Microvasive
Endoscopy, Mansfield EP and Meadox Medicals (collectively, the "Boston
Scientific Divisions"), The Company also has marketing arrangements with
Allergan, Inc. ("Allergan"), a global provider of eye care and other specialty
therapeutic products, and Smith & Nephew Richards Inc. ("Smith & Nephew
Richards"), a global provider of medical orthopaedic devices, which
relationships have been in transition during 1996.
Under its joint marketing arrangement with SciMed, SciMed markets adapted
versions of the Company's Vista angioplasty, cardiac catheterization laboratory,
cost and patient satisfaction modules. Microvasive Urology markets adapted
versions of the Company's Vista BPH
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management and prostate cancer procedure modules, and will market additional
urology procedure modules as such modules are developed. Microvasive Endoscopy
will market adapted versions of the Company's Vista colonoscopy, endoscopic
retrograde cholangiopancreatography ("ERCP") and esophagastric duodenoscopy
("EGD") modules, and will market additional Vista pulmonary and alimentary
endoscopy procedure modules as such modules are developed. Mansfield EP will
market adapted versions of the Company's Vista electrophysiology studies module,
and will market additional electrophysiology modules as such modules are
developed. Meadox Medicals will market adapted versions of the Company's current
Vista vascular surgery module and will market additional vascular surgery
modules as such modules are developed. SciMed and the Boston Scientific
Divisions purchase Vista modules from the Company for resale either as an
independent product or as part of a package of goods and services that SciMed or
the Boston Scientific Divisions provide to the customer. In connection with
these joint marketing arrangements, the Company will manage national databases
comprised of data to be collected from customers of SciMed or the Boston
Scientific Divisions. During the term of these joint marketing agreements, the
Company may not provide Vista software for distribution by a competitor of
SciMed or the Boston Scientific Divisions, as long as SciMed or the Boston
Scientific Divisions meet applicable minimum purchase requirements. SciMed is
the owner of the Vista programs developed for SciMed and the database containing
information about users of the Company's software purchased through SciMed. The
Boston Scientific Divisions are the owners of the programs and additional
features developed for the Boston Scientific Divisions and the databases
collected on their behalf. At the same time, the Company will own and manage
national databases comprised of data (excluding the fields developed for the
Boston Scientific Divisions) collected from the Boston Scientific Division's
customers and from customers that purchase procedure modules directly from the
Company. If the Company terminates any of the agreements or is unable to serve
SciMed or the Boston Scientific Divisions or purchasers of Company modules from
SciMed and the Boston Scientific Divisions under the terms of the applicable
agreement, or if SciMed or the Boston Scientific Divisions terminate an
agreement due to a material breach by the Company, the voluntary or involuntary
filing for bankruptcy of the Company or the sale of substantially all of the
assets or capital stock of the Company, SciMed or the Boston Scientific
Divisions will have continued access to and the right to use the source code to
the Vista software programs subject to the agreement.
The Company has also established a joint marketing arrangement with
Allergan, Inc. ("Allergan"), a global provider of eye care and other specialty
therapeutic products, to market adapted versions of the Company's ophthalmology,
cost and patient satisfaction modules. Allergan purchases modules from the
Company for resale either as an independent product or as part of a package of
goods and services that Allergan provides to ophthalmologists. In connection
with this joint marketing arrangement, the Company will manage a national
database comprised of data to be collected from Allergan's customers. The
Company's agreement with Allergan is effective until August 14, 1997; however,
either party may terminate the agreement without cause after giving 60 days
prior notice. Allergan has a right of first refusal to obtain co-exclusive
rights and licenses to distribute certain software and related materials in
every country of the world in the medical disciplines of vision care,
ophthalmology, orthopaedics, neurology, pediatrics and dermatology. Allergan is
the owner of the software developed for it and the database containing
information about users of the Company's software purchased through Allergan. If
Allergan terminates the agreement due to the voluntary or involuntary filing of
bankruptcy of the Company, Allergan will have continued access to and right to
use the source code to the software programs subject to the agreement. During
the term of the agreement, Allergan has agreed not to distribute any other
national database clinical outcomes software. To maintain its rights under the
agreement, Allergan must meet minimum purchase requirements. In 1996, Allergan
did not meet these minimum purchase requirements. Consequently, on October 3,
1996, the Company notified Allergan that, due to Allergan's failure to comply
with its minimum purchase requirements as stated in the agreement, the Company
no longer was required to sell software programs for distribution exclusively to
Allergan pursuant to the terms of the agreement. The Company continues to market
Vista ophthalmology products through Allergan on a non-exclusive basis.
In November 1995, the Company established a joint marketing arrangement in
the United States with Smith & Nephew Richards to market versions of the
Company's Vista hip replacement, knee replacement and sports medicine knee and
shoulder clinical outcomes modules, as well as additional orthopaedic procedure
modules as such modules are developed. Smith & Nephew Richards purchases Vista
modules from the Company for resale either as an independent product or as part
of a package of goods and services that Smith & Nephew Richards provides to
hospitals, orthopaedic surgeons and other physicians. In connection with this
joint marketing arrangement, the Company will, on behalf of Smith & Nephew
Richards, maintain and manage a database comprised of data collected from Smith
& Nephew Richards' customers. The Company's agreement with Smith & Nephew
Richards is effective until January 31, 2001, and will automatically renew for
additional one-year periods unless either party provides 180 days prior notice
of termination. The Company and Smith & Nephew
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Richards each have a right of first refusal to establish a joint marketing
arrangement with the other if either the Company or Smith & Nephew Richards
intends to market orthopaedic procedure modules outside the United States or
introduces modules in the fields of orthopaedic rehabilitation, wound care and
otolaryngology (excluding laryngology). During the term of the Smith & Nephew
Richards agreement, the Company may not provide Vista orthopaedic software for
distribution by a competitor of Smith & Nephew Richards, as long as Smith &
Nephew Richards meets minimum purchase requirements. The agreement provides that
Smith & Nephew Richards is the owner of the programs and additional features
developed for Smith & Nephew Richards under the agreement and the related
database collected on its behalf. At the same time, the Company will own and
manage a national orthopaedic database comprised of data collected from Smith &
Nephew Richards' customers and from customers that purchase orthopaedic
procedure modules directly from the Company. Upon termination of the agreement,
the Company must provide Smith & Nephew Richards with full and complete copies
of the data from the programs and separate database the Company developed for
Smith & Nephew Richards under the agreement and delete all such records from the
Company's files.
The Company is in discussions with Smith & Nephew Richards regarding
disputes under their marketing arrangement, including allegations of material
breaches under their agreement and requests for certain payments.
CUSTOMERS
The Company's customers include specialty physicians, hospitals, physician
networks, managed care organizations, other healthcare payors, pharmaceutical
and medical device firms located in the United States, Europe, South America and
Asia. The Company is the sole vendor of cardiac surgery and cardiology outcomes
database software to Columbia Healthcare Association network.
The Company's cardiology products are primarily designed for and sold to
hospitals, with cardiology group practices a secondary market. The Company
primarily markets its cardiac and thoracic surgery modules to hospitals and
cardiac and thoracic group practices. The primary target market for the
Company's ophthalmologic products are physician group practices. The Company's
urology products are sold to office-based practices and to hospital urological
units. The primary market for the Company's orthopaedic products is the single
and multi-specialty orthopaedic practices and networks.
BSM's customers include healthcare providers and pharmaceutical and medical
device firms located in the United States. CLMA's customers include
pharmaceutical firms located primarily in the United States.
COMPETITION
The market for healthcare information systems and services is highly
competitive. The Company believes that the principal competitive factors for
outcomes software are the quality and depth of the underlying clinical outcomes
database, the usefulness of the data and reports generated by the software,
customer service and support, ease-of-use, compatibility of the system,
potential for product enhancement and vendor reputation. The Company believes
its principal competitive advantages are the clinical focus of its databases,
the depth of patient records in its databases, its installed base of programs,
its customer service and its affiliation with the medical associations.
The Company's competitors include other providers of clinical outcomes
software, healthcare consulting firms, providers of medical information derived
from databases based on claims data and clinical research organizations. As the
market for outcomes software develops, additional competitors may enter the
market and competition may intensify. BSM's and CLMA's competitors include
healthcare consulting firms and clinical research organizations. Many of the
Company's, BSM's and CLMA's competitors and
-16-
<PAGE>
potential competitors have greater financial, development, technical, marketing
and selling resources than the Company, and have substantial installed customer
bases in the healthcare industry. The Company also faces significant competition
from internal information services at hospitals, many of which have developed
their own outcomes databases.
PROPRIETARY RIGHTS AND LICENSES
The Company depends upon a combination of trade secret, copyright and
trademark laws, license agreements, nondisclosure and other contractual
provisions, and technical measures to protect its proprietary rights in its
products. The Company distributes its products under software license agreements
which grant customers a nonexclusive, nontransferable license to the Company's
products and contain terms and conditions prohibiting the unauthorized
reproduction or transfer of the Company's products. The Company attempts to
protect its trade secrets and other proprietary information through agreements
with employees and consultants. The Company also seeks to protect the source
code of its products as a trade secret and as an unpublished copyright work.
There can be no assurance that these protections will be adequate or that the
Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology. The Company
believes that, due to the rapid pace of innovation within the software industry,
factors such as the technological and creative skills of its personnel, and
ongoing reliable product maintenance and support, are more important in
establishing and maintaining a leadership position within the industry than are
the various legal protections of its technology. Although the Company believes
that its products, trademarks and other proprietary rights do not infringe upon
the proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company in the future.
GOVERNMENT REGULATION
The confidentiality of patient records and the circumstances under which
such records may be released to the national databases is subject to substantial
regulation by state governments. These state laws and regulations govern both
the disclosure and use of confidential patient medical record information.
Minnesota, for instance, prohibits "release" of "health records" unless the
patient has consented or a statutory exception has been met. One such exception
is a release for scientific medical research. Although the Minnesota statute
does not define either "health records" or "release" the statute appears to
apply only to records that are patient identifiable.
Although compliance with the laws and regulations of the various states is
principally the responsibility of the hospital, physician or other healthcare
provider supplying the data to the Company, the national databases have been
designed to enable healthcare providers to comply with the confidentiality
requirements of state law. To protect patient confidentiality, data entries to
the national databases delete any patient identifiers, including name, address,
hospital and physician. The Company believes that its procedures comply with the
laws and regulations regarding the collection of patient data in substantially
all jurisdictions, but regulations governing patient confidentiality rights are
evolving rapidly.
Additional legislation governing the dissemination of medical record
information has been proposed at both the state and federal level. In general,
this legislation may require holders of such information to implement security
measures that may be of substantial cost to the Company. One bill currently
pending in Congress would protect and regulate the confidentiality of medical
record information. The bill would prohibit the disclosure of individually
identifiable health information, except with the patient's consent. Without the
patient's consent, medical information could be disclosed only for other limited
purposes, including disclosures to permit the creation of nonidentifiable health
information and to facilitate medical research. The bill would preempt most
state laws regarding access to, and the use and disclosure of, medical record
information. The Company collects,
-17-
<PAGE>
compiles and discloses health care information which it believes is not
individually identifiable and therefore would not be protected healthcare
information under the bill. If the bill is enacted, it may simplify the
Company's regulatory compliance efforts by superseding the various, and
sometimes inconsistent, state laws governing the collection, use and disclosure
of health care information. The Company cannot accurately assess the likelihood
that the bill or any other proposal will become law, or the final scope of any
law.
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
healthcare facilities. During the past several years, the healthcare industry
has been subject to an increase in governmental regulation of, among other
things, reimbursement rates and certain capital expenditures. Many lawmakers
have proposed programs to reform the United States healthcare system. These
programs may contain proposals to increase governmental involvement in
healthcare, lower reimbursement rates and otherwise change the operating
environment for the Company's customers. Healthcare providers may react to these
proposals and the uncertainty surrounding such proposals by curtailing or
deferring investment, including those for the Company's products and related
services. Cost containment measures instituted by healthcare providers as a
result of regulatory reform or otherwise could result in greater selectivity in
the allocation of capital funds. Such selectivity could have an adverse effect
on the Company's ability to sell its products and related services. The Company
cannot predict with any certainty what impact, if any, such proposals or
healthcare reforms might have on its business, financial condition and results
of operations.
EMPLOYEES
As of March 25, 1997, the Company employed a total of 179 full-time
employees. None of the Company's employees is represented by a labor union. The
Company has experienced no work stoppages and believes that its employee
relations are excellent.
EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of the executive officers
of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Kevin R. Green.................... 42 President, Chief Executive Officer and Director
David R. Teckman.................. 40 Vice President, Sales
Richard J. Willemin............... 46 Interim Vice President, Finance and Chief Financial Officer
Lisa K. Olson, Ph.D............... 39 Vice President, Corporate Marketing and Planning
Bruce S. Maller................... 42 Vice President and President of BSM
Donald F. Fortin, M.D............. 39 Vice President and Chief Scientific Officer
Charles L. McIntosh, M.D., Ph.D... 59 Vice President and President of CLMA
</TABLE>
Mr. Green has served as the President and Chief Executive Officer
since joining the Company in January 1996. From September 1991 to December
1995, Mr. Green was employed by Integrated Medical Systems, Inc., a provider of
electronic communication networks to the healthcare industry, where, during part
of this period, he served as President and Chief Executive Officer.
-18-
<PAGE>
Mr. Teckman has served as Vice President, Sales since September 1996.
From 1989 to 1996, he served as Senior Vice President, Sales for PCS Health
Systems, Inc., a provider of information-driven healthcare solutions.
Mr. Willemin has served as Interim Vice President, Finance and Chief
Financial Officer since March 1997. Prior to his joining the Company, he served
as Chief Financial Officer at Datalogix International, Inc. from September 1996
to January 1997. From June 1994 to August 1996, Mr. Willemin served as Vice
President and Chief Financial Officer of NEIC, a transaction processing company
in the health care industry. From March 1992 to June 1994, he served as interim
Chief Financial Officer during periods of transition for several companies,
including Saratoga Springs Water Company, a beverage manufacturer and
distributor; Canyon Ranch Spa Cuisine, a mail order health food company; and
Cosmetics Plus, a health and beauty aid retailer.
Dr. Olson has served as Vice President, Corporate Marketing and
Planning since joining the Company in April 1995. From November 1994 to April
1995, Dr. Olson was an independent consultant providing marketing and management
advice to healthcare organizations. From 1987 to August 1994, Dr. Olson was an
Associate Executive Vice President for the American College of Cardiology, a
22,000 member nonprofit professional society. Since December 1993, Dr. Olson has
also been an Adjunct Professor at Georgetown University in its healthcare
business certificate program.
Mr. Maller has served as Vice President since October 1995, and
President and Chief Executive Officer of BSM since the merger of a wholly owned
subsidiary of the Company and BSM in October 1995. From 1979 until September
1995, Mr. Maller served in the same capacity with BSM.
Dr. Fortin has served as Vice President and Chief Scientific Officer
since January 1997. From July 1995 to December 1996, Dr. Fortin was Director of
the Health Information Center and, from July 1993 to December 1996, Assistant
Professor of Medicine for the Division of Cardiology at Duke University Medical
Center.
Dr. McIntosh has served as Vice President since December 1996. Since
1990, Dr. McIntosh has also served as President of CLMA. Prior to 1990, Dr.
McIntosh served on the Commissioned Corps of the U.S. Public Health Services as
a cardiac surgeon and researcher at the National Heart, Lung and Blood Institute
of the National Institute of Health.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. These forward-
looking statements involve risks and uncertainties that may cause the Company's
actual results to differ materially from the results discussed in the forward-
looking statements. Factors that might cause such differences include, but are
not limited to, failure of the Company's joint marketing partners to market
successfully the Company's Vista products; termination of any of the Company's
joint marketing arrangements; failure of the Company's new products, including
the Crescendo! products and registries, to achieve market acceptance or
significant delays in the introduction of these new products or the discovery of
material defects in these products after introduction; termination of one or
more of the Company's agreements with national medical associations; lack of
continued market acceptance of the Company's clinical outcomes database
software; failure of the Company to maintain the integrity of its national
databases;
-19-
<PAGE>
failure of the Company to integrate the business of CLMA into the Company's
operations; changes in government regulation; loss of key management personnel;
increased competition; and inability of the Company to obtain adequate
protection for the Company's proprietary technology. The forward-looking
statements herein are qualified in their entirety by the cautions and risk
factors set forth under "Cautionary Statement" filed as Exhibit 99 to this
Annual Report on Form 10-K.
The Company is a corporation organized under the laws of the State of
Minnesota. Its headquarters are located at 10900 Red Circle Drive, Minnetonka,
Minnesota, 55343.
ITEM 2. PROPERTIES.
- -------------------
The Company occupies approximately 54,451 square feet of space at its
headquarters near Minneapolis, Minnesota, under a lease expiring in 2005. The
Company leases space in Nice, France for Summit Medical Europe, S.A.R.L., its
European subsidiary. The Company also leases space in Nevada for BSM, space in
Massachusetts for MIS, space in North Carolina for Cordillera and space in
Maryland for CLMA.
ITEM 3. LEGAL PROCEEDINGS.
- --------------------------
The Company has been named as a defendant in three federal court
securities putative class actions captioned Jong E. Lee v. Summit Medical
-----------------------------
Systems, Inc., Mathias Faue, George E. and Patricia E. Faue, Janice
- ------------- ----------------------------------------------------
Mc Quiston v. Summit Medical Systems, Inc., Edward F. Sweeney, Kevin R. Green,
- ------------------------------------------------------------------------------
Anthony W. Rees, Kent J. Thiry, Dennis M. Powers, John M. Nehra, and Judith Anne
- --------------------------------------------------------------- -----------
Jacobson v. Summit Medical Systems, Inc., each filed in United States
- -----------------------------------------
District Court of the District of Minnesota on March 10, 1997, March 26, 1997
and March 31, 1997, respectively. Each action alleges, in essence, that the
Company made misleading public disclosures relating to its financial statements.
In each action, the plaintiffs seek a declaration that the action be certified
as a class action and compensatory damages for losses incurred as a result of
each alleged misleading public disclosures. The Company believes each of these
actions are without merit and intends to defend against them vigorously.
The Company has been informed by the Division of Enforcement of the
Securities and Exchange Commission (the "Commission"), through service of a
subpoena on March 25, 1997, that the Commission is conducting an investigation
of the Company, relating to the Company's restatement of certain financial
statements. The Company is cooperating fully with the Commission and its
investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ------------------------------------------------------------------------------
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "SUMT." The following table sets forth the high and low prices
of the Company's Common Stock for the periods indicated as reported on the
Nasdaq National Market since the Company's initial public offering of Common
Stock on August 4, 1995.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ------- -------
<S> <C> <C>
1995
Third quarter (commencing August 4, 1995).. $17-1/8 $11-3/8
Fourth quarter............................. $25-1/2 $14-1/2
1996
First quarter.............................. $22-3/4 $ 16
Second quarter............................. $24-1/2 $ 19
Third quarter.............................. $ 21 $11-1/2
Fourth quarter............................. $13-1/4 $ 6
</TABLE>
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<PAGE>
On March 24, 1997 the last reported sales price for the Company's Common
Stock on the Nasdaq National Market was $3-3/8 per share. At March 24, 1997
there were approximately 206 record holders of the Company's Common Stock.
The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company currently intends to retain all available funds and any
future earnings for use in the operation of its business.
-21-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
- --------------------------------
The consolidated statements of operations data set forth below for each of
the three years ended December 31, 1994, 1995 and 1996 and the consolidated
balance sheet data at December 31, 1995 and 1996 are derived from, and are
qualified by reference to, the audited consolidated financial statements
included elsewhere in this Annual Report. The consolidated statements of
operations data for the years ended December 31, 1992 and 1993 and the
consolidated balance sheet data at December 31, 1992, 1993 and 1994 are derived
from audited consolidated financial statements of the Company not included
herein. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Company's consolidated financial statements and related notes,
and other financial information included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1992 1993 1994(1) 1995(1) 1996
--------- --------- ---------- ---------- ---------
(Restated) (Restated)
<S> <C> <C> <C> <C> <C>
(In thousands, except per share amounts)
Revenue:
Software licenses $ 1,977 $ 3,713 $ 5,212 $ 6,077 $ 6,094
Support and service 382 793 2,157 3,685 4,975
Consulting fees 1,789 2,689 3,904 5,720 6,103
--------- --------- ---------- ---------- ---------
Total revenue 4,148 7,195 11,273 15,482 17,172
Cost of sales:
Software licenses 224 444 545 831 961
Support and service 495 1,129 1,421 1,797 2,590
Consulting fees 1,005 1,345 2,919 3,316 4,130
--------- --------- ---------- ---------- ---------
Total cost of sales 1,724 2,918 4,885 5,944 7,681
--------- --------- ---------- ---------- ---------
Gross profit 2,424 4,277 6,388 9,538 9,491
Operating expenses:
Selling and marketing 955 2,035 4,667 6,277 8,825
Research and development 263 569 817 1,230 3,932
Purchase of in-process
research and development - - - 7,435 4,746
General and administrative 1,180 1,465 2,142 4,195 6,693
--------- --------- ---------- ---------- ---------
Total operating expenses 2,398 4,069 7,626 19,137 24,196
--------- --------- ---------- ---------- ---------
Income (loss) from operations 26 208 (1,238) (9,599) (14,705)
Interest income, net 2 4 81 575 1,888
--------- --------- ---------- ---------- ---------
Income (loss) before income taxes 28 213 (1,157) (9,024) (12,817)
Income tax expense - - 16 - 19
--------- --------- ---------- ---------- ---------
Net income (loss) $ 28 $ 213 $ (1,173) $ (9,024) $(12,836)
========= ========= ========== ========== =========
Net income (loss) per share (2) $ 0.01 $ 0.05 $ (0.24) $ (1.37 ) $ (1.37)
========= ========= ========== ========== =========
Weighted average shares outstanding(2) 3,674 4,247 4,930 6,581 9,399
========= ========= ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- ---------- ---------- ---------
(Restated) (Restated)
<S> <C> <C> <C> <C> <C>
(In thousands)
Cash, cash equivalents on short-term
investments $ 754 $ 657 $ 3,148 $ 22,921 $ 44,630
Working capital 797 535 2,819 24,276 41,707
Total assets 1,546 2,574 6,447 29,551 53,487
Long -term debt, excluding current portion 53 91 153 29 27
Total shareholders' equity 834 1,133 3,891 25,834 46,083
</TABLE>
(1) Restated as described in Note 2 to the Consolidated Financial
Statements.
(2) Computed on a fully diluted basis as described in Note 3 to the
Consolidated Financial Statements.
-22-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS.
- -------------
OVERVIEW
The Company is a leading provider of clinical information systems and
consulting services to the healthcare industry. The Company currently offers
database products primarily on two technology platforms: Crescendo! and Vista.
The Crescendo! platform is designed for use in hospital cardiac catheterization
and cardiovascular surgery programs. The Company introduced, in the second half
of 1996, a Crescendo! Forte product, a comprehensive information database for
use in high volume hospital cardiac catheterization and cardiovascular surgery
centers, including medical research centers. The Company is also developing a
standard Crescendo! product for medium and lower volume cardiac catheterization
and cardiovascular centers that desire to collect a core set of outcomes
measurements. The Vista platform is a Windows based, flat file application,
covering a product line of over 40 database software modules that is primarily
used in five medical specialties: cardiac and thoracic surgery, cardiology,
ophthalmology, urology and orthopaedics. Through its CQS package, the Company
offers to customers of its cardiovascular products a combined three year
software license and a program of implementation, training, data management and
consulting services that is designed to increase the value obtained by the
customer from the Company's database software. The Company also provides a range
of consulting services through its subsidiaries, BSM and CLMA. The Company
introduced, in late 1996, registry services related to the use of a particular
medical device or therapeutic agent, which are designed to collect and report
clinical information through Crescendo! platform software utilizing the WWW.
A number of factors contributed to the Company's performance in 1996,
including:
(i) Customer demand for Vista products in 1996 was adversely affected
by a market trend away from flat file, PC-based systems, toward
client/server, relational database architectures. A decision was made in
1996 to address this trend on an interim basis, by developing an enhanced
version of the Vista product ("Vista Elite") featuring additional reporting
and decision support capabilities. This development effort was discontinued
in February 1997, after a decision was made to accelerate, and focus on,
the development of the Company's Crescendo! client/server, relational
database platform and on-line technologies. While the Company believes that
the Crescendo! product line will address the emerging needs of the
marketplace, the adoption of this technology involves product development
and market risks that may cause results to differ materially from this
belief.
(ii) During 1996, sales of Vista products were adversely affected by
a decision to have the Company's sales force focus primarily on management
and support of indirect sales through the corporate marketing partners
rather than direct sales activity. In the fourth quarter of 1996, the
Company adopted a direct sales focus for sales of the Company's Crescendo!
products and CQS package, and it began hiring additional sales personnel.
The Company also implemented an inbound telesales initiative to support
sales of Vista products. See "Sales and Marketing--Corporate Joint
Marketing."
(iii) The Company's performance in 1996 was also affected by the
introduction of Crescendo! products and CQS packages during the second half
of 1996. Although the Company signed agreements for four Crescendo!
products and 15 CQS packages in 1996, these agreements did not result in
revenue due to unfulfilled obligations. In addition, the Crescendo!
products and CQS package will not significantly contribute to revenue until
such time, if any, as these products and package are more widely accepted
in the marketplace. The contribution of the Crescendo! products and CQS
package to revenue is also affected by a longer sales cycle for these
products and packages due to the greater complexity and higher purchase
prices associated with these sales.
-23-
<PAGE>
Several factors also contributed to an increase in operating expenses in
1996 including:
(i) The acquisition of CLMA in December 1996, which was accounted
for as a pooling of interest, involved acquisition related costs of
$523,000. Under pooling rules such costs are expensed. See "Recent
Developments."
(ii) The acquisition during December 1996 of the equity interest in
Cordillera not owned by the Company resulted in costs totaling $4.7 million
for purchase of in-process research and development. See "Recent
Developments" below.
(iii) The dual development of the Crescendo! products and Vista Elite
product resulted in greater research and development expense, including
personnel, consulting and software sublicense costs associated with the
Vista Elite development, totaling approximately $1 million in the second
half of 1996.
(iv) In preparation for the transition to offering a more service
intensive CQS package, the Company hired additional implementation,
consulting and support personnel in the second half of 1996 in advance of
introducing the CQS package.
(v) The Company also increased the number of the direct sales
personnel in anticipation of product introduction.
(vi) The Company incurred additional personnel and marketing costs
in an attempt to expand into additional medical specialty markets (e.g.
urology, endoscopy and critical care) to fulfill obligations entered into
with certain of the Company's joint marketing partners in 1995.
The Company anticipates that it will continue to experience operating
losses during 1997.
RECENT DEVELOPMENTS
On December 31, 1996, the Company acquired CLMA, pursuant to a merger in
which CLMA became a wholly-owned subsidiary of the Company and the Company
issued 976,453 shares of Common Stock in exchange for the outstanding stock of
CLMA. The merger is accounted for as a pooling of interests and is
reflected retroactively in the financial statements of the Company on that
basis.
On December 31, 1996, the Company entered into a reorganization agreement
(the "Reorganization Agreement") pursuant to which the Company acquired the
outstanding equity interest and all options to acquire equity interests in
Cordillera L.L.C. ("Cordillera") not held by the Company. The total purchase
price of the acquisition was $5,898,000, consisting of cash ($2,000,000), the
value of options and warrants to purchase 675,000 shares of Company Common Stock
for a ten year period at $7.50 per share ($3,792,000) and acquisition related
expenses ($106,000), and was allocated to research and development in process
($4,746,000) and developed technology ($1,552,000). Purchased research and
development in process was expensed as of December 31, 1996, the acquisition
date, and developed technology will be amortized straight-line over a three year
period. During 1996, Cordillera has been engaged in the development of a
client/server, relational database application and the on-line system and WWW
technologies to be employed in the Company's registries. In conjunction with the
Reorganization Agreement, Dr. Fortin joined the Company as Vice President and
Chief Scientific Officer and Drs. Califf and Phillips continued as consultants
to the Company.
In March, 1997, the Company established a cost reduction program to reduce
the workforce throughout the Company, except at BSM and CLMA, and to close the
operations of MIS, its subsidiary near Boston. Twenty-nine positions were
eliminated as a result, reducing the number of employees from 208 at December
31, 1996 to 179 at March 25, 1997. The Company also has incurred severance
expenses in the first quarter of 1997 related to executive officers of the
Company. Included in these charges are severance payments to former Chief
Financial Officer, Donald Haas.
RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The financial statements included in this Annual Report contain
restatements of previously reported financial positions and results of
operations for the years 1994 and 1995 and the nine months ended September 30,
1996. The restatements are based on an investigation by the Company's
management, auditors, and outside counsel of the Company's accounting practices
after concerns were brought to the attention of senior management and the
Company's Board of Directors by a new chief financial officer on February 27,
1997. The restatements primarily involve revenue recognition practices related
to certain sales of software licenses and related services including
-24-
<PAGE>
revenue recognized based on purchase commitments made by certain corporate
marketing partners but prior to actual shipment of products ("partner
commitments"), and revenue recognized in advance of actual shipment in other
contexts ("preshipment recognition"). In addition, with respect to products
first introduced in the second half of 1996, revenue had been incorrectly
recognized under CQS and Crescendo! contracts involving unfulfilled obligations,
including commitments for future delivery of additional product features and
performance of implementation and consulting services, and on a database
development program based on negotiations with a prospective customer that were
not finalized. Negotiations for this database development program were
subsequently discontinued without an order.
Consequently, the Company's financial statements have been restated to
recognize revenue in the appropriate periods and defer revenue recognition on
certain contracts until the conditions for such recognition have been satisfied.
Corresponding adjustments to expenses associated with revenues have been made to
cost of sales and operating expenses (primarily sales commissions) in each
affected period as appropriate.
These restatements had the net effect of reducing revenue for 1994, 1995
and the nine months ended September 30, 1996 by $1,052,000, $2,214,000 and
$1,782,000, respectively. See Note 2 in Notes to Consolidated Financial
Statements and "Summary of Restatement of Revenues." On a full year basis for
1996, using the Company's February 26, 1997 earnings announcement as a baseline,
revenues for 1996 were reduced by $2,372,000. Of the cumulative revenue
reductions of $5,638,000 through December 31, 1996, approximately $1.9 million
related to partner commitments, $1.3 million to pre-shipment recognition, $1.7
million to CQS and Crescendo! contracts, $500,000 to the database development
program and $200,000 to an increase in the reserve for customer returns and
allowances. As to partner commitments, revenue will be recognized in the future
at the time of shipment. The amount and timing of shipments under these partner
commitments depends, in part, on the market demand for Vista products, which are
currently the only products covered by these commitments, the effect on demand
for Vista products or the Company's decision to focus its product development
efforts on Crescendo! products, and the ability of the Company to enter into
satisfactory arrangements with its marketing partners regarding the scope of
database products and services to be sold under these arrangements. See "Sales
and Marketing." As to pre-shipment recognition, shipments representing
approximately $300,000 of these cumulative adjustments have occurred through
March 31, 1997, and a significant portion of the remaining balance of $1.0
million is likely not to be realized.
The Company expects to incur significant legal and accounting fees in
connection with the investigation of the Company's revenue recognition practices
and the three shareholder class action suits filed on March 10, 1997, March 26,
1997 and March 31, 1997. These fees will be included in operating expenses as
incurred 1997. The Company also incurred $200,000 of executive officer severance
expense in the first quarter of 1997.
Results of Operations
The following table sets forth certain financial data expressed as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1992 1993 1994 1995 1996
------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses 47.7% 51.6% 46.2% 39.3% 35.5%
Support and service 9.2 11.0 19.1 23.8 29.0
Consulting Fees 43.1 37.4 34.7 36.9 35.5
------- -------- -------- ------- --------
Total Revenue 100.0 100.0 100.0 100.0 100.0
Cost of sales:
Software licenses 5.4 6.2 4.8 5.4 5.6
Support and service 11.9 15.7 12.6 11.6 15.1
Consulting Fees 24.2 18.7 25.9 21.4 24.1
------- -------- -------- ------- --------
Total cost of sales 41.5 40.6 43.3 38.4 44.8
Gross profit 58.5 59.4 56.7 61.6 55.2
Operating expenses:
Selling and marketing 23.0 28.3 41.4 40.5 51.4
Research and development 6.3 7.9 7.2 7.9 22.9
Purchase of in-process
research and development 0.0 0.0 0.0 48.0 27.6
General and administrative 28.4 20.4 19.0 27.1 39.0
------- -------- -------- ------- --------
Total operating expenses 57.8 56.6 67.6 123.5 140.9
------- -------- -------- ------- --------
Income (loss) from operations 0.8 2.8 -10.9 -61.9 -85.7
Interest income, net 0.0 0.1 0.7 3.7 11.0
------- -------- -------- ------- --------
Income (loss) before income taxes 0.8 2.9 -10.2 -58.2 -74.7
Income tax expense 0.0 0.0 - 0.1 0.0 -0.1
------- -------- -------- ------- --------
Net Income (loss) 0.8% 2.9% -10.3% -58.2% -74.8%
======= ======== ======== ======= ========
</TABLE>
Years Ended December 31, 1996, 1995 and 1994
TOTAL REVENUE. Summit's revenue for 1996 was derived primarily from
software sales, support and services related to its Vista products and
consulting services provided by its BSM and CLMA subsidiaries. Revenue for 1996
of $17.2 million represented a 11% increase from 1995 resulting from an increase
in support service, consulting and software revenues. Revenue from sales to
marketing partners comprised 27% of total software, support and service revenue
(excluding consulting) in 1996. Revenue for 1995 was
-25-
<PAGE>
$15.5 million, an increase of $ 4.2 million or 37% over 1994 attributable mainly
to growth in the Vista customer base.
SOFTWARE LICENSE REVENUE. The Company's software license revenue in 1996
related primarily to shipments of Vista software to end users and corporate
marketing partners. Sales of software licenses for 1996 were $6.1 million,
essentially unchanged from 1995. Revenues were flat due to various factors that
adversely affected revenues as discussed more fully in the Overview section,
including (i) a shift in market demand away from a flat file, PC based solution
and towards client/server, relational database based solutions; (ii) an
unsuccessful attempt to rely more heavily on corporate marketing partners to
sell the product; and (iii) a longer sales cycle with the CQS package reflecting
the greater complexity and price of CQS versus Vista and lack of a referenceable
customer base.
Sales of software licenses for 1995 were $6.1 million, an increase of
$865,000 million or 17% over 1994. This increase is attributable to increased
sales of cardiology, cardiac surgery, and ophthalmology modules as well as
higher prices for procedure modules.
SUPPORT AND SERVICE REVENUE. Support and service revenue primarily
includes an annual service fee, training fees, and, in the future, will include
fees for the service components of the Company's new CQS package. Annual service
fees are recognized ratably over the period in which support services are
provided. All other services are recognized upon performance of the applicable
services. Support and service revenue in 1996 was $5.0 million, an increase of
$1.3 million or 35% over 1995, due to an increase in the installed customer
base. Support and service revenue in 1995 was $3.7 million, an increase of $1.5
million or 71% over 1994, reflecting a larger customer base and additional
development fees from joint marketing partners related to urology and endoscopy
modules.
CONSULTING REVENUE. Consulting revenue consists of fees received by BSM
for providing strategic development, financial analysis and systems planning
services to health care providers and vendors and fees received by CLMA for
regulatory affairs services provided primarily to manufacturers of new medical
device and biologic products in order to secure FDA approval. CLMA services
include regulatory strategy for FDA submissions, clinical trials and statistical
analysis. Revenue is recognized when services are performed. Consulting revenue
in 1996 was $6.1 million, an increase of $382,000 or 7% over 1995 attributed to
new customers and additional services provided to existing customers. Consulting
revenue in 1995 was $5.7 million, an increase of $1.8 million or 46% over 1994.
Both increases were attributable to an increase in the customer base.
COST OF TOTAL REVENUE. Cost of sales as a percentage of total revenue was
45% in 1996, compared to 38% in 1995, primarily due to the Company's focus on
building the support and implementation staffing needed to support the CQS sales
model, an increase in lower margin interfacing services and lower margins on
consulting activities at BSM and CLMA. Cost of sales in 1995 was 38% of total
revenue compared to 43% in 1994 reflecting an increase in higher margin software
sales.
COST OF SOFTWARE LICENSE REVENUE. Cost of software license revenue
consists of expenses directly related to sales of software licenses, including
royalties, freight, user guides, diskettes, amortization of capitalized software
and an allocation of costs incurred by the customer service department for
various software related activities. Amortization of capitalized software
amounted to $38,000 in 1996. At December 31, 1996, the balance in capitalized
software was $1.2 million primarily representing software purchased in
connection with the Cordillera acquisition.
-26-
<PAGE>
The following table sets forth, for the periods indicated, the relationship
of cost of license fees and license fee revenues:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
License fee revenue......................... $ 6,094 $ 6,077 $ 5,212
Cost of license fees........................ 961 831 545
Cost of license fees as a percentage
of license fee revenues..................... 16% 14% 10%
</TABLE>
Cost of license fees increased as a percent of license fee revenues during
1996 due to an increase in lower margin system interfacing services provided in
connection with the Windows-based Vista products which represented a higher
percentage of new installations versus the DOS product in 1996 than in 1995. The
DOS software did not provide such interfacing capability. The increase in cost
of license fees in 1995 compared with 1994 is also due to an increase in system
interfacing services.
COST OF SUPPORT AND SERVICE REVENUE. Cost of support and service revenue
consists of expenses directly related to sales of support and service, including
royalties, customer service personnel costs, and expenses for training and
clinical data services. The following table sets forth, for the periods
indicated, the relationship of cost of support and services and support and
service revenues:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Support and service revenue.................. $ 4,975 $ 3,685 $ 2,157
Cost of support and service.................. 2,590 1,797 1,421
Cost of support and service as a percentage
of support and service revenues.............. 52% 49% 66%
</TABLE>
Cost of support and service increased as a percentage of revenues in 1996
as the Company hired additional implementation consulting and support personnel
in the second half of 1996 to support the new CQS package. The decline in cost
of support and services as a percent of related revenues in 1995 over 1994 was
attributable to more efficient utilization of personnel as the number of
customers increased.
COST OF CONSULTING REVENUE. Cost of consulting revenue consists of
personnel costs and related expenses associated with the BSM and CLMA
subsidiaries. The following table sets forth, for the periods indicated, the
relationship of the cost of consulting and consulting revenue:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Consulting revenue.......................... $ 6,103 $ 5,720 $ 3,904
Cost of consulting.......................... 4,130 3,316 2,919
Cost of consulting as a percentage of
consulting revenues........................ 68% 58% 75%
</TABLE>
Cost of consulting increased to 68% of consulting revenue in 1996 compared
to 58% in 1995 as a shortfall in new Vista installations adversely impacted
follow-on consulting opportunities at BSM. Cost also increased with the addition
of a BSM branch in Atlanta. The percentage dropped to 58% in 1995 from 75% in
1994 reflecting more efficient utilization of personnel at CLMA following a 47%
increase in consulting fees.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses include
primarily salaries, benefits and commissions associated with the Company's
direct sales force; product marketing; advertising and product literature.
Selling and marketing expenses were $8.8 million in 1996, an increase of $2.5
million or 41% over 1995 reflecting costs associated with the development
-27-
<PAGE>
of the CQS package and Vista Elite and Crescendo! product line and including
additional staffing in the sales and marketing areas, development and production
of marketing materials and product literature related to CQS and Crescendo!, and
increased travel to medical conventions. In addition, the Company incurred
significant personnel and marketing costs in an attempt to expand into
additional medical specialty markets (e.g., urology, endoscopy and critical
care), and to fulfill obligations extended with certain marketing partners in
1995. These initiatives generated very little increased revenues, and the
Company has reduced its focus on them. The Company also upgraded its sales force
and implemented a telesales operation in the second half of 1996.
Selling and marketing expenses were $6.3 million in 1995, an increase of
$1.6 million or 34% over 1994, due to expenses relating to the expansion of the
direct sales force in the U.S., increased salaries for marketing personnel and
expenses related to hiring additional personnel related to new specialty
procedure modules.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
primarily include the salaries and benefits associated with technical services
personnel and outside consultants involved in developing new software products.
Research and development costs have been expensed as incurred. Research and
development expenses were $3.9 million in 1996, an increase of $2.7 million over
1995 reflecting additional staffing and associated costs in connection with
migrating the Company's software products to a client/server, relational
database (a) technology platform (i.e. Crescendo!), (b) personnel, consulting
and software sublicense costs incurred in connection with Vista Elite and
various other software products involving new medical specialties, and (c)
supporting multiple product platforms and operating systems. The Company has
developed a strategy to focus its future development efforts on a client/server
relational database platform and on-line technologies.
Research and development expenses were $1.2 million in 1995, an increase of
$413,000 or 51% over 1994, due primarily to the addition of technical and
programming personnel by the Company and MIS.
PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT. In fourth quarter 1996,
the Company incurred a $4.7 million charge for in-process research and
development purchased in connection with the acquisition of 100% of the
Cordillera equity interest. In fourth quarter 1995, an in-process R&D charge of
$7.4 million was recorded on the formation of the Cordillera joint venture with
Duke University.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
primarily include the salaries and benefits associated with general management,
finance and human resources, as well as the cost of legal and professional
services. General and administrative expenses were $6.7 in 1996, an increase of
$2.5 million over 1995 attributable to (a) transaction costs incurred on the
CLMA acquisition, (b) recruiting and relocation expenses incurred with
additional hiring and (c) an increase in reserves for bad debt.
General and administrative expenses were $4.2 million in 1995, an increase
of $2.1 million compared to 1994, due primarily to increased personnel and
higher salaries for accounting, human resources and business development
personnel, increased administrative expenses at the Company's European
subsidiary, Summit Medical Europe S.A.R.L., and higher legal and transaction
cost incurred in the BSM and MIS acquisitions.
INTEREST INCOME, NET. Interest income, net, increased to $1.9 million in
1996 from $575,000 in 1995 as proceeds from the Company's public offerings in
1995 and 1996 were invested in short term securities. Interest income, net, in
1995 was $575,000 compared to $81,000 in 1994, due to interest income recorded
on proceeds received from the Company's August 1995 initial public offering.
INCOME TAXES. To date, the Company has not incurred any substantial income
tax liability because of its historical operating losses. The deferred tax
asset related to additional operating loss carry forwards generated in 1996 was
fully offset by an increase in the valuation reserve. See Note 16 of Notes to
Consolidated Financial Statements.
-28-
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial data
for 1994, 1995 and 1996, in dollars and percentage of revenue. All amounts and
percentages in the following tables have been restated to reflect poolings of
interests and revenue recognition as disclosed elsewhere in this Annual Report.
In the opinion of the Company's management, this unaudited information has been
prepared on the same basis as the audited information included elsewhere in this
Annual Report and includes all adjustment necessary to present fairly the
information set forth therein. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Three Months Ended, (1) Three Months Ended, (1)
---------------------------------------- -----------------------------------------
March 31, June 30, Sept. 30 Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1994 1994 1994 1994 1994 1994 1994 1994
--------- -------- -------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses $1,063 $ 1,181 $ 1,230 $ 1,738 41.2% 49.5% 43.8% 49.7%
Support and service 326 449 632 750 12.6% 18.8% 22.5% 21.4%
Consulting fees 1,192 755 946 1,011 46.2% 31.7% 33.7% 28.9%
---------------------------------------- ---------------------------------------
Total revenue 2,581 2,385 2,808 3,499 100.0% 100.0% 100.0% 100.0%
Cost of Sales:
Software licenses 109 123 123 190 4.2% 5.2% 4.4% 5.4%
Support and services 290 325 383 423 11.2% 13.6% 13.6% 12.1%
Consulting fees 1,146 254 733 786 44.4% 10.7% 26.1% 22.4%
---------------------------------------- ---------------------------------------
Total cost of sales 1,545 702 1,239 1,399 59.8% 29.5% 44.1% 39.9%
Gross profit 1,036 1,683 1,569 2,100 40.2% 70.5% 55.9% 60.1%
Operating expenses 1,555 1,683 2,056 2,332 60.2% 70.6% 73.2% 66.6%
---------------------------------------- ---------------------------------------
Income (loss) from operations (519) (0) (487) (232) -20.0% -0.1% -17.3% -6.5%
Net income (loss) $ (519) $ 11 $ (460) $ (205) -20.0% 0.4% -16.4% -5.7%
======================================== =======================================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended, (1) Three Months Ended, (1)
---------------------------------------- -----------------------------------------
March 31, June 30, Sept. 30 Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1995 1995 1995 1995 1995 1995 1995 1995
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses $1,097 $ 1,706 $ 1,415 $ 1,859 34.3% 43.3% 37.7% 40.5%
Support and service 693 767 1,015 1,210 21.7% 19.5% 27.0% 26.4%
Consulting fees 1,407 1,467 1,325 1,521 44.0% 37.2% 35.3% 33.1%
---------------------------------------- ---------------------------------------
Total revenue 3,197 3,940 3,755 4,590 100.0% 100.0% 100.0% 100.0%
Cost of Sales:
Software licenses 113 249 306 163 3.5% 6.3% 8.1% 3.6%
Support and service 377 417 531 472 11.8% 10.6% 14.1% 10.3%
Consulting fees 835 875 757 849 26.1% 22.2% 20.2% 18.5%
---------------------------------------- ---------------------------------------
Total cost of sales 1,325 1,541 1,594 1,484 41.4% 39.1% 42.4% 32.4%
Gross profit 1,872 2,399 2,161 3,106 58.6% 60.9% 57.6% 67.6%
Operating expenses 2,365 3,038 3,039 10,695(2) 74.0% 77.1% 80.9% 233.0%
---------------------------------------- ----------------------------------------
Income (loss) from
operations (493) (639) (878) (7,589) -15.4% -16.2% -23.3% -165.4%
Net income (loss) $ (461) $ (614) $ (680) $ (7,269) -14.4% -15.6% -18.1% -158.5%
======================================== ========================================
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended, (1) Three Months Ended, (1)
---------------------------------------- -----------------------------------------
March 31, June 30, Sept. 30 Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996 1996 1996 1996 1996
--------- -------- -------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software licenses $1,710 $ 2,298 $ 1,508 $ 578 36.5% 43.0% 37.4% 18.6%
Support and service 1,432 1,589 989 965 30.5% 29.7% 24.6% 31.0%
Consulting fees 1,547 1,457 1,531 1,568 33.0% 27.3% 38.0% 50.4%
---------------------------------------- ----------------------------------------
Total revenue 4,688 5,344 4,028 3,111 100.0% 100.0% 100.0% 100.0%
Cost of Sales:
Software licenses 349 180 186 246 7.4% 3.4% 4.6% 7.9%
Support and service 581 638 588 783 12.4% 11.9% 14.6% 25.2%
Consulting fees 810 985 1,138 1,197 17.3% 18.4% 28.2% 38.5%
---------------------------------------- ----------------------------------------
Total Cost of sales 1,740 1,803 1,912 2,226 37.1% 33.7% 47.4% 71.6%
Gross profit 2,948 3,541 2,116 885 62.9% 66.3% 52.6% 28.4%
Operating expenses 3,482 4,103 4,457 12,154(2) 74.3% 76.8% 110.7% 390.5%
---------------------------------------- ----------------------------------------
Income (loss) from
operations (533) (562) (2,341) (11,269) -11.4% -10.5% -58.1% -362.1%
Net income (loss) $ (250) $ (222) $(1,713) $(10,651) -5.4% -4.1% -42.5% -342.2%
======================================== ========================================
</TABLE>
_______________________
(1) Restated as described in Note 2 to the Consolidated Financial Statements.
(2) Includes expenses of $7.4 and $4.7 million in 1995 and 1996, respectively,
for the purchase of in-process research and development in connection with
the formation of the Joint Venture and buyout in 1995 and 1996
respectively.
Restatement of Previously Issued Financial Statements
The following is a summary of selected unaudited quarterly information, as
presented to reflect the effect of the restatements for the three years ended
December 31, 1996:
<TABLE>
<CAPTION>
Net income Net income
Gross (loss) from Net income (loss) per
Revenues Profit operations (loss) share
------------ ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
1996 (1)
Three months ended March 31:
As previously reported $ 3,913,281 $ 2,678,767 ($544,325) ($280,808) ($0.03)
Effect of McIntosh pooling 1,016,851 483,383 225,949 224,148 0.03
Effect of restatement (241,800) (214,120) (215,749) (194,744) (0.02)
------------ ------------- ------------- ------------- ----------
As restated $ 4,688,332 $ 2,948,030 ($534,125) ($251,404) ($0.03)
Three months ended June 30:
As previously reported $ 5,116,161 $ 3,698,189 ($93,705) $247,469 $0.03
Effect of McIntosh pooling 915,724 457,081 94,743 93,328 0.01
Effect of restatement (688,563) (614,707) (563,007) (563,007) (0.06)
------------ ------------- ------------- ------------- ----------
As restated $ 5,343,322 $ 3,540,563 ($561,969) ($222,210) ($0.02)
Three months ended September 30:
As previously reported $ 4,098,474 $ 2,671,073 ($1,466,685) ($837,177) ($0.08)
Effect of McIntosh pooling 781,358 259,237 (86,662) (88,084) (0.01)
Effect of restatement (852,471) (814,724) (788,301) (788,301) (0.08)
------------ ------------- ------------- ------------- ----------
As restated $ 4,027,361 $ 2,115,586 ($2,341,648) ($1,713,562) ($0.17)
Three months ended December 31: (2) (3)
As previously reported $ 2,744,040 $ 1,061,597 ($10,241,021) ($9,688,928) ($0.94)
Effect of McIntosh pooling 957,200 371,485 (37,082) (37,934) 0.00
Effect of restatement (588,821) (546,683) (989,589) (922,094) (0.09)
------------ ------------- ------------- ------------- ----------
As restated $ 3,112,419 $ 886,399 ($11,267,692) ($10,648,956) ($1.03)
1996 Total: (2) (3)
As previously reported $15,871,956 $10,109,626 ($12,345,736) ($10,559,444) ($1.12)
Effect of McIntosh pooling 3,671,133 1,571,186 196,948 191,458 0.02
Effect of restatement (2,371,655) (2,190,234) (2,556,646) (2,468,146) (0.26)
------------ ------------- ------------- ------------- ----------
As restated $17,171,434 $ 9,490,578 ($14,705,434) ($12,836,132) ($1.37)
</TABLE>
<TABLE>
<CAPTION>
Net income Net income
Gross (loss) from Net income (loss) per
Revenues Profit operations (loss) share
------------ ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
1995 (1)
Three months ended March 31:
As previously reported $ 2,624,448 $1,748,947 ($341,313) ($300,437) ($0.06)
Effect of McIntosh pooling 941,026 455,564 149,798 146,487 0.03
Effect of restatement (368,510) (331,659) (300,222) (305,863) (0.06)
------------ ------------- ------------- ------------- ----------
As restated $ 3,196,964 $1,872,852 ($491,737) ($459,813) ($0.08)
Three months ended June 30:
As previously reported $ 2,929,122 $1,961,767 ($707,369) ($686,789) ($0.13)
Effect of McIntosh pooling 1,031,922 455,049 92,738 89,493 0.02
Effect of restatement (20,985) (18,886) (25,299) (17,418) (0.00)
------------ ------------- ------------- ------------- ----------
As restated $ 3,940,059 $2,397,930 ($639,930) ($614,714) ($0.11)
Three months ended September 30:
As previously reported $ 3,776,776 $2,580,241 ($204,351) ($6,124) ($0.00)
Effect of McIntosh pooling 921,452 444,507 137,331 134,371 0.02
Effect of restatement (943,000) (863,700) (810,540) (808,190) (0.11)
------------ ------------- ------------- ------------- ----------
As restated $ 3,755,228 $2,161,048 ($877,560) ($679,943) ($0.09)
Three months ended December 31: (3)
As previously reported $ 4,470,338 $3,434,709 ($7,013,328) ($6,664,430) ($0.81)
Effect of McIntosh pooling 1,001,134 463,411 126,764 124,233 0.02
Effect of restatement (881,612) (791,951) (702,657) (729,188) (0.09)
------------ ------------- ------------- ------------- ----------
As restated $ 4,589,860 $3,106,169 ($7,589,221) ($7,269,385) ($0.88)
1995 Total: (3)
As previously reported $13,800,684 $9,725,664 ($8,266,361) ($7,657,780) ($1.16)
Effect of McIntosh pooling 3,895,534 1,818,531 506,631 494,584 0.08
Effect of restatement (2,214,107) (2,006,196) (1,838,718) (1,860,659) (0.28)
------------ ------------- ------------- ------------- ----------
As restated $15,482,111 $9,537,999 ($9,598,448) ($9,023,855) ($1.37)
</TABLE>
<TABLE>
<CAPTION>
Net income Net income
Gross (loss) from Net income (loss) per
Revenues Profit operations (loss) share
------------ ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
1994 (1)
Three months ended March 31:
As previously reported $ 1,750,430 $1,079,492 ($181,825) ($181,089) ($0.04)
Effect of McIntosh pooling 830,515 (44,275) (337,894) (338,866) (0.08)
Effect of restatement 0 0 0 0 0
------------ ------------- ------------- ------------ -------------
As restated $ 2,580,945 $1,035,217 ($519,719) ($519,955) ($0.12)
Three months ended June 30:
As previously reported $ 1,970,814 $1,268,554 ($414,758) ($403,892) ($0.09)
Effect of McIntosh pooling 414,697 414,697 414,697 414,697 0.09
Effect of restatement 0 0 0 0 0
------------ ------------- ------------- ------------ -------------
As restated $ 2,385,511 $1,683,251 ($61) $ 10,805 $ 0.00
Three months ended September 30:
As previously reported $ 2,499,661 $1,784,322 ($86,084) ($83,852) ($0.02)
Effect of McIntosh pooling 721,813 155,943 (33,989) (34,273) (0.01)
Effect of restatement (414,000) (372,600) (367,954) (343,620) (0.06)
------------ ------------- ------------- ------------ -------------
As restated $ 2,807,474 $1,567,665 ($488,027) ($461,745) ($0.09)
Three months ended December 31:
As previously reported $ 3,406,418 $2,495,068 $ 281,173 $334,761 $ 0.06
Effect of McIntosh pooling 730,574 180,504 (4,124) (7,508) (0.00)
Effect of restatement (638,010) (574,209) (507,134) (529,548) (0.09)
------------ ------------- ------------- ------------ -------------
As restated $ 3,498,982 $2,101,363 ($230,085) ($202,295) ($0.04)
1994 Total:
As previously reported $ 9,627,323 $6,627,436 ($401,494) ($334,072) ($0.07)
Effect of McIntosh pooling 2,697,599 706,869 38,690 34,050 0.01
Effect of restatement (1,052,010) (946,809) (875,088) (873,168) (0.18)
------------ ------------- ------------- ------------ -------------
As restated $11,272,912 $6,387,496 ($1,237,892) ($1,173,190) ($0.24)
</TABLE>
(1) The unaudited quarterly financial data presented above are restated to
include (i) a December 1996 pooling of interests transaction for all
periods presented, and (ii) the effects of the restatement of consolidated
results of operations for 1994 and 1995 as described in Note 2 to the
consolidated financial statements. Such data for 1996 are also restated to
reflect the continued effects of such matters, plus elimination of
additional revenues recognized on new product introductions in 1996 pending
completion of significant vendor obligations, performance of implementation
and consulting services and finalization of contracts.
(2) Not previously reported. Represents amounts included in or derived from the
Company's press release on February 26, 1997.
(3) Includes pre-tax charges to operations for in-process research and
development expensed at dates of purchase business combinations of
$7,435,000 in the quarter ended December 31, 1995 and $4,746,000 in the
quarter ended December 31, 1996.
-30-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased by $7.2 million
during 1996. This increase reflects net proceeds of $29.4 million provided by
financing activities including the sale of common stock in the Company's second
public offering completed in July 1996, offset by a net increase in investments
amounting to $14.5 million, purchases of equipment and fixtures of $2.7 million
and net cash used in operating activities of $3.8 million. Operating losses in
1996 resulted from lower than expected software license fees and increased
operating costs associated with selling, marketing and developing the Company's
new generation of software while continuing to support multiple product
platforms.
As of December 31, 1996, the Company had $3.8 million in accounts
receivable, a decrease of $536,000 over the balance at December 31, 1995. The
Company believes its current provision of $650,000 for sales returns, allowances
and bad debts is adequate.
Cash of $23.5 million was provided by financing activities
during 1995 primarily from the net proceeds of sales of common stock in the
Company's initial public offering completed in August 1995.
Cash used in investing activities during 1996 and 1995 was $18.4
million and $18.9 million, respectively. Investing activities consisted
primarily of purchases of investments in excess of sales of investments of $14.5
million, $17.8 million, and $2.9 million for the years 1996, 1995, and 1994
respectively.
As of December 31, 1996, the Company had net working capital of $41.7
million, compared to $24.3 million at December 31, 1995. The increase in
working capital was primarily due to net proceeds from sales of common stock in
the Company's second public offering completed in July 1996. During 1995, the
Company had an increase in net working capital of $21.5 million, primarily
reflecting net proceeds of the sales of common stock in the Company's initial
public offering. The Company does not have any capital requirement needs for the
foreseeable future.
The Company believes that the continued expenditure of funds will be
necessary to support its future growth. The Company believes that the cash and
short-term investments on hand at December 31, 1996 together with funds
generated from operations, will be adequate to fund its operations, capital
requirements and expansion needs for the foreseeable future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ----------------------------------------------------
The financial statements of the Company as of and for the year ended
December 31, 1996 begin on page F-1 of this Annual Report.
-31-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- --------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -----------------------------------------------------------
Pursuant to General Instruction G(3), reference is made to the
information contained in the Company's definitive Proxy Statement for its 1997
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission on or before April 30, 1997, which information is incorporated herein
by reference. A list of executive officers is found in Item 1.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
Pursuant to General Instruction G(3), reference is made to the
information contained in the Company's definitive Proxy Statement for its 1997
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission on or before April 30, 1997, which information is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
Pursuant to General Instruction G(3), reference is made to the
information contained in the Company's definitive Proxy Statement for its 1997
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission on or before April 30, 1997, which information is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------------------------------------------------------
Pursuant to General Instruction G(3), reference is made to the
information contained in the Company's definitive Proxy Statement for its 1997
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission on or before April 30, 1997, which information is incorporated herein
by reference.
-32-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- -------------------------------------------------------------------------
(A)(1) FINANCIAL STATEMENTS
--------------------
<TABLE>
<CAPTION>
PAGE NUMBER
IN THIS
DESCRIPTION ANNUAL REPORT
--------------------------------------------------------------------------------------
<S> <C>
Report of Independent Auditors............................. F-2
Consolidated Financial Statements
Consolidated Statements of Financial Position.............. F-3
Consolidated Statements of Operations...................... F-4
Consolidated Statement of Changes in Shareholders' Equity.. F-5
Consolidated Statement of Cash Flows....................... F-6
Notes to Consolidated Financial Statements................. F-7
</TABLE>
(A)(2) FINANCIAL STATEMENT SCHEDULES
-----------------------------
Schedule II -- Valuation and Qualifying Accounts S-1
All other financial statement schedules normally required under Regulation
S-X have been omitted because they are not applicable or not required, or
because the required information is included in the consolidated financial
statements or notes thereto.
(A)(3) EXHIBITS
--------
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
*3.1 Restated Articles of Incorporation of the Company, as amended
*3.2 Bylaws of the Company
*4.1 Form of Certificate for Common Stock
*10.1 Agreement Regarding Distribution of Software Programs between Allergan,
Inc., and Summit Medical Systems, Inc., dated September 1, 1994
*10.2 Agreement Regarding Distribution of Software Programs between SciMed Life
Systems, Inc., and Summit Medical Systems, Inc., dated March 1, 1994, as
amended in September 1994
*10.3 ACC National Database Development Agreement, dated February 8, 1991
</TABLE>
-33-
<PAGE>
<TABLE>
<S> <C>
*10.4 American Society of Cataract and Refractive Surgery National Database
Development Agreement, dated February 18, 1994
*10.5 First Amendment and Restatement of STS National Database Agreement,
dated March 26, 1995
*10.6 Summit Medical Systems, Inc., 1993 Stock Option Plan
*10.7 Summit Medical Systems, Inc., 1995 Employee Stock Purchase Plan
*10.8 Summit Medical Systems, Inc., 1995 Non-Employee Director Stock Option Plan
*10.9 Employment Agreement dated October 19, 1992, between Summit Medical
Systems, Inc., and Edward F. Sweeney
*10.10 Employment Agreement dated October 19, 1992, between Summit Medical
Systems, Inc., and Dennis Powers
*10.11 Employment Agreement dated August 2, 1993, between Summit Medical
Systems, Inc., and William Cavanagh
*****10.12 Employment Letter of December 29, 1995, between Summit Medical Systems,
Inc., and Kevin R. Green
*****10.13 Employment Letter dated October 5, 1995, between Summit Medical
Systems, Inc. and Bruce S. Maller
*10.14 Agreement Regarding Distribution of Software Programs between Boston
Scientific Corporation and Summit Medical Systems, Inc., dated June 30, 1995
*10.15 Amendment by Letter dated July 26, 1995 of Agreement Regarding Distribution
of Software Programs between SciMed Life Systems, Inc. and Summit Medical
Systems, Inc., dated March 1, 1994, as amended in September 1994
*10.16 Amendment by Letter dated July 18, 1995 of Agreement Regarding Distribution
of Software Programs between Summit Medical Systems, Inc., and Boston
Scientific Corporation, dated June 30, 1995
*10.17 Amendment by Letter dated July 26, 1995 of Agreement Regarding Distribution
of Software Programs between Summit Medical Systems, Inc., and Boston
Scientific Corporation, dated June 30, 1995
****10.18 Agreement Regarding Distribution of Software Programs between Boston
Scientific Corporation and Summit Medical Systems, Inc. dated September 1,
1995
****10.19 Agreement Regarding Distribution of Software Programs between Smith &
Nephew Richards, Inc. and Summit Medical Systems, Inc. dated November 10,
1995
</TABLE>
-34-
<PAGE>
<TABLE>
<S> <C>
****10.20 Agreement Regarding Distribution of Software Programs between Boston
Scientific Corporation and Summit Medical Systems, Inc. dated December 1,
1995
**10.21 Agreement and Plan of Merger between BSM Acquisition Corp., BSM Financial,
Inc., Bruce S. Maller and Summit Medical Systems, Inc. dated September 29,
1995
***10.22 Agreement and Plan of Merger between MIS Acquisition Corp., Medical
Information Systems Company, Inc. and Summit Medical Systems, Inc. dated
November 15, 1995
*****10.23 License Agreement between Duke University and Summit Medical Systems,
Inc. dated December 29, 1995
*****10.24 Cordillera L.L.C. Limited Liability Company Agreement dated December 29,
1995
*****10.25 Sublicense and Distribution Agreement between Cordillera L.L.C. and Summit
Medical Systems, Inc. dated December 29, 1995
*****10.26 Employment Letter dated January 19, 1996, between Summit Medical Systems,
Inc. and George J. Marshalek, Jr.
******10.27 Amendment by Letters dated January 2, 1996, January 16, 1996 and June 29, 1996,
of ACC National Database Development Agreement, dated February 8, 1991.
10.28 First and Second Amendment to Summit Medical Systems, Inc., 1993 Stock
Option Plan
*******10.29 Agreement and Plan of Merger between Summit Medical Systems, Inc. CLM
Acquisition Corp. and C. L. McIntosh & Associates, Inc. dated December 31,
1996.
10.30 Employment Agreement between Summit Medical Systems, Inc., C. L. McIntosh
& Associates, Inc. and Charles L. McIntosh dated December 31, 1996.
10.31 Option Agreement between Summit Medical Systems, Inc. and Charles L.
McIntosh dated December 31, 1996.
10.32 Reorganization Agreement between Summit Medical Systems, Inc., Cordillera
L.L.C., DR Ware LLP and Duke University dated December 31, 1996.
10.33 Employment Agreement between Summit Medical Systems, Inc. and Donald F.
Fortin dated December 31, 1996.
10.34 Option Agreement between Summit Medical Systems, Inc. and Donald F. Fortin
dated December 31, 1996
10.35 Option Agreement between Summit Medical Systems, Inc. and Robert Califf
dated December 31, 1996
</TABLE>
-35-
<PAGE>
<TABLE>
<S> <C>
10.36 Option Agreement between Summit Medical Systems, Inc. and Harry Phillips
dated December 31, 1996
10.37 Amendment to License Agreement between Duke University and Summit
Medical Systems, Inc. dated December 31, 1996
10.38 Amendment to Cordillera L.L.C. Limited Liability Company Agreement dated
December 31, 1996
10.39 Lease Agreement between Summit Medical Systems, Inc. and Red Circle L.L.P.
dated September 30, 1996
10.40 Employment Letter dated March 26, 1997 between Summit Medical Systems,
Inc. and Richard Willemin
10.41 Employment Letter dated June 12, 1996 between Summit Medical Systems,
Inc. and David Teckman
11.1 Statement re: computation of per share earnings
23.1 Consent of Ernst & Young LLP
27 Financial Data Schedule
99 Cautionary Statement.
</TABLE>
_________________
* Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-93700)
** Incorporated by reference to the Company's Current Report on Form 8-K
dated October 19, 1995 (File No. 0-26390).
*** Incorporated by reference to the Company's Current Report on Form 8-K
dated December 4, 1995 (File No. 0-26390).
**** Confidential treatment requested as to certain portions.
***** Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-01958).
****** Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-05711).
******* Incorporated by reference to the Company's Current Report on Form 8-K
filed January 14, 1997 (File No. 0-26390).
(B) REPORTS ON FORM 8-K
-------------------
No current reports on Form 8-K were filed during the last quarter of the
fiscal year ended December 31, 1996.
(C) EXHIBITS
--------
See Item 14(a)(3) above.
(D) FINANCIAL STATEMENT SCHEDULES
-----------------------------
See Item 14(a)(2) above.
-36-
<PAGE>
Summit Medical Systems, Inc.
Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................. F-2
Consolidated Financial Statements
Consolidated Statements of Financial Position.............................. F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statement of Changes in Shareholders' Equity.................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors
Summit Medical Systems, Inc.
We have audited the consolidated statements of financial position of Summit
Medical Systems, Inc. as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. Our
audits also include the financial statement schedule listed in the Index at Item
14(a). These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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 consolidated financial position of Summit
Medical Systems, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, prior years'
financial statements have been restated.
Minneapolis, Minnesota
April 3, 1997
F-2
<PAGE>
Summit Medical Systems, Inc.
Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
----------------------------------
(Restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,386,069 $ 2,202,004
Short-term investments 35,243,624 20,718,674
Accounts receivable (net of allowance of $650,000 and
$100,397 at 1996 and 1995, respectively) 3,776,351 4,312,164
Notes receivable--officer - 59,632
Advances to officers and employees - 190,000
Other current assets 678,627 481,786
----------------------------------
Total current assets 49,084,671 27,964,260
Equipment and fixtures, net 3,203,931 1,483,682
Computer software costs, net 1,198,573 103,207
----------------------------------
Total assets $ 53,487,175 $ 29,551,149
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,617,718 $ 1,286,860
Accrued compensation 1,236,118 797,170
Accrued royalties 375,332 332,773
Deferred revenue 1,867,006 1,134,176
Income tax payable 7,648 -
Note payable--officer - 17,991
Line of credit 150,000 80,000
Notes payable and convertible debentures 100,000 15,000
Current portion of long-term debt 23,628 24,092
----------------------------------
Total current liabilities 7,377,450 3,688,062
Long-term debt 26,525 28,719
Commitments - -
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares-38,933,333 -- 1996 and 1995
Issued and outstanding shares-10,343,830 -- 1996;
8,492,018 -- 1995 103,438 84,920
Additional paid-in capital 69,700,376 36,187,859
Accumulated deficit (23,720,614) (10,438,411)
----------------------------------
Total shareholders' equity 46,083,200 25,834,368
----------------------------------
Total liabilities and shareholders' equity $ 53,487,175 $ 29,551,149
==================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Summit Medical Systems, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-----------------------------------------------------
(Restated) (Restated)
<S> <C> <C> <C>
Revenues:
Software licenses $ 6,093,653 $ 6,077,317 $ 5,211,559
Support and service 4,975,223 3,684,842 2,156,721
Consulting fees 6,102,558 5,719,952 3,904,632
-----------------------------------------------------
Total revenue 17,171,434 15,482,111 11,272,912
Cost of sales:
Software licenses 960,860 830,978 545,496
Support and service 2,590,011 1,797,388 1,420,574
Consulting fees 4,129,985 3,315,747 2,919,346
-----------------------------------------------------
Total cost of sales 7,680,856 5,944,113 4,885,416
-----------------------------------------------------
Gross profit 9,490,578 9,537,998 6,387,496
Operating expenses:
Selling and marketing 8,824,971 6,276,646 4,666,669
Research and development 3,932,296 1,230,425 817,120
Purchase of in-process research and development 4,746,000 7,435,000 -
General and administrative 6,692,745 4,194,375 2,141,599
-----------------------------------------------------
Total operating expenses 24,196,012 19,136,446 7,625,388
-----------------------------------------------------
Loss from operations (14,705,434) (9,598,448) (1,237,892)
Interest income, net 1,887,928 574,594 80,602
-----------------------------------------------------
Loss before income taxes (12,817,506) (9,023,854) (1,157,290)
Income tax expense 18,626 - 15,900
-----------------------------------------------------
Net loss $ (12,836,132) $ (9,023,854) $ (1,173,190)
=====================================================
Net loss per share $ (1.37) $ (1.37) $ (0.24)
=====================================================
Weighted average shares outstanding 9,398,931 6,580,922 4,929,913
=====================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Summit Medical Systems, Inc.
Consolidated Statement of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
----------------------------------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL
-----------------------------------------------------------
<S> <C>
Balance December 31, 1993 - $ - 4,218,352 $ 42,183 $ 1,211,558
Issuance of preferred stock at $2.50 per share,
net of offering costs of $106,900 1,600,000 16,000 - - 3,877,100
Issuance of common stock for debt - - 2,746 27 7,473
Issuance of common stock - - 10,416 104 119,896
Distribution to shareholders - - - - -
Net loss - - - - -
-----------------------------------------------------------
Balance December 31, 1994 (restated) 1,600,000 16,000 4,231,514 42,314 5,216,027
Issuance of common stock - - 7,167 72 104,936
Exercise of stock options - - 76,665 767 26,731
Employee stock purchase plan - - 35,016 350 267,522
Issuance of stock related to establishment of
joint venture - - 200,000 2,000 4,198,000
Value of stock options and warrants issued in
connection with joint venture - - - - 2,935,000
Value of stock option issued for services - - - - 218,684
Conversion of preferred stock into common stock (1,600,000) (1,000) 1,066,656 10,667 5,333
Public offering proceeds, net of expenses of
$2,630,624 - - 2,875,000 28,750 23,215,626
Distribution to shareholders - - - - -
Net loss - - - - -
-----------------------------------------------------------
Balance December 31, 1995 (restated) - - 8,492,018 84,920 36,187,859
Exercise of stock options - - 60,550 606 127,204
Employee stock purchase plan - - 39,262 392 399,816
Public offering proceeds, net expenses of $590,503 - - 1,752,000 17,520 29,193,497
Value of stock warrants issued in connection with
Cordillera purchase - - - - 3,792,000
Distribution to shareholders - - - - -
Net loss - - - - -
-----------------------------------------------------------
Balance December 31, 1996 - $ - 10,343,830 $103,438 $69,700,376
===========================================================
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
-------------------------
<S>
Balance December 31, 1993 $ (120,939) $1,132,802
Issuance of preferred stock at $2.50 per share,
net of offering costs of $106,900 - 3,893,100
Issuance of common stock for debt - 7,500
Issuance of common stock - 120,000
Distribution to shareholders (89,714) (89,714)
Net loss (1,173,190) (1,173,190)
-------------------------
Balance December 31, 1994 (restated) (1,383,843) 3,890,498
Issuance of common stock - 105,008
Exercise of stock options - 27,498
Employee stock purchase plan - 267,872
Issuance of stock related to establishment of
joint venture - 4,200,000
Value of stock options and warrants issued in
connection with joint venture - 2,935,000
Value of stock option issued for services - 218,684
Conversion of preferred stock into common stock - -
Public offering proceeds, net of expenses of
$2,630,624 - 23,244,376
Distribution to shareholders (30,714) (30,714)
Net loss (9,023,854) (9,023,854)
-------------------------
Balance December 31, 1995 (restated) (10,438,411) 25,834,368
Exercise of stock options - 127,810
Employee stock purchase plan - 400,208
Public offering proceeds, net expenses of $2,324,983 - 29,211,017
Value of stock warrants and options issued in
connection with Cordillera purchase - 3,792,000
Distribution to shareholders (446,071) (446,071)
Net loss (12,836,132) (12,836,132)
-------------------------
Balance December 31, 1996 $(23,720,614) $46,083,200
=========================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Summit Medical Systems, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
---------------------------------------------
(Restated) (Restated)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(12,836,132) $ (9,023,854) $(1,173,190)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation 977,444 581,384 345,185
Amortization 103,207 91,000 8,000
Deferred income taxes - (15,900) 15,900
Value of warrants, options and common stock
issued in connection with joint venture acquisitions 3,792,000 7,135,000 -
Value of stock options issued for services - 218,684 -
Losses on partnership investments - - 1,895
Changes in operating assets and liabilities:
Accounts receivable 535,813 (2,283,676) (886,451)
Advances to officers and employees 190,000 (190,000) -
Other current assets (137,209) (389,577) (67,097)
Accounts payable and accrued expenses 2,330,858 682,458 138,318
Accrued compensation and royalties 481,507 119,940 406,180
Accrued settlement reserve - - 82,500
Income tax payable 7,648 - -
Deferred revenue 732,830 428,797 425,313
---------------------------------------------
Net cash used in operating activities (3,822,034) (2,645,744) (703,447)
INVESTING ACTIVITIES
Purchase of short-term investments (66,648,127) (28,700,801) (7,390,887)
Sale (purchase) of long-term investments - 42,418 (4,700)
Sales of short-term investments 52,123,177 10,884,966 4,446,230
Purchases of equipment and fixtures (2,705,958) (1,110,299) (642,629)
Disposal of equipment and fixtures 8,265 52,814 -
Purchase of software development -
Cordillera acquisition (1,152,000) - -
Computer software costs (46,573) (65,000) (137,899)
---------------------------------------------
Net cash used in investing activities (18,421,216) (18,895,902) (3,729,885)
FINANCING ACTIVITIES
Net proceeds from line of credit 70,000 65,000 -
Proceeds from long-term debt 52,211 - 143,166
Principal payments on long-term debt (54,869) (61,742) (112,195)
Principal payments on notes and debentures (15,000) (93,699) (7,500)
Proceeds from notes payable and convertible debentures 100,000 - 12,490
Proceeds from note payable--officer - 17,166 19,366
Payments on note payable--officer (17,991) - -
Distributions to shareholders (446,071) (30,714) (89,714)
Net proceeds from common stock transactions 29,611,225 23,617,256 120,000
Net proceeds from exercise of common stock options 127,810 27,498 -
Net proceeds from sale of preferred stock - - 3,893,100
---------------------------------------------
Net cash provided by financing activities 29,427,315 23,540,765 3,978,713
---------------------------------------------
Increase (decrease) in cash and cash equivalents 7,184,065 1,999,119 (454,619)
Cash and cash equivalents at beginning of period 2,202,004 202,885 657,504
---------------------------------------------
Cash and cash equivalents at end of period $ 9,386,069 $ 2,202,004 $ 202,885
=============================================
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 14,054 $ 20,388 $ 4,654
Supplemental disclosure of noncash investing activities:
Equipment and fixtures acquired in exchange for long-term
debt 35,000 30,570 -
</TABLE>
F-6
<PAGE>
Summit Medical Systems, Inc.
Notes to Consolidated Financial Statements
December 31, 1996
1. DESCRIPTION OF BUSINESS
Summit Medical Systems, Inc. (the "Company") is a leading provider of clinical
outcomes database software and related products and services for selected
medical specialties in the healthcare industry. The Company's database software
enables healthcare providers to record, analyze and report detailed clinical
information on medical procedures, diseases and patient outcomes. In addition,
the Company provides a range of consulting services related to regulatory
affairs and clinical studies.
2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The accompanying financial statements reflect restatements of previously
reported consolidated financial position and results of operations as of and for
the years ended December 31, 1995 and 1994. The restatements are based on an
investigation of the Company's accounting practices by the Company's management,
auditors and outside counsel following concerns brought to the attention of
senior management and the Company's Board of Directors by a new chief financial
officer on February 27, 1997. The restatements primarily involve revenue
recognition practices related to certain sales of software licenses and related
services including revenue recognized based on purchase commitments made by
certain corporate marketing partners but prior to actual shipment of product,
and revenue recognized in advance of actual shipment of product in other
contexts.
The "as reported" consolidated results of operations and financial position
presented below give effect to the restatement for the acquisition of C. L.
McIntosh & Associates, Inc., accounted for as a pooling of interest, as
disclosed in Note 4. The effect of the restatement described in the previous
paragraph on the Company's 1995 and 1994 financial statements is as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------ ---------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Total revenue $17,696,218 $15,482,111 $12,324,922 $11,272,912
Net loss (7,163,196) (9,023,854) (300,022) (1,173,190)
Net loss per share (1.09) (1.37) (.06) (.24)
Accumulated deficit (7,704,585) (10,438,411) (510,675) (1,383,843)
Shareholders' equity 28,568,194 25,834,368 4,763,666 3,890,498
</TABLE>
F-7
<PAGE>
Summit Medical Systems, Inc.
Notes to Consolidated Financial Statements
December 31, 1996
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, BSM Financial, Inc., Medical Information Systems
Company, Inc., Summit Medical Europe, S.A.R.L. and C. L. McIntosh & Associates,
Inc. All intercompany balances and transactions have been eliminated.
REVENUE RECOGNITION
Software Licenses and Upgrades: The Company recognizes revenue from contracts
for sales of software licenses on shipment provided that no significant vendor
and post-contract support obligations remain outstanding and that collections of
resulting receivables are probable.
Support and Service: Revenue for service and support is deferred and recognized
over the period in which support services are provided using the straight-line
method. All other revenue, including training fees, is recognized upon
performance of the applicable services.
Consulting Services: Revenues from consulting services are recognized as the
services are performed.
Software Licenses With Other Significant Vendor Obligations: The Company will
recognize revenue under agreements requiring significant vendor obligations such
as installation, testing, interface, and system integration when all of the
following conditions have been satisfied: (i) delivery has occurred; (ii) system
installation, testing, integration and on-site consulting assistance has been
completed; (iii) customer acceptance has been received; and (iv) collectibility
is probable. If a significant portion of the revenue is due beyond twelve months
of the date of the agreement, revenue will be recognized as each annual payment
becomes due. In addition, certain contracts may require revenue recognition
under contract accounting rules, whereby revenue is recognized on a percentage
completion basis, subject to probability of collection.
F-8
<PAGE>
Summit Medical Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST OF SALES
The Company records cost of sales on a basis that matches the expenses incurred
with the sales revenue generated. A portion of the costs is allocated between
software licenses and support and service based on the amount of employee time
spent completing the product shipments or providing services. Management
believes the allocation methods used for cost of sales are reasonable.
ROYALTY EXPENSE
The Company recognizes and accrues royalty expense at the time the Company
recognizes the related revenue from software licenses sold and services
rendered. Royalties are due and paid 45 days after the end of the quarter in
which the Company collects the related receivable.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. Cash equivalents are carried at
cost, which approximates market value.
SHORT-TERM INVESTMENTS
Investments with a maturity of more than ninety days at the date of purchase are
classified as short-term investments. Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company has classified its short-
term investments, consisting of U.S.Treasury Bills, U.S. Treasury Notes,
Commercial Paper and Discounted Notes, as available for sale. At December 31,
1995 and December 31, 1996, the fair market value of the short-term investments
approximated the amortized cost.
F-9
<PAGE>
Summit Medical Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE ALLOWANCE
The Company determines an allowance for doubtful accounts based upon an analysis
of the collectibility of specific accounts and the aging of the accounts
receivable. The Company's accounts receivable consists of large corporations and
hospitals with excellent credit history.
EQUIPMENT AND FIXTURES
Equipment and fixtures are stated at cost. The Company provides for depreciation
using accelerated methods at rates designed to amortize the cost of equipment
and fixtures over their estimated useful lives of three to seven years.
COMPUTER SOFTWARE COSTS
Computer software costs include the cost of internally developed software, which
have been capitalized in accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed" and $1,152,000 of developed software technology
acquired in connection with the acquisition of a joint venture (see Note 5). The
capitalized costs are amortized at the faster of projected revenue or straight-
line basis over their estimated useful lives, generally three years or less,
commencing when each product is available to the market. Amortization expense,
based on an eighteen month useful life, for computer software during 1996, 1995
and 1994 was $38,540 and $91,000 and $8,000, respectively. Accumulated
amortization for computer software at December 31, 1996 and 1995 was $137,540
and $99,000, respectively.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred
income taxes are provided for temporary differences between financial reporting
and tax bases of assets and liabilities.
F-10
<PAGE>
Summit Medical Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares and common share equivalents, if dilutive, outstanding during the periods
presented after giving effect to the conversion of convertible preferred stock
into common stock. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No.83 ("SAB No. 83."), shares convertible into common stock
and common stock equivalent shares issued or granted by the Company at prices
less than the initial offering price during the 12 months immediately preceding
the initial public offering, in 1995, have been included in the determination of
shares used in calculation of net loss per share, as if they were outstanding
for all periods presented up to the initial public offering date.
Subsequent to the initial public offering date, net loss per share is computed
by dividing the net loss for the period by the weighted average number of shares
of common stock outstanding during the period.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share." The Company does
not expect the adoption of the Statement to have a material impact on the
financial statements.
F-11
<PAGE>
Summit Medical Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK COMPENSATION PLANS
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and related interpretations in accounting
for its stock options. Under APB 25, when the exercise price of stock options
equals the market price of the underlying stock on the date of the grant, no
compensation expense is recognized.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("Statement 123"). Accordingly, the Company has made pro forma
disclosures of what net loss and loss per share would have been had the
provisions of Statement 123 been applied to the Company's stock options.
RECLASSIFICATION
Certain prior year items have been reclassified to conform with the 1996
presentation.
4. MERGERS
Effective November 20, 1995, the Company exchanged 126,386 shares of common
stock in a pooling of interests for all outstanding shares of Medical
Information Systems Company, Inc., a developer of decision-support software for
determining expected outcomes from preventive care, occupational health, and
pharmacological interventions.
Effective October 6, 1995, the Company exchanged 182,524 shares of common stock
in a pooling of interests for all outstanding shares of BSM Financial, Inc., a
health care consulting firm providing services in the areas of strategic
planning, data analysis and various other services.
F-12
<PAGE>
Summit Medical Systems, Inc.
Notes to Consolidated Financial Statements (Continued)
4. MERGERS (CONTINUED)
Effective December 31, 1996, the Company exchanged 976,453 shares for all
outstanding shares of common stock in a pooling of interests of C. L. McIntosh &
Associates, Inc., a health care consulting firm providing services in the areas
of Medicare and regulatory affairs.
Condensed statements of operations data for the years ended December 31, 1996,
1995 and 1994 for the effects of the merger with C. L. McIntosh & Associates,
Inc. are as follows:
<TABLE>
<CAPTION>
Summit C.L.
Medical McIntosh &
Systems, Inc. Associates, Inc. Combined
------------------------------------------------
(Restated)
<S> <C> <C> <C>
1994
Revenue $ 8,575,313 $2,697,599 $11,272,912
Net loss (1,139,140) (34,050) (1,173,190)
Net loss per share (.29) (.03) (.24)
1995
Revenue $ 11,586,577 $3,895,534 $15,482,111
Net loss (8,529,270) (494,584) (9,023,854)
Net loss per share (1.52) (.51) (1.37)
1996
Revenue $ 13,500,301 $3,671,133 $17,171,434
Net income (loss) (13,027,591) 191,459 (12,836,132)
Net income (loss) per share (1.55) .20 (1.37)
</TABLE>
F-13
<PAGE>
Summit Medical Systems, Inc
Notes to Consolidated Financial Statements (continued)
5. ACQUISITION OF JOINT VENTURE
On December 29, 1995, the Company entered into a software license agreement with
Duke University ("Duke") and formed a joint venture, Cordillera L.L.C., with
three of Duke's nationally recognized cardiologists. Under the software license
agreement, Duke granted the Company an exclusive license to the Duke Cardiology
Information System, a clinical information database system for cardiology. In
connection with the software license agreement, the Company issued 200,000
shares of common stock to Duke and a seven-year warrant to purchase an
additional 200,000 shares of common stock at $21.00 per share, the market value
of the Company's common stock on the day prior to the issuance of the warrant.
The Company also issued a vested option for 40,000 shares of common stock at
$15.50 per share, the market value of the Company's stock on the day of the
issuance of the option. The option was issued to the Company's chief executive
officer for assistance received from him related to this transaction while he
was acting as an independent consultant to the Company. In addition, Duke and
the individual cardiologists were entitled to subscribe for the purchase of up
to a 50% ownership position in the joint venture at any time prior to December
29, 2002, at a cost of $2,000.
The total purchase price of $7,435,000 consisting of the market price of the
stock ($4,200,000), the value of the option and warrant ($2,935,000) and
acquisition-related expenses ($300,000) was allocated to in-process software
development technology and was expensed upon closing of the transaction on
December 29, 1995.
The Company's ownership position in the joint venture until December 1996 was
99%, and resulted in all start-up losses being consolidated into the Company's
operating results.
F-14
<PAGE>
Summit Medical Systems, Inc
Notes to Consolidated Financial Statements (continued)
5. ACQUISITION OF JOINT VENTURE (CONTINUED)
On December 31, 1996, the Company acquired the outstanding equity interest and
all options to acquire equity interests in Cordillera L.L.C. not held by the
Company. The total purchase price of $5,898,000, consisting of cash
($2,000,000), the value of options and warrants to purchase 675,000 shares of
Company Common Stock for a ten year period at $7.50 per share ($3,792,000) and
acquisition related expenses ($106,000) has been allocated to developed software
($1,152,000) and to in-process software development technology $(4,746,000). The
in-process software development technology was expensed upon closing of the
transaction on December 31, 1996 and the developed software will be amortized
straight line over a three year period. The agreement also includes warrants to
purchase 200,000 shares of Company common stock for a ten year period at $7.50
per share if certain performance measurements are met. No value was assigned to
these warrants due to their contingent nature.
6. NOTE RECEIVABLE - OFFICER
The note receivable from an officer bearing interest at 9% was forgiven in
December 1996.
7. ADVANCES TO OFFICERS AND EMPLOYEES
On December 31, 1995, the Company paid bonuses to officers and employees on the
basis of preliminary financial results achieved in 1995. As a result of
subsequent adjustments in reporting the final results for 1995, it was
determined that $190,000 of these bonuses paid to officers and employees were
not in fact earned. The resulting payments made in December were treated as an
advance against 1996 bonuses, with the Company having the right to deduct this
advance from any bonus payment earned in 1996. These advances were expensed in
1996.
F-15
<PAGE>
Summit Medical Systems, Inc
Notes to Consolidated Financial Statements (continued)
8. EQUIPMENT AND FIXTURES
Equipment and fixtures are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------------
<S> <C> <C>
Furniture and fixtures $1,640,983 $ 830,018
Computer and telephone equipment 3,146,829 1,664,877
Vehicles 55,261 90,070
Leasehold improvements 466,292 78,623
---------------------------
5,309,365 2,663,588
Less accumulated depreciation (2,105,434) 1,179,906
---------------------------
$3,203,931 $1,483,682
===========================
</TABLE>
The Company has adopted SFAS 121 "Accounting for the Impairment of Long-Lived
Assets," which requires losses on impairment of long-lived assets used in
operations to be recorded when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amounts. The adoption had no impact on the financial
statements.
9. NOTE PAYABLE - OFFICER
During 1996 and 1995, an officer advanced funds in the form of a demand note
which was paid in full in 1996.
10. SHORT-TERM NOTES PAYABLE
On July 2, 1995, prior to the merger with the Company, Medical Information
Systems Company, Inc. issued an aggregate of $45,000 of 11% unsecured Promissory
Notes due July 1, 1996 to two members of its Board of Directors. The remaining
balance of $17,991 was paid in full in 1996.
Prior to the merger with the Company, C. L. McIntosh & Associates, Inc. had a
balance on its line of credit at December 31, 1995 of $80,000, the entirety of
which was due on May 1, 1996, along with unpaid accrued interest of one percent
over the bank's prime rate. In 1996, the Company paid $20,000 of this balance
and received an additional $90,000 for a balance of $150,000 at December 31,
1996 (prime rate 8.25% at December 31, 1996). The weighted-average interest rate
on the borrowings in fiscal 1996 was 8.875%.
F-16
<PAGE>
Summit Medical Systems, Inc
Notes to Consolidated Financial Statements (continued)
10. SHORT-TERM NOTES PAYABLE (CONTINUED)
On December 23, 1996, prior to the merger of the Company, C. L. McIntosh &
Associates, Inc. issued a $100,000 unsecured Promissory Note due July 1, 1997,
with interest of one percent over the bank's prime rate.
11. CONVERTIBLE DEBENTURE
During 1993, the Company borrowed $30,000 from two health organizations in the
amount of $15,000 each. The convertible debentures provided for a one-year term
with interest at six percent, due at maturity.
During 1994, one lender exercised its option and converted their debenture for
2,746 shares of Common Stock and $7,500 cash.
During 1996, the Company paid in full the remaining balance of $15,000.
12. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
----------------------
<S> <C> <C>
Note payable, interest at 10% payable monthly,
secured by accounts receivable,
principal due June 30, 1997 $ - $ 3,533
Note payable, interest at prime plus 2%, due
in equal monthly installments of
$560, unsecured - 7,680
Note payable, interest at 8%, due in equal
monthly installments of $627, secured by a vehicle - 26,178
Note payable, interest at 9.25% payable monthly,
secured by accounts receivable, principal due
September 15, 1997 6,920 15,420
Note payable, interest at 9.63%, due in
equal monthly installments of $1,127, unsecured 29,051 -
Capital lease,
interest at 14.59%, due in equal monthly
installments of $601, secured by
telephone system 14,182 -
----------------------
Total debt 50,153 52,811
Less current portion (23,628) (24,092)
----------------------
Long-term debt, net of current portion $26,525 $ 28,719
======================
</TABLE>
F-17
<PAGE>
Summit Medical Systems, Inc
Notes to Consolidated Financial Statements (continued)
13. SALES OF PREFERRED STOCK
In 1994, the Company sold 1,600,000 shares of Series A Convertible Preferred
Stock in a private placement for $4,000,000 less related offering costs of
$106,900. Upon the closing of the initial public offering of the Company's
Common Stock in August 1995, all Preferred Stock then outstanding was converted
into an aggregate of 1,066,656 shares of Common Stock.
14. SALES OF COMMON STOCK
In August 1995, the Company sold 2,875,000 shares of Common Stock in its initial
public offering for $25,875,000, less related costs of $2,630,624.
In July 1996, the Company sold an additional 1,752,000 shares of Common Stock in
a secondary offering for $31,536,000, less related costs of $2,324,983.
15. LEASES
The Company leases its office space, an automobile and certain office equipment
under various operating leases which expire between April 1997 and November
2005. The Company is required to pay a pro rata share of taxes and utilities for
each of the office locations. Future minimum payments under the leases at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Fiscal year:
<S> <C>
1997 $ 903,441
1998 991,185
1999 988,500
2000 1,016,614
2001 764,021
Thereafter 2,639,151
------------
$7,302,912
============
</TABLE>
Rent expense for the years ended December 31, 1996, 1995 and 1994 was $934,492,
$634,967 and $453,810, respectively.
F-18
<PAGE>
Summit Medical Systems, Inc
Notes to Consolidated Financial Statements (continued)
16. INCOME TAXES
As of December 31, 1996, the Company had a net operating loss (NOL) and AMT
credit carryforwards of approximately $11,375,000 and $33,000, respectively,
available to offset its future income tax liability. The NOL and tax credit
carryforwards begin to expire in the year 2009.
Income tax expense for the years ended December 31, 1996, 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
---------------------------------
<S> <C> <C> <C>
Current $18,626 $ - $ -
Deferred - - 15,900
---------------------------------
$18,626 $ - $15,900
=================================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 3,981,000 $ 1,016,000
Temporary differences:
Purchase of in-process research
and development 4,089,000 2,478,000
Allowance for doubtful
accounts 227,000 35,000
Valuation allowance (8,297,000) (3,529,000)
------------------------------
Net deferred tax asset $ - $ -
==============================
</TABLE>
A valuation allowance of 100% of tax benefits has been provided because of the
Company's recent history of operating losses. The Company has made private and
public offerings of its stock during the past three years and, as a result, may
have incurred ownership changes under Section 382 of the Internal Revenue Code.
Section 382 may limit the amount of net operating losses that can be utilized in
the future.
F-19
<PAGE>
Summit Medical System, Inc.
Notes to Consolidated Financial Statements (continued)
17. STOCK OPTIONS
In 1993, the Company established the Stock Option Plan of 1993, for which
2,126,666 shares of common stock were reserved. The options held by officers can
be either incentive stock options or nonstatutory options to be granted to
employees and consultants of the Company. The option price is equal to the fair
market value of the common stock on the date of grant. Options vest and become
exercisable at various intervals and expire 5 years from the date of grant.
In 1995, the Company adopted the 1995 Director Plan, for which 66,666 shares of
common stock have been reserved. The plan provides for an automatic grant of
nonqualified stock options to purchase 6,666 shares of common stock to
nonemployee directors on the date such individuals are first appointed directors
of the Company, and an automatic grant of an option to purchase an additional
2,000 shares of common stock on the day after each subsequent annual meeting of
the Company's shareholders. The option price is equal to the fair market value
of the common stock on the date of grant. Options vest and become exercisable as
to 100% of such shares on the first annual anniversary of the date of such grant
and expire 10 years from the date of grant.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES PLAN NON-PLAN EXERCISE
AVAILABLE OPTION OPTIONS PRICE
FOR GRANT OUTSTANDING OUTSTANDING PER SHARE
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 28,021 265,312 113,330 $ 1.25
Shares reserved 533,333 - - -
Granted (275,991) 275,991 33,332 3.75
Canceled 40,000 (40,000) - 1.50
-----------------------------------------------
Balance at December 31, 1994 325,363 501,303 146,662 2.43
Granted (231,998) 231,998 18,794 12.17
Exercised - (9,999) (66,666) 0.36
Canceled 13,333 (13,333) - 3.75
-----------------------------------------------
Balance at December 31, 1995 106,698 709,969 98,790 5.53
Shares reserved 1,300,000 - -
Granted (2,346,634) 2,346,634 610,666 10.63
Exercised - (54,975) (5,575) 2.11
Canceled 1,266,609 (1,266,609) (5,000) 15.41
-----------------------------------------------
Balance at December 31, 1996 326,673 1,735,019 698,881 $ 6.65
==============================================================
</TABLE>
F-20
<PAGE>
Summit Medical Systems, Inc.
Notes to Consolidated Financial Statements (continued)
17. STOCK OPTIONS (CONTINUED)
In late 1996, the Company repriced previously granted options held by management
to purchase 669,442 shares of common stock from original exercise prices that
ranged from $13.00 to $17.00 per share to new exercise prices that ranged from
$6.75 to $7.00 per share. Additionally, previously granted options held by the
same individuals to purchase 185,250 shares of common stock at exercise prices
ranging from $13.00 to $17.00 per share were canceled.
The following table summarizes information about the stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTION EXERCISABLE
------------------------------------------- ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------------------- ------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
$ .22 - $ 2.25 233,230 $1.54 $ 1.47 124,365 $ 1.49
3.75 - 5.00 297,859 2.97 3.75 107,600 3.75
5.00 - 7.50 1,708,858 6.69 7.05 227,056 6.95
7.50 - 8.00 57,166 5.56 7.65 - -
14.00 - 14.50 2,787 3.60 14.34 2,787 14.34
17.00 - 17.50 130,000 4.08 17.25 - -
22.00 - 22.50 4,000 9.32 22.50 - -
------------------------------------------- ----------------------------
2,433,900 5.58 $ 6.65 461,808 $ 4.89
</TABLE>
Options outstanding expire at various dates during the period from 1998 through
2006. Exercise prices for options outstanding as of December 31, 1996 ranged
from $.22 to $22.50 per share. The number of options exercisable as of December
31, 1996, 1995 and 1994 were 461,808, 178,709 and 137,460, respectively at
weighted average exercise prices of $4.89, $2.35 and $.81 per share,
respectively.
The weighted-average grant date fair value of plan options granted at market
prices during the years ended December 31, 1996 and 1995 was $4.81 and $6.14 per
share, respectively. The weighted-average grant date fair value of plan options
granted above market prices during the years ended December 31, 1996 and 1995
was $-0- and $2.31 per share, respectively.
F-21
<PAGE>
Summit Medical Systems, Inc.
Notes to Consolidated Financial Statements (continued)
17. STOCK OPTIONS (CONTINUED)
The weighted-average grant date fair value of non-plan options granted at market
prices during the years ended December 31, 1996 and 1995 was $9.61 and $-0-,
respectively. The weighted-average grant date fair value of non-plan options
granted below market prices during the years ended December 31, 1996 and 1995
was $5.52 and $8.91, respectively. The weighted-average grant date fair value of
non-plan options granted above market prices during the years ended December 31,
1996 and 1995 was $0 and $4.19, respectively.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the Black-
Scholes option pricing model with the following weighted-average assumptions for
1996 and 1995: risk free interest rate of 6.00%; no dividend yield; volatility
factors of 87.7% and 61.5% and a weighted-average expected life of the option of
2.29 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
F-22
<PAGE>
Summit Medical Systems, Inc.
Notes to Consolidated Financial Statements (continued)
17. STOCK OPTIONS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------
<S> <C> <C>
Pro forma net loss ($13,672,621) ($9,598,186)
Pro forma loss per share $(1.45) $(1.46)
</TABLE>
The pro forma effect on net loss for 1996 and 1995 is not representative of the
pro forma effect on net loss in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995.
18. EMPLOYEE STOCK PURCHASE PLAN
In May 1995, the Company adopted the 1995 Employee Stock Purchase Plan whereby
133,333 shares of common stock have been reserved. All employees who have met
the service eligibility requirements are eligible to participate and may direct
the Company to make payroll deductions of two to fifteen percent of their
compensation during a purchase period for the purchase of shares under the plan.
The 1995 Stock Purchase Plan provides participating employees the right, subject
to certain limitations, to purchase the Company's common stock at a price equal
to the lower of 85% of the fair market value of the Company's common stock on
the first day, or the last day, of the applicable purchase period. The first
purchase period commenced on August 3, 1995 and ended on December 29, 1995.
Subsequent purchase periods will run for six months, subject to acceleration in
the case of a merger or consolidation in which the Company is not the surviving
corporation, or the liquidation, dissolution or sale of substantially all of the
assets of the Company. In 1996 and 1995, 39,262 shares and 35,016 shares were
purchased and issued, respectively.
F-23
<PAGE>
Summit Medical Systems, Inc.
Notes to Consolidated Financial Statements (continued)
19. STOCK AUTHORIZATION AND STOCK SPLITS
In June 1995, the Board of Directors approved a 1.5-to-1 reverse stock split for
common stock and options of the Company, effective June 15, 1995.
All share, per share, weighted average share, and stock option information in
these financial statements has been restated to reflect the stock split as if it
occurred at the beginning of the earliest period presented.
20. DISTRIBUTION AND LICENSE AGREEMENTS
In 1995 and 1994, the Company entered into product distribution agreements with
several companies. These agreements grant each distributor an exclusive right
and license to market, sell and distribute selected programs worldwide. In order
to maintain exclusivity, each distributor has agreed to purchase a minimum
number of programs over the next five years.
In June 1995, Medical Information Systems Company, Inc. ("MIS"), a wholly-owned
subsidiary of the Company, entered into a license agreement with DRI/McGraw-Hill
("DRI") to utilize DRI's proprietary data and forecast services for a two-year
period. Pursuant to the agreement, MIS pays a monthly license fee to DRI in the
amount of $6,667 for twelve months and issued a warrant to purchase 4,460 shares
of the Company's common stock at $1.00 per share for ten years. The value of
this warrant was determined to be $60,000 and is being amortized as a cost of
the data base over the two-year license agreement period.
21. SIGNIFICANT CUSTOMER
The Company sells a substantial portion of its product to one customer. During
1996 and 1995, sales to this customer aggregated $1,651,039 and $1,344,639,
respectively. At December 31, 1996 and 1995, amounts due from this customer
included in accounts receivable were $478,267 and $735,590, respectively.
F-24
<PAGE>
Summit Medical Systems, Inc.
Notes to Consolidated Financial Statements (continued)
22. COMMITMENTS AND CONTINGENCIES
The Company has been named as a defendant in two federal court securities
punitive class action suits filed in United States District Court of the
District of Minnesota on March 10, 1997 and March 26, 1997, respectively. These
actions allege, in essence, that the Company made misleading public disclosures
relating to its financial statements. The Company believes both these actions
are without merit and intends to defend against them vigorously.
The Company has been informed by the Division of Enforcement of the
Securities and Exchange Commission (the "Commission"), through service of a
subpoena on March 25, 1997, that the Commission is conducting an investigation
of the Company, relating to the Company's restatement of certain financial
statements. The Company is cooperating fully with the Commission and its
investigation and intends to continue to do so.
23. SUBSEQUENT EVENT
The Company terminated several employees subsequent to year end in order to
reduce its expense levels. In connection with this reduction, severance payments
of approximately $400,000 were made and will be expensed in the first quarter of
1997.
F-25
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
SUMMIT MEDICAL SYSTEMS, INC.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------
Additions
---------------------
Charged Charged Balance
Balance at to Costs to Other at End
Beginning and Accounts- Deductions- of
Description of Period Expenses Describe Describe Period
----------- --------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Deducted from asset accounts:
Allowance for doubtful accounts $20,000 $82,783 $ - $23,250 (1) $79,533
Year ended December 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts $79,533 $20,864 $ - $ - $100,397
Year ended December 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts $100,397 $308,806 $300,000 (2) $59,203 $650,000
</TABLE>
(1) Write-off uncollectible accounts receivable.
(2) Sales Return Allowance
S-1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 31, 1997 SUMMIT MEDICAL SYSTEMS, INC.
By /s/ Kevin R. Green
---------------------------------------
Kevin R. Green, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ W. Hudson Connery Chairman of the Board March 31, 1997
- -------------------------
W. Hudson Connery
/s/ Kevin R. Green President, Chief Executive March 31, 1997
- -------------------------
Kevin R. Green Officer and Director
(principal executive officer)
/s/ Richard J. Willemin Interim Vice President, March 31, 1997
- -------------------------
Richard J. Willemin Finance and Chief Financial
Officer (principal financial
and accounting officer)
/s/ John M. Nehra Director March 31, 1997
- -------------------------
John M. Nehra
/s/ Kent J. Thiry Director March 31, 1997
- -------------------------
Kent J. Thiry
/s/ Edward F. Sweeney Director March 31, 1997
- -------------------------
Edward F. Sweeney
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Number
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
*3.1 Restated Articles of Incorporation of the Company, as amended.........
*3.2 Bylaws of the Company.................................................
*4.1 Form of Certificate for Common Stock..................................
*10.1 Agreement Regarding Distribution of Software Programs
between Allergan, Inc., and Summit Medical Systems, Inc.,
dated September 1, 1994...............................................
*10.2 Agreement Regarding Distribution of Software Programs
between SciMed Life Systems, Inc., and Summit Medical
Systems, Inc., dated March 1, 1994, as amended in
September 1994........................................................
*10.3 ACC National Database Development Agreement, dated
February 8, 1991......................................................
*10.4 American Society of Cataract and Refractive Surgery
National Database Development Agreement, dated
February 18, 1994.....................................................
*10.5 First Amendment and Restatement of STS National
Database Agreement, dated March 26, 1995..............................
*10.6 Summit Medical Systems, Inc., 1993 Stock
Option Plan...........................................................
*10.7 Summit Medical Systems, Inc., 1995 Employee Stock
Purchase Plan.........................................................
*10.8 Summit Medical Systems, Inc., 1995 Non-Employee
Director Stock Option Plan............................................
*10.9 Employment Agreement dated October 19, 1992,
between Summit Medical Systems, Inc., and
Edward F. Sweeney.....................................................
*10.10 Employment Agreement dated October 19, 1992,
between Summit Medical Systems, Inc., and
Dennis Powers.........................................................
*10.11 Employment Agreement dated August 2, 1993, between
Summit Medical Systems, Inc., and William Cavanagh....................
*****10.12 Employment Letter of December 29, 1995, between
Summit Medical Systems, Inc., and Kevin R. Green......................
*****10.13 Employment Letter dated October 5, 1995, between
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Summit Medical Systems, Inc. and Bruce S. Maller......................
*10.14 Agreement Regarding Distribution of Software Programs
between Boston Scientific Corporation and Summit
Medical Systems, Inc., dated June 30, 1995............................
*10.15 Amendment by Letter dated July 26, 1995 of Agreement
Regarding Distribution of Software Programs between
SciMed Life Systems, Inc. and Summit Medical Systems, Inc.,
dated March 1, 1994, as amended in September 1994.....................
*10.16 Amendment by Letter dated July 18, 1995 of Agreement
Regarding Distribution of Software Programs between
Summit Medical Systems, Inc., and Boston Scientific
Corporation, dated June 30, 1995......................................
*10.17 Amendment by Letter dated July 26, 1995 of Agreement
Regarding Distribution of Software Programs between
Summit Medical Systems, Inc., and Boston Scientific
Corporation, dated June 30, 1995......................................
****10.18 Agreement Regarding Distribution of Software Programs
between Boston Scientific Corporation and Summit
Medical Systems, Inc. dated September 1, 1995.........................
****10.19 Agreement Regarding Distribution of Software Programs
between Smith & Nephew Richards, Inc. and Summit
Medical Systems, Inc. dated November 10, 1995.........................
****10.20 Agreement Regarding Distribution of Software Programs
between Boston Scientific Corporation and Summit
Medical Systems, Inc. dated December 1, 1995..........................
**10.21 Agreement and Plan of Merger between BSM Acquisition
Corp., BSM Financial, Inc., Bruce S. Maller and Summit
Medical Systems, Inc. dated September 29, 1995........................
***10.22 Agreement and Plan of Merger between MIS Acquisition
Corp., Medical Information Systems Company, Inc. and
Summit Medical Systems, Inc. dated November 15, 1995..................
*****10.23 License Agreement between Duke University and Summit
Medical Systems, Inc. dated December 29, 1995.........................
*****10.24 Cordillera L.L.C. Limited Liability Company Agreement
dated December 29, 1995...............................................
*****10.25 Sublicense and Distribution Agreement between
Cordillera L.L.C. and Summit Medical Systems, Inc.
dated December 29, 1995...............................................
*****10.26 Employment Letter dated January 19, 1996, between Summit
Medical Systems, Inc. and George J. Marshalek, Jr.....................
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
******10.27 Amendment by Letters dated January 2, 1996, January 16,
1996 and June 29, 1996, of ACC National Database Development
Agreement, dated February 8, 1991.....................................
10.28 First and Second Amendment to Summit Medical Systems, Inc., 1993
Stock Option Plan.....................................................
*******10.29 Agreement and Plan of Merger between Summit Medical Systems,
Inc. CLM Acquisition Corp. and C. L. McIntosh & Associates, Inc.
December dated 31, 1996...............................................
10.30 Employment Agreement between Summit Medical Systems, Inc.,
C. L. McIntosh & Associates, Inc. and Charles L. McIntosh
dated December 31, 1996...............................................
10.31 Option Agreement between Summit Medical Systems, Inc. and
Charles L. McIntosh dated December 31, 1996...........................
10.32 Reorganization Agreement between Summit Medical Systems, Inc.,
Cordillera L.L.C., DR Ware LLP and Duke University dated December
31, 1996..............................................................
10.33 Employment Agreement between Summit Medical Systems, Inc. and
Donald Fortin dated December 31, 1996.................................
10.34 Option Agreement between Summit Medical Systems, Inc. and
Donald Fortin dated December 31, 1996.................................
10.35 Option Agreement between Summit Medical Systems, Inc. and
Robert Califf dated December 31, 1996.................................
10.36 Option Agreement between Summit Medical Systems, Inc. and Harry
Phillips dated December 31, 1996......................................
10.37 Amendment to License Agreement between Duke University and Summit
Medical Systems, Inc. dated December 31, 1996.........................
10.38 Amendment to Cordillera L.L.C. Limited Liability Company
Agreement dated December 31, 1996.....................................
10.39 Lease Agreement between Summit Medical Systems, Inc. and Red
Circle L.L.P. dated September 30, 1996................................
10.40 Employment Letter dated March 26, 1997 between Summit Medical
Systems, Inc. and Richard Willemin....................................
10.41 Employment letter dated June 12, 1996 between Summit Medical
Systems, Inc. and David Teckman.......................................
11.1 Statement re: computation of per share earnings......................
23.1 Consent of Ernst & Young LLP..........................................
27 Financial Data Schedule...............................................
99 Cautionary Statement..................................................
</TABLE>
________________
* Incorporated by reference to the Exhibit with the same number in the
Company's Registration Statement on Form S-1 (File No. 33-93700).
** Incorporated by reference to the Company's Current Report on Form 8-K
dated October 19, 1995 (File No. 0-26390).
*** Incorporated by reference to the Company's Current Report on Form 8-K
dated December 4, 1995 (File No. 0-26390).
<PAGE>
**** Confidential treatment requested as to certain portions.
***** Incorporated by reference to the Exhibit with the same number in the
Company's Registration Statement on Form S-1 (File No. 333-01958).
****** Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-05711).
******* Incorporated by reference to the Company's Current Report on Form 8-K
filed January 14, 1997 (File No. 0-26390).
<PAGE>
Exhibit 10.28
AMENDMENTS TO 1993 STOCK OPTION PLAN
April 28, 1995
The shareholders of Summit Medical Systems, Inc. (the "Company") adopted the
following amendments to the Company's Stock Option Plan of 1993 (the "Plan") at
their annual meeting held on April 28, 1995:
1. The first amendment adopted was to replace in its entirety Section 5.1 of
the Plan with the following text:
5.1 Number. The number of shares of Stock hereby made available and
------
reserved for issuance under the Plan is 820,000. The aggregate number of shares
of Stock available under this Plan shall be subject to adjustment as provided in
Section 5.3. The total number of shares of Stock may be authorized but unissued
shares of Stock, or shares acquired by purchase as directed by the Board from
time to time in its discretion, to be used for issuance upon exercise of Options
granted hereunder.
2. The second amendment adopted was to replace in its entirety Section 13.1 of
the Plan with the following text:
13.1 Acquisition. In the event that an Acquisition occurs with respect to
-----------
the Company, the Company shall cancel Options outstanding as of the effective
date of Acquisition, whether or not such Options are then exercisable, in return
for payment to the Optionees of an amount equal to a reasonable estimate of an
amount (hereinafter the "Spread") equal to the difference between the net amount
per share payable in the Acquisition, or as a result of the Acquisition, less
the exercise price of the Option. In estimating the Spread, appropriate
adjustments to give effect to the existence of the Options shall be made, such
as deeming the Options to have been exercised, with the Company receiving the
exercise price payable thereunder, and treating the shares receivable upon
exercise of the Options as being outstanding in determining the net amount per
share. For purposes of this section, an "Acquisition" shall mean any transaction
in which substantially all of the Company's assets are acquired or in which a
controlling amount of the Company's outstanding shares are acquired, in each
case by a single person or entity or an affiliated group of persons and/or
entities. For purposes of this Section a controlling amount shall mean more than
fifty percent (50%) of the issued and outstanding shares of Stock of the
Company. The Company shall have such an obligation regardless of how the
Acquisition is effectuated, whether by direct purchase, through a merger or
similar corporate transaction, or otherwise. In cases where the acquisition
consists of the acquisition of assets of the Company, the net amount per share
shall be calculated on the basis of the net amount receivable with respect to
shares upon a distribution and liquidation by the Company after giving effect to
expenses and charges, including but not limited to taxes, payable by the Company
before the liquidation can be completed.
If the Company has no obligations under this Section 13.1 the remaining
provisions of this Article XIII shall apply, to the extent applicable.
-1-
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
SECOND AMENDMENT TO THE 1993 STOCK OPTION PLAN
APRIL 25, 1996
I, Dennis H. Powers, Secretary of Summit Medical Systems, Inc., a Minnesota
corporation (the "Company"), hereby certify on behalf of the Company that in
March of 1996, pursuant to Section 12.1 of the Company's Stock Option Plan
of 1993, as amended (the "Plan"), the Board of Directors approved a second
amendment to the Plan providing for the issuance of an additional 1,300,000
shares of common stock under the Plan (the "Second Amendment"). The
shareholders of the Company adopted the Second Amendment at their Annual Meeting
held on April 25, 1996. Accordingly, Section 5.1 of the Plan is hereby amended
and restated as follows:
5.1 Number. The number of shares of Stock hereby made available and
------
reserved for issuance under the Plan is 2,126,666. The aggregate number of
shares of Stock available under this Plan shall be subject to adjustment as
provided in Section 5.3. The total number of shares of Stock may be
authorized but unissued shares of Stock, or shares acquired by purchase as
directed by the Board from time to time in its discretion, to be used for
issuance upon exercise of Options granted hereunder.
IN WITNESS WHEREOF, I have hereto signed my name.
________________________________________
Dennis H. Powers
Secretary
-2-
<PAGE>
Exhibit 10.30
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated December 31,
1996, by and among Summit Medical Systems, Inc., a Minnesota corporation
("Purchaser"), C. L. McIntosh & Associates, Inc. (the "Company"), and Charles L.
McIntosh, an individual resident of the state of Maryland ("Executive").
WHEREAS, Executive has heretofore been employed as an executive
officer of the Company;
WHEREAS, Purchaser has agreed to acquire the Company pursuant to an
Agreement and Plan of Merger, dated December 31, 1996 by and among Purchaser,
CLM Acquisition Corp., a Minnesota corporation ("Merger Subsidiary") and the
Company (the "Merger Agreement"), which provides for the merger of the Company
with and into Merger Subsidiary (the "Merger") (all capitalized terms not
defined herein are as defined in the Merger Agreement);
WHEREAS, Purchaser and the Company have further agreed on, among other
things, the execution of this Agreement; and
WHEREAS, the Company desires to retain the services of Executive
subsequent to the consummation of the Merger, and Executive desires to be
employed by the Company, on the terms and subject to the conditions set forth in
this Agreement.
NOW, THEREFORE, in consideration of the respective covenants and
commitments of Purchaser, the Company and Executive set forth below, and as an
inducement to Purchaser to consummate the Merger, the Company and Executive
hereby agree as follows:
1. Employment. The Company hereby employs Executive, and Executive
----------
accepts such employment and agrees to perform services for the Company, for the
period and upon the other terms and conditions set forth in this Agreement.
Purchaser agrees that it is jointly and severally liable with the Company for
all duties and obligations undertaken by the Company under this Agreement,
including, but not limited to, payment of Executive's compensation and provision
of his benefits.
2. Term. Unless terminated at an earlier date in accordance with
----
Section 9 of this Agreement, the term of Executive's employment hereunder shall
commence on the day following the Effective Time and shall extend for a
continuous period until three years from the date thereof. Thereafter, the terms
of this Agreement shall be extended for successive one year periods unless
Purchaser, the Company or Executive objects to such extension by written notice
to the other party at least 90 days prior to the expiration of such initial term
or any extension thereof.
<PAGE>
3. Position and Duties.
-------------------
3.01 Service with Company. During the term of this
--------------------
Agreement, Executive agrees to serve as President of the Company and Vice
President of the Purchaser and to perform such employment duties, consistent
with the position of President of the Company and Vice President of the
Purchaser, as shall be assigned to him from time to time. Purchaser agrees to
appoint Executive, and Executive agrees to serve, as a member of the Board of
Directors of the Company, and as a member of the executive council of the
Purchaser.
3.02 Performance of Duties. Executive agrees to serve the
---------------------
Company faithfully and to the best of his ability and to devote his full time,
attention and efforts to the business and affairs of the Company during the term
of his employment. Executive hereby confirms that he is under no contractual
commitments inconsistent with his obligations set forth in this Agreement and
that, during the term of his employment, he will not render or perform any
services for any other corporation, firm, entity or person which are
inconsistent with the provisions of this Agreement or which would otherwise
impair his ability to perform his duties hereunder.
4. Compensation.
------------
4.01 Base Salary. As base compensation for all services to
-----------
be rendered by Executive under this Agreement during the term of this Agreement,
the Company shall pay to Executive an annual salary of $175,000 in accordance
with normal payroll procedures and policies.
4.02 Incentive Compensation. Executive shall be entitled to
----------------------
participate in such bonus or incentive compensation plans as may be established
by Purchaser's Board of Directors from time to time for Purchaser's executive
level employees.
4.03 Option. On the date Executive's employment hereunder
------
with the Purchaser commences, the Purchaser shall grant Executive an employee
stock option to purchase 70,000 shares of Common Stock of the Purchaser under
the Purchaser's 1993 Stock Option Plan (the "Option Plan"), subject to the terms
of the Stock Option Agreement between the Purchaser and the Executive, dated
December 31, 1996.
4.04 Participation in Benefit Plans. During the term of
------------------------------
Executive's employment by the Company, Executive shall be entitled to receive
such life, disability, medical, dental and other insurance coverage (including
directors and officers insurance) as are being provided by the Purchaser to its
executive level employees from time to time to the extent that Executive's age,
position or other
-2-
<PAGE>
factors qualify him for such fringe benefits. The current benefits to which
Executive is entitled are set forth on Schedule 4.04 hereto.
Nothing in this Agreement is intended to or shall in any way restrict
Purchaser's right to amend, modify or terminate any of its benefit plans during
the term of Executive's employment.
4.05 Expenses. In accordance with the Company's normal
--------
policies for expense verification, the Company will pay or reimburse Executive
for all reasonable and necessary out-of-pocket expenses incurred by him in the
performance of his duties under this Agreement, subject to the presentment of
appropriate documentation in accordance with Purchaser's normal policy for
expense verification.
5. Confidential Information. Except as permitted or directed by
------------------------
Purchaser, during the term of this Agreement or at any time thereafter,
Executive shall not divulge, furnish or make accessible to anyone or use in any
way (other than in the ordinary course of the business of the Company) any
confidential or secret knowledge or information of the Company or of any
affiliate of the Company including Purchaser and its other subsidiaries
(collectively, the "Purchaser Affiliates") which Executive has acquired or
become acquainted with prior to the term of this Agreement while working for the
Company or will acquire or become acquainted with during the term of this
Agreement, whether or not during regular working hours, in each case, whether
developed by himself or by others, concerning any trade secrets, confidential or
secret designs, processes, formulae, plans, devices or material (whether or not
patented or patentable) directly or indirectly useful in any aspect of the
business of the Company or of any Purchaser Affiliate, any customer or supplier
lists of the Company or of any Purchaser Affiliate, any confidential or secret
development or research work of the Company or of any Purchaser Affiliate, or
any other confidential information or secret aspects of the business of the
Company or of any Purchaser Affiliate. Executive acknowledges that the above-
described knowledge or information constitutes a unique and valuable asset of
the Company and of the respective Purchaser Affiliates and represents a
substantial investment of time and expense by the Company and by the Purchaser
Affiliates and that any disclosure or other use of such knowledge or information
other than for the sole benefit of the Company or of any Purchaser Affiliate
would be wrongful and would cause irreparable harm to such Purchaser Affiliate.
Both during and after the term of this Agreement, Executive will not
intentionally act in any manner that is reasonably likely to reduce the value of
such knowledge or information to any Purchaser Affiliate. The foregoing
obligations of confidentiality shall not apply to any knowledge or information
which before being divulged by the Executive (i) has become generally known to
the public through no wrongful act of the Executive; (ii) has been rightfully
received by the Executive from a third party without restriction on disclosure
and without breach of an obligation of confidentiality running either directly
or indirectly to any Purchaser Affiliate;
-3-
<PAGE>
(iii) has been approved for release and released to the general public by
written authorization of any Purchaser Affiliate; (iv) has been disclosed
pursuant to a requirement of a governmental agency or of law without similar
restrictions or other protections against public disclosure, or has been
required to be disclosed by operation of law; or (v) is independently developed
by the Executive without use, directly or indirectly, of any knowledge or
information that is proprietary knowledge or information of the Company or any
Purchaser Affiliate.
6. Ventures. If, during the term of Executive's employment
--------
pursuant to this Agreement, Executive is engaged in or associated with the
planning or implementing of any project, program or venture involving the
Company and a third party or parties, all rights in such project, program or
venture shall belong to the Company. Except as formally approved by Purchaser's
Board of Directors, Executive shall not be entitled to any interest in such
project, program or venture or to any commission, finder's fee or other
compensation in connection therewith other than the salary to be paid to
Executive as provided in this Agreement.
7. Intellectual Property.
---------------------
7.01 Assignment. Executive hereby assigns and agrees to assign
----------
to the Company, to the extent such rights are not already owned by the Company,
(a) all tangible embodiments of and intellectual property rights in developments
made or conceived by Executive solely or in collaboration with others prior to
his employment with the Company and provided to the Purchaser or the Company
directly, or indirectly through any predecessor entity to the Company, by
Executive and (b) all intellectual property rights in developments made or
conceived by Executive solely or in collaboration with others during the term of
his employment by the Company. Executive further agrees that all copyrightable
works made by Executive for the Company shall be considered "works made for
hire" for the benefit of the Company and to the extent not qualifying as "works
made for hire" are hereby assigned to the Company. Executive will disclose
promptly and fully to the Company all developments owned by the Company under
this Agreement. Executive warrants that his rights in developments assigned to
the Company by this Agreement have not been previously licensed, pledged,
assigned or encumbered by Executive.
7.02 Records. Executive will keep complete and accurate
-------
accounts, notes, data and records of all developments in the manner and form
requested by the Company. Such accounts, notes, data and records shall be the
property of the Company, and, upon request by the Company, Executive will
promptly surrender the same to it or, if not previously surrendered upon its
request or otherwise, Executive will surrender the same, and all copies thereof,
to the Company upon the conclusion of his employment.
-4-
<PAGE>
8. Noncompetition and Nonsolicitation Covenants.
--------------------------------------------
8.01 Agreement Not to Compete. Executive agrees that during
------------------------
the term of his employment by the Company and for one year thereafter (whether
termination of employment is with or without cause, or whether it is occasioned
by Executive or the Company), (the "Restricted Period"), subject to the
following proviso, he shall not, directly or indirectly, engage in competition
with the Company in any manner or capacity (e.g. as an adviser, principal,
agent, partner, officer, director, stockholder employee, member of an
association (other than an industry trade association or similar professional
society) or otherwise) in any phase of the business which the Company is
conducting during the term of this Agreement or any extensions thereof, provided
however in the event of termination pursuant to 9.01(d) or 9.01(e), Executive
shall be solely obligated not to engage in competition with the Company during
the Restricted Period in the business of clinical trials management.
8.02 Geographic Extent of Covenant. The obligations of
-----------------------------
Executive under Section 8.01 shall apply to all markets, domestic or foreign, in
which the Company has engaged in business during the term of this Agreement or
any extensions thereof, through production, promotional sales or marketing
activities or has otherwise established goodwill, business reputation or any
customer or supplier relationships.
8.03 Nonsolicitation; Non-hire and Noninterference. During
---------------------------------------------
the term of this Agreement and for the Restricted Period, Executive shall not
(a) induce or attempt to induce any employee of the Company or of any Purchaser
Affiliate to leave the employ of the Company or such Purchaser Affiliate,
respectively, or in any way interfere adversely with the relationship between
any such employee and such Purchaser Affiliate, (b) induce or attempt to induce
any employee of the Company or of any Purchaser Affiliate to work for, render
services or provide advice to or supply confidential business information or
trade secrets of any Purchaser Affiliate to any third person, firm or
corporation, (c) employ, or otherwise pay for services rendered by, any employee
of the Company or any Purchaser Affiliate in any business enterprise with which
Executive may be associated, connected or affiliated or (d) induce or attempt to
induce any customer, supplier, licensee, licensor or other business relation of
the Company or of any Purchaser Affiliate to cease doing business with the
Company or such Purchaser Affiliate, respectively, or in any way interfere with
the relationship between any such customer, supplier, licensee, licensor or
other business relation and the Company or such Purchaser Affiliate.
8.04 Indirect Competition or Solicitation. Executive agrees
------------------------------------
that, during the term of this Agreement and the period covered by Sections 8.01
or 8.03 hereof, he will not, directly or indirectly, assist or encourage any
other person in carrying out, directly or indirectly, any activity that would be
prohibited by the
-5-
<PAGE>
provisions of Sections 8.01 or 8.03 if such activity were carried out by
Executive, either directly or indirectly; and, in particular, Executive agrees
that he will not, directly or indirectly, induce any employee of the Company or
of any Purchaser Affiliate to carry out, directly or indirectly, any such
activity.
9. Termination.
-----------
9.01 Grounds for Termination. This Agreement shall terminate
-----------------------
prior to the expiration of the initial term set forth in Section 2 or any
extension thereof in the event that at any time during such initial term or any
extension thereof :
(a) Executive dies, or
(b) Executive becomes disabled (as defined below), so that he
cannot perform the essential functions of his position with
or without reasonable accommodation, or
(c) The Board of Directors of Purchaser elects to terminate this
Agreement for "cause" and notifies Executive in writing of
such election, or
(d) The Board of Directors of Purchaser elects to terminate this
Agreement without "cause" and notifies Executive in writing
of such election, or
(e) Executive elects to terminate this Agreement and notifies
Purchaser in writing of such election.
If this Agreement is terminated pursuant to the subsections of
this Section 9.01, such termination shall be effective immediately.
9.02 "Cause" Defined.
---------------
(a) Executive has breached the provision of sections 5, 6, 7 or
8 of this Agreement in any material respect, or
(b) Executive has engaged in willful and material misconduct,
including willful and material failure to perform
Executive's duties as an officer of employee of the Company
and has failed to "cure" such default within thirty (30)
days after receipt of written notice of default from the
President of Purchaser, or
-6-
<PAGE>
(c) Executive has committed fraud, misappropriation or
embezzlement in connection with the Company's business, or
(d) Executive has been convicted (and all appeals therefrom have
been exhausted) or has pleaded nolo contendere to criminal
misconduct (except for parking violations, occasional minor
traffic violations and similar infractions), or
(e) Executive's established use of narcotics, liquor or illicit
drug has a detrimental effect on the performance of his
employment responsibilities, as determined in good faith by
Purchaser's Board of Directors.
In the event that Purchaser terminates Executive's employment for
"cause" pursuant to subsection 9.01(c) and Executive objects in writing to the
Board's determination that there was proper "cause" for such termination within
twenty (20) days after Executive is notified of such termination, the matter
shall be resolved by arbitration in accordance with the provisions of Section
10.01. If Executive fails to object to any such determination of "cause" in
writing within such twenty (20) day period, he shall be deemed to have waived
his right to object to that determination. If such arbitration determines that
there was not proper "cause" for termination, such termination shall be deemed
to be a termination pursuant to subsection 9.01(d) and Executive's sole remedy
shall be to receive the wage continuation benefits contemplated by Section 9.06.
9.03 Effect of Termination Notwithstanding any termination
---------------------
of this Agreement, Executive, in consideration of his employment hereunder to
the date of such termination, shall remain bound by the provisions of this
Agreement which specifically relate to periods, activities or obligations upon
or subsequent to the termination of Executive's employment.
9.04 "Disability" Defined. For the purposes of this Agreement,
----------
the term "disability" shall mean the physical or mental illness or disability of
the Executive, which renders him unable to perform his duties hereunder in a
significant respect for a period of at least three consecutive months or for
shorter periods totaling more than one hundred twenty (120) days during any 365
day period.
9.05 Surrender of Records and Property. Upon termination of
---------------------------------
his employment with the Company, Executive shall deliver promptly to the Company
all records, manuals, books, blank forms, documents, letters, memoranda, notes,
notebooks, reports, data, tables, calculations or copies thereof, which are the
property of the Company or which relate in any way to the business, products,
-7-
<PAGE>
practices or techniques of the Company, and all other property, trade secrets
and confidential information of the Company, including, but not limited to, all
documents which in whole or in part contain any trade secrets or confidential
information of the Company, which in any of these cases are in his possession or
under his control.
9.06 Wage Continuation. If Executive's employment by the Company
-----------------
is terminated by the Company pursuant to subsection 9.01(d), the Company shall
continue to pay to Executive his base salary and shall continue to provide
health insurance benefits for Executive through the earlier of (a) the date that
Executive has obtained other full-time employment, or (b) the expiration of the
term of this Agreement; provided, however, that in the event Executive obtains
other full time employment, the Company shall continue to pay, until the
expiration of the term of this Agreement, the excess, if any, of Executive's
base salary over Executive's salary and bonus from his other full time
employment. In addition, if Executive's employment by the Company is terminated
pursuant to subsection 9.01(a), (b) or (d), Executive (or his guardian or his
estate as may be applicable) shall be entitled to receive a pro rata portion
(based on the number of days of employment during the fiscal year) of any bonus
payment that would have been payable to him for that fiscal year if Executive
had been in the employ of the Company for the full fiscal year. If this
Agreement is terminated pursuant to subsection 9.01(a), 9.01(b), 9.01(c) or
9.01(e), Executive's right to base salary and benefits shall immediately
terminate, except as may otherwise be required by applicable law or the
preceding sentence.
10. Settlement of Disputes.
----------------------
10.01 Arbitration. Except as provided in section 10.02, any
-----------
claims or disputes of any nature between Company, Purchaser and Executive
arising from or related to the performance, breach, termination, expiration,
application, or meaning of this Agreement or any matter relating to Executive's
employment and the termination of that employment by Purchaser shall be resolved
exclusively by arbitration in Minneapolis, Minnesota, in accordance with the
applicable rules then obtaining of the American Arbitration Association. The
fees of the arbitrator(s) and other costs incurred by Executive and Purchaser in
connection with such arbitration shall be paid by the party who is unsuccessful
in such arbitration.
The decision of the arbitrator(s) shall be final and binding upon
both parties. Judgment of the award rendered by the arbitrator(s) may be entered
in any court having jurisdiction thereof. In the event of submission of any
dispute to arbitration, each party shall, not later than thirty (30) days prior
to the date set for hearing, provide to the other party and to the arbitrator(s)
a copy of all exhibits upon which the party intends to rely at the hearing and a
list of all persons each party intends to call at the hearing.
-8-
<PAGE>
10.02 Resolution of Certain Claims - Injunctive Relief. Section
------------------------------------------------
10.01 shall have no application to claims by Purchaser asserting a violation of
section 5, 6, 7, 8 or 9.05 or seeking to enforce, by injunction or otherwise,
the terms of section 5, 6, 7, 8 or 9.05. Such claims may be maintained by
Purchaser in a lawsuit subject to the terms of section 10.03. Executive agrees
that, in addition to, but not to the exclusion of any other available remedy,
Purchaser shall have the right to enforce the provisions of sections 5, 6, 7, 8
and 9.05 by applying for and obtaining temporary and permanent restraining
orders or injunctions from a court of competent jurisdiction without the
necessity of filing a bond therefor, and the successful party shall be entitled
to recover from the unsuccessful party its reasonable attorneys' fees and costs
in any actions related to sections 5, 6, 7, 8 and 9.05.
10.03 Venue. Any action at law, suit in equity, or judicial
-----
proceeding arising directly, indirectly, or otherwise in connection with, out
of, related to or from this Agreement or any provision hereof, shall be
litigated only in the courts of the state of Minnesota, County of Hennepin.
Executive waives any right the Executive may have to transfer or change the
venue of any litigation brought against Executive by Purchaser.
10.04 Severability. To the extent any provision of this Agreement
------------
shall be invalid or unenforceable, it shall be considered deleted herefrom and
the remainder of such provision and of this Agreement shall be unaffected and
shall continue in full force and effect. In furtherance and not in limitation of
the foregoing, should the duration or geographical extent of, or business
activities covered by, any provision of this Agreement be in excess of that
which is valid and enforceable under applicable law, then such provision shall
be construed to cover only that duration, extent or activities which may validly
and enforceably be covered. Executive acknowledges the uncertainty of the law in
this respect and expressly stipulates that this Agreement be given the
construction which renders its provisions valid and enforceable to the maximum
extent (not exceeding its express terms) possible under applicable law.
11. Miscellaneous.
-------------
11.01 Governing Law. This Agreement is made under and shall be
-------------
governed by and construed in accordance with the laws of the state of Minnesota.
11.02 Prior Agreements. This Agreement contains the entire
----------------
agreement of the parties relating to the employment of Executive by Company and
the ancillary matters discussed herein and supersedes all prior agreements and
understandings with respect to such matters, and the parties hereto have made no
agreements, representations or warranties relating to such employment or
ancillary matters which are not set forth herein.
-9-
<PAGE>
11.03 Withholding Taxes. The Company may withhold from any
-----------------
benefits payable under this Agreement all federal, state, city or other taxes as
shall be required pursuant to any law or governmental regulation or ruling.
11.04 Amendments. No amendment or modification of this Agreement
----------
shall be deemed effective unless made in writing and signed by the both
Executive, Purchaser and the Company.
11.05 No Waiver. No term or condition of this Agreement shall be
---------
deemed to have been waived, nor shall there be any estoppel to enforce any
provisions of this Agreement, except by a statement in writing signed by the
party against whom enforcement of the waiver or estoppel is sought. Any written
waiver shall not be deemed a continuing waiver unless specifically stated, shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
11.06 Assignment. This Agreement shall not be assignable, in
----------
whole or in part, by either party without the written consent of the other
party, except that Purchaser may, without the consent of Executive, assign its
rights and obligations under this Agreement to any corporation, firm or other
business entity with or into which the Company may merge or consolidate, or to
which the Company may sell or transfer all or substantially all of its assets.
After any such assignment by Purchaser, Purchaser shall be discharged from all
further liability hereunder and such assignee shall thereafter be deemed to be
the Company for the purposes of all provisions of this Agreement including this
Section 11.
11.07 Counterparts. This Agreement may be simultaneously executed
------------
in any number of counterparts, and such counterparts executed and delivered,
each as an original, shall constitute but one and the same instrument.
11.08 Captions and Headings. The captions and paragraph headings
---------------------
used in this Agreement are for convenience of reference only, and shall not
affect the construction or interpretation of this Agreement or any of the
provisions hereof.
11.09 Notices. Any notice or communication required or permitted
-------
hereunder shall be in writing and either delivered personally, telegraphed or
telecopied or sent by overnight courier, or by certified or registered mail,
postage prepaid, and shall be deemed to be given, dated and received when so
delivered personally or by courier, telegraphed or telecopied, or, if mailed,
five business days after the date of mailing to the following address or
telecopy number, or to such other address or addresses such person may
subsequently designate by notice given hereunder.
-10-
<PAGE>
(a) if to Purchaser or the Company, to:
Summit Medical Systems, Inc.
10900 Red Circle Drive
Minnetonka, Minnesota 55343
Telephone: (612) 939-2200
Facsimile: (612) 939-2799
Attention: Anthony W. Rees
with a copy to:
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402-1498
Telephone: (612) 343-7962
Facsimile: (612) 340-8738
Attention: Jonathan B. Abram
(b) if to the Executive, to:
C. L. McIntosh & Associates, Inc.
12300 Twinbrook Parkway, Suite 625
Rockville, MD 20852
Telephone: (301) 770-9590
Facsimile: (301) 770-9584
Attention: Charles L. McIntosh
with a copy to:
Galland, Kharasch, Morse & Garfinkle, P.C.
Canal Square
1054 31st Street, N.W.
Washington, D.C. 20007-4492
Telephone: (202) 342-5247
Facsimile: (202) 342-5219
Attention: Joseph B. Hoffman, Esq.
-11-
<PAGE>
IN WITNESS WHEREOF, Executive, Purchaser and the Company have executed
this Agreement as of the date set forth in the first paragraph.
___________________________
Charles L. McIntosh
C. L. MC INTOSH & ASSOCIATES, INC.
By_________________________
Charles L. McIntosh
President
SUMMIT MEDICAL SYSTEMS, INC.
By_________________________
Kevin R. Green
President and Chief Executive Officer
-12-
<PAGE>
EXHIBIT 10.31
SUMMIT MEDICAL SYSTEMS, INC.
----------------------------
NONSTATUTORY STOCK OPTION AGREEMENT
-----------------------------------
UNDER THE STOCK OPTION PLAN OF 1993, AS AMENDED
-----------------------------------------------
Between:
SUMMIT MEDICAL SYSTEMS, INC. (the "Company") and Charles L. McIntosh (the
"Employee"), dated as of December 31, 1996.
The Company and Employer have entered into an Employment Agreement, dated
December 31, 1996, by and among the Company, C.L. McIntosh & Associates, Inc.
("CLM") and Employee (the "Employment Agreement"), pursuant to which the Company
agrees to grant Employee an employee stock option.
The Company hereby grants to the Employee an option (the "Option") to
purchase 70,000 shares (the "Shares") of the Company's common stock under the
Summit Medical Systems, Inc. Stock Option Plan of 1993, as amended, (the "Plan")
upon the following terms and conditions:
1. Purchase Price. The purchase price of the stock shall be $ 7.25 per
--------------
share, which is not less than the fair market value of the stock on the date of
this Agreement.
2. Nonstatutory Option. The Option shall be a Nonstatutory Option, as
-------------------
defined in the Plan.
3. Period of Exercise. The Option will expire on the date (the
------------------
"Expiration Date") five (5) years and ninety (90) days (five (5) years in the
case of a Significant Shareholder) from the date of this Agreement. The Option
may be exercised only while the Employee is actively employed by the Company (or
a Subsidiary Corporation or Parent Corporation, if any, of the Company) and as
provided in Section 3(f) and Section 5, dealing with termination of employment.
The Option may be exercised for up to, but not in excess of, the amount of
Shares subject to the Option on or after the fifth anniversary of the date of
this Agreement. The Employee may earlier exercise the Option in the amounts and
in accordance with the conditions set forth below.
(a) After the first anniversary of the date of this Agreement, the
Option may be exercised for not in excess of 14,000 of the Shares
originally subject to the Option.
<PAGE>
(b) After the second anniversary of the date of this Agreement, the
Option may be exercised for not in excess of an additional 14,000 of the
Shares originally subject to the Option.
(c) After the third anniversary of the date of this Agreement, the
Option may be exercised for not in excess of an additional 14,000 of the
Shares originally subject to the Option.
(d) After the fourth anniversary of the date of this Agreement, the
Option may be exercised for not in excess of an additional 14,000 of the
Shares originally subject to the Option.
(e) Notwithstanding the foregoing, (x) if CLM's revenues for the year
ended December 31, 1997 ("Fiscal 1997"), determined as a separate operating
unit in accordance with generally accepted accounting principles
consistently applied in all periods, exceeds CLM's revenues for the year
ended December 31, 1996 by 35% or more and CLM's operating margin is 12% or
greater for Fiscal 1997, then the Option shall become exercisable for an
aggregate of 35,000 of the Shares, on or after the date on which the
Company's independent auditors first deliver their report with respect to
the Company's consolidated statement of operations for Fiscal 1997, and (y)
if CLM's revenues for the year ended December 31, 1998 ("Fiscal 1998"),
determined as a separate operating unit in accordance with generally
accepted accounting principles consistently applied in all periods, exceeds
CLM's revenues for the year ended December 31, 1997 by 35% or more and
CLM's operating margin is 12% or greater for Fiscal 1998, then the Option
shall become exercisable for not in excess of an additional 35,000 of the
Shares, on or after the date on which the Company's independent auditors
first deliver their report with respect to the Company's consolidated
statement of operations for Fiscal 1998. For purposes of this Section
3(e), CLM's revenues and operating margin shall be determined in accordance
with the following principles: (A) CLM shall be operated as an independent
entity with responsibility for its general and administrative functions,
such as payroll and fringe benefits; (B) the Company shall charge CLM only
for direct services provided by the Company to CLM, including, without
limitation, the services of the Product Manager, the Software Managers and
the related services provided by the Company in accordance with Section
9.04 of the Merger Agreement; (C) all such charges by the Company shall be
at its direct costs, including, without limitation, any benefit expenses,
but before any allocation of indirect general and administrative expenses;
and (D) the Company shall not charge CLM for any indirect general and
administrative expenses.
(f) The Option may be exercised earlier upon: (i) the retirement of
the Employee at the normal retirement date of sixty-five (65); or (ii) the
termination of the Employee's employment with CLM at any time after the
initial three year term of the Employment Agreement unless the Company
-2-
<PAGE>
terminates Employee's employment for "cause" (as defined in the Employment
Agreement) pursuant to Section 9.01(d) of the Employment Agreement. In
either case, the Option may be exercised at any time and from time to time
within its terms in whole or in part of the total amount of Shares subject
to the Option, but it shall not be exercisable after the Expiration Date.
4. Transferability. This Option is not transferable except by will or
the laws of descent and distribution and may be exercised during the lifetime of
the Employee only by him.
5. Termination of Employment. If an Employee's employment with the
-------------------------
Company and any Subsidiary Corporation or Parent Corporation of the Company is
terminated, the Option may be exercised (to the extent exercisable at the date
of the Employee's termination) by the Employee within three (3) months after the
date of termination; provided, however, that:
a. If the Employee's employment is terminated because the Employee is
disabled within the meaning of Internal Revenue Code (S) 422, the Option
may be exercised, at any time and from time to time within its terms in
whole or in part of the total amount of Shares subject to the Option,
pursuant to this Agreement;
b. If the Employee dies, the Option may be exercised, at any time and
from time to time within its terms in whole or in part of the total amount
of Shares subject to the Option, by the Employee's legal representative or
by a person who acquired the right to exercise such option by bequest or
inheritance or by reason of the death of the Employee pursuant to this
Agreement;
c. If the Employee's employment is terminated without cause pursuant
to Section 9.01(d) of the Employment Agreement, the Option may be
exercised, at any time and from time to time within its terms in whole or
in part of the total amount of Shares subject to the Option, pursuant to
this Agreement; and
d. In no event (including death of the Employee) may this Option be
exercised more than five (5) years and ninety (90) days from the date
hereof.
6. Service. This Agreement shall in no way restrict the right of the
-------
Company or any Subsidiary Corporation or Parent Corporation to terminate
Employee's employment at any time.
7. Method of Exercise. The Option may be exercised, subject to the terms
------------------
and conditions of this Agreement by written notice to the Company. The notice
-3-
<PAGE>
shall be in the form attached to this Agreement and will be accompanied by
payment (in such form as the Company may specify) of the full purchase price of
the shares to be issued, and in the event of an exercise under the terms of
paragraphs 5(a) or 5(b) hereof, appropriate proof of the right to exercise the
Option. The Company will issue and deliver certificates representing the number
of shares purchased under the Option, registered in the name of the Employee (or
other purchaser under paragraph 5 hereof) as soon as practicable after receipt
of the notice.
8. Withholding. In any case where withholding is required or advisable
-----------
under federal, state or local law in connection with any exercise by the
Employee hereunder, the Company is authorized to withhold appropriate amounts
from amounts payable to the Employee, or may require the Employee to remit to
the Company an amount equal to such appropriate amounts.
9. Incorporation of Plan. This Agreement is made pursuant to the
---------------------
provisions of the Plan, which Plan is incorporated by reference herein. Terms
used herein shall have the meaning employed in the Plan, unless the context
clearly requires otherwise. In the event of a conflict between the provisions
of the Plan and the provisions of this Agreement, the provisions of the Plan
shall govern.
10. Acquisition, Merger or Liquidation.
----------------------------------
10.1 Acquisition. In the event that an Acquisition occurs with respect
------------
to the Company, the Company shall cancel Options outstanding as of the effective
date of Acquisition, whether or not such Options are then exercisable, in return
for payment to the Optionees of an amount equal to a reasonable estimate of an
amount (hereinafter the "Spread") equal to the difference between the net amount
per share payable in the Acquisition, or as a result of the Acquisition, less
the exercise price of the Option. In estimating the Spread, appropriate
adjustments to give effect to the existence of the Options shall be made, such
as deeming the Options to have been exercised, with the Company receiving the
exercise price payable thereunder, and treating the shares receivable upon
exercise of the Options as being outstanding in determining the net amount
payable per share. For purposes of this section, an "Acquisition" shall mean
any transaction in which substantially all of the Company's assets are acquired
or in which a controlling amount of the Company's outstanding shares are
acquired, in each case by a single person or entity or an affiliated group of
persons and/or entities. For purposes of this Section a controlling amount
shall mean more than fifty percent (50%) of the issued and outstanding shares of
Stock of the Company. The Company shall have such an obligation regardless of
how the Acquisition is effectuated, whether by direct purchase, through a merger
or similar corporate transaction, or otherwise. In cases where the Acquisition
consists of the acquisition of assets of the Company, the net amount per share
shall be calculated on the basis of the net amount receivable with respect to
shares upon a distribution and liquidation by the Company after giving effect to
expenses and charges, including but not limited to taxes, payable by the Company
before the liquidation can be completed.
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<PAGE>
Where the Company does not exercise its option under this Section 10.1, the
remaining provisions of this Article X shall apply, to the extent applicable.
10.2 Merger or Consolidation. Subject to any required action by the
------------------------
stockholders, if the Company shall be the surviving corporation in any merger or
consolidation, any Option granted hereunder shall pertain to and apply to the
securities to which a holder of the number of shares of Stock issuable upon
exercise of the Option would have been entitled in such merger or consolidation.
10.3 Other Transactions. A dissolution or a liquidation of the
-------------------
Company or a merger and consolidation in which the Company is not the surviving
corporation shall cause every Option outstanding hereunder to terminate as of
the effective date of such dissolution, liquidation, merger or consolidation.
However, the Optionee either (i) shall be offered a firm commitment whereby the
resulting or surviving corporation in a merger or consolidation will tender to
the Optionee an option (the "Substitute Option") to purchase its shares on terms
and conditions both as to number of shares and otherwise, which will
substantially preserve to the Optionee the rights and benefits of the Option
outstanding hereunder granted by the Company, or (ii) shall have the right
immediately prior to such dissolution, liquidation, merger, or consolidation, to
exercise any unexercised Options whether or not then exercisable, subject to the
provisions of this Plan. The Board shall have absolute and uncontrolled
discretion to determine whether the Optionee has been offered a firm commitment
and whether the tendered Substitute Option will substantially preserve to the
Optionee the rights and benefits of the Option outstanding hereunder. In any
event, any Substitute Option for an Incentive Stock Option shall comply with the
requirements of Section 424(a) of the Code.
SUMMIT MEDICAL SYSTEMS, INC.
ACCEPTED: By______________________________________
Kevin R. Green
President and Chief Executive Officer
_________________________
Charles L. McIntosh
-5-
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
----------------------------
NOTICE OF EXERCISE OF STOCK OPTION ISSUED
-----------------------------------------
UNDER THE STOCK OPTION PLAN OF 1993, AS AMENDED
-----------------------------------------------
To: Board of Directors
SUMMIT MEDICAL SYSTEMS, INC.
I hereby exercise my Option dated __________ to purchase _____ shares of
$.01 par value common stock of the Company at the option exercise price of
$__________ per share. Enclosed is a certified or cashier's check in the total
amount of $__________, or payment in such other form as the Company has
specified.
I request that my shares be issued in my name as follows:
___________________________________________________________________________
(Print your name in the form in which you wish to
have the shares registered)
___________________________________________________________________________
(Social Security Number)
___________________________________________________________________________
(Street and Number)
___________________________________________________________________________
(City) (State) (Zip Code)
Dated: __________, 19__.
Signature:__________________________________
<PAGE>
Exhibit 10.32
REORGANIZATION AGREEMENT
This Reorganization Agreement ("Agreement") is made and entered into as of
the 31st day of December, 1996 (the "Effective Date"), by and between Summit
Medical Systems, Inc., a Minnesota corporation ("Summit"), DR Ware LLC, a North
Carolina limited liability company ("DR Ware"), Duke University, a North
Carolina not-for-profit corporation ("Duke"), and Cordillera LLC, a Delaware
limited liability company ("Cordillera").
WHEREAS, Summit and DR Ware entered into a Limited Liability Company
Agreement dated December 29, 1995 ("Cordillera Agreement"), pursuant to which
the parties became the sole members of Cordillera, with Summit as the record and
beneficial owner of 202,000 Member Units (as that term is defined in the
Cordillera Agreement) and DR Ware as the record and beneficial owner of 2,000
Member Units;
WHEREAS, Duke was also granted an option ("Option") to purchase up to
200,000 Member Units in exchange for a stated Capital Contribution under the
Cordillera Agreement, which Option Duke has not exercised, assigned or otherwise
transferred as of the Effective Date;
WHEREAS, Summit desires to purchase the Member Units owned by DR Ware, and
extinguish Duke's Option, in order to become the owner of all currently
outstanding and available Member Units in Cordillera, so that Summit may wind-up
and transfer the business of Cordillera to Summit (the "Reorganization"), and
the other parties so agree subject to the terms and conditions of this
Agreement;
WHEREAS, Summit also desires to obtain the services of certain employees
of, and consultants to, Cordillera under the terms of an employment agreement
and consulting agreements, as applicable, as a condition to closing the
Reorganization; and
WHEREAS, Summit and Duke also desire to modify certain terms of the License
Agreement between Duke University and Summit Medical Systems, Inc. dated
December 29, 1995 (the "License Agreement"), to which Cordillera is a third
party beneficiary, as a condition to closing the Reorganization.
NOW, THEREFORE, for other good and valuable consideration, the receipt
and adequacy of which are hereby acknowledged, the parties agree as follows:
<PAGE>
1. CLOSING AND PURCHASE OF MEMBERSHIP UNITS.
----------------------------------------
1.1 CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Dorsey & Whitney
LLP, in Minneapolis, Minnesota, on the 31st day of December, 1996 at 3:00 P.M.
Minneapolis time (the "Closing Date").
1.2 PURCHASE OF DR WARE'S MEMBER UNITS. Subject to the terms and
----------------------------------
condition of this Agreement, on the Closing Date DR Ware shall sell to Summit,
and Summit hereby agrees to purchase from DR Ware, 2,000 Member Units in
Cordillera. In exchange for the Member Units, Summit shall pay to DR Ware
compensation equal to One Hundred Dollars ($100.00) at the Closing.
2. CANCELLATION OF DUKE'S OPTION AND EXISTING WARRANT.
--------------------------------------------------
2.1 CANCELLATION OF OPTION AND EXISTING WARRANT. Subject to the terms
and conditions of this Agreement, as of the Closing Date Duke consents to the
cancellation of (a) its Option granted pursuant to Section 4.2 of the Cordillera
Agreement, and (b) that certain Warrant to subscribe for and purchase up to
200,000 shares of common stock of Summit, dated December 29, 1995 (the "Existing
Warrant"), which was granted to Duke pursuant to Section 3.1 of the License
Agreement. Duke warrants and represents to Summit that it has not, as of the
Effective Date, exercised, assigned or otherwise transferred the Option or
Existing Warrant, in whole or in part, nor will it do so prior to or on the
Closing Date.
2.2 ISSUANCE OF WARRANTS. On the Closing Date, Summit shall issue to
Duke two (2) separate warrants (singly, "New Warrant" or collectively, "New
Warrants") to subscribe for and purchase common stock of Summit up to the
aggregate amount of 200,000 shares (the "Duke Shares"), subject to (a) the terms
and conditions of the Investment and Registration Rights Agreement between
Summit and Duke dated the Closing Date, and (b) the particular terms and
conditions contained in each of the New Warrants.
2.3 ENDOWMENTS. As further consideration for Duke's consent to the
cancellation of the Option and Existing Warrant, Summit shall deliver to Duke on
the Closing Date the total amount of Two Million Dollars ($2,000,000), which
shall be used by Duke to endow a Chair and a Fellowship at Duke University in
accordance with the terms contained in the forms attached hereto as Exhibit K.
3. AMENDMENT TO SUBLICENSE AND DISTRIBUTION AGREEMENT. Subject to the terms
--------------------------------------------------
and conditions of this Agreement, Duke hereby waives its right to determine (in
conjunction with Summit and Cordillera), pursuant to Section 9.3(f) of the
Sublicense and Distribution Agreement between Summit and Cordillera dated
December 29, 1995 (the "Sublicense Agreement"), the disposition of the residual
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<PAGE>
rights and duties Cordillera has or may have with respect to the IP Rights (as
defined in the Sublicense Agreement) as of the Closing Date and all times
thereafter.
4. CONDITIONS TO OBLIGATION TO CLOSE.
---------------------------------
4.1 CONDITIONS TO OBLIGATION OF SUMMIT. The obligations of Summit to
consummate the transactions to be performed in connection with the Closing is
subject to satisfaction of the conditions set forth below:
(a) Receipt of the Existing Warrant from Duke prior to or at the Closing;
(b) Receipt of an executed Amendment to the License Agreement from Duke
prior to or at the Closing, a copy of which is attached hereto as
Exhibit A;
(c) Receipt of an executed Investment and Registration Rights Agreement
from Duke prior to or at the Closing, a copy of which is attached
hereto as Exhibit B;
(d) Receipt of a copy of the Employment Agreement between Summit and Dr.
Donald Fortin, executed by Dr. Fortin, prior to or at the Closing, a
copy of which is attached hereto as Exhibit C;
(e) Receipt of a copy of the Nonstatutory Stock Option Agreement between
Summit and Dr. Donald Fortin, executed by Dr. Fortin, prior to or at
the Closing, a copy of which is attached hereto as Exhibit D;
(f) Receipt of a copy of the Consulting Agreement between Summit and Dr.
Robert Califf, executed by Califf, prior to or at the Closing, a copy
of which is attached hereto as Exhibit E;
(g) Receipt of a copy of the Nonstatutory Stock Option Agreement between
Summit and Dr. Robert Califf, executed by Dr. Califf, prior to or at
the Closing, a copy of which is attached hereto as Exhibit F;
(h) Receipt of a copy of the Consulting Agreement between Summit and Dr.
Harry Phillips, executed by Dr. Phillips, prior to or at the Closing,
a copy of which is attached hereto as Exhibit G;
(i) Receipt of a copy of the Nonstatutory Stock Option Agreement between
Summit and Dr. Harry Phillips, executed by Dr. Phillips, prior to or
at the Closing, a copy of which is attached hereto as Exhibit H;
-3-
<PAGE>
(j) Written approval of the Managers of Cordillera to all transactions
necessary to effectuate the Reorganization, including (a) an executed
Amendment to the Cordillera Agreement, which shall permit the
purchase of DR Ware's Member Units by Summit and make other changes
to reflect Summit's sole ownership of Member Units in Cordillera, a
copy of which is attached hereto as Exhibit I; (b) approval of the
dissolution, winding up, and distribution of assets of Cordillera to
Summit in accordance with the Delaware Limited Liability Company Act.
(k) Receipt of a certificate from DR Ware at the Closing stating that its
representations and warranties in Section 6 of this Agreement are
true, complete and accurate as of the Closing Date;
(l) Receipt of a certificate from Duke at the Closing stating that its
representations and warranties in Section 8 of this Agreement are
true, complete and accurate as of the Closing Date; and
(m) Receipt of a certificate from Cordillera at the Closing stating that
its representations and warranties in Section 9 of this Agreement are
true, complete and accurate as of the Closing Date.
4.2 CONDITIONS TO OBLIGATION OF DR WARE. The obligation of DR Ware to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
(a) Receipt of the compensation due from Summit for the Member Units, as
provided in Section 1.2 above, at the Closing;
(b) Receipt of a certificate from Summit at the Closing stating that its
representations and warranties in Section 7 of this Agreement are
true, complete and accurate as of the Closing Date;
(c) Receipt of a certificate from Duke at the Closing stating that its
representations and warranties in Section 8 of this Agreement are
true, complete and accurate as of the Closing Date; and
(d) Receipt of a certificate from Cordillera at the Closing stating that
its representations and warranties in Section 9 of this Agreement are
true, complete and accurate as of the Closing Date.
4.3 CONDITIONS TO OBLIGATION OF DUKE. The obligation of Duke to
consummate the transactions to be performed by it in connection with the Closing
is subject to satisfaction of the following conditions:
-4-
<PAGE>
(a) Receipt of the New Warrants representing the Duke Shares from Summit
at the Closing, a copy of such New Warrants being attached hereto as
Exhibit J;
(b) Receipt of a certificate from DR Ware at the Closing stating that its
representations and warranties in Section 6 of this Agreement are
true, complete and accurate as of the Closing Date; and
(c) Receipt of a certificate from Summit at the Closing stating that its
representations and warranties in Section 7 of this Agreement are
true, complete and accurate as of the Closing Date; and
(d) Receipt of a certificate from Cordillera at the Closing stating that
its representations and warranties in Section 9 of this Agreement are
true, complete and accurate as of the Closing Date.
5. WIND-UP AND TRANSFER OF CORDILLERA'S BUSINESS. To effectuate the
---------------------------------------------
Reorganization, Summit may, at any time after the Closing Date, take any action
(including executing and delivering any documents) in the name and on behalf of
either Summit or Cordillera, and Cordillera hereby consents to Summit taking
such actions, in order to carry out and effectuate the transactions contemplated
by this Agreement. Duke and DR Ware shall require their respective Managers of
Cordillera to vote for approval of all such actions by Summit or Cordillera,
including approving Exhibit I hereto.
6. REPRESENTATIONS AND WARRANTIES BY DR WARE. DR Ware hereby represents and
-----------------------------------------
warrants to the parties hereto that:
6.1 OWNERSHIP. DR Ware is the record and beneficial owner of 2,000
Member Units;
6.2 ACTS AND PROCEEDINGS. This Agreement, and all actions taken by DR
Ware as required hereunder, which DR Ware represents have been taken, have been
duly authorized by all necessary action on the part of DR Ware, and this
Agreement has been duly executed and delivered by DR Ware so that it is a valid
and binding agreement of DR Ware;
6.3 LIENS, ENCUMBRANCES ETC. The Member Units are not subject to, and
will be delivered to Summit on the Closing Date free and clear of, any liens,
encumbrances or other restrictions of any kind or nature, other than
restrictions on transferability that are imposed by the federal Securities Act
of 1933 (the "Securities Act") and applicable state securities laws;
-5-
<PAGE>
6.4 NO BROKERS OR FINDERS. No person, firm or corporation has or will
have, as a result of any act or omission by DR Ware, any right, interest or
valid claim against Cordillera or Summit for any commission, fee or other
compensation as a finder or broker, or in any similar capacity, in connection
with the transactions contemplated by this Agreement; and
6.5 NO CONFLICT. The execution, delivery and performance of this
Agreement will not result in any violation of, be in conflict with, or
constitute a default under, with or without the passage of time or the giving of
notice: (i) any provision of any judgment, decree, order or ordinance to which
DR Ware is a party or by which DR Ware is bound, (ii) any material contract,
agreement, note, mortgage, indenture, lease instrument, permit, franchise,
license, obligation or commitment to which DR Ware is party or by which DR Ware,
or any of its properties or assets may be bound or affected, or (iii) any
statute, rule or governmental application applicable to DR Ware.
7. REPRESENTATIONS OF SUMMIT. Summit represents and warrants to the parties
-------------------------
hereto that:
7.1 ACTS AND PROCEEDINGS. This Agreement, and all actions taken by Summit
as required hereunder, which Summit represents have been taken, have been duly
authorized by all necessary action on the part of Summit, and this Agreement has
been duly executed and delivered by Summit so that it is a valid and binding
agreement of Summit;
7.2 NO BROKERS OR FINDERS. No person, firm or corporation has or will
have, as a result of any act or omission by Summit, any right, interest or valid
claim against Cordillera or Summit for any commission, fee or other compensation
as a finder or broker, or in any similar capacity, in connection with the
transactions contemplated by this Agreement;
7.3 NO CONFLICT. The execution, delivery and performance of this
Agreement will not result in any violation of, be in conflict with, or
constitute a default under, with or without the passage of time or the giving of
notice: (i) any provision of any judgment, decree, order or ordinance to which
Summit is a party or by which Summit is bound, (ii) any material contract,
agreement, note, mortgage, indenture, lease instrument, permit, franchise,
license, obligation or commitment to which Summit is party or by which Summit,
or any of its properties or assets may be bound or affected, or (iii) any
statute, rule or governmental application applicable to Summit; and
7.4 ACCESS TO INFORMATION. Summit has made available to Duke at a
reasonable time prior to the execution of this Agreement any additional
information (which Summit possesses or can acquire without unreasonable effort
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<PAGE>
or expense) as Duke has requested to verify the accuracy of information
furnished to Duke in connection with this Agreement and the Duke Shares. There
is no material fact not disclosed to Duke of which any officer or director of
Summit is aware which materially affects adversely, or could reasonably be
anticipated to materially affect adversely, Summit's business, including its
operating results, assets, customer relations, employee relations and business
prospects.
7.5 CAPITAL STOCK. The authorized capital stock of Summit consists of
40,533,333 shares of capital stock, $.01 par value, of which 1,600,000 shares
are designated as Series A Convertible Preferred Stock. As of the date hereof,
9,342,545 shares of Summit common stock, and no shares of Series A Convertible
Preferred Stock, are issued and outstanding. All such outstanding shares of
Summit common stock have been duly authorized and are validly issued, fully paid
and nonassessable.
8. REPRESENTATIONS OF DUKE. Duke represents and warrants to the parties
------------------------
hereto that:
8.1 OWNERSHIP. Duke has not exercised, transferred or assigned, in whole
or in part, its rights granted under the Option or Existing Warrant;
8.2 ACTS AND PROCEEDINGS. This Agreement, and all actions taken by Duke
as required hereunder, which Duke represents have been taken, have been duly
authorized by all necessary action on the part of Duke, and this Agreement has
been duly executed and delivered by Duke so that it is a valid and binding
agreement of Duke;
8.3 LIENS, ENCUMBRANCES ETC. The Option and Existing Warrant are not
subject to, and will be delivered to Summit on the Closing Date free and clear
of, any liens, encumbrances or other restrictions of any kind or nature, other
than restrictions on transferability that are imposed by the Securities Act and
applicable state securities laws;
8.4 NO BROKERS OR FINDERS. No person, firm or corporation has or will
have, as a result of any act or omission by Duke, any right, interest or valid
claim against Cordillera or Summit for any commission, fee or other compensation
as a finder or broker, or in any similar capacity, in connection with the
transactions contemplated by this Agreement;
8.5 NO CONFLICT. The execution, delivery and performance of this
Agreement will not result in any violation of, be in conflict with, or
constitute a default under, with or without the passage of time or the giving of
notice: (i) any provision of any judgment, decree, order or ordinance to which
Duke is a party or by which Duke is bound, (ii) any material contract,
agreement, note, mortgage,
-7-
<PAGE>
indenture, lease instrument, permit, franchise, license, obligation or
commitment to which Duke is party or by which Duke, or any of its properties or
assets may be bound or affected, or (iii) any statute, rule or governmental
application applicable to Duke; and
8.6 ACCESS TO INFORMATION. Duke acknowledges that Summit has made
available to Duke at a reasonable time prior to the execution of this Agreement
the opportunity to ask questions and receive answers concerning the terms and
conditions of this Agreement and to obtain any additional information (which
Summit possesses or can acquire without unreasonable effort or expense) as may
be necessary to verify the accuracy of information furnished to Duke in
connection with the Duke Shares; and Duke has fully provided Summit with all
information that Summit has requested from Duke.
9. REPRESENTATIONS OF CORDILLERA. Cordillera represents and warrants to the
-----------------------------
parties hereto that:
9.1 ACTS AND PROCEEDINGS. This Agreement, and all actions taken by
Cordillera as required hereunder, which Cordillera represents have been taken,
have been duly authorized by all necessary action on the part of Cordillera, and
this Agreement has been duly executed and delivered by Cordillera so that it is
a valid and binding agreement of Cordillera;
9.2 NO BROKERS OR FINDERS. No person, firm or corporation has or will
have, as a result of any act or omission by Cordillera, any right, interest or
valid claim against Cordillera or Summit for any commission, fee or other
compensation as a finder or broker, or in any similar capacity, in connection
with the transactions contemplated by this Agreement;
9.3 NO CONFLICT. The execution, delivery and performance of this
Agreement will not result in any violation of, be in conflict with, or
constitute a default under, with or without the passage of time or the giving of
notice: (i) any provision of any judgment, decree, order or ordinance to which
Cordillera is a party or by which Cordillera is bound, (ii) any material
contract, agreement, note, mortgage, indenture, lease instrument, permit,
franchise, license, obligation or commitment to which Cordillera is party or by
which Cordillera, or any of its properties or assets may be bound or affected,
or (iii) any statute, rule or governmental application applicable to Cordillera.
10. MISCELLANEOUS.
-------------
10.1 AMENDMENTS. WAIVERS. ETC. Neither this Agreement nor any provision
hereof may be amended, waived, discharged or terminated orally, but only in
writing signed by all the parties.
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<PAGE>
10.2 ASSIGNMENT. All the terms and provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties to
this Agreement and their respective successors and assigns. No party may assign
this Agreement or any of its rights or obligations hereunder, in whole or in
part, without the prior written approval of the other parties.
10.3 SEVERABILITY. Any term or provision of this Agreement that is found
to be invalid or unenforceable by a court of competent jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof.
10.4 HEADINGS. The headings of the articles and sections of this
Agreement have been inserted for convenience of reference only and shall not
affect in any way the meaning or interpretation of this Agreement or constitute
a part of this Agreement.
10.5 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State or Minnesota, excluding its choice or law
rules.
10.6 COUNTERPARTS. This Agreement may be executed concurrently in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.7 ENTIRE AGREEMENT. This Agreement (including all attached Exhibits
and the documents referred to herein) constitutes the entire agreement between
the parties and supersedes any prior understandings, agreements or
representations between the parties, whether written or oral, to the extent they
relate in any way to the subject matter hereof.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives, as of the Effective Date.
DR WARE LLC DUKE UNIVERSITY
By__________________________________ By_________________________________
Name________________________________ Name_______________________________
Title_______________________________ Title______________________________
CORDILLERA LLC SUMMIT MEDICAL SYSTEMS, INC.
By__________________________________ By_________________________________
Name________________________________ Name_______________________________
Title_______________________________ Title______________________________
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<PAGE>
EXHIBIT A
AMENDMENT
THIS AMENDMENT is made and entered into as of December 31, 1996 (the
"Effective Date"), by and between DUKE UNIVERSITY ("Duke"), a North Carolina
not-for-profit corporation, having its principal office at Durham, North
Carolina 27708, and SUMMIT MEDICAL SYSTEMS, INC. ("Summit"), a Minnesota
corporation, having its principal offices at 10900 Red Circle Drive, Suite 100,
Minneapolis, Minnesota 55343-9106.
Recitals
--------
WHEREAS, Duke and Summit entered into a License Agreement dated December
29, 1995 (the "License Agreement"), pursuant to which Summit was granted an
exclusive license to the Software and Derivative Works (as defined in the
License Agreement), with a requirement to grant a sublicense to Cordillera LLC,
a Delaware limited liability corporation ("Cordillera");
WHEREAS, Summit has agreed to acquire Cordillera pursuant to a
Reorganization Agreement of even date herewith (the "Reorganization Agreement"),
by and among Summit, Cordillera, DR Ware L.L.C. and Duke, which provides for
Summit's purchase of all other parties' member units, and options for member
units, in Cordillera, and the wind-up and transfer of Cordillera's business to
Summit (the "Reorganization");
WHEREAS, as a result of the Reorganization, certain modifications to the
License Agreement are required; and
WHEREAS, Duke, Summit and the other parties to the Reorganization Agreement
have agreed that execution of this Amendment by Summit and Duke is a condition
of closing the Reorganization.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
herein contained, the parties do hereby agree:
1. License Grant. The first sentence of Section 2.1 of the License Agreement
-------------
is modified by substituting the words "fully-paid" for "royalty-bearing".
2. Sublicenses. The second sentence of Section 2.2 of the License Agreement
-----------
is deleted in its entirety. In addition, at the beginning of the third sentence
of Section 2.2 in the License Agreement, the following clauses are deleted: "In
addition, subject to the prior written consent of the Joint Venture,".
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<PAGE>
3. Right of First Negotiation. The right of first negotiation to New
--------------------------
Technology granted to Summit pursuant to Section 2.7 of the License Agreement
shall not extend to any data or databases collected with such New Technology;
provided, however, that Duke acknowledges that Summit's license to the Duke
Databank discussed in Section 2.6 of the License Agreement shall not in any way
be affected by the foregoing.
4. Running Royalties. Duke and Summit acknowledge that, as of the Closing
-----------------
Date (as that term is defined in the Reorganization Agreement), the license to
the Software and Derivative Works granted to Summit in Section 2.1 of the
Agreement is fully-paid and that no additional running royalties are due or
payable to Duke, Cordillera or any other third party therefor. Accordingly,
Sections 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 3.8 and 3.10 of the License Agreement are
deleted in their entirety.
5. Infringement by Licensed Software. The second sentence of Section 5.4 of
---------------------------------
the License Agreement is deleted in its entirety and replaced by the following:
However, in the event there are no running royalties owed to Duke at
the time of such a Legal Action, within a reasonable time Duke shall
have the option of paying any sum owed to the third party due to such
indemnification or, in lieu of such cash payment, of transferring to
Summit the equivalent fair market value therefor in the form of (i)
the New Warrants (issued pursuant to Section 2.2 of the Reorganization
Agreement dated December 31, 1996 by and between Summit, Duke,
Cordillera LLC and DR Ware LLC), or any portion thereof that has not
been exercised by Duke, (ii) any Summit common stock received by Duke
pursuant to its exercise of all or any portion of the New Warrants
(the "Duke Securities") which Duke holds, or (iii) the net value
realized by Duke for all or any portion of the New Warrants or the
Duke Securities which Duke has assigned, sold or otherwise transferred
to a third party. The fair market value of the New Warrants and Duke
Securities transferred to Summit shall be determined as of the date
liability is imposed on Duke under this Section 5.4. Notwithstanding
the foregoing, Duke's indemnification obligation under this Section
5.4 shall be limited to the total value of the New Warrants, including
any Duke Securities received by Duke pursuant to its exercise thereof
that are held by Duke, and the net value realized by Duke for any
portion thereof assigned, sold or otherwise transferred to a third
party.
In addition, the last sentence of Section 5.4(c) of the License Agreement is
deleted in its entirety and replaced by the following:
In the event there are no running royalties owed to Duke at the time
of such a Legal Action, Duke shall transfer to Summit the equivalent
fair
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<PAGE>
market value of such license fee payment by Summit to the third party
in the form of (i) the New Warrants, or any portion thereof that has
not been exercised by Duke, (ii) any Duke Securities that Duke holds,
or (iii) the net value realized by Duke for all or any portion of the
New Warrants or the Duke Securities which Duke has assigned, sold or
otherwise transfered to a third party. The fair market value of the
New Warrants and Duke Securities transferred to Summit shall be
determined as of the date liability is imposed on Duke under this
Section 5.4.
6. Reserved Duke Use Rights. Duke's right to a royalty-free license to the
------------------------
Site-Specific Products granted in Section 6.3 of the License Agreement shall be
modified to also include Summit's Crescendo product, including all commercially
available derivative works and new versions thereof, regardless of whether
Crescendo is part of Summit's Site-Specific Products or On-Line Products.
Notwithstanding the foregoing, Duke shall be required to pay for all consulting,
implementation or project management services related to Crescendo, which it
requests from Summit, on terms as the parties may then mutually agree. Further,
Duke shall use it best efforts to integrate Crescendo with all software and
applications currently a part of, or added to, the Duke Medical Center computing
systems, so as to ensure Crescendo's continued role as an integral part of the
Duke Medical Center's computing systems.
7. Termination. Section 7.2(f) of the License Agreement is deleted in its
-----------
entirety.
8. Assumption of Obligations. Summit shall assume all obligations and rights
-------------------------
of Cordillera as expressly stated in the License Agreement, except the audit
rights under Section 3.9 thereof which, as to Cordillera, shall be canceled.
9. Effect of Amendment. Except as expressly modified herein, the License
-------------------
Agreement shall remain in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed in
duplicate as of the Effective Date.
DUKE UNIVERSITY SUMMIT MEDICAL SYSTEMS, INC.
By_________________________________ By_________________________________
Name_______________________________ Name_______________________________
Title______________________________ Title______________________________
___________________________________ ___________________________________
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EXHIBIT B
INVESTMENT AND REGISTRATION RIGHTS AGREEMENT
THIS INVESTMENT AND REGISTRATION RIGHTS AGREEMENT, dated as of December 31,
1996 (the "Agreement"), among Summit Medical Systems, Inc., a Minnesota
corporation (the "Company"), and Duke University (the "University").
WHEREAS, the Company has agreed to issue warrants, pursuant to those two
New Warrants, dated December 31, 1996, which entitle the holder thereof to
subscribe for and purchase shares of the Company's Common Stock (the "Shares");
and
WHEREAS, the University may transfer the New Warrants or the Shares,
subject to the terms and conditions of this Agreement, to other persons or
entities (the "Subsequent Holders," and together with the University, the
"Shareholders");
WHEREAS, the New Warrants and Shares will be issued to the University
without registration under the Securities Act of 1933, as amended (the
"Securities Act"), and the Company and the University desire to provide for
compliance with the Securities Act and for the registration of the resale by the
Shareholders of the Shares upon the terms and subject to conditions set forth
below.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
herein contained, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used but not defined in this
-------------
Agreement shall have the meanings ascribed to such terms in the Reorganization
Agreement or New Warrants, as appropriate.
2. Investment Representations of Shareholders. Each Shareholder hereby
------------------------------------------
represents, warrants, acknowledges, covenants and agrees as follows: (i) the
Shares are being acquired for the Shareholder's own account for investment
purposes only and not with a view to any public resale, public distribution or
public offering thereof within the meaning of the Securities Act or any state
securities or "blue sky" law, except in compliance with the Securities Act or in
reliance upon an exemption therefrom; (ii) the Shares have not been registered
under the Securities Act or any state securities or "blue sky" law; (iii) the
Shareholder is an "accredited investor" within the meaning of Rule 501 of
Regulation D under the Securities Act or, if not, the Shareholder, either alone
or with the Shareholder's purchaser representative, has such knowledge and
experience in financial and business matters that the Shareholder is capable of
evaluating the merits and risks of the prospective investment in the Shares and
able to bear the economic consequences thereof;
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<PAGE>
(iv) in making the Shareholder's decision to invest in the Shares, the
Shareholder has relied upon independent investigations made by the Shareholder
and, to the extent believed by the Shareholder to be appropriate, the
Shareholder's representatives, including the Shareholder's professional, tax and
other advisors, and has not relied upon any representation or warranty from the
Company, or any of its directors, officers, employees, agents, affiliates or
representatives, with respect to the value of the Shares; (v) the Company has
not made any representation, warranty, acknowledgement or covenant, in writing
or otherwise, to the Shareholder regarding the tax consequences, if any, of the
New Warrants or of the resale of the Shares by the Shareholder; (vi) the
Shareholder and the Shareholder's representatives have been given a full
opportunity to examine all documents and to ask questions of, and to receive
answers from, the Company and its representatives concerning the terms of the
New Warrants, the Shareholder's investment in the Shares and the business of the
Company and such other information as the Shareholder desires in order to
evaluate an investment in the Shares, and all such questions have been answered
to the full satisfaction of the Shareholder; (vii) the Shareholder has been
furnished with all the Company books, records, documents and other information
about the Company's assets, operations and business activities which the
Shareholder has requested and which the Shareholder considers necessary or
relevant to enable the Shareholder to make a prudent decision about the New
Warrants; (viii) the Shareholder has evaluated the merits and risks of an
investment in the Shares and has determined that the Shares are a suitable
investment for the Shareholder in light of the Shareholder's overall financial
condition and prospects; (ix) the Shareholder has been advised, and is aware,
that the market prices of shares of stock of publicly traded companies fluctuate
and that there can be no assurance as to the future performance of any given
securities, including shares of Company Common Stock; and (x) the Shareholder
has been furnished with all publicly available information about the Company's
assets, operations and business activities which it has requested and which it
considers necessary or relevant to enable it to make a decision about its
acquisition of the Shares.
3. Restrictions on Transfer.
------------------------
(a) Each Shareholder agrees that the Shareholder will not sell, assign,
transfer or otherwise dispose (each, a "Transfer") of the Shares (or any
interest therein) except upon the terms and conditions specified in this
Agreement, and the Shareholder will cause any subsequent holder of Shares to
agree to take and hold the Shares subject to the terms and conditions of this
Agreement, if such Shares are required to include a legend pursuant to Section 3
hereof.
(b) Each Shareholder agrees to deliver to the Company a notice of
assignment stating the name, address, telephone number and fax number, if any,
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<PAGE>
of the assignee and the name of any personal representative of the assignee, if
any, and the date of such transfer (the "Notice of Assignment").
(c) Each certificate representing the Shares issued to a Shareholder shall
include a legend in substantially the following form; provided, however, that
such legend shall not be required if a transfer is being made in connection with
a sale of Shares registered under the Securities Act, or in connection with a
sale in compliance with Rule 144 or, if applicable, Rule 145 under the
Securities Act (each, a "Public Sale"), or if the opinion of counsel for the
Company is to the further effect that neither such legend nor the restrictions
on transfer in this Section 3 are required in order to ensure compliance with
the Securities Act:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES LAW, AND MAY NOT BE TRANSFERRED, SOLD OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM. SUCH SHARES MAY BE TRANSFERRED ONLY IN
COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THE INVESTMENT AND
REGISTRATION RIGHTS AGREEMENT DATED AS OF DECEMBER 31, 1996
BETWEEN THE ISSUER AND THE INDIVIDUAL PARTY THERETO, A COMPLETE
AND CORRECT COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE
PRINCIPAL OFFICE OF THE ISSUER AND WILL BE FURNISHED TO THE
HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE.
(d) The restrictions set forth in this Section 3 shall terminate and cease
to be effective with respect to any of the Shares (i) upon the sale of any such
Shares, if such Shares have been registered under the Securities Act, (ii) upon
receipt by the Company of an opinion of counsel reasonably acceptable to the
Company, in form reasonably satisfactory to the Company, to the effect that
compliance with such restrictions is not necessary to comply with the Securities
Act with respect to the Transfer of such Shares, or (iii) upon the expiration of
the three-year period referred to in Rule 144(k) under the Securities Act (as
such Rule may be amended from time to time), if, pursuant to Rule 144(k), the
Shareholder was not an "affiliate" of the Company at the time of the sale of the
Shares and has not been an "affiliate" of the Company during the preceding three
months.
4. Registration Under the Securities Act.
-------------------------------------
(a) Required Registration. If, at any time after the Company shall be
---------------------
eligible to file a registration statement on Form S-3 with the Securities and
Exchange
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<PAGE>
Commission, the Company receives a written request therefor from Shareholders
who are the holders of a majority of the Shares outstanding as of the time such
notice is given, the Company shall prepare and file a registration statement
under the Securities Act for the Shares which are the subject of such request
and shall use its best efforts to cause such registration statement to become
effective; provided, however, that the Company shall not be obligated to prepare
and file such registration statement and/or may suspend the effectiveness of any
registration statement for a period of not more than 90 days as deemed necessary
(i) by the Company or any underwriter in connection with the offering of shares
of the Company's Common Stock, or (ii) by the Company if the Company is in
possession of material information that has not been disclosed to the public and
the Company reasonably deems disclosure of such information in a registration
statement to be inadvisable. A Shareholder may require only two registrations of
Shares pursuant to this Section 4 (a). In the event that the Shareholder
determines for any reason not to proceed with a registration at any time before
the registration statement has been declared effective by the Commission, and
requests the Company to withdraw such registration statement, if theretofore
filed with the Commission, with respect to the Shares covered thereby, and the
Shareholder agrees to bear its own expenses incurred in connection therewith and
to reimburse the Company for the expenses incurred by it attributable to the
registration of such Shares, then the Shareholder shall not be deemed to have
exercised its right to require the Company to register Shares pursuant to this
Section 4.
(b) Incidental Registration. Each time the Company shall determine to
-----------------------
proceed with the actual preparation and filing of a registration (other than on
Form S-4 or Form S-8) statement under the Securities Act in connection with the
proposed offer and sale for money of any of its securities by it or any of its
security holders, the Company will give written notice of its determination to
all Shareholders. Upon the written request of a Shareholder given within 10
days after receipt of any such notice from the Company, the Company will, except
as herein provided, cause all such Shares, the Shareholders of which have so
requested registration thereof, to be included in such registration statement,
all to the extent requisite to permit the sale or other disposition by the
prospective seller or sellers of the Shares to be so registered; provided,
however, that (a) nothing herein shall prevent the Company from, at any time,
abandoning or delaying any such registration initiated by it, and (b) the rights
pursuant to this subsection 4(b) shall not apply to the Company's first filing
of a registration statement after the date hereof except as to a request to
register up to 50,000 Shares made by Subsequent Holders. If any registration
pursuant to this section shall be underwritten in whole or in part, the Company
may require that the Shares requested for inclusion pursuant to this section be
included in the underwriting on the same terms and conditions as the securities
otherwise being sold through the underwriters. If in the good faith judgment of
the managing underwriter of such public offering the inclusion of all of the
Shares originally covered by a request for registration would reduce the
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number of shares to be offered by the Company or interfere with the successful
marketing of the shares of stock offered by the Company, the number of Shares
otherwise to be included in the underwritten public offering may be reduced pro
rata among the holders thereof requesting such registration. Those Shares which
are thus excluded from the underwritten public offering shall be withheld from
the market by the holders thereof for a period, not to exceed 180 days, which
the managing underwriter reasonably determines is necessary in order to effect
the underwritten public offering.
(c) Registration Procedures. If the Company is required by the provisions
-----------------------
of this Section 4 to register the Shares under the Securities Act, the Company
will:
(i) prepare and file with the Commission a registration statement
with respect to such securities, and use its best efforts to cause such
registration statement to become and remain effective for such period as
may be reasonably necessary to effect the sale of such securities for a
period of 12 months after the effective date of the registration statement,
or such shorter period that shall terminate (i) when all the Shares covered
by the registration statement have been sold or (ii) at any time when the
Shareholders are entitled to sell the Shares without registration under the
Securities Act pursuant to Rule 144 (or any similar rule or regulation);
(ii) use reasonable best efforts to prepare and file with the
Commission such amendments to the registration statement and supplements to
the prospectus contained therein as may be necessary;
(iii) furnish to the Shareholders and to the underwriters of the
securities being registered, if any, such reasonable number of copies of
the registration statement, preliminary prospectus, final prospectus and
such other documents as the Shareholders and such underwriters may
reasonably request in order to facilitate the public offering of such
securities;
(iv) use its best efforts to register or qualify the securities
covered by the registration statement under such state securities or blue
sky laws of such jurisdictions as the Shareholders may reasonably request
and do any other things which may be necessary and advisable to enable the
Shareholders to consummate the sale or other public disposition of the
Shares in such jurisdictions, except that the Company shall not for any
purpose be required to execute a general consent to service of process or
to qualify to do business as a foreign corporation in any jurisdiction
wherein it is not so qualified;
(v) notify each Shareholder or Shareholder's counsel, if any,
participating in such registration, promptly after it shall receive notice
thereof, of the time when the registration statement has become effective
or a
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supplement to any prospectus forming a part of the registration statement
has been filed;
(vi) notify each Shareholder or Shareholder's counsel, if any,
promptly of any request by the Commission for the amending or supplementing
of the registration statement or prospectus or for additional information;
(vii) prepare and promptly file with the Commission and promptly
notify each Shareholder or Shareholder's counsel, if any, of the filing of
such amendment or supplement to the registration statement or prospectus as
may be necessary to correct any statements or omissions if, at the time
when a prospectus relating to such securities is required to be delivered
under the Securities Act, any event shall have occurred as the result of
which any such prospectus or any other prospectus as then in effect would
include an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading;
(viii) advise each Shareholder or Shareholder's counsel, if any,
promptly after it shall receive notice or obtain knowledge thereof, of the
issuance of any stop order by the Commission suspending the effectiveness
of the registration statement or the initiation or threatening of any
proceeding for that purpose and promptly use its best efforts to prevent
the issuance of any stop order or to obtain its withdrawal if such stop
order should be issued;
(ix) use its best efforts to cause the Shares to continue to be
authorized for listing on the Nasdaq National Market; and
(x) prior to filing the registration statement, prospectus, or any
amendment or supplement thereto, furnish to each Shareholder or
Shareholder's counsel, if any, copies of such registration statement,
prospectus, amendment, or supplement which is proposed to be filed,
together with exhibits thereto by the foregoing.
(d) Expenses. With respect to the registration of Shares, the Company
--------
shall bear all costs and fees associated with the registration including,
without limitation, the following fees, costs and expenses: all registration,
filing and Nasdaq fees, printing expenses, fees and disbursements of Company
counsel and accountants, all internal Company expenses, and all legal fees and
disbursements and other expenses of complying with state securities or blue sky
laws of any jurisdictions in which the securities to be offered are to be
registered or qualified, except as provided herein below. Fees and
disbursements of counsel and accountants for each Shareholder, as well as
underwriting discounts and
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commissions and transfer taxes for each Shareholder shall be borne by each
Shareholder.
(e) Indemnification.
---------------
(i) The Company will indemnify and hold harmless each Shareholder
from and against any and all loss, damage, liability, cost and expense to
which any Shareholder or any controlling person thereof may become subject
under the Securities Act or otherwise, insofar as such losses, damages,
liabilities, costs or expenses are caused by any untrue statement or
alleged untrue statement of any material fact contained in the registration
statement, any prospectus contained therein or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances in which they
were made, not misleading; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, damage,
liability, cost or expense arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission so
made in reliance on information furnished by such Shareholder; provided,
further, that the Company shall not be liable in any such case to the
extent that any such loss, damage, liability, cost or expense arises out of
or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission in the final prospectus, if such untrue
statement or alleged untrue statement or omission or alleged omission is
corrected in any amendment or supplement to the final prospectus and such
Shareholder or such Shareholder's agents thereafter fails to deliver such
final prospectus as so amended or supplemented prior to or concurrently
with the sale of the Shares covered by the registration statement to the
person asserting such loss, damage, liability, cost or expense after the
Company had furnished such Shareholder with a sufficient number of copies
of the final prospectus as so amended or supplemented in a manner and at a
time sufficient to permit delivery of the same by such Shareholder.
(ii) Each Shareholder will indemnify and hold harmless the Company
and any controlling person thereof from and against any and all loss,
damage, liability, cost or expense to which the Company or any controlling
person thereof may become subject under the Securities Act or otherwise,
insofar as such losses, damages, liabilities, costs or expenses are caused
by any untrue or alleged untrue statement of any material fact contained in
the registration statement, any prospectus contained therein or any
amendment or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light
of the
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<PAGE>
circumstances in which they were made, not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was so made in reliance on
and with information furnished by such Shareholder.
(iii) Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (i) or (ii) of this section of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions, such indemnified party will, if a claim thereof is to
be made against the indemnifying party pursuant to the provisions of said
paragraph (i) or (ii), promptly notify the indemnifying party of the
commencement thereof; but the omission to so notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party otherwise than hereunder. In case such action is brought against any
indemnified party and it notifies the indemnifying party of the
commencement thereof, the indemnifying party shall have the right to
participate in, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party; provided,
however, if the defendants in any action include both the indemnified party
and the indemnifying party and there is a conflict of interest which would
prevent counsel for the indemnifying party from also representing the
indemnified party, the indemnified party or parties shall have the right to
select separate counsel to participate in the defense of such action on
behalf of such indemnified party or parties. After notice from the
indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party pursuant to the provisions of said paragraph (i) or (ii)
for any legal or other expense subsequently incurred by such indemnified
party in connection with the defense thereof other than reasonable costs of
investigation, unless (A) the indemnified party shall have employed counsel
in accordance with the proviso of the preceding sentence, (B) the
indemnifying party shall not have employed counsel reasonably satisfactory
to the indemnified party to represent the indemnified party within a
reasonable time after the notice of the commencement of the action, or (C)
the indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party.
(f) Sales Through Market Makers. Each Shareholder agrees that, for a
---------------------------
period of two years from the date hereof, such Shareholder will not sell any
Shares except through registered market makers in the Company's Common Stock on
the Nasdaq National Market; provided, however, that the terms of any such sale
shall not be any less favorable than provided to Summit's executive officers.
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<PAGE>
5. Rule 144. the Company shall comply with the requirements of Rule
--------
144(c) under the Securities Act, as such Rule may be amended from time to time
(or any similar rule or regulation hereafter adopted by the Commission),
regarding the availability of current public information to the extent required
to enable any Shareholder to sell Shares without registration under the
Securities Act pursuant to Rule 144 (or any similar rule or regulation). Upon
the request of any Shareholder, the Company will deliver to such Shareholder a
written statement as to whether it has complied with such requirement.
6. Amendments and Waivers. This Agreement may be amended or modified and
----------------------
the Company may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, only if the Company shall have obtained
the written consent to such amendment, modification, action or omission to act,
of the Shareholder or Shareholders of at least 75% of the Shares as of the date
such consent is given. Each Shareholder shall be bound by any consent authorized
by this Section 6, whether or not any Shares shall have been marked to indicate
such consent.
7. Nominees for Beneficial Owners. In the event that any Shares are held
------------------------------
by a nominee for the beneficial owner thereof, the beneficial owner thereof may,
at its election, be treated as the Shareholder for purposes of any request or
other action by the Shareholders pursuant to this Agreement. If the beneficial
owner of any Share so elects, the Company may require assurances reasonably
satisfactory to it of such owner's beneficial ownership of such Shares.
8. Notices. Any notice or communication required or permitted hereunder
-------
shall be in writing and either delivered personally, telegraphed or telecopied
or sent by overnight courier, or by certified or registered mail, postage
prepaid, and shall be deemed to be given, dated and received when so delivered
personally or by courier, telegraphed or telecopied, or, if mailed, five
business days after the date of mailing to the following address or telecopy
number, or to such other address or addresses as such person may subsequently
designate by notice given hereunder:
(a) if to the Company, to:
Summit Medical Systems, Inc.
Suite 100
10900 Red Circle Drive
Minneapolis, Minnesota 55343-9106
Telephone: (612) 939-2200
Facsimile: (612) 939-2799
Attention: Anthony W. Rees
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<PAGE>
with a copy to:
Dorsey & Whitney P.L.L.P.
220 South Sixth Street
Minneapolis, Minnesota 55402-1498
Telephone: (612) 343-7962
Facsimile: (612) 340-8738
Attention: Jonathan B. Abram
(b) if to the University, to:
Duke University
Room M100 Davison Building
Duke South Hospital
Duke University Medical Center
Durham, North Carolina 27710
Telephone: (919) 684-3628
Facsimile: (919) 684-8874
Attention: Robert L. Taber
with a copy to:
Duke University
Office of University Counsel
011 Allen Building
Durham, North Carolina
Telephone: (919) 684-3955
Facsimile: (919) 684-8725
(c) if to any Shareholder other than the University, to such address
designated in the most recent Notice of Assignment relating to the assignment of
Shares to such Shareholder.
9. Company to Retain Copy. A copy of this Agreement, including all
----------------------
Exhibits hereto, shall be filed with the Company, and the Company shall make it
available to the Shareholders at all reasonable times during normal business
hours.
10. Entire Agreement. This Agreement (together with the Reorganization
----------------
Agreement and the New Warrants) represents the entire agreement and
understanding among the Company and the other parties to this Agreement in
respect of the subject matter contained herein. There are no restrictions,
promises, warranties, or undertakings, other than those set forth or referred to
herein or in the Reorganization Agreement and the New Warrants, with respect to
the registration
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<PAGE>
rights granted by the Company with respect to the Shares. This Agreement, the
Reorganization Agreement and the New Warrants supersede all prior agreements and
understandings between the parties with respect to the subject matter of this
Agreement.
11. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws of the State of Minnesota (other than its
rules of conflicts of laws to the extent the application of the laws of another
jurisdiction would be required thereby).
12. Severability. If any provision of this Agreement or the application
------------
thereof to any person or circumstances is determined by a court of competent
jurisdiction to be invalid, void or unenforceable, the remaining provisions
hereof, or the application of such provision to persons or circumstances other
than those as to which it has been held invalid or unenforceable, shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated thereby, so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner adverse to any
party. Upon such determination, the parties shall negotiate in good faith in an
effort to agree upon a suitable and equitable substitute provision to effect the
original intent of the parties.
13. Arbitration. Any controversy or claim arising out of or relating to
-----------
this Agreement or the formation, breach or interpretation hereof, will be
settled by arbitration before one arbitrator in accordance with the Commercial
Arbitration Rules of the American Arbitration Association in Minneapolis,
Minnesota. Judgment upon the award rendered by the arbitration may be entered
and enforced in the court with jurisdiction over the appropriate party. All
controversies not subject to arbitration or contesting any arbitration will be
litigated in the State of Minnesota, Hennepin County District Court or a federal
court in the State of Minnesota (and each of the parties hereto hereby consent
to the exclusive jurisdiction of such courts and waive any objections thereto).
14. Miscellaneous. The headings in this Agreement are for purposes of
-------------
reference only and shall not limit or otherwise affect the meaning of this
Agreement. This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, but all of which, when taken
together, shall constitute one and the same instrument.
15. Transfer of Registration Rights. The rights contained in Section 4
-------------------------------
hereof to cause the Company to register the Shares may be assigned or otherwise
conveyed to a transferee or assignee of Shares who shall be considered a
"Subsequent Holder" for purposes of Section 4.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
SUMMIT MEDICAL SYSTEMS, INC.
By ________________________________
Name:
Title:
DUKE UNIVERSITY
By ________________________________
Name:
Title:
_______________________________________________________________________
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<PAGE>
EXHIBIT C
EMPLOYMENT AGREEMENT
AGREEMENT, dated December 31, 1996 (the "Effective Date"), by and
between Summit Medical Systems, Inc., a Minnesota corporation ("Summit") and
Donald F. Fortin, M.D., an individual resident of the state of North Carolina
("Executive").
WHEREAS, Executive has heretofore been employed as an executive
officer of Cordillera, LLC, a Delaware limited liability corporation (the
"Company");
WHEREAS, Summit has agreed to acquire the Company pursuant to a
Reorganization Agreement of even date herewith (the "Reorganization Agreement")
by and among Summit, Company, DR Ware LLC and Duke University, which provides
for the purchase by Summit of all other parties' member units, and options for
member units, in Company, and the wind-up and transfer of the Company's business
to Summit (the "Reorganization");
WHEREAS, the parties to the Reorganization Agreement have agreed that
execution of this Agreement is a condition of closing the Reorganization; and
WHEREAS, the Summit desires to retain the services of Executive
subsequent to the consummation of the Reorganization, and Executive desires to
be employed by the Summit, on the terms and subject to the conditions set forth
in this Agreement.
NOW, THEREFORE, in consideration of the respective covenants and
commitments of Summit and Executive set forth below, and as an inducement to
Summit to consummate the Reorganization, the Executive and Summit hereby agree
as follows:
1. Employment. Summit hereby employs Executive, and Executive
----------
accepts such employment and shall perform services for Summit, for the period
and upon the other terms and conditions set forth in this Agreement.
2. Term. Unless terminated at an earlier date in accordance with
----
Section 9 of this Agreement, the term of Executive's employment hereunder shall
commence on the Effective Date and shall extend for a continuous period until
four (4) years from the date thereof. Thereafter, the terms of this Agreement
shall be extended for successive one year periods unless Summit or Executive
objects to such extension by written notice to the other party at least ninety
(90) days prior to the expiration of such initial term or any extension thereof.
- --------------------------------------------------------------------------------
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<PAGE>
3. Position and Duties.
-------------------
3.1 Service with Summit. During the term of this
-------------------
Agreement, Executive agrees to serve as Vice-President and Chief Scientific
Officer of Summit and to perform such employment duties, consistent with such
position, as Summit shall reasonably assign to him from time to time.
3.2 Performance of Duties. Executive agrees to serve
---------------------
Summit faithfully and to the best of his ability and, except as provided in
Section 3.3 below, to devote his full time, attention and efforts to the
business and affairs of Summit during the term of his employment. Executive
hereby confirms that he is under no contractual commitments inconsistent with
his obligations set forth in this Agreement and that, during the term of his
employment, except as provided in Section 3.3 below, he shall not render or
perform any services for any other corporation, firm, entity or person which are
inconsistent with the provisions of this Agreement or which would otherwise
impair his ability to perform his duties hereunder.
3.3 Other Employment. Summit acknowledges and agrees that
----------------
Executive shall continue to be employed at Duke University or a practice group
affiliated therewith for one (1) day per week.
4. Compensation.
------------
4.1 Base Salary. As base compensation for all services to
-----------
be rendered by Executive under this Agreement during the term of this Agreement,
Summit shall pay to Executive an annual salary of One Hundred Fifty Thousand
Dollars ($ 150,000) in accordance with normal payroll procedures and policies.
4.2 Incentive Compensation. Executive shall be entitled to
----------------------
participate in such bonus or incentive compensation plans as may be established
by Summit's Board of Directors from time to time for Summit's executive level
employees.
4.3 Option. On the Closing Date (as defined in the
------
Reorganization Agreement), Summit shall grant to Executive a nonstatutory stock
option (the, "Option") to subscribe for and purchase common stock of Summit up
to the aggregate amount of 300,000 shares, subject to the terms and conditions
of the Nonstatutory Stock Option Agreement between Summit and the Executive of
even date herewith.
4.4 Participation in Benefit Plans. During the term of
------------------------------
Executive's employment by Summit, Executive shall be entitled to receive such
life, disability, medical, dental and other insurance coverage as are being
provided by
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<PAGE>
Summit to its executive level employees from time to time to the extent that
Executive's age, position or other factors qualify him for such fringe benefits.
Nothing in this Agreement is intended to or shall in any way restrict Summit's
right to amend, modify or terminate any of its benefit plans during the term of
Executive's employment.
4.5 Expenses. In accordance with Summit's normal policies
--------
for expense verification, Summit shall pay or reimburse Executive for all
reasonable and necessary out-of-pocket expenses incurred by him in the
performance of his duties under this Agreement, subject to the presentment of
appropriate documentation in accordance with Summit's normal policy for expense
verification.
4.6 Signing Bonus. Summit agrees to pay Executive a signing
-------------
bonus on January 2, 1997, in the amount of $129,371.
5. Confidential Information. Except as permitted or directed
------------------------
by Summit, during the term of this Agreement or at any time thereafter,
Executive shall not divulge, furnish or make accessible to anyone or use in any
way (other than in the ordinary course of the business of Summit) any
confidential or secret knowledge or information of Company, Summit or Summit
Affiliates which Executive has acquired or become acquainted with prior to the
term of this Agreement while working for the Company, or shall acquire or become
acquainted with during the term of this Agreement in the course of Executive'
employment, whether or not during regular working hours, in each case, whether
developed by himself or by others, concerning any trade secrets, confidential or
secret designs, processes, formulae, plans, algorithms, software, devices or
material (whether or not patented or patentable) directly or indirectly useful
in any aspect of the business of Summit or of any Summit Affiliate, any customer
or supplier lists of Summit or of any Summit Affiliate, any confidential or
secret development or research work of Summit or of any Summit Affiliate, or any
other confidential information or secret aspects of the business of Summit or
any Summit Affiliate. As used herein, "Summit Affiliate" shall mean any entity
that controls or is controlled by Summit, with "control" meaning the ownership
of 50% or more of the voting securities in such entity. Executive acknowledges
that the above-described knowledge or information constitutes a unique and
valuable asset of Summit and of the respective Summit Affiliates and represents
a substantial investment of time and expense by Summit and the Summit Affiliates
and that any disclosure or other use of such knowledge or information other than
for the sole benefit of Summit or of any Summit Affiliate would be wrongful and
would cause irreparable harm to Summit or such Summit Affiliate. Both during and
after the term of this Agreement, Executive shall not intentionally act in any
manner that is reasonably likely to reduce the value of such knowledge or
information to Summit or any Summit Affiliate. The foregoing obligations of
confidentiality shall not apply to any
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<PAGE>
knowledge or information that (a) is at the time acquired by Executive, or
thereafter becomes, a part of the public domain other than through the act or
omission of Executive, (b) is provided by Summit or any Summit Affiliate to a
third party without any obligation of confidentiality, or (c) is required by law
to be disclosed.
6. Ventures. If, during the term of Executive's employment
--------
pursuant to this Agreement, Executive is engaged in or associated with the
planning or implementing of any project, program or venture involving Summit and
a third party or parties, all rights in such project, program or venture shall
belong to Summit. Except as formally approved by Summit's Board of Directors,
Executive shall not be entitled to any interest in such project, program or
venture or to any commission, finder's fee or other compensation in connection
therewith other than the salary to be paid to Executive as provided in this
Agreement.
7. Intellectual Property.
---------------------
7.1 Assignment. Executive hereby assigns to Summit, to the
----------
extent such rights are not already owned by the Company or Summit, (a) all
tangible embodiments of and intellectual property rights in developments made or
conceived by Executive in the course of his employment solely or in
collaboration with others during his employment at Company, and (b) all
intellectual property rights in developments made or conceived by Executive in
the course of his employment solely or in collaboration with others during the
term of his employment by Summit. Executive further agrees that all
copyrightable works made by Executive for Summit shall be considered "works made
for hire" for the benefit of Summit and, to the extent not qualifying as "works
made for hire," all rights in such copyrightable works are hereby assigned to
Summit. Executive shall disclose promptly and fully to Summit all developments
owned by Summit under this Agreement. Executive warrants that his rights in
developments assigned to Summit by this Agreement have not been previously
licensed, pledged, assigned or encumbered by Executive other than as may have
been assigned to the Company.
7.2 Records. Executive shall keep complete and accurate
-------
accounts, notes, data and records of all developments in the manner and form
reasonably requested by Summit. Such accounts, notes, data and records shall be
the property of Summit, and, upon request by Summit, Executive shall promptly
surrender the same to it or, if not previously surrendered upon its request or
otherwise, Executive shall surrender the same, and all copies thereof, to Summit
upon the conclusion of his employment.
8. Non-competition and Non-solicitation Covenants.
----------------------------------------------
8.1 Agreement Not to Compete. Executive agrees that during
------------------------
the term of his employment by Summit and for eighteen (18) months thereafter
(whether termination of employment is with or without cause, or whether it is
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<PAGE>
occasioned by Executive or Summit)(the "Restricted Period"), he shall not,
directly or indirectly, engage in competition with Summit or any Summit
Affiliate in any manner or capacity (e.g. as an adviser, principal, agent,
partner, officer, director, stockholder employee, member of an association or
otherwise) in any phase of the business which Summit or any Summit Affiliate is
conducting during the term of this Agreement or any extensions thereof.
Notwithstanding the foregoing, Summit acknowledges and agrees that none of the
following shall constitute a breach of this Section 8.1: (a) Executive's
employment at Duke University, in any capacity; (b) Executive's practice of
medicine, in any capacity; or (c) Executive's performance of services, in any
capacity, for any healthcare system, managed care system, insurer, or other
entity engaged in the provision or management of healthcare services, so long as
such entity does not market, license or sell, or develop with a view toward
marketing, licensing or selling, to any third party, other than its own members
or constituents, products or services competitive with those marketed, licensed
or sold by Summit or any Summit Affiliates.
8.2 Geographic Extent of Covenant. The obligations of
-----------------------------
Executive under Section 8.1 shall apply to all markets, domestic or foreign, in
which Summit or any Summit Affiliate has engaged in business during the term of
this Agreement or any extensions thereof, through production, promotional sales
or marketing activities or has otherwise established substantial goodwill,
business reputation or any customer or supplier relationships.
8.3 Non-solicitation; Non-hire and Non-interference. During the
-----------------------------------------------
term of this Agreement and for the Restricted Period, Executive shall not (a)
induce or attempt to induce any employee of Summit or of any Summit Affiliate to
leave the employ of Summit or such Summit Affiliate, respectively, or in any way
interfere adversely with the relationship between any such employee and Summit
or such Summit Affiliate, (b) induce or attempt to induce any employee of Summit
or of any Summit Affiliate to work for, render services or provide advice to or
supply confidential business information or trade secrets of Summit or any
Summit Affiliate to any third person, firm or corporation, (c) employ, or
otherwise pay for services rendered by, any employee of Summit or any Summit
Affiliate in any business enterprise with which Executive may be associated,
connected or affiliated, or (d) induce or attempt to induce any customer,
supplier, licensee, licensor or other business relation of Summit or of any
Summit Affiliate to cease doing business with the Company or such Summit
Affiliate, respectively, or in any way interfere with the relationship between
any such customer, supplier, licensee, licensor or other business relation and
the Summit or such Summit Affiliate.
8.4 Indirect Competition or Solicitation. Executive agrees
------------------------------------
that, during the term of this Agreement and the period covered by Sections 8.1
or 8.3 hereof, he shall not, directly or indirectly, assist or encourage any
other person in carrying out, directly or indirectly, any activity that would be
prohibited by the provisions of Sections 8.1 or 8.3 if such activity were
carried out by Executive, either
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<PAGE>
directly or indirectly; and, in particular, Executive agrees that he shall not,
directly or indirectly, induce any employee of Summit or of any Summit Affiliate
to carry out, directly or indirectly, any such activity.
9. Termination.
-----------
9.1 Grounds for Termination. This Agreement shall terminate
-----------------------
prior to the expiration of the initial term set forth in Section 2 or any
extension thereof in the event that at any time during such initial term or any
extension thereof:
(a) Executive dies; or
(b) Executive becomes disabled (as defined below), so that he
cannot perform the essential functions of his position with
reasonable accommodation; or
(c) The Board of Directors of Summit elects to terminate this
Agreement for "cause" and notifies Executive in writing of
such election; or
(d) The Board of Directors of Summit elects to terminate this
Agreement without "cause" and notifies Executive in writing
of such election; or
(e) Executive elects to terminate this Agreement and notifies
Summit in writing of such election.
Any such termination shall be effective immediately.
9.2 "Cause" Defined.
---------------
(a) Executive has breached in any material respect the provision
of Sections 5, 6, 7 or 8 of this Agreement in any material
respect and has failed to cure such breach within thirty
(30) days after written notice thereof to Executive; or
(b) Executive has engaged in willful and material misconduct,
including willful and material failure to perform
Executive's duties as an officer or employee of Summit and
has failed to "cure" such default within thirty (30) days
after receipt of written notice of default from the
President of Summit; or
_______________________________________________________________________________
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<PAGE>
(c) Executive has committed material fraud, misappropriation or
embezzlement in connection with Summit's business; or
(d) Executive has been convicted or has pleaded nolo contendere
to criminal misconduct (except for parking violations and
occasional minor traffic violations); or
(e) Executive's use of narcotics, liquor or illicit drug has a
materially detrimental effect on the performance of his
employment responsibilities, as reasonably determined by
Summit's Board of Directors.
In the event that Summit terminates Executive's employment for "cause"
pursuant to subsection 9.1(c) and Executive objects in writing to the Board's
determination that there was proper "cause" for such termination within thirty
(30) days after Executive is notified of such termination, the matter shall be
resolved by arbitration in accordance with the provisions of Section 10.1. If
Executive fails to object to any such determination of "cause" in writing within
such thirty (30) day period, he shall be deemed to have waived his right to
object to that determination. If such arbitration determines that there was not
proper "cause" for termination, such termination shall be deemed to be a
termination pursuant to Subsection 9.1(d) and Executive's sole remedy shall be
to receive the wage continuation benefits contemplated by Section 9.6.
9.3 Effect of Termination Notwithstanding any termination
---------------------
of this Agreement, the parties hereto shall remain bound by the provisions of
this Agreement which specifically relate to periods, activities or obligations
upon, or subsequent to, the termination of Executive's employment.
9.4 "Disability" Defined. For the purposes of this
--------------------
Agreement, the term "disability" shall mean the physical or mental illness or
disability of the Executive, which renders him unable to perform his duties
hereunder for a period of at least two consecutive months or for shorter periods
totaling more than ninety (90) days during any 365 day period.
9.5 Surrender of Records and Property. Upon termination of
---------------------------------
his employment with Summit, Executive shall deliver promptly to Summit all
records, manuals, books, blank forms, documents, letters, memoranda, notes,
notebooks, software, algorithms, reports, data, tables, calculations and all
other information, or copies thereof, which are the property of Summit or any
Summit Affiliate, or which relate in any way to the business, products,
practices or techniques of Summit or any Summit Affiliate, and all other
property, trade secrets and confidential information of Summit or any Summit
Affiliate, including, but not limited to, all documents which in whole or in
part contain any trade secrets or
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<PAGE>
confidential information of Summit or any Summit Affiliate, which in any of
these cases are in his possession or under his control.
9.6 Wage Continuation. If Executive's employment by Summit
-----------------
is terminated pursuant to Subsection 9.1(d), Summit shall continue to pay to
Executive his base salary and shall continue to provide health insurance
benefits for Executive for eighteen (18) months following termination of this
Agreement. If this Agreement is terminated pursuant to subsection 9.1(a),
9.1(b), 9.1(c) or 9.1(e), Executive's right to base salary and benefits shall
immediately terminate, except as may otherwise be required by applicable law.
10. Settlement of Disputes.
----------------------
10.1 Arbitration. Except as provided in Section 10.2, any
-----------
claims or disputes of any nature between Summit and Executive arising from or
related to the performance, breach, termination, expiration, application, or
meaning of this Agreement or any matter relating to Executive's employment and
the termination of that employment by Summit shall be resolved exclusively by
arbitration in Durham, North Carolina, in accordance with the applicable rules
then obtaining of the American Arbitration Association. The fees of the
arbitrator(s), reasonable attorneys' fees and other costs incurred by Executive
and Summit in connection with such arbitration shall be recovered by the
prevailing party in such arbitration.
The decision of the arbitrator(s) shall be final and binding upon
both parties. Judgment of the award rendered by the arbitrator(s) may be entered
in any court having jurisdiction thereof. In the event of submission of any
dispute to arbitration, each party shall, not later than thirty (30) days prior
to the date set for hearing, provide to the other party and to the arbitrator(s)
a copy of all exhibits upon which the party intends to rely at the hearing and a
list of all persons each party intends to call at the hearing.
10.2 Resolution of Certain Claims - Injunctive Relief.
------------------------------------------------
Section 10.1 shall have no application to claims by Summit asserting a violation
of Sections 5, 6, 7, 8 or 9.5 or seeking to enforce, by injunction or otherwise,
the terms of Sections 5, 6, 7, 8 or 9.5. Such claims may be maintained by
Summit in a lawsuit subject to the terms of Section 10.3. Executive agrees
that, in addition to, but not to the exclusion of, any other available remedy,
Summit shall have the right to enforce the provisions of Sections 5, 6, 7, 8 and
9.5 by applying for and obtaining temporary and permanent restraining orders or
injunctions from a court of competent jurisdiction subject to filing a bond
therefor, and the prevailing party shall be entitled to recover from the other
party its reasonable attorneys' fees and costs in any action related to
enforcement of the provisions of Sections 5, 6, 7, 8 and 9.5.
10.3 Venue. Any action or proceeding arising under Section
-----
10.2 of this Agreement shall be litigated only in the federal or state courts
located in
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<PAGE>
the State of Minnesota, County of Hennepin. Executive agrees such a venue is
reasonable and convenient and waives any right the Executive may have to
transfer or change the venue of any litigation brought against Executive by
Summit pursuant to such Section 10.2.
10.4 Severability. To the extent any provision of this
------------
Agreement shall be invalid or unenforceable, it shall be considered deleted
herefrom and the remainder of such provision and of this Agreement shall be
unaffected and shall continue in full force and effect.
11. Miscellaneous.
-------------
11.1 Governing Law. This Agreement is made under and shall
-------------
be governed by and construed in accordance with the laws of the State of
Minnesota, excluding its choice of law rules.
11.2 Prior Agreements. This Agreement (including the
----------------
Options and Stock Option Agreement) contains the entire agreement of the parties
relating to the employment of Executive by Summit and the ancillary matters
discussed herein and supersedes all prior agreements and understandings with
respect to such matters, whether oral or written, and the parties hereto have
made no agreements, representations or warranties relating to such employment or
ancillary matters which are not set forth herein.
11.3 Withholding Taxes. Summit may withhold from any
-----------------
benefits payable under this Agreement all federal, state, city or other taxes as
shall be required pursuant to any law or governmental regulation or ruling.
11.4 Amendments. No amendment or modification of this
----------
Agreement shall be deemed effective unless made in writing and signed by the
both Executive and Summit.
11.5 No Waiver. No term or condition of this Agreement
---------
shall be deemed to have been waived, nor shall there be any estoppel to enforce
any provisions of this Agreement, except by a statement in writing signed by the
party against whom enforcement of the waiver or estoppel is sought. Any written
waiver shall not be deemed a continuing waiver unless specifically stated, shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
11.6 Assignment. The rights and duties of Executive under
----------
this Agreement are personal and may not be assigned, in whole or in part,
without the written consent of Summit, in its sole discretion. Subject to the
foregoing, this
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<PAGE>
Agreement shall be binding upon and inure to the benefit of, and be enforceable
against, the parties hereto and any permitted assignees or successors.
11.7 Counterparts. This Agreement may be simultaneously
------------
executed in any number of counterparts, and such counterparts executed and
delivered, each as an original, shall constitute but one and the same
instrument.
11.8 Captions and Headings. The captions and paragraph
---------------------
headings used in this Agreement are for convenience of reference only, and shall
not affect the construction or interpretation of this Agreement or any of the
provisions hereof.
11.9 Notices. All notices and other communications
-------
hereunder shall be in writing and shall be deemed given if delivered personally
or by facsimile transmission (receipt verified), telexed, or sent by express
courier service, to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice; provided, that notices
of a change or address shall be effective only upon receipt thereof):
If to Summit, addressed to:
Summit Medical Systems, Inc.
10900 Red Circle Drive, Suite 100
Minneapolis, Minnesota 55343-9106.
Fax: (612) 939-2790
Attn: Chief Financial Officer
If to Fortin, addressed to:
Donald F. Fortin, M.D.
6330 Quadrangle Drive, Suite 300
Durham, North Carolina 27514
Fax:(919)419-9555
-
IN WITNESS WHEREOF, Executive and Summit have executed this
Agreement as of the Effective Date.
SUMMIT MEDICAL SYSTEMS, INC.
___________________________ By_________________________
Donald F. Fortin, M.D.
Name_______________________
Title______________________
_______________________________________________________________
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<PAGE>
EXHIBIT D
SUMMIT MEDICAL SYSTEMS INC.
NONSTATUTORY STOCK OPTION AGREEMENT
This Nonstatutory Stock Option Agreement is made this 31st day of December
1996 (the "Effective Date"), by and between Summit Medical Systems, Inc. (the
"Company") and Donald F. Fortin, M.D. (the "Employee").
WHEREAS, the Company and Employee desire to enter into an Employment
Agreement of even date herewith (the "Employment Agreement"), pursuant to which
Employee would serve as Vice-President and Chief Scientific Officer of the
Company; and
WHEREAS, an option to purchase shares of the Company's common stock is an
essential inducement for Employee to enter into the Employment Agreement.
NOW THEREFORE, in consideration of the premises and of the mutual covenants
herein contained, the parties hereto agree as follows:
1. Grant of Option. The Company hereby grants to the Employee an option (the
---------------
"Option") to purchase 300,000 shares of the Company's Common Stock on the terms
and conditions set forth herein.
2. Purchase Price. The purchase price of the Company's Common Stock shall be
--------------
$7.50 per share (subject to adjustment as noted below).
3. Nonstatutory Option. The Option is not intended to be an incentive stock
-------------------
option within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended.
4. Exercise. The holder hereof may exercise this Option for up to 300,000
--------
shares of the Company's Common Stock in cumulative installments, each
exercisable in whole or in part, at any time from the date first exercisable up
to ten (10) years from the Effective Date (the "Expiration Date"), as follows:
Number of shares as to
Date First Exercisable which Option is exercisable
- ---------------------- ---------------------------
<TABLE>
<CAPTION>
<S> <C>
Effective Date 45,000
December 31, 1997 85,000
December 31, 1998 85,000
</TABLE>
________________________________________________________________________________
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<PAGE>
December 31, 1999 85,000
The Option may be exercised only while the Employee is actively employed by the
Company, or alternatively as provided in Section 6, dealing with termination of
employment.
5. Transferability. This Option is not transferable except by will or the laws
---------------
of descent and distribution, or with the prior written consent of the Company.
6. Termination of Employment. The holder hereof shall have the right to
-------------------------
exercise the Option only to the extent of the full number of shares of the
Company's Common Stock the Employee was entitled to purchase under the Option on
the effective date of termination of the Employment Agreement; provided,
however, that if Employee's employment with the Company terminates due to
Employee's death, disablement or without cause in accordance with Sections
9.1(a), (b) or (d), respectively, of the Employment Agreement, the Option shall
be exercisable as to all 300,000 shares of the Company's Common Stock
immediately upon the effective date of such termination, notwithstanding Section
4 above. In the event of termination of Employee's employment with the Company
for any and all reasons, the Option may be exercised by the holder hereof until
the Expiration Date, subject to the extent provided in this Section 6.
7. Service. This Agreement shall in no way restrict the right of the Company or
-------
Summit Affiliate to terminate Employee's employment at any time.
8. Method of Exercise. The Option may be exercised, subject to the terms and
------------------
conditions of this Agreement by written notice to the Company. The notice shall
be in the form attached to this Agreement and will be accompanied by payment by
check (bank check, certified check or personal check) or by delivery to the
Company for cancellation shares of Common Stock having a Market Price (defined
in Section 11(f) below) equal to the full purchase price of the shares to be
issued on the date the notice of exercise is received by the Company, and in the
event of an exercise by an executor or administrator or other person authorized
under Section 5, appropriate proof of the right of such person to exercise the
Option. The Company will issue and deliver certificates representing the number
of shares purchased under the Option, registered in the name of the holder
hereof as soon as practicable after receipt of the notice.
9. Withholding. In any case where withholding is required or advisable under
-----------
federal, state or local law in connection with any exercise by the Employee
hereunder, Employee may elect to (i) authorize the Company to withhold
appropriate amounts from amounts payable to the Employee, (ii) remit to the
Company an amount equal to such appropriate withholding, or (iii) have the
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<PAGE>
Company withhold a portion of the shares of Common Stock otherwise to be
delivered upon exercise of such option having a Market Price equal to the amount
of such appropriate withholding.
10. Registration. Company shall use commercially reasonable efforts to register
------------
the shares of Common Stock that Employee obtains pursuant to an exercise of the
Option on a registration statement on Form S-8 (or any successor form) and the
Company shall use commercially reasonable efforts to maintain the effectiveness
of such registration statement for so long as any portion of the Option remains
exercisable by Employee hereunder.
11. Anti-Dilution Adjustments. The above provisions are, however, subject to
-------------------------
the following:
(a) The purchase price set forth in Section 2 above shall, from and after the
date of issuance of this Option, be subject to adjustment from time to time as
hereinafter provided. Upon each adjustment of the purchase price, the holder
hereof shall thereafter be entitled to purchase, at the purchase price resulting
from such adjustment, the number of shares obtained by multiplying the purchase
price in effect immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment and dividing
the product thereof by the purchase price resulting from such adjustment.
(b) In case the Company shall at any time subdivide its outstanding shares of
Common Stock into a greater number of shares, including any dividend declared to
effect a subdivision of the outstanding shares of Common Stock, the purchase
price in effect immediately prior to such subdivision shall be proportionately
reduced, and conversely, in case the outstanding shares of Common Stock of the
Company shall be combined into a smaller number of shares, the purchase price in
effect immediately prior to such combination shall be proportionately increased.
(c) If any capital reorganization or reclassification of the capital stock of
the Company, or consolidation or merger of the Company with another corporation,
or the sale of all or substantially all of its assets to another corporation
shall be effected in such a way that holders of Common Stock shall be entitled
to receive stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provision shall be made
whereby the holder hereof shall thereafter have the right to purchase and
receive, upon the basis and upon the terms and conditions specified in this
Option and in lieu of the shares of Common Stock of the Company immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby, such shares of stock, securities or assets as may be issued
or payable with respect to or in exchange for a number of outstanding
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<PAGE>
shares of such Common Stock equal to the number of shares of such stock
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby had such reorganization, reclassification,
consolidation, merger or sale not taken place, and in any such case appropriate
provision shall be made with respect to the rights and interests of the holder
hereof to the end that the provisions hereof (including without limitation
provisions for adjustments of the purchase price and of the number of shares
purchasable upon the exercise of this Option) shall thereafter be applicable, as
nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise hereof. The Company shall not effect
any such consolidation, merger or sale, unless prior to the consummation thereof
the successor corporation (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing such assets shall assume,
by written instrument executed and mailed to the registered holder hereof at the
last address of such holder appearing on the books of the Company, the
obligation to deliver to such holder such shares of stock, securities or assets
as, in accordance with the foregoing provisions, such holder may be entitled to
purchase.
(d) Upon any adjustment of the purchase price, then and in each such case the
Company shall give written notice thereof, by first-class mail, postage prepaid,
addressed to the registered holder of this Option at the address of such holder
as shown on the books of the Company, which notice shall state the purchase
price resulting from such adjustment and the increase or decrease, if any, in
the number of shares purchasable at such price upon the exercise of this Option,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
(e) If any event occurs as to which the other provisions of this Section 11 are
not strictly applicable or if strictly applicable would not fairly protect the
purchase rights of the holder of this Option or of Common Stock in accordance
with the essential intent and principles of such provisions, then this Option
shall be adjusted in the application of such provisions, in accordance with such
essential intent and principles, so as to protect such purchase rights as
aforesaid.
(f) No fractional shares of Common Stock shall be issued upon the exercise of
this Option, but, instead of any fraction of a share which would otherwise be
issuable, the Company shall pay a cash adjustment (which may be effected as a
reduction of the amount to be paid by the holder hereof upon such exercise) in
respect of such fraction in an amount equal to the same fraction of the Market
Price per share of Common Stock on the date of the written notice of exercise
required by Section 8 above. "Market Price" for purposes of this Section 11(f),
Sections 8 and 9 hereof, and for the purpose of determining the option purchase
price shall mean, if the Common Stock is traded on a securities exchange or on
the Nasdaq National Market, the closing price of the Common Stock on such
exchange or the Nasdaq National
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<PAGE>
Market, or, if the Common Stock is otherwise traded in the over-the-counter
market, the closing bid price, in each case averaged over a period of 5
consecutive business days prior to the date as of which "Market Price" is being
determined. If at any time the Common Stock is not traded on an exchange or the
Nasdaq National Market, or otherwise traded in the over-the-counter market, the
"Market Price" shall be deemed to be the higher of (i) the book value thereof as
determined by any firm of independent public accountants of recognized standing
selected by the Board of Directors of the Company as of the last day of any
month ending within 60 days preceding the date as of which the determination is
to be made, or (ii) the fair value thereof determined in good faith by the Board
of Directors of the Company as of a date which is within 15 days of the date as
of which the determination is to be made.
12. Common Stock. As used herein, the term "Common Stock" shall mean and
-------------
include the Company's presently authorized Common Stock and shall also include
any capital stock of any class of the Company hereafter authorized which shall
not be limited to a fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Company; provided that the shares purchasable pursuant to this Option shall
include shares designated as Common Stock of the Company on the date of original
issue of this Option or, in the case of any reclassification of the outstanding
shares thereof, the stock, securities or assets provided for in Section 11(c)
above.
13. No Voting Rights. This Option shall not entitle the holder hereof to any
----------------
voting rights or other rights as a shareholder of the Company.
14. Optional Conversion.
-------------------
(a) In addition to and without limiting the rights of the holder of this Option
under the terms of this Option, such holder shall have the right (the
"Conversion Right") to convert this Option or any portion thereof into shares of
Common Stock as provided in this Section 14 at any time from and after the
Effective Date and to and including the Expiration Date, subject to the
restrictions set forth in Section 4. Upon exercise of the Conversion Right with
respect to a particular number of shares subject to this Option (the "Converted
Option Shares"), the Company shall deliver to the holder of this Option, without
payment by the holder of any exercise price or any cash or other consideration,
that number of shares of Common Stock equal to the quotient obtained by dividing
the Net Value (as hereinafter defined) of the Converted Option Shares by the
Market Price of a single share of Common Stock, determined in each case as of
the close of business on the Conversion Date (as hereinafter defined). The "Net
Value" of the Converted Option Shares shall be
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<PAGE>
determined by subtracting the aggregate option purchase price of the Converted
Option Shares from the Market Price of the Converted Option Shares.
Notwithstanding anything in this Section 14 to the contrary, the Conversion
Right cannot be exercised with respect to a number of Converted Option Shares
having a Net Value below $100. No fractional shares shall be issuable upon
exercise of the Conversion Right, and if the number of shares to be issued in
accordance with the foregoing formula is other than a whole number, the Company
shall pay to the holder of this Option an amount in cash equal to the fair
market value of the resulting fractional share.
(b) The Conversion Right may be exercised by the holder of this Option by the
surrender of this Option at the principal office of the Company together with a
written statement specifying that the holder thereby intends to exercise the
Conversion Right and indicating the number of shares subject to this Option
which are being surrendered (referred to in paragraph (a) above as the Converted
Option Shares) in exercise of the Conversion Right. Such conversion shall be
effective upon receipt by the Company of this Option together with the aforesaid
written statement, or on such later date as is specified therein (the
"Conversion Date"), but not later than the Expiration Date. Certificates for
the shares of Common Stock issuable upon exercise of the Conversion Right,
together with a check in payment of any fractional share and, in the case of a
partial exercise, a new option evidencing the shares remaining subject to this
Option, shall be issued as of the Conversion Date and shall be delivered to the
holder of this Option within 7 days following the Conversion Date.
15. Governing Law. All questions concerning this Option will be governed and
-------------
interpreted and enforced in accordance with the internal law of the State of
Minnesota without regard for principles of conflict of law.
SUMMIT MEDICAL SYSTEMS, INC.
ACCEPTED: By____________________________
Its___________________________
_________________________
Donald F. Fortin, M.D.
________________________________________________________________________________
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<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
----------------------------
NOTICE OF EXERCISE OF STOCK OPTION
----------------------------------
To: Board of Directors
SUMMIT MEDICAL SYSTEMS, INC.
I hereby exercise my Option dated
__________ to purchase _____ shares of $.01 par value common stock of the
Company at the option exercise price of $__________ per share. Enclosed is a
certified or cashier's check in the total amount of $__________, or payment in
such other form as the Company has specified.
I request that my shares be issued in
my name as follows:
_______________________________________
(Print your name in the form in which you wish to
have the shares registered)
___________________________________
(Social Security Number)
___________________________________
(Street and Number)
___________________________________
(City) (State) (Zip Code)
Dated: __________, 19__.
Signature:__________________________
_______________________________________________________________________________
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<PAGE>
EXHIBIT E
CONSULTING AGREEMENT
CONSULTING AGREEMENT is made and entered into as of the 31st day of
December, 1996 (the "Effective Date"), by and between Summit Medical Systems,
Inc., a Minnesota corporation ("Summit"), and Robert M. Califf, M.D., an
individual resident of the State of North Carolina (the "Consultant").
WHEREAS, Consultant has heretofore been retained as a consultant to
Cordillera, LLC, a Delaware limited liability corporation (the "Company");
WHEREAS, Summit has agreed to acquire the Company pursuant to a
Reorganization Agreement of even date herewith (the "Reorganization Agreement")
by and among Summit, Company, DR Ware LLC and Duke University, which provides
for the purchase by Summit of all other parties' member units, and options for
member units, in Company, and the wind-up and transfer of the Company's business
to Summit (the "Reorganization");
WHEREAS, the parties to the Reorganization Agreement have agreed that
execution of this Agreement is a condition of closing the Reorganization; and
WHEREAS, Summit desires to retain the services of Consultant
subsequent to the consummation of the Reorganization, and Consultant desires to
be so retained by Summit, on the terms and subject to the conditions set forth
in this Agreement.
NOW, THEREFORE, in consideration of the respective covenants and
commitments of Summit and Consultant set forth below, and as an inducement to
Summit to consummate the Reorganization, Summit and Consultant hereby agree as
follows:
1. Consulting. Summit hereby retains the consulting services of
----------
Consultant, and Consultant shall perform such consulting services for Summit,
for the period and upon the other terms and conditions set forth in this
Agreement.
2. Term. Unless terminated at an earlier date in accordance with
----
Section 8 of this Agreement, Consultant's services shall be retained hereunder
for a continuous period of four (4) years beginning on the Effective Date.
Thereafter, the terms of this Agreement shall be extended for successive one
year periods unless Summit or Consultant objects to such extension by written
notice to the other party at least ninety (90) days prior to the expiration of
such initial term or any extension thereof.
_______________________________________________________________________________
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<PAGE>
3. Position and Duties.
-------------------
3.1 Service with Summit. During the term of this Agreement,
-------------------
Consultant agrees to perform such duties and projects on behalf of Summit as the
parties shall mutually agree, provided that Consultant shall be available for
such duties and project for at least four (4) hours of service in each month of
this Agreement.
3.2 Performance of Duties. With respect to those duties and
---------------------
projects of Consultant hereunder, Consultant agrees to serve Summit faithfully
and to the best of his ability. Consultant hereby confirms that he is under no
contractual commitments inconsistent with his obligations set forth in this
Agreement and that, during the term hereof, he shall not enter into contractual
commitments that are materially inconsistent with the provisions of this
Agreement or which would otherwise materially impair his ability to perform his
duties hereunder.
3.3 Location. Consultant shall perform services hereunder
--------
primarily at Summit's offices in Raleigh, North Carolina, but he may, at
Summit's expense, also render services at such other locations as may be
specified by Summit and agreed to by Consultant.
4. Compensation.
------------
4.1 Consulting Fee. As compensation in full for Con sultant's
--------------
services hereunder, Summit shall pay to Consultant a consulting fee at the rate
of Twelve Hundred Fifty Dollars ($1,250.00) per month. The consulting fee shall
be payable to Consultant in arrears at the end of each calendar month during the
term of this Agreement, and a prorated portion of such fee shall be payable upon
termination of this Agreement if such termination occurs other than at the end
of a month.
4.2 Option. On the Closing Date (as defined in the
------
Reorganization Agreement), Summit shall grant to Consultant a non-qualified
stock option (the "Option") to subscribe for and purchase common stock of
Summit, up to the aggregate amount of 150,000 shares, subject to the terms and
conditions of the Nonstatutory Stock Option Agreement between the Summit and
Consultant of even date herewith.
4.3 Taxes. Consultant shall be solely responsible for any
-----
income or social security taxes due upon any payments or the Options received
under this Agreement, and hereby indemnifies and holds Summit harmless from any
charge, liability or penalty due to or arising out of any failure by Consultant
to pay such
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<PAGE>
taxes. Consultant acknowledges Summit may issue a Form 1099 as to any payments
or Options received under this Agreement and report the same to the Internal
Revenue Service.
4.4 Signing Bonus. Summit shall pay to Consultant a signing
-------------
bonus on January 2, 1997, in the amount of Fifty Nine Thousand Six Hundred and
Eighty Five Dollars ($59,685.00).
5. Expenses. Consultant shall be reimbursed by Summit in accordance
--------
with the policies and procedures that are established from time to time by
Summit for all reasonable and necessary out-of-pocket expenses that are incurred
by Consultant in performing his duties under this Agreement, including, without
limitation, reasonable travel expenses incurred by Consultant in rendering
services outside of the metropolitan Raleigh, North Carolina area.
6. Confidential Information. Except as permitted or directed by
------------------------
Summit, during the term of this Agreement or at any time thereafter, Consultant
shall not divulge, furnish or make accessible to anyone or use in any way (other
than in performing his duties hereunder) any confidential or secret knowledge or
information of the Company, Summit or of any Summit Affiliate which Consultant
has acquired or become acquainted with prior to the term of this Agreement while
being engaged as a consultant for the Company, or shall acquire or become
acquainted with during the term of this Agreement in the course of performing
Consultant's duties hereunder, whether or not during regular working hours, in
each case, whether developed by himself or by others, concerning any trade
secrets, confidential or secret designs, processes, formulae, plans, algorithms,
software, devices or material (whether or not patented or patentable) directly
or indirectly useful in any aspect of the business of Summit or of any Summit
Affiliate, any customer or supplier lists of Summit or of any Summit Affiliate,
any confidential or secret development or research work of Summit or of any
Summit Affiliate, or any other confidential information or secret aspects of the
business of Summit or any Summit Affiliate. As used herein, "Summit Affiliate"
shall mean any entity that controls or is controlled by Summit, with "control"
meaning the ownership of 50% or more of the voting securities in such entity.
Consultant acknowledges that the above-described knowledge or information
constitutes a unique and valuable asset of Summit and of the respective Summit
Affiliates and represents a substantial investment of time and expense by Summit
and Summit Affiliates and that any disclosure or other use of such knowledge or
information other than for the sole benefit of Summit or of any Summit Affiliate
would be wrongful and would cause irreparable harm to Summit or such Summit
Affiliate. Both during and after the term of this Agreement, Consultant shall
not intentionally act in any manner that is reasonably likely to reduce the
value of such knowledge or information to Summit or any Summit Affiliate. The
foregoing obligations of confidentiality shall not apply
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<PAGE>
to any knowledge or information that (a) is at the time acquired by Consultant,
or thereafter becomes, a part of the public domain other than through the act or
omission of Consultant, (b) is provided by Summit or any Summit Affiliate to a
third party without any obligation of confidentiality, or (c) is required by law
to be disclosed.
7. Intellectual Property.
---------------------
7.1 Assignment. Consultant hereby assigns to Summit, to the extent
----------
such rights are not already owned by the Company or Summit, (a) all tangible
embodiments of and intellectual property rights in developments made or
conceived by Consultant, solely or in collaboration with others, during and in
the course of his provision of services to the Company prior to the Effective
Date of this Agreement, and (b) all intellectual property rights in developments
made or conceived by Consultant, solely or in collaboration with others, during
and in the course of his provision of services to Summit hereunder during the
term of this Agreement. Consultant further agrees that all copyrightable works
made by Consultant for Summit shall be, if possible, considered "works made for
hire" for the benefit of Summit and, to the extent not qualifying as "works made
for hire," all rights in such copyrightable works are hereby assigned to Summit.
Consultant shall disclose promptly and fully to Summit all developments owned by
Summit under this Agreement. Consultant warrants that his rights in developments
assigned to Summit by this Agreement have not been previously licensed, pledged,
assigned or encumbered by Consultant other than as may have been assigned to the
Company.
7.2 Records. Consultant shall keep complete and accurate accounts,
-------
notes, data and records of all developments in the manner and form reasonably
requested by Summit. Such accounts, notes, data and records shall be the
property of Summit, and, upon request by Summit, Consultant shall promptly
surrender the same to it or, if not previously surrendered upon its request or
otherwise, Consultant shall surrender the same, and all copies thereof, to
Summit upon the conclusion of this Agreement.
8. Termination. This Agreement may be terminated prior to its expiration
-----------
(a) in the event of a material breach by either party, which breach is not cured
within thirty (30) days written notice by the other party, or (b) at any time by
either party upon ninety (90) days prior written notice. The parties' rights and
obligations under Sections 6, 7, 9 and 10 shall survive any termination of this
Agreement, and Consultant shall be entitled to receive its consulting fee and
expenses for any services performed prior to such termination.
9. Settlement of Disputes.
----------------------
________________________________________________________________________________
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<PAGE>
9.1 Arbitration. Except as provided in Section 9.2, any claims or
-----------
disputes of any nature between Summit and Consultant arising from or related to
the performance, breach, termination, expiration, application, or meaning of
this Agreement or any matter relating to Consultant's services and the
termination of such services by Summit shall be resolved exclusively by
arbitration in Durham, North Carolina, in accordance with the applicable rules
then obtaining of the American Arbitration Association. The fees of the
arbitrator(s), reasonable attorneys' fees and other costs incurred by Consultant
and Summit in connection with such arbitration shall be recovered by the
prevailing party in such arbitration.
The decision of the arbitrator(s) shall be final and binding
upon both parties. Judgment of the award rendered by the arbitrator(s) may be
entered in any court having jurisdiction thereof. In the event of submission of
any dispute to arbitration, each party shall, not later than thirty (30) days
prior to the date set for hearing, provide to the other party and to the
arbitrator(s) a copy of all exhibits upon which the party intends to rely at the
hearing and a list of all persons each party intends to call at the hearing.
9.2 Resolution of Certain Claims - Injunctive Relief. Section 9.1
------------------------------------------------
shall have no application to claims by Summit asserting a violation of Sections
6 or 7 or seeking to enforce, by injunction or otherwise, the terms of Sections
6 or 7. Such claims may be maintained by Summit in a lawsuit subject to the
terms of Section 9.3. Consultant agrees that, in addition to, but not to the
exclusion of, any other available remedy, Summit shall have the right to enforce
the provisions of Sections 6 or 7 by applying for and obtaining temporary and
permanent restraining orders or injunctions from a court of competent
jurisdiction subject to filing a bond therefor, and the prevailing party shall
be entitled to recover from the other party its reasonable attorneys' fees and
costs in actions related to the enforcement of the provisions of Sections 6 or
7.
9.3 Venue. Any action or proceeding arising under Section 9.2 of
-----
this Agreement shall be litigated only in the federal or state courts located in
the State of Minnesota, County of Hennepin. Consultant agrees to agrees that
such a venue is reasonable and convenient and waives any right Consultant may
have to transfer or change the venue of any litigation brought against
Consultant by Summit pursuant to such Section 9.2.
9.4 Severability. To the extent any provision of this Agreement
------------
shall be invalid or unenforceable, it shall be considered deleted herefrom and
the remainder of such provision and of this Agreement shall be unaffected and
shall continue in full force and effect.
________________________________________________________________________________
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<PAGE>
10. Miscellaneous.
--------------
10.1 Governing Law. This Agreement is made under and shall be
-------------
governed by and construed in accordance with the laws of the State of Minnesota,
excluding its choice of law rules.
10.2 Prior Agreements. This Agreement (including the Options and
----------------
Stock Option Agreement) contains the entire agreement of the parties relating to
Consultant's services for Summit and the ancillary matters discussed herein and
supersedes all prior agreements and understandings with respect to such matters,
whether oral or written, and the parties hereto have made no agreements,
representations or warranties relating to such services or ancillary matters
which are not set forth herein.
10.3 Relationship of Parties. It is understood and agreed that
-----------------------
Consultant is an independent contractor and not an employee of the Summit.
Consultant has no authority to obligate the Summit by contract or otherwise.
10.4 Amendments. No amendment or modification of this Agreement
----------
shall be deemed effective unless made in writing and signed by the both
Consultant and Summit.
10.5 No Waiver. No term or condition of this Agreement shall be
---------
deemed to have been waived, nor shall there be any estoppel to enforce any
provisions of this Agreement, except by a statement in writing signed by the
party against whom enforcement of the waiver or estoppel is sought. Any written
waiver shall not be deemed a continuing waiver unless specifically stated, shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
10.6 Assignment. The rights and duties of Consultant under this
----------
Agreement are personal and may not be assigned, in whole or in part, without the
written consent of Summit, in its sole discretion. Subject to the foregoing,
this Agreement shall be binding upon and inure to the benefit of, and be
enforceable against, the parties hereto and any permitted assignees or
successors.
10.7 Counterparts. This Agreement may be simultaneously executed in
------------
any number of counterparts, and such counterparts executed and delivered, each
as an original, shall constitute but one and the same instrument.
10.8 Captions and Headings. The captions and paragraph headings used
---------------------
in this Agreement are for convenience of reference only, and shall not affect
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<PAGE>
the construction or interpretation of this Agreement or any of the provisions
hereof.
10.9 Notices. All notices and other communications hereunder shall
-------
be in writing and shall be deemed given if delivered personally or by facsimile
transmission (receipt verified), telexed, or sent by express courier service, to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice; provided, that notices of a change or address
shall be effective only upon receipt thereof):
If to Summit, addressed to:
Summit Medical Systems, Inc.
10900 Red Circle Drive, Suite 100
Minneapolis, Minnesota 55343-9106.
Fax: (612) 939-2790
Attn: Chief Financial Officer
If to Consultant, addressed to:
Robert M. Califf, M.D.
Duke Clinical Research Institute
Erwin Mill Building
2024 West Main Street
Bay A, Room 108
Durham, North Carolina 27705
Fax:(919) 286-8820
IN WITNESS WHEREOF, Summit and Consultant have executed this Agreement as
of the Effective Date.
ROBERT M. CALIFF, M.D. SUMMIT MEDICAL SYSTEMS, INC.
____________________________________ By_________________________________
Name_______________________________
Title______________________________
________________________________________________________________________________
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<PAGE>
EXHIBIT F
SUMMIT MEDICAL SYSTEMS INC.
NONSTATUTORY STOCK OPTION AGREEMENT
This Nonstatutory Stock Option Agreement is made this 31st day of December
1996 (the "Effective Date"), by and between Summit Medical Systems, Inc. (the
"Company") and Robert M. Califf, M.D. (the "Consultant").
WHEREAS, the Company and Consultant desire to enter into an Consulting
Agreement of even date herewith (the "Consulting Agreement") pursuant to which
Consultant would provide certain consulting services to the Company; and
WHEREAS, an option to purchase shares of the Company's common stock is an
essential inducement for Consultant to enter into the Consulting Agreement.
NOW THEREFORE, in consideration of the premises and of the mutual covenants
herein contained, the parties hereto agree as follows:
1. Grant of Option. The Company hereby grants to Consultant an option (the
---------------
"Option") to purchase up to an aggregate amount of 150,000 shares of the
Company's Common Stock on the terms and conditions set forth herein.
2. Exercise. (a) Consultant may exercise this Option for up to 112,500 shares
--------
of the Company's Common Stock in cumulative installments, each exercisable in
whole or in part, from the date first exercisable up to the Expiration Date, as
follows:
<TABLE>
<CAPTION>
Number of shares as to
Date First Exercisable which Option is exercisable
- ---------------------- ---------------------------
<S> <C>
Effective Date 16,875
December 31, 1997 31,875
December 31, 1998 31,875
December 31, 1999 31,875
</TABLE>
(b) Consultant may exercise this Option for up to 37,500 additional shares of
the Company's Common Stock as follows:
In the event that (i) prior to the fifth anniversary of the Effective Date, the
Company shall have entered into On-line Outcomes Registry Agreements (as
hereinafter defined) which have in the aggregate Contract Values (as hereinafter
defined) of at least $40 million, and (ii) as of the date, if any, on which
clause (i) is satisfied, the average of the last reported sale prices of the
Company's common stock on the
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<PAGE>
Nasdaq National Market during the period of the thirty (30) most recent trading
days, ending on the date on which clause (i) is satisfied, is less than $28.00
per share, this Option may be exercised by Consultant, in whole or in part, as
to 18,750 shares of the Company's Common Stock. Notwithstanding the foregoing,
in the event that, prior to the fifth anniversary of the Effective Date, the
Company shall have entered into On-line Outcomes Registry Agreements which have
in the aggregate Contract Values of at least $75 million, this Option may be
exercised, in whole or in part, as to 37,500 shares of the Company's Common
Stock. "On-line Outcomes Registry Agreements" shall mean any written agreement,
understanding or arrangement pursuant to which the Company will develop,
maintain, manage, operate, or otherwise provide services related to, a central
registry or database (a "registry") that collects clinical medical data from
participants in the registry or database, primarily using On-line Technologies
(as hereinafter defined) to receive data into the registry, to process queries
to the registry, and to deliver reports and responses to the participants in the
registry. "On-line Technologies" shall mean software products and related
services that require a participant in the registry to access an off-site
central processing unit or server maintained by the Company or a third party in
order to input, aggregate, access and/or process the participant's clinical
medical data and other data from, or reports based on, the clinical medical data
in the registry. "Contract Value", as to any On-line Outcomes Registry
Agreement, shall be determined in accordance with Exhibit A hereto. The Company
agrees that within twenty (20) business days of the execution and delivery of
each On-line Outcomes Registry Agreement, the Company will determine in good
faith the Contract Value of such On-line Outcomes Registry Agreement in
accordance with the provisions of Exhibit A and will give written notice to
Consultant, which notice shall state the Contract Value for such On-line
Outcomes Registry Agreement as determined by the Company and the aggregate
Contract Values for all On-line Outcomes Registry Agreements as of the date of
such notice. The calculation of Contract Value set forth in this notice shall be
certified by Donald Fortin, M.D. as Chief Scientific Officer of the Company. If
Consultant objects to the determination of Contract Value within thirty (30)
business days following the date of the notice, the Company and Consultant shall
negotiate in good faith for a period of thirty (30) business days to settle any
dispute regarding the Contract Value. If such dispute has not been settled
within such thirty (30) business day period, the dispute shall be settled in
accordance with the arbitration provision of Section 11 below.
3. Purchase Price. The purchase price of the stock shall be $7.50 per share
--------------
(subject to adjustment as noted below).
4. Nonstatutory Option. The Option is not intended to be an incentive stock
-------------------
option within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended.
________________________________________________________________________________
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<PAGE>
5. Period of Exercise. The Option will expire on the date (the "Expiration
------------------
Date") ten (10) years from the Effective Date. The Option may be exercised only
while the Consulting Agreement is in effect between the Company and Consultant,
or alternatively as provided in Section 7, which deals with termination of the
Consulting Agreement; provided, however, that the Option shall not be
exercisable after the Expiration Date.
6. Transferability. This Option is not transferable except by will or the laws
---------------
laws of descent and distribution, or with the prior written consent of the
Company.
7. Termination of Consulting Agreement. The holder hereof shall have the
-----------------------------------
right to exercise the Option only to the extent of the full number of shares of
the Company's Common Stock the Consultant was entitled to purchase under the
Option on the effective date of termination of the Consulting Agreement;
provided, however, that if the Consulting Agreement terminates for any reason
other than Consultant's material breach thereof, or Consultant's voluntary
termination thereof other than as a result of Company's uncured material breach,
the Option shall be exercisable as to all 150,000 shares of the Company's Common
Stock immediately upon the effective date of such termination, notwithstanding
Section 2 above. In the event of termination of the Consulting Agreement for
any and all reasons, the Option may be exercised by the holder hereof until the
Expiration Date, subject to the extent provided in this Section 7.
8. Service. This Agreement shall in no way restrict the right of the Company
-------
or Consultant to terminate the Consulting Agreement in accordance with its
terms.
9. Method of Exercise. The Option may be exercised, subject to the terms and
------------------
conditions of this Agreement, by written notice to the Company. The notice shall
be in the form attached to this Agreement and will be accompanied by payment by
check (bank check, certified check or personal check) or by delivery to the
Company for cancellation shares of Common Stock having a Market Price (defined
in Section 13(f) below) equal to the full purchase price of the shares to be
issued on the date the notice of exercise is received by the Company, and in the
event of an exercise by an executor or administrator or other person authorized
under Section 6 hereof appropriate proof of the right of such person to exercise
the Option. The Company will issue and deliver certificates representing the
number of shares purchased under the Option, registered in the name of the
holder hereof as soon as practicable after receipt of the notice.
10. Withholding. In any case where withholding is required under federal,
-----------
state or local law in connection with any exercise by the Consultant hereunder,
Consultant may elect to (i) authorize the Company to withhold appropriate
amounts from amounts payable to the Consultant, (ii) remit to the Company an
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<PAGE>
amount equal to such appropriate withholding, or (iii) have the Company withhold
a portion of the shares of Common Stock otherwise to be delivered upon exercise
of such option having a Market Price equal to the amount of such appropriate
withholding.
11. Arbitration. Any dispute, claim or controversy arising out of or in
-----------
connection with this Agreement or this Option which has not been settled through
negotiation within a period of thirty (30) days after the date on which either
party shall first have notified the other party in writing of the existence of a
dispute shall be settled by final and binding arbitration under the then
applicable Commercial Arbitration Rules of the American Arbitration Association
("AAA"). Any such arbitration shall be conducted by three (3) arbitrators
appointed by mutual agreement of the parties or, failing such agreement, in
accordance with such AAA Rules. At least one (1) arbitrator shall be an
experienced computer software professional, and at least one (1) arbitrator
shall be an experienced business attorney with background in the licensing and
distribution of computer software. Any such arbitration shall be conducted in
Durham, North Carolina. An arbitral award may be enforced in any court of
competent jurisdiction. Notwithstanding any contrary provision in the AAA Rules,
the following additional procedures and rules shall apply to any such
arbitration:
(a) Each party shall have the right to request from the arbitrators, and the
arbitrators shall order upon good cause shown, reasonable and limited pre-
hearing discovery, including (i) exchange of witness lists, (ii) depositions
under oath of named witnesses at a mutually convenient location, (iii) written
interrogatories, and (iv) document requests.
(b) Upon conclusion of the pre-hearing discovery, the arbitrators shall
promptly hold a hearing upon the evidence to be adduced by the parties and shall
promptly render a written opinion and award.
(c) The arbitrators may not award or assess punitive damages against either
party.
(d) Each party shall bear its own costs and expenses of the arbitration and
one-half (1/2) of the fees and costs of the arbitrators, subject to the power of
the arbitrators, in their sole discretion, to award all such reasonable cots,
expenses and fees to the prevailing party.
12. Registration. Company shall use commercially reasonable efforts to
------------
register the shares of Common Stock that Consultant obtains pursuant to an
exercise of the Option on a registration statement on Form S-8 (or any successor
form) and the Company shall use commercially reasonable efforts to maintain the
effectiveness of
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<PAGE>
such registration statement for so long as any portion of the Option remains
exercisable by Consultant hereunder.
13. Anti-Dilution Adjustments. The above provisions are, however, subject to
-------------------------
the following:
(a) The purchase price set forth in Section 3 above shall, from and after the
date of issuance of this Option, be subject to adjustment from time to time as
hereinafter provided. Upon each adjustment of the purchase price, the holder
hereof shall thereafter be entitled to purchase, at the purchase price resulting
from such adjustment, the number of shares obtained by multiplying the purchase
price in effect immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment and dividing
the product thereof by the purchase price resulting from such adjustment.
(b) In case the Company shall at any time subdivide its outstanding shares of
Common Stock into a greater number of shares, including any dividend declared to
effect a subdivision of the outstanding shares of Common Stock, the purchase
price in effect immediately prior to such subdivision shall be proportionately
reduced, and conversely, in case the outstanding shares of Common Stock of the
Company shall be combined into a smaller number of shares, the purchase price in
effect immediately prior to such combination shall be proportionately increased.
(c) If any capital reorganization or reclassification of the capital stock of
the Company, or consolidation or merger of the Company with another corporation,
or the sale of all or substantially all of its assets to another corporation
shall be effected in such a way that holders of Common Stock shall be entitled
to receive stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provision shall be made
whereby the holder hereof shall thereafter have the right to purchase and
receive, upon the basis and upon the terms and conditions specified in this
Option and in lieu of the shares of Common Stock of the Company immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby, such shares of stock, securities or assets as may be issued
or payable with respect to or in exchange for a number of outstanding shares of
such Common Stock equal to the number of shares of such stock immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby had such reorganization, reclassification, consolidation,
merger or sale not taken place, and in any such case appropriate provision shall
be made with respect to the rights and interests of the holder hereof to the end
that the provisions hereof (including without limitation provisions for
adjustments of the purchase price and of the number of shares purchasable upon
the exercise of this Option) shall thereafter be applicable, as nearly as may
be, in relation to any shares of
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<PAGE>
stock, securities or assets thereafter deliverable upon the exercise hereof. The
Company shall not effect any such consolidation, merger or sale, unless prior to
the consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation purchasing such
assets shall assume, by written instrument executed and mailed to the registered
holder hereof at the last address of such holder appearing on the books of the
Company, the obligation to deliver to such holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to purchase.
(d) Upon any adjustment of the purchase price, then and in each such case the
Company shall give written notice thereof, by first-class mail, postage prepaid,
addressed to the registered holder of this Option at the address of such holder
as shown on the books of the Company, which notice shall state the purchase
price resulting from such adjustment and the increase or decrease, if any, in
the number of shares purchasable at such price upon the exercise of this Option,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
(e) If any event occurs as to which the other provisions of this Section 13 are
not strictly applicable or if strictly applicable would not fairly protect the
purchase rights of the holder of this Option or of Common Stock in accordance
with the essential intent and principles of such provisions, then this Option
shall be adjusted in the application of such provisions, in accordance with such
essential intent and principles, so as to protect such purchase rights as
aforesaid.
(f) No fractional shares of Common Stock shall be issued upon the exercise of
this Option, but, instead of any fraction of a share which would otherwise be
issuable, the Company shall pay a cash adjustment (which may be effected as a
reduction of the amount to be paid by the holder hereof upon such exercise) in
respect of such fraction in an amount equal to the same fraction of the Market
Price per share of Common Stock on the date of the written notice of exercise
required by Section 9 above. "Market Price" for purposes of this Section 13(f),
Sections 9 and 10 hereof, and for the purpose of determining the option purchase
price shall mean, if the Common Stock is traded on a securities exchange or on
the Nasdaq National Market, the closing price of the Common Stock on such
exchange or the Nasdaq National Market, or, if the Common Stock is otherwise
traded in the over-the-counter market, the closing bid price, in each case
averaged over a period of 5 consecutive business days prior to the date as of
which "Market Price" is being determined. If at any time the Common Stock is not
traded on an exchange or the Nasdaq National Market, or otherwise traded in the
over-the-counter market, the "Market Price" shall be deemed to be the higher of
(i) the book value thereof as determined by any firm of independent public
accountants of recognized standing
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<PAGE>
selected by the Board of Directors of the Company as of the last day of any
month ending within 60 days preceding the date as of which the determination is
to be made, or (ii) the fair value thereof determined in good faith by the Board
of Directors of the Company as of a date which is within 15 days of the date as
of which the determination is to be made.
14. Common Stock. As used herein, the term "Common Stock" shall mean and
-------------
include the Company's presently authorized Common Stock and shall also include
any capital stock of any class of the Company hereafter authorized which shall
not be limited to a fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Company; provided that the shares purchasable pursuant to this Option shall
include shares designated as Common Stock of the Company on the date of original
issue of this Option or, in the case of any reclassification of the outstanding
shares thereof, the stock, securities or assets provided for in Section 13(c)
above.
15. No Voting Rights. This Option shall not entitle the holder hereof to any
----------------
voting rights or other rights as a shareholder of the Company.
16. Optional Conversion.
-------------------
(a) In addition to and without limiting the rights of the holder of this Option
under the terms of this Option, such holder shall have the right (the
"Conversion Right") to convert this Option or any portion thereof into shares of
Common Stock as provided in this Section 16 at any time from and after the
Effective Date and to and including the Expiration Date, subject to the
restrictions set forth in Section 5. Upon exercise of the Conversion Right with
respect to a particular number of shares subject to this Option (the "Converted
Option Shares"), the Company shall deliver to the holder of this Option, without
payment by the holder of any exercise price or any cash or other consideration,
that number of shares of Common Stock equal to the quotient obtained by dividing
the Net Value (as hereinafter defined) of the Converted Option Shares by the
Market Price of a single share of Common Stock, determined in each case as of
the close of business on the Conversion Date (as hereinafter defined). The "Net
Value" of the Converted Option Shares shall be determined by subtracting the
aggregate option purchase price of the Converted Option Shares from the Market
Price of the Converted Option Shares. Notwithstanding anything in this Section
16 to the contrary, the Conversion Right cannot be exercised with respect to a
number of Converted Option Shares having a Net Value below $100. No fractional
shares shall be issuable upon exercise of the Conversion Right, and if the
number of shares to be issued in accordance with the foregoing formula is other
than a whole number, the Company shall pay to the
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<PAGE>
holder of this Option an amount in cash equal to the fair market value of the
resulting fractional share.
(b) The Conversion Right may be exercised by the holder of this Option by the
surrender of this Option at the principal office of the Company together with a
written statement specifying that the holder thereby intends to exercise the
Conversion Right and indicating the number of shares subject to this Option
which are being surrendered (referred to in paragraph (a) above as the Converted
Option Shares) in exercise of the Conversion Right. Such conversion shall be
effective upon receipt by the Company of this Option together with the aforesaid
written statement, or on such later date as is specified therein (the
"Conversion Date"), but not later than the Expiration Date. Certificates for
the shares of Common Stock issuable upon exercise of the Conversion Right,
together with a check in payment of any fractional share and, in the case of a
partial exercise, a new option evidencing the shares remaining subject to this
Option, shall be issued as of the Conversion Date and shall be delivered to the
holder of this Option within 7 days following the Conversion Date.
17. Governing Law. All questions concerning this Option will be governed and
-------------
interpreted and enforced in accordance with the internal law of the State of
Minnesota without regard for principles of conflict of law.
ACCEPTED: SUMMIT MEDICAL SYSTEMS, INC.
____________________________________ By_________________________________
Robert M. Califf, M.D.
Its________________________________
________________________________________________________________________________
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<PAGE>
EXHIBIT A
CONTRACT VALUE
The Contract Value of each On-line Outcomes Registry Agreement shall be
determined in accordance with the following procedures. The Contract Value of
each On-line Outcomes Registry Agreement shall equal the sum of (a) the Fixed
Fees (as hereinafter defined) and (b) the Variable Fees (as hereinafter
defined). "Fixed Fees" shall mean the sum of all sponsorship fees, periodic site
license fees or other fixed fees to be paid to the Company during the term of
the On-line Outcomes Registry Agreement for which a cash payment of an amount
certain is specified in such agreement. "Variable Fees" shall mean the product
of the Estimated Fees (as hereinafter defined) multiplied by .75. "Estimated
Fees" shall mean the sum of all usage, encounter, inquiry, training, service and
other variable fees, based on usage of the registry and related services by
participants, to be paid to the Company during the term of the On-line Outcomes
Registry Agreement. The Company shall estimate the Estimated Fees in good faith
as of the date the On-line Outcomes Registry Agreement is executed and
delivered. The Company represents, warrants and covenants that it will have a
reasonable basis for its estimate of Estimated Fees and that such estimate will
be prepared on a basis consistent with the internal projections of the Company.
The estimate of Estimated Fees will be prepared using the pricing terms as set
forth in the On-line Outcomes Registry Agreement, including, without limitation,
estimates of any volume discounts, based on the usage estimates made in
accordance with the following sentence. The Company shall prepare in good faith
an estimate of the usage of the registry and related services by participants
over the term of the On-line Outcomes Registry Agreement. By way of example
only, an estimate of the Estimated Fees for a stent registry would include (i)
an estimate of the number of cardiac catheter laboratories ("cath labs") to be
covered by the agreement, (ii) an estimate of the size distribution of such cath
labs, (iii) an estimate of usage of the registry and related services by each
cath lab based on its size, and (iv) an estimate of any volume discounts based
on the foregoing. The foregoing procedure shall be applied in a manner similar
to the illustration attached hereto as Exhibit B, subject to the specific terms
and conditions of the applicable On-Line Outcomes Registry Agreement; provided,
that in Exhibit B the calculation of Contract Value illustrated therein shall
not include the Net Present Value discount shown, but, rather, shall include the
multiplication of any Estimated Fees by the factor of .75.
________________________________________________________________________________
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SUMMIT MEDICAL SYSTEMS, INC.
----------------------------
NOTICE OF EXERCISE OF STOCK OPTION
----------------------------------
To: Board of Directors
SUMMIT MEDICAL SYSTEMS, INC.
I hereby exercise my Option dated __________ to purchase _____ shares of $.01
par value common stock of the Company at the option exercise price of
$__________ per share. Enclosed is a certified or cashier's check in the total
amount of $__________, or payment in such other form as the Company has
specified.
I request that my shares be issued in my name as follows:
________________________________________________________________________________
(Print your name in the form in which you wish to
have the shares registered)
________________________________________________________________________________
(Social Security Number)
________________________________________________________________________________
(Street and Number)
________________________________________________________________________________
(City) (State) (Zip Code)
Dated: __________, 19__.
Signature: _____________________________
________________________________________________________________________________
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EXHIBIT G
CONSULTING AGREEMENT
CONSULTING AGREEMENT is made and entered into as of the 31st day of
December, 1996 (the "Effective Date"), by and between Summit Medical Systems,
Inc., a Minnesota corporation ("Summit"), and Harry R. Phillips, III, M.D., an
individual resident of the State of North Carolina (the "Consultant").
WHEREAS, Consultant has heretofore been retained as a consultant to
Cordillera, LLC, a Delaware limited liability corporation (the "Company");
WHEREAS, Summit has agreed to acquire the Company pursuant to a
Reorganization Agreement of even date herewith (the "Reorganization Agreement")
by and among Summit, Company, DR Ware LLC and Duke University, which provides
for the purchase by Summit of all other parties' member units, and options for
member units, in Company, and the wind-up and transfer of the Company's business
to Summit (the "Reorganization");
WHEREAS, the parties to the Reorganization Agreement have agreed that
execution of this Agreement is a condition of closing the Reorganization; and
WHEREAS, Summit desires to retain the services of Consultant
subsequent to the consummation of the Reorganization, and Consultant desires to
be so retained by Summit, on the terms and subject to the conditions set forth
in this Agreement.
NOW, THEREFORE, in consideration of the respective covenants and
commitments of Summit and Consultant set forth below, and as an inducement to
Summit to consummate the Reorganization, Summit and Consultant hereby agree as
follows:
1. Consulting. Summit hereby retains the consulting services of
----------
Consultant, and Consultant shall perform such consulting services for Summit,
for the period and upon the other terms and conditions set forth in this
Agreement.
2. Term. Unless terminated at an earlier date in accordance with Section
----
8 of this Agreement, Consultant's services shall be retained hereunder for a
continuous period of four (4) years beginning on the Effective Date. Thereafter,
the terms of this Agreement shall be extended for successive one year periods
unless Summit or Consultant objects to such extension by written notice to the
other party at least ninety (90) days prior to the expiration of such initial
term or any extension thereof.
________________________________________________________________________________
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3. Position and Duties.
-------------------
3.1 Service with Summit. During the term of this Agreement,
-------------------
Consultant agrees to perform such duties and projects on behalf of Summit as the
parties shall mutually agree, provided that Consultant shall be available for
such duties and projects for at least four (4) hours of service in each month of
this Agreement.
3.2 Performance of Duties. With respect to those duties and
---------------------
projects of Consultant hereunder, Consultant agrees to serve Summit faithfully
and to the best of his ability. Consultant hereby confirms that he is under no
contractual commitments inconsistent with his obligations set forth in this
Agreement and that, during the term hereof, he shall not enter into contractual
commitments that are materially inconsistent with the provisions of this
Agreement or which would otherwise materially impair his ability to perform his
duties hereunder.
3.3 Location. Consultant shall perform services hereunder primarily
--------
at Summit's offices in Raleigh, North Carolina, but he may, at Summit's expense,
also render services at such other locations as may be specified by Summit and
agreed to by Consultant.
4. Compensation.
------------
4.1 Consulting Fee. As compensation in full for Consultant's
--------------
services hereunder, Summit shall pay to Consultant a consulting fee at the rate
of Twelve Hundred Fifty Dollars ($1,250.00) per month. The consulting fee shall
be payable to Consultant in arrears at the end of each calendar month during the
term of this Agreement, and a prorated portion of such fee shall be payable upon
termination of this Agreement if such termination occurs other than at the end
of a month.
4.2 Option. On the Closing Date (as defined in the Reorganization
------
Agreement), Summit shall grant to Consultant a non-qualified stock option (the
"Option") to subscribe for and purchase common stock of Summit, up to the
aggregate amount of 150,000 shares, subject to the terms and conditions of the
Nonstatutory Stock Option Agreement between the Summit and Consultant of even
date herewith.
4.3 Taxes. Consultant shall be solely responsible for any income or
-----
social security taxes due upon any payments or the Options received under this
Agreement, and hereby indemnifies and holds Summit harmless from any charge,
liability or penalty due to or arising out of any failure by Consultant to pay
such
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taxes. Consultant acknowledges Summit may issue a Form 1099 as to any
payments or Options received under this Agreement and report the same to the
Internal Revenue Service.
4.4 Signing Bonus. Summit agrees to pay consultant a signing bonus
-------------
on January 2, 1997, in the amount of $59,685.
5. Expenses. Consultant shall be reimbursed by Summit in accordance with
--------
the policies and procedures that are established from time to time by Summit for
all reasonable and necessary out-of-pocket expenses that are incurred by
Consultant in performing his duties under this Agreement, including, without
limitation, reasonable travel expenses incurred by Consultant in rendering
services outside of the metropolitan Raleigh, North Carolina area.
6. Confidential Information. Except as permitted or directed by Summit,
------------------------
during the term of this Agreement or at any time thereafter, Consultant shall
not divulge, furnish or make accessible to anyone or use in any way (other than
in performing his duties hereunder) any confidential or secret knowledge or
information of the Company, Summit or of any Summit Affiliate which Consultant
has acquired or become acquainted with prior to the term of this Agreement while
being engaged as a consultant for the Company, or shall acquire or become
acquainted with during the term of this Agreement in the course of performing
Consultant's duties hereunder, whether or not during regular working hours, in
each case, whether developed by himself or by others, concerning any trade
secrets, confidential or secret designs, processes, formulae, plans, algorithms,
software, devices or material (whether or not patented or patentable) directly
or indirectly useful in any aspect of the business of Summit or of any Summit
Affiliate, any customer or supplier lists of Summit or of any Summit Affiliate,
any confidential or secret development or research work of Summit or of any
Summit Affiliate, or any other confidential information or secret aspects of the
business of Summit or any Summit Affiliate. As used herein, "Summit Affiliate"
shall mean any entity that controls or is controlled by Summit, with "control"
meaning the ownership of 50% or more of the voting securities in such entity.
Consultant acknowledges that the above-described knowledge or information
constitutes a unique and valuable asset of Summit and of the respective Summit
Affiliates and represents a substantial investment of time and expense by Summit
and Summit Affiliates and that any disclosure or other use of such knowledge or
information other than for the sole benefit of Summit or of any Summit Affiliate
would be wrongful and would cause irreparable harm to Summit or such Summit
Affiliate. Both during and after the term of this Agreement, Consultant shall
not intentionally act in any manner that is reasonably likely to reduce the
value of such knowledge or information to Summit or any Summit Affiliate. The
foregoing obligations of confidentiality shall not apply to any knowledge or
information that (a) is at the time acquired by Consultant, or
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thereafter becomes, a part of the public domain other than through the act or
omission of Consultant, (b) is provided by Summit or any Summit Affiliate to a
third party without any obligation of confidentiality, or (c) is required by law
to be disclosed.
7. Intellectual Property.
---------------------
7.1 Assignment. Consultant hereby assigns to Summit, to the extent
----------
such rights are not already owned by the Company or Summit, (a) all tangible
embodiments of and intellectual property rights in developments made or
conceived by Consultant, solely or in collaboration with others, during and in
the course of his provision of services to the Company prior to the Effective
Date of this Agreement, and (b) all intellectual property rights in developments
made or conceived by Consultant, solely or in collaboration with others, during
and in the course of his provision of services to Summit hereunder during the
term of this Agreement. Consultant further agrees that all copyrightable works
made by Consultant for Summit shall be, if possible, considered "works made for
hire" for the benefit of Summit and, to the extent not qualifying as "works made
for hire," all rights in such copyrightable works are hereby assigned to Summit.
Consultant shall disclose promptly and fully to Summit all developments owned by
Summit under this Agreement. Consultant warrants that his rights in developments
assigned to Summit by this Agreement have not been previously licensed, pledged,
assigned or encumbered by Consultant other than as may have been assigned to the
Company.
7.2 Records. Consultant shall keep complete and accurate accounts,
-------
notes, data and records of all developments in the manner and form reasonably
requested by Summit. Such accounts, notes, data and records shall be the
property of Summit, and, upon request by Summit, Consultant shall promptly
surrender the same to it or, if not previously surrendered upon its request or
otherwise, Consultant shall surrender the same, and all copies thereof, to
Summit upon the conclusion of this Agreement.
8. Termination. This Agreement may be terminated prior to its expiration
-----------
(a) in the event of a material breach by either party, which breach is not cured
within thirty (30) days written notice by the other party, or (b) at any time by
either party upon ninety (90) days prior written notice. The parties' rights and
obligations under Sections 6, 7, 9 and 10 shall survive any termination of this
Agreement, and Consultant shall be entitled to receive its consulting fee and
expenses for any services performed prior to such termination.
________________________________________________________________________________
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9. Settlement of Disputes.
----------------------
9.1 Arbitration. Except as provided in Section 9.2, any claims or
-----------
disputes of any nature between Summit and Consultant arising from or related to
the performance, breach, termination, expiration, application, or meaning of
this Agreement or any matter relating to Consultant's services and the
termination of such services by Summit shall be resolved exclusively by
arbitration in Durham, North Carolina, in accordance with the applicable rules
then obtaining of the American Arbitration Association. The fees of the
arbitrator(s), reasonable attorneys' fees and other costs incurred by Consultant
and Summit in connection with such arbitration shall be recovered by the
prevailing party in such arbitration.
The decision of the arbitrator(s) shall be final and binding
upon both parties. Judgment of the award rendered by the arbitrator(s) may be
entered in any court having jurisdiction thereof. In the event of submission of
any dispute to arbitration, each party shall, not later than thirty (30) days
prior to the date set for hearing, provide to the other party and to the
arbitrator(s) a copy of all exhibits upon which the party intends to rely at the
hearing and a list of all persons each party intends to call at the hearing.
9.2 Resolution of Certain Claims - Injunctive Relief. Section 9.1
------------------------------------------------
shall have no application to claims by Summit asserting a violation of Sections
6 or 7 or seeking to enforce, by injunction or otherwise, the terms of Sections
6 or 7. Such claims may be maintained by Summit in a lawsuit subject to the
terms of Section 9.3. Consultant agrees that, in addition to, but not to the
exclusion of, any other available remedy, Summit shall have the right to enforce
the provisions of Sections 6 or 7 by applying for and obtaining temporary and
permanent restraining orders or injunctions from a court of competent
jurisdiction subject to filing a bond therefor, and the prevailing party shall
be entitled to recover from the other party its reasonable attorneys' fees and
costs in actions related to the enforcement of the provisions of Sections 6 or
7.
9.3 Venue. Any action or proceeding arising under Section 9.2 of
-----
this Agreement shall be litigated only in the federal or state courts located in
the State of Minnesota, County of Hennepin. Consultant agrees to agrees that
such a venue is reasonable and convenient and waives any right Consultant may
have to transfer or change the venue of any litigation brought against
Consultant by Summit pursuant to such Section 9.2.
9.4 Severability. To the extent any provision of this Agreement
------------
shall be invalid or unenforceable, it shall be considered deleted herefrom and
the remainder of such provision and of this Agreement shall be unaffected and
shall continue in full force and effect.
________________________________________________________________________________
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10. Miscellaneous.
--------------
10.1 Governing Law. This Agreement is made under and shall be
-------------
governed by and construed in accordance with the laws of the State of Minnesota,
excluding its choice of law rules.
10.2 Prior Agreements. This Agreement (including the Options and
----------------
Stock Option Agreement) contains the entire agreement of the parties relating to
Consultant's services for Summit and the ancillary matters discussed herein and
supersedes all prior agreements and understandings with respect to such matters,
whether oral or written, and the parties hereto have made no agreements,
representations or warranties relating to such services or ancillary matters
which are not set forth herein.
10.3 Relationship of Parties. It is understood and agreed that
-----------------------
Consultant is an independent contractor and not an employee of the Summit.
Consultant has no authority to obligate the Summit by contract or otherwise.
10.4 Amendments. No amendment or modification of this Agreement
----------
shall be deemed effective unless made in writing and signed by the both
Consultant and Summit.
10.5 No Waiver. No term or condition of this Agreement shall be
---------
deemed to have been waived, nor shall there be any estoppel to enforce any
provisions of this Agreement, except by a statement in writing signed by the
party against whom enforcement of the waiver or estoppel is sought. Any written
waiver shall not be deemed a continuing waiver unless specifically stated, shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
10.6 Assignment. The rights and duties of Consultant under this
----------
Agreement are personal and may not be assigned, in whole or in part, without the
written consent of Summit, in its sole discretion. Subject to the foregoing,
this Agreement shall be binding upon and inure to the benefit of, and be
enforceable against, the parties hereto and any permitted assignees or
successors.
10.7 Counterparts. This Agreement may be simultaneously executed in
------------
any number of counterparts, and such counterparts executed and delivered, each
as an original, shall constitute but one and the same instrument.
________________________________________________________________________________
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10.8 Captions and Headings. The captions and paragraph headings used
---------------------
in this Agreement are for convenience of reference only, and shall not affect
the construction or interpretation of this Agreement or any of the provisions
hereof.
10.9 Notices. All notices and other communications hereunder shall
-------
be in writing and shall be deemed given if delivered personally or by facsimile
transmission (receipt verified), telexed, or sent by express courier service, to
the parties at the following addresses (or at such other address for a party as
shall be specified by like notice; provided, that notices of a change or address
shall be effective only upon receipt thereof):
If to Summit, addressed to:
Summit Medical Systems, Inc.
10900 Red Circle Drive, Suite 100
Minneapolis, Minnesota 55343-9106.
Fax: (612) 939-2790
Attn: Chief Financial Officer
If to Consultant, addressed to:
Harry R. Phillips, III, M.D.
Division of Cardiology
7412 Duke North
Box 3126, Duke University Medical Center
Durham, North Carolina 27705
Fax:(919) 681-4804
IN WITNESS WHEREOF, Summit and Consultant have executed this Agreement as
of the Effective Date.
HARRY R. PHILLIPS, III, M.D. SUMMIT MEDICAL SYSTEMS, INC.
____________________________________ By_________________________________
Name_______________________________
Title______________________________
________________________________________________________________________________
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<PAGE>
EXHIBIT H
SUMMIT MEDICAL SYSTEMS INC.
NONSTATUTORY STOCK OPTION AGREEMENT
This Nonstatutory Stock Option Agreement is made this 31st day of December
1996 (the "Effective Date"), by and between Summit Medical Systems, Inc. (the
"Company") and Harry R. Phillips, III, M.D. (the "Consultant").
WHEREAS, the Company and Consultant desire to enter into an Consulting
Agreement of even date herewith (the "Consulting Agreement") pursuant to which
Consultant would provide certain consulting services to the Company; and
WHEREAS, an option to purchase shares of the Company's common stock is an
essential inducement for Consultant to enter into the Consulting Agreement.
NOW THEREFORE, in consideration of the premises and of the mutual covenants
herein contained, the parties hereto agree as follows:
1. Grant of Option. The Company hereby grants to Consultant an option (the
---------------
"Option") to purchase up to an aggregate amount of 150,000 shares of the
Company's Common Stock on the terms and conditions set forth herein.
2. Exercise. (a) Consultant may exercise this Option for up to 112,500 shares
--------
of the Company's Common Stock in cumulative installments, each exercisable in
whole or in part, from the date first exercisable up to the Expiration Date, as
follows:
<TABLE>
<CAPTION>
Number of shares as to
Date First Exercisable which Option is exercisable
- ------------------------------------------------------------------------
<S> <C>
Effective Date 16,875
December 31, 1997 31,875
December 31, 1998 31,875
December 31, 1999 31,875
</TABLE>
(b) Consultant may exercise this Option for up to 37,500 additional shares of
the Company's Common Stock as follows:
In the event that (i) prior to the fifth anniversary of the Effective Date, the
Company shall have entered into On-line Outcomes Registry Agreements (as
hereinafter defined) which have in the aggregate Contract Values (as hereinafter
defined) of at least $40 million, and (ii) as of the date, if any, on which
clause (i) is satisfied, the average of the last reported sale prices of the
Company's common stock on the
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Nasdaq National Market during the period of the thirty (30) most recent trading
days, ending on the date on which clause (i) is satisfied, is less than $28.00
per share, this Option may be exercised by Consultant, in whole or in part, as
to 18,750 shares of the Company's Common Stock. Notwithstanding the foregoing,
in the event that, prior to the fifth anniversary of the Effective Date, the
Company shall have entered into On-line Outcomes Registry Agreements which have
in the aggregate Contract Values of at least $75 million, this Option may be
exercised, in whole or in part, as to 37,500 shares of the Company's Common
Stock. "On-line Outcomes Registry Agreements" shall mean any written agreement,
understanding or arrangement pursuant to which the Company will develop,
maintain, manage, operate, or otherwise provide services related to, a central
registry or database (a "registry") that collects clinical medical data from
participants in the registry or database, primarily using On-line Technologies
(as hereinafter defined) to receive data into the registry, to process queries
to the registry, and to deliver reports and responses to the participants in the
registry. "On-line Technologies" shall mean software products and related
services that require a participant in the registry to access an off-site
central processing unit or server maintained by the Company or a third party in
order to input, aggregate, access and/or process the participant's clinical
medical data and other data from, or reports based on, the clinical medical data
in the registry. "Contract Value", as to any On-line Outcomes Registry
Agreement, shall be determined in accordance with Exhibit A hereto. The Company
agrees that within twenty (20) business days of the execution and delivery of
each On-line Outcomes Registry Agreement, the Company will determine in good
faith the Contract Value of such On-line Outcomes Registry Agreement in
accordance with the provisions of Exhibit A and will give written notice to
Consultant, which notice shall state the Contract Value for such On-line
Outcomes Registry Agreement as determined by the Company and the aggregate
Contract Values for all On-line Outcomes Registry Agreements as of the date of
such notice. The calculation of Contract Value set forth in this notice shall be
certified by Donald Fortin, M.D. as Chief Scientific Officer of the Company. If
Consultant objects to the determination of Contract Value within thirty (30)
business days following the date of the notice, the Company and Consultant shall
negotiate in good faith for a period of thirty (30) business days to settle any
dispute regarding the Contract Value. If such dispute has not been settled
within such thirty (30) business day period, the dispute shall be settled in
accordance with the arbitration provision of Section 11 below.
3. Purchase Price. The purchase price of the stock shall be $7.50 per share
--------------
(subject to adjustment as noted below).
4. Nonstatutory Option. The Option is not intended to be an incentive stock
-------------------
option within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended.
________________________________________________________________________________
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<PAGE>
5. Period of Exercise. The Option will expire on the date (the "Expiration
------------------
Date") ten (10) years from the Effective Date. The Option may be exercised only
while the Consulting Agreement is in effect between the Company and Consultant,
or alternatively as provided in Section 7, which deals with termination of the
Consulting Agreement; provided, however, that the Option shall not be
exercisable after the Expiration Date.
6. Transferability. This Option is not transferable except by will or the laws
---------------
of descent and distribution, or with the prior written consent of the Company.
7. Termination of Consulting Agreement. The holder hereof shall have the
-----------------------------------
right to exercise the Option only to the extent of the full number of shares of
the Company's Common Stock the Consultant was entitled to purchase under the
Option on the effective date of termination of the Consulting Agreement;
provided, however, that if the Consulting Agreement terminates for any reason
other than Consultant's material breach thereof, or Consultant's voluntary
termination thereof other than as a result of Company's uncured material breach,
the Option shall be exercisable as to all 150,000 shares of the Company's Common
Stock immediately upon the effective date of such termination, notwithstanding
Section 2 above. In the event of termination of the Consulting Agreement for
any and all reasons, the Option may be exercised by the holder hereof until the
Expiration Date, subject to the extent provided in this Section 7.
8. Service. This Agreement shall in no way restrict the right of the Company
-------
or Consultant to terminate the Consulting Agreement in accordance with its
terms.
9. Method of Exercise. The Option may be exercised, subject to the terms and
------------------
conditions of this Agreement, by written notice to the Company. The notice shall
be in the form attached to this Agreement and will be accompanied by payment by
check (bank check, certified check or personal check) or by delivery to the
Company for cancellation shares of Common Stock having a Market Price (defined
in Section 13(f) below) equal to the full purchase price of the shares to be
issued on the date the notice of exercise is received by the Company, and in the
event of an exercise by an executor or administrator or other person authorized
under Section 6 hereof appropriate proof of the right of such person to exercise
the Option. The Company will issue and deliver certificates representing the
number of shares purchased under the Option, registered in the name of the
holder hereof as soon as practicable after receipt of the notice.
10. Withholding. In any case where withholding is required under federal,
-----------
state or local law in connection with any exercise by the Consultant hereunder,
Consultant may elect to (i) authorize the Company to withhold appropriate
amounts from amounts payable to the Consultant, (ii) remit to the Company an
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<PAGE>
amount equal to such appropriate withholding, or (iii) have the Company withhold
a portion of the shares of Common Stock otherwise to be delivered upon exercise
of such option having a Market Price equal to the amount of such appropriate
withholding.
11. Arbitration. Any dispute, claim or controversy arising out of or in
-----------
connection with this Agreement or this Option which has not been settled through
negotiation within a period of thirty (30) days after the date on which either
party shall first have notified the other party in writing of the existence of a
dispute shall be settled by final and binding arbitration under the then
applicable Commercial Arbitration Rules of the American Arbitration Association
("AAA"). Any such arbitration shall be conducted by three (3) arbitrators
appointed by mutual agreement of the parties or, failing such agreement, in
accordance with such AAA Rules. At least one (1) arbitrator shall be an
experienced computer software professional, and at least one (1) arbitrator
shall be an experienced business attorney with background in the licensing and
distribution of computer software. Any such arbitration shall be conducted in
Durham, North Carolina. An arbitral award may be enforced in any court of
competent jurisdiction. Notwithstanding any contrary provision in the AAA
Rules, the following additional procedures and rules shall apply to any such
arbitration:
(a) Each party shall have the right to request from the arbitrators, and the
arbitrators shall order upon good cause shown, reasonable and limited pre-
hearing discovery, including (i) exchange of witness lists, (ii) depositions
under oath of named witnesses at a mutually convenient location, (iii) written
interrogatories, and (iv) document requests.
(b) Upon conclusion of the pre-hearing discovery, the arbitrators shall
promptly hold a hearing upon the evidence to be adduced by the parties and shall
promptly render a written opinion and award.
(c) The arbitrators may not award or assess punitive damages against either
party.
(d) Each party shall bear its own costs and expenses of the arbitration and
one-half (1/2) of the fees and costs of the arbitrators, subject to the power of
the arbitrators, in their sole discretion, to award all such reasonable cots,
expenses and fees to the prevailing party.
12. Registration. Company shall use commercially reasonable efforts to
------------
register the shares of Common Stock that Consultant obtains pursuant to an
exercise of the Option on a registration statement on Form S-8 (or any successor
form) and the Company shall use commercially reasonable efforts to maintain the
effectiveness of
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such registration statement for so long as any portion of the Option remains
exercisable by Consultant hereunder.
13. Anti-Dilution Adjustments. The above provisions are, however, subject to
-------------------------
the following:
(a) The purchase price set forth in Section 3 above shall, from and after the
date of issuance of this Option, be subject to adjustment from time to time as
hereinafter provided. Upon each adjustment of the purchase price, the holder
hereof shall thereafter be entitled to purchase, at the purchase price resulting
from such adjustment, the number of shares obtained by multiplying the purchase
price in effect immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment and dividing
the product thereof by the purchase price resulting from such adjustment.
(b) In case the Company shall at any time subdivide its outstanding shares of
Common Stock into a greater number of shares, including any dividend declared to
effect a subdivision of the outstanding shares of Common Stock, the purchase
price in effect immediately prior to such subdivision shall be proportionately
reduced, and conversely, in case the outstanding shares of Common Stock of the
Company shall be combined into a smaller number of shares, the purchase price in
effect immediately prior to such combination shall be proportionately increased.
(c) If any capital reorganization or reclassification of the capital stock of
the Company, or consolidation or merger of the Company with another corporation,
or the sale of all or substantially all of its assets to another corporation
shall be effected in such a way that holders of Common Stock shall be entitled
to receive stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provision shall be made
whereby the holder hereof shall thereafter have the right to purchase and
receive, upon the basis and upon the terms and conditions specified in this
Option and in lieu of the shares of Common Stock of the Company immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby, such shares of stock, securities or assets as may be issued
or payable with respect to or in exchange for a number of outstanding shares of
such Common Stock equal to the number of shares of such stock immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby had such reorganization, reclassification, consolidation,
merger or sale not taken place, and in any such case appropriate provision shall
be made with respect to the rights and interests of the holder hereof to the end
that the provisions hereof (including without limitation provisions for
adjustments of the purchase price and of the number of shares purchasable upon
the exercise of this Option) shall thereafter be applicable, as nearly as may
be, in relation to any shares of
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stock, securities or assets thereafter deliverable upon the exercise hereof. The
Company shall not effect any such consolidation, merger or sale, unless prior to
the consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation purchasing such
assets shall assume, by written instrument executed and mailed to the registered
holder hereof at the last address of such holder appearing on the books of the
Company, the obligation to deliver to such holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to purchase.
(d) Upon any adjustment of the purchase price, then and in each such case the
Company shall give written notice thereof, by first-class mail, postage prepaid,
addressed to the registered holder of this Option at the address of such holder
as shown on the books of the Company, which notice shall state the purchase
price resulting from such adjustment and the increase or decrease, if any, in
the number of shares purchasable at such price upon the exercise of this Option,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
(e) If any event occurs as to which the other provisions of this Section 13 are
not strictly applicable or if strictly applicable would not fairly protect the
purchase rights of the holder of this Option or of Common Stock in accordance
with the essential intent and principles of such provisions, then this Option
shall be adjusted in the application of such provisions, in accordance with such
essential intent and principles, so as to protect such purchase rights as
aforesaid.
(f) No fractional shares of Common Stock shall be issued upon the exercise of
this Option, but, instead of any fraction of a share which would otherwise be
issuable, the Company shall pay a cash adjustment (which may be effected as a
reduction of the amount to be paid by the holder hereof upon such exercise) in
respect of such fraction in an amount equal to the same fraction of the Market
Price per share of Common Stock on the date of the written notice of exercise
required by Section 9 above. "Market Price" for purposes of this Section 13(f),
Sections 9 and 10 hereof, and for the purpose of determining the option purchase
price shall mean, if the Common Stock is traded on a securities exchange or on
the Nasdaq National Market, the closing price of the Common Stock on such
exchange or the Nasdaq National Market, or, if the Common Stock is otherwise
traded in the over-the-counter market, the closing bid price, in each case
averaged over a period of 5 consecutive business days prior to the date as of
which "Market Price" is being determined. If at any time the Common Stock is
not traded on an exchange or the Nasdaq National Market, or otherwise traded in
the over-the-counter market, the "Market Price" shall be deemed to be the higher
of (i) the book value thereof as determined by any firm of independent public
accountants of recognized standing
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<PAGE>
selected by the Board of Directors of the Company as of the last day of any
month ending within 60 days preceding the date as of which the determination is
to be made, or (ii) the fair value thereof determined in good faith by the Board
of Directors of the Company as of a date which is within 15 days of the date as
of which the determination is to be made.
14. Common Stock. As used herein, the term "Common Stock" shall mean and
-------------
include the Company's presently authorized Common Stock and shall also include
any capital stock of any class of the Company hereafter authorized which shall
not be limited to a fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Company; provided that the shares purchasable pursuant to this Option shall
include shares designated as Common Stock of the Company on the date of original
issue of this Option or, in the case of any reclassification of the outstanding
shares thereof, the stock, securities or assets provided for in Section 13(c)
above.
15. No Voting Rights. This Option shall not entitle the holder hereof to any
----------------
voting rights or other rights as a shareholder of the Company.
16. Optional Conversion.
-------------------
(a) In addition to and without limiting the rights of the holder of this Option
under the terms of this Option, such holder shall have the right (the
"Conversion Right") to convert this Option or any portion thereof into shares of
Common Stock as provided in this Section 16 at any time from and after the
Effective Date and to and including the Expiration Date, subject to the
restrictions set forth in Section 5. Upon exercise of the Conversion Right with
respect to a particular number of shares subject to this Option (the "Converted
Option Shares"), the Company shall deliver to the holder of this Option, without
payment by the holder of any exercise price or any cash or other consideration,
that number of shares of Common Stock equal to the quotient obtained by dividing
the Net Value (as hereinafter defined) of the Converted Option Shares by the
Market Price of a single share of Common Stock, determined in each case as of
the close of business on the Conversion Date (as hereinafter defined). The "Net
Value" of the Converted Option Shares shall be determined by subtracting the
aggregate option purchase price of the Converted Option Shares from the Market
Price of the Converted Option Shares. Notwithstanding anything in this Section
16 to the contrary, the Conversion Right cannot be exercised with respect to a
number of Converted Option Shares having a Net Value below $100. No fractional
shares shall be issuable upon exercise of the Conversion Right, and if the
number of shares to be issued in accordance with the foregoing formula is other
than a whole number, the Company shall pay to the
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holder of this Option an amount in cash equal to the fair market value of the
resulting fractional share.
(b) The Conversion Right may be exercised by the holder of this Option by the
surrender of this Option at the principal office of the Company together with a
written statement specifying that the holder thereby intends to exercise the
Conversion Right and indicating the number of shares subject to this Option
which are being surrendered (referred to in paragraph (a) above as the Converted
Option Shares) in exercise of the Conversion Right. Such conversion shall be
effective upon receipt by the Company of this Option together with the aforesaid
written statement, or on such later date as is specified therein (the
"Conversion Date"), but not later than the Expiration Date. Certificates for
the shares of Common Stock issuable upon exercise of the Conversion Right,
together with a check in payment of any fractional share and, in the case of a
partial exercise, a new option evidencing the shares remaining subject to this
Option, shall be issued as of the Conversion Date and shall be delivered to the
holder of this Option within 7 days following the Conversion Date.
17. Governing Law. All questions concerning this Option will be governed and
-------------
interpreted and enforced in accordance with the internal law of the State of
Minnesota without regard for principles of conflict of law.
ACCEPTED: SUMMIT MEDICAL SYSTEMS, INC.
______________________________________ By_____________________________
Harry R. Phillips, III, M.D.
Its____________________________
________________________________________________________________________________
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EXHIBIT A
CONTRACT VALUE
The Contract Value of each On-line Outcomes Registry Agreement shall be
determined in accordance with the following procedures. The Contract Value of
each On-line Outcomes Registry Agreement shall equal the sum of (a) the Fixed
Fees (as hereinafter defined) and (b) the Variable Fees (as hereinafter
defined). "Fixed Fees" shall mean the sum of all sponsorship fees, periodic
site license fees or other fixed fees to be paid to the Company during the term
of the On-line Outcomes Registry Agreement for which a cash payment of an amount
certain is specified in such agreement. "Variable Fees" shall mean the product
of the Estimated Fees (as hereinafter defined) multiplied by .75. "Estimated
Fees" shall mean the sum of all usage, encounter, inquiry, training, service and
other variable fees, based on usage of the registry and related services by
participants, to be paid to the Company during the term of the On-line Outcomes
Registry Agreement. The Company shall estimate the Estimated Fees in good faith
as of the date the On-line Outcomes Registry Agreement is executed and
delivered. The Company represents, warrants and covenants that it will have a
reasonable basis for its estimate of Estimated Fees and that such estimate will
be prepared on a basis consistent with the internal projections of the Company.
The estimate of Estimated Fees will be prepared using the pricing terms as set
forth in the On-line Outcomes Registry Agreement, including, without limitation,
estimates of any volume discounts, based on the usage estimates made in
accordance with the following sentence. The Company shall prepare in good faith
an estimate of the usage of the registry and related services by participants
over the term of the On-line Outcomes Registry Agreement. By way of example
only, an estimate of the Estimated Fees for a stent registry would include (i)
an estimate of the number of cardiac catheter laboratories ("cath labs") to be
covered by the agreement, (ii) an estimate of the size distribution of such cath
labs, (iii) an estimate of usage of the registry and related services by each
cath lab based on its size, and (iv) an estimate of any volume discounts based
on the foregoing. The foregoing procedure shall be applied in a manner similar
to the illustration attached hereto as Exhibit B, subject to the specific terms
and conditions of the applicable On-Line Outcomes Registry Agreement; provided,
that in Exhibit B the calculation of Contract Value illustrated therein shall
not include the Net Present Value discount shown, but, rather, shall include the
multiplication of any Estimated Fees by the factor of .75.
________________________________________________________________________________
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<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
----------------------------
NOTICE OF EXERCISE OF STOCK OPTION
----------------------------------
To: Board of Directors
SUMMIT MEDICAL SYSTEMS, INC.
I hereby exercise my Option dated __________ to purchase _____ shares of $.01
par value common stock of the Company at the option exercise price of
$__________ per share. Enclosed is a certified or cashier's check in the total
amount of $__________, or payment in such other form as the Company has
specified.
I request that my shares be issued in my name as follows:
________________________________________________________________________________
(Print your name in the form in which you wish to
have the shares registered)
________________________________________________________________________________
(Social Security Number)
________________________________________________________________________________
(Street and Number)
________________________________________________________________________________
(City) (State) (Zip Code)
Dated: __________, 19__.
Signature: ___________________________
________________________________________________________________________________
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<PAGE>
EXHIBIT I
AMENDMENT
THIS AMENDMENT is made and entered into as of December 31, 1996 (the
"Effective Date"), by and between SUMMIT MEDICAL SYSTEMS, INC., a Minnesota
corporation ("Summit") and DR WARE LLC, a North Carolina limited liability
company.
Recitals
--------
WHEREAS, Summit and DR Ware entered into the Limited Liability Company
Agreement of Cordillera LLC dated December 29, 1995 (the "LLC Agreement"),
pursuant to which Summit and DR Ware became the sole Members (as that term is
defined in the LLC Agreement) of Cordillera LLC, a North Carolina limited
liability company ("Cordillera");
WHEREAS, Summit has agreed to acquire all of Dr Ware's Member Units in
Cordillera pursuant to a Reorganization Agreement (the "Reorganization
Agreement") by and among Summit, Cordillera, DR Ware and Duke University, a
North Carolina not-for-profit company ("Duke");
WHEREAS, as a result of Summit becoming the sole Member of Cordillera,
certain modifications to the LLC Agreement are required.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
herein contained, the parties do hereby agree:
1. Names and Addresses of the Members. The name and address of DR Ware is
----------------------------------
deleted in its entirety from Section 1.3 of the LLC Agreement.
2. Capital Contribution of Duke. Section 4.2 of the LLC Agreement is
----------------------------
deleted in its entirety.
3. Additional Capital Contributions by Summit. Any and all obligations of
------------------------------------------
Summit to make any Capital Contributions to Cordillera, pursuant to Section 4.3
of the LLC Agreement, after the Effective Date are hereby extinguished.
4. Number of Managers. Section 6.3 of the LLC Agreement is deleted in its
------------------
entirety and replaced by the following:
________________________________________________________________________________
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<PAGE>
The number of Managers shall, at all times, be two. The two Managers shall be
appointed by Summit. Summit, in its sole discretion, may remove one or more of
the Managers who were appointed by it and appoint a new Manager or Managers.
5. Purchase Option. Section 9.8 of the LLC Agreement is deleted in its
---------------
entirety.
6. Conversion to Corporation. Section 11.4(a) of the LLC Agreement is
-------------------------
deleted in its entirety.
7. Limitation on Benefits of this Agreement. All rights given to Duke (or its
----------------------------------------
assigns) to enforce the terms of the LLC Agreement are hereby deleted from
Section 14.8 of the LLC Agreement and extinguished as of the Effective Date.
8. Effect of Amendment. Except as expressly modified herein, the LLC
-------------------
Agreement shall remain in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed in
duplicate as of the Effective Date.
SUMMIT MEDICAL SYSTEMS, INC. DR WARE LLC
By_______________________________ By________________________________
Name_____________________________ Name______________________________
Title____________________________ Title_____________________________
________________________________________________________________________________
SO AGREED:
DUKE UNIVERSITY
By______________________________
Name____________________________
Title___________________________
________________________________
________________________________________________________________________________
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<PAGE>
EXHIBIT J
WARRANT
To Subscribe for and Purchase Common Stock of
SUMMIT MEDICAL SYSTEMS, INC.
THIS CERTIFIES THAT, for value received, Duke University (herein called
"Purchaser") or registered assigns is entitled to subscribe for and purchase
from Summit Medical Systems, Inc. (herein called the "Company"), a corporation
organized and existing under the laws of the State of Minnesota, at the price
specified below (subject to adjustment as noted below) at any time from and
after the date hereof (the "Issuance Date") to and including the tenth
anniversary of the Issuance Date (the "Expiration Date"), 150,000 fully paid and
nonassessable shares of the Company's Common Stock (subject to adjustment as
noted below).
The warrant purchase price per share (subject to adjustment as noted below)
shall be equal to $7.50 per share of the Company's Common Stock on the Issuance
Date.
This Warrant is subject to the following provisions, terms and conditions:
1. Exercise. The rights represented by this Warrant may be exercised by
--------
the holder hereof, in whole or in part, by written notice of exercise delivered
to the principal office of the Company, accompanied by this Warrant (properly
endorsed if required) and the warrant purchase price in the form of (i) check,
(ii) the Company's Common Stock or (iii) a combination of the payment forms in
(i) and (ii); provided, however, that if any shares of the Company's Common
stock are used for such payment, the value of each share surrendered by the
Purchaser shall be equal to the market price (as defined in paragraph 3(f)
hereof) per share of the Company's Common Stock on the date such shares are
mailed or otherwise dispatched by the Purchaser. The Company agrees that the
shares so purchased shall be and are deemed to be issued to the holder hereof as
the record owner of such shares as of the close of business on the date on which
this Warrant shall have been surrendered and payment made for such shares as
aforesaid. Certificates for the shares of stock so purchased shall be delivered
to the holder hereof within a reasonable time, not exceeding ten business days,
after the rights represented by this Warrant shall have been so exercised, and,
unless this Warrant has expired, a new Warrant representing the number of
shares, if any, with respect to which this Warrant shall not then have been
exercised shall also be delivered to the holder hereof within such time.
2. Covenants of the Company. The Company covenants and agrees that all
------------------------
shares which may be issued upon the exercise of the rights represented by this
Warrant will, upon issuance, be duly authorized and issued, fully paid and
nonassessable. The Company further covenants and agrees that during the period
within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized, and reserved for the purpose of issue
or transfer upon exercise of the subscription rights evidenced by this Warrant,
a sufficient number of shares of its Common Stock to provide for the exercise of
the rights represented by this Warrant.
________________________________________________________________________________
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<PAGE>
3. Anti-Dilution Adjustments. The above provisions are, however, subject
-------------------------
to the following:
(a) The warrant purchase price shall, from and after the date of
issuance of this Warrant, be subject to adjustment from time to time as
hereinafter provided. Upon each adjustment of the warrant purchase price,
the holder of this Warrant shall thereafter be entitled to purchase, at the
warrant purchase price resulting from such adjustment, the number of shares
obtained by multiplying the warrant purchase price in effect immediately
prior to such adjustment by the number of shares purchasable pursuant
hereto immediately prior to such adjustment and dividing the product
thereof by the warrant purchase price resulting from such adjustment.
(b) In case the Company shall at any time subdivide its outstanding
shares of Common Stock into a greater number of shares, including any
dividend declared to effect a subdivision of the outstanding shares of
Common Stock, the warrant purchase price in effect immediately prior to
such subdivision shall be proportionately reduced, and conversely, in case
the outstanding shares of Common Stock of the Company shall be combined
into a smaller number of shares, the warrant purchase price in effect
immediately prior to such combination shall be proportionately increased.
(c) If any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale of all or substantially all of its assets
to another corporation shall be effected in such a way that holders of
Common Stock shall be entitled to receive stock, securities or assets with
respect to or in exchange for Common Stock, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby the holder hereof shall thereafter
have the right to purchase and receive, upon the basis and upon the terms
and conditions specified in this Warrant and in lieu of the shares of
Common Stock of the Company immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby, such shares
of stock, securities or assets as may be issued or payable with respect to
or in exchange for a number of outstanding shares of such Common Stock
equal to the number of shares of such stock immediately theretofore
purchasable and receivable upon the exercise of the rights represented
hereby had such reorganization, reclassification, consolidation, merger or
sale not taken place, and in any such case appropriate provision shall be
made with respect to the rights and interests of the holder of this Warrant
to the end that the provisions hereof (including without limitation
provisions for adjustments of the warrant purchase price and of the number
of shares purchasable upon the exercise of this Warrant) shall thereafter
be applicable, as nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise hereof. The
Company shall not effect any such consolidation, merger or sale, unless
prior to the consummation thereof the successor corporation (if other than
the Company) resulting from such consolidation or merger or the corporation
purchasing such assets shall assume, by written instrument executed and
mailed to the registered holder hereof at the last address of such holder
appearing on the books of the Company, the obligation to deliver to such
holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holder may be entitled to purchase.
(d) Upon any adjustment of the warrant purchase price, then and in
each such case the Company shall give written notice thereof, by first-
class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company,
which notice shall state the warrant purchase price resulting from such
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<PAGE>
adjustment and the increase or decrease, if any, in the number of shares
purchasable at such price upon the exercise of this Warrant, setting forth
in reasonable detail the method of calculation and the facts upon which
such calculation is based.
(e) If any event occurs as to which the other provisions of this
paragraph 3 are not strictly applicable or if strictly applicable would not
fairly protect the purchase rights of the holder of this Warrant or of
Common Stock in accordance with the essential intent and principles of such
provisions, then this Warrant shall be adjusted in the application of such
provisions, in accordance with such essential intent and principles, so as
to protect such purchase rights as aforesaid.
(f) No fractional shares of Common Stock shall be issued upon the
exercise of this Warrant, but, instead of any fraction of a share which
would otherwise be issuable, the Company shall pay a cash adjustment (which
may be effected as a reduction of the amount to be paid by the holder
hereof upon such exercise) in respect of such fraction in an amount equal
to the same fraction of the market price per share of Common Stock on the
date of the written notice of exercise required by paragraph 1 above.
"Market price" for purposes of this paragraph 3(f), paragraph 1 and
paragraph 9(d) hereof, and for the purpose of determining the warrant
purchase price shall mean, if the Common Stock is traded on a securities
exchange or on the Nasdaq National Market, the closing price of the Common
Stock on such exchange or the Nasdaq National Market, or, if the Common
Stock is otherwise traded in the over-the-counter market, the closing bid
price, in each case averaged over a period of 5 consecutive business days
prior to the date as of which "market price" is being determined. If at
any time the Common Stock is not traded on an exchange or the Nasdaq
National Market, or otherwise traded in the over-the-counter market, the
"market price" shall be deemed to be the higher of (i) the book value
thereof as determined by any firm of independent public accountants of
recognized standing selected by the Board of Directors of the Company as of
the last day of any month ending within 60 days preceding the date as of
which the determination is to be made, or (ii) the fair value thereof
determined in good faith by the Board of Directors of the Company as of a
date which is within 15 days of the date as of which the determination is
to be made.
4. Common Stock. As used herein, the term "Common Stock" shall mean and
------------
include the Company's presently authorized Common Stock and shall also include
any capital stock of any class of the Company hereafter authorized which shall
not be limited to a fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Company; provided that the shares purchasable pursuant to this Warrant shall
include shares designated as Common Stock of the Company on the date of original
issue of this Warrant or, in the case of any reclassification of the outstanding
shares thereof, the stock, securities or assets provided for in paragraph 3(c)
above.
5. No Voting Rights. This Warrant shall not entitle the holder hereof to
----------------
any voting rights or other rights as a shareholder of the Company.
6. Notice of Transfer of Warrant or Resale of Shares. The holder of this
-------------------------------------------------
Warrant, by acceptance hereof, agrees to give written notice to the Company
before transferring this Warrant or transferring any Common Stock issuable or
issued upon the exercise hereof of such holder's intention to do so, describing
briefly the manner of any proposed transfer of this Warrant or such holder's
intention as to the disposition to be made of shares of Common Stock issuable or
issued upon the exercise hereof. Such holder shall also provide the Company with
written representations from the holder and the
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<PAGE>
proposed transferee satisfactory to the Company regarding the transfer or, at
the election of the Company, an opinion of counsel reasonably satisfactory to
the Company to the effect that the proposed transfer of this Warrant or
disposition of shares may be effected without registration or qualification
(under any Federal or State law) of this Warrant or the shares of Common Stock
issuable or issued upon the exercise hereof. Upon receipt of such written notice
and either such representations or opinion by the Company, such holder shall be
entitled to transfer this Warrant, or to exercise this Warrant in accordance
with its terms and dispose of the shares received upon such exercise or to
dispose of shares of Common Stock received upon the previous exercise of this
Warrant, all in accordance with the terms of the notice delivered by such holder
to the Company, provided that an appropriate legend, if any, respecting the
aforesaid restrictions on transfer and disposition may be endorsed on this
Warrant or the certificates for such shares.
7. Transferability. Subject to the provisions of paragraph 6 hereof, this
---------------
Warrant and all rights hereunder are transferable, in whole or in part, at the
principal office of the Company by the holder hereof in person or by duly
authorized attorney, upon surrender of this Warrant properly endorsed. Each
taker and holder of this Warrant, by taking or holding the same, consents and
agrees that the bearer of this Warrant, when endorsed, may be treated by the
Company and all other persons dealing with this Warrant as the absolute owner
hereof for any purpose and as the person entitled to exercise the rights
represented by this Warrant, or to the transfer hereof on the books of the
Company, any notice to the contrary notwithstanding; but until such transfer on
such books, the Company may treat the registered holder hereof as the owner for
all purposes.
This Warrant is exchangeable, upon the surrender hereof by the holder
hereof at the principal office of the Company, for new Warrants of like tenor
representing in the aggregate the right to subscribe for and purchase the number
of shares which may be subscribed for and purchased hereunder, each of such new
Warrants to represent the right to subscribe for and purchase such number of
shares as shall be designated by said holder hereof at the time of such
surrender.
8. Registration Rights. The holder of this Warrant and of the Common
-------------------
Stock issuable or issued upon the exercise hereof shall be entitled to the
registration rights set forth in that certain Investment and Registration Rights
Agreement, dated December 31, 1996, by and between the Purchaser and the Company
9. Optional Conversion.
-------------------
(a) In addition to and without limiting the rights of the holder of
this Warrant under the terms of this Warrant, the holder of this Warrant
shall have the right (the "Conversion Right") to convert this Warrant or
any portion thereof into shares of Common Stock as provided in this
paragraph 9 at any time from and after the Issuance Date and to and
including the Expiration Date, subject to the restrictions set forth in
paragraph (c) below. Upon exercise of the Conversion Right with respect to
a particular number of shares subject to this Warrant (the "Converted
Warrant Shares"), the Company shall deliver to the holder of this Warrant,
without payment by the holder of any exercise price or any cash or other
consideration, that number of shares of Common Stock equal to the quotient
obtained by dividing the Net Value (as hereinafter defined) of the
Converted Warrant Shares by the fair market value (as defined in paragraph
(d) below) of a single share of Common Stock, determined in each case as of
the close of business on the Conversion Date (as hereinafter defined). The
"Net Value" of the Converted Warrant Shares shall be determined by
subtracting the aggregate warrant purchase price of the Converted Warrant
Shares from the aggregate fair market value of the Converted Warrant
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<PAGE>
Shares. Notwithstanding anything in this paragraph 9 to the contrary, the
Conversion Right cannot be exercised with respect to a number of Converted
Warrant Shares having a Net Value below $100. No fractional shares shall
be issuable upon exercise of the Conversion Right, and if the number of
shares to be issued in accordance with the foregoing formula is other than
a whole number, the Company shall pay to the holder of this Warrant an
amount in cash equal to the fair market value of the resulting fractional
share.
(b) The Conversion Right may be exercised by the holder of this
Warrant by the surrender of this Warrant at the principal office of the
Company together with a written statement specifying that the holder
thereby intends to exercise the Conversion Right and indicating the number
of shares subject to this Warrant which are being surrendered (referred to
in paragraph (a) above as the Converted Warrant Shares) in exercise of the
Conversion Right. Such conversion shall be effective upon receipt by the
Company of this Warrant together with the aforesaid written statement, or
on such later date as is specified therein (the "Conversion Date"), but not
later than the expiration date of this Warrant. Certificates for the
shares of Common Stock issuable upon exercise of the Conversion Right,
together with a check in payment of any fractional share and, in the case
of a partial exercise, a new warrant evidencing the shares remaining
subject to this Warrant, shall be issued as of the Conversion Date and
shall be delivered to the holder of this Warrant within 7 days following
the Conversion Date.
(c) In the event the Conversion Right would, at any time this Warrant
remains outstanding, be deemed by the Company's independent certified
public accountants to give rise to a charge to the Company's earnings for
financial reporting purposes, then the Conversion Right shall automatically
terminate upon the Company's written notice to the holder of this Warrant
of such adverse accounting treatment.
(d) For purposes of this paragraph 10, the "fair market value" of a
share of Common Stock as of a particular date shall be its "market price",
calculated as described in paragraph 4(g) hereof.
10. Governing Law. All questions concerning this Warrant will be governed
-------------
and interpreted and enforced in accordance with the internal law of the State of
Minnesota without regard for principles of conflict of law.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer and this Warrant to be dated as of December 31, 1996.
SUMMIT MEDICAL SYSTEMS, INC.
By___________________________
Name:
Title:
________________________________________________________________________________
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<PAGE>
RESTRICTION ON TRANSFER
THIS WARRANT OR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF MAY NOT BE RESOLD OR TRANSFERRED UNLESS SUCH RESALE OR TRANSFER IS
EXEMPTED FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), AND ANY APPLICABLE STATE SECURITIES LAWS ("LAWS"), AND THE
COMPANY RECEIVES, PRIOR TO RESALE OR TRANSFER, WRITTEN REPRESENTATIONS OF THE
HOLDER AND PROPOSED TRANSFEREE SATISFACTORY TO THE COMPANY REGARDING SUCH
TRANSFER OR, AT THE ELECTION OF THE COMPANY, AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY TO THE EFFECT THAT THE PROPOSED TRANSFER OF THIS
WARRANT OR OF SUCH SHARES MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT OR
QUALIFICATION UNDER THE LAWS , OR THE RESALE OR TRANSFER OF THIS WARRANT OR OF
SUCH SHARES IS REGISTERED UNDER THE ACT AND ANY APPLICABLE LAWS.
________________________________________________________________________________
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<PAGE>
FORM OF ASSIGNMENT
(To Be Signed Only Upon Assignment)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto __________________________ Warrant, and appoints _________________________
transfer this Warrant on the books of the Company with the full power of
substitution in the premises.
Dated:
In the presence of:
Signature:____________________________________
Note: The signature must conform in all
respects to the name of the holder as written
on the face of this Warrant without alteration,
enlargement or any change whatsoever, and the
signature must be guaranteed in the usual
manner.
________________________________________________________________________________
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<PAGE>
SUBSCRIPTION FORM
To be Executed by the Holder of this Warrant if such Holder
Desires to Exercise this Warrant in Whole or in Part:
To: Summit Medical Systems, Inc. (the "Company")
The undersigned,____________________________, hereby irrevocably elects to
exercise the right of purchase represented by this Warrant for, and to purchase
thereunder, _________________ shares of Common Stock provided for therein and
tenders payment herewith to the order of the Company in the amount of
$__________________, such payment being made as provided on the face of this
Warrant.
Please insert Social Security or other identifying number of the
undersigned:
___________________________________
The undersigned requests that certificates for such shares of Common Stock
be issued as follows:
Name:_____________________________________________
Address:__________________________________________
Deliver to:_______________________________________
Address:__________________________________________
and, if such number of shares of Common Stock shall not be all the shares of
Common Stock purchasable hereunder, that a new Warrant for the balance remaining
of the shares of Common Stock purchasable under this Warrant be registered in
the name of, and delivered to, the undersigned at the address stated above.
Dated:
Signature:______________________________
Note: The signature must conform in all
respects to the name of the holder as
written on the face of this Warrant
without alteration, enlargement or any
change whatsoever.
________________________________________
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<PAGE>
WARRANT
To Subscribe for and Purchase Common Stock of
SUMMIT MEDICAL SYSTEMS, INC.
THIS CERTIFIES THAT, for value received, Duke University (herein called
"Purchaser") or registered assigns, subject to the terms and conditions set
forth herein, is entitled to subscribe for and purchase from Summit Medical
Systems, Inc. (herein called the "Company"), a corporation organized and
existing under the laws of the State of Minnesota, at the price specified below
(subject to adjustment as noted below) at any time from and after the date
hereof (the "Issuance Date") to and including the tenth anniversary of the
Issuance Date (the "Expiration Date"), 50,000 fully paid and nonassessable
shares of the Company's Common Stock (subject to adjustment as noted below).
The warrant purchase price per share (subject to adjustment as noted below)
shall be equal to $7.50 per share of the Company's Common Stock on the Issuance
Date.
This Warrant is subject to the following provisions, terms and conditions:
1. Exercise. This Warrant shall be exercisable by the holder hereof in
--------
accordance with the following terms and conditions:
(a) In the event that (i) prior to the fifth anniversary of the Issuance Date,
the Company shall have entered into On-line Outcomes Registry Agreements (as
hereinafter defined) which have in the aggregate Contract Values (as hereinafter
defined) of at least $40 million, and (ii) as of the date, if any, on which
clause (i) is satisfied, the average of the last reported sale prices of the
Company's common stock on the Nasdaq National Market during the period of the
thirty most recent trading days, ending on the date on which clause (i) is
satisfied, is less than $28.00 per share, this Warrant may be exercised by the
holder hereof, in whole or in part, as to 25,000 shares of the Company's Common
Stock in accordance with paragraph 1(b) hereof. "On-line Outcomes Registry
Agreements" shall mean any written agreement, understanding or arrangement
pursuant to which the Company will develop, maintain, manage, operate, or
otherwise provide services related to, a central registry or database (a
"registry") that collects clinical medical data from participants in the
registry or database, primarily using On-line Technologies (as hereinafter
defined) to receive data into the registry, to process queries to the registry,
and to deliver reports and responses to the participants in the registry. "On-
line Technologies" shall mean software products and related services that
require a participant in the registry to access an off-site central processing
unit or server maintained by the Company or a third party in order to input,
aggregate, access and/or process the participant's clinical medical data and
other data from, or reports based on, the clinical medical data in the registry.
"Contract Value", as to any On-line Outcomes Registry Agreement, shall be
determined in accordance with Exhibit A hereto. Notwithstanding the foregoing,
in the event that, prior to the fifth anniversary of the Issuance Date, the
Company shall have entered into On-line Outcomes Registry Agreements which have
in the aggregate Contract Values of at least $75 million, this Warrant may be
exercised, in whole or in part, as to 50,000 shares of the Company's Common
Stock in accordance in paragraph 1(b) hereof. The Company agrees that within 20
business days of the execution and delivery of each On-line Outcomes Registry
Agreement, the Company will determine in good faith the Contract Value of such
On-line
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<PAGE>
Outcomes Registry Agreement in accordance with the provisions of Exhibit A and
will give written notice to the holder hereof, which notice shall state the
Contract Value for such On-line Outcomes Registry Agreement as determined by the
Company and the aggregate Contract Values for all On-line Outcomes Registry
Agreements as of the date of such notice. The calculation of Contract Value set
forth in this notice shall be certified by Donald Fortin, M.D. as Chief
Scientific Officer of the Company. If the holder hereof objects to the
determination of Contract Value within 30 business days following the date of
the notice, the Company and such holder shall negotiate in good faith for a
period of 30 business days to settle any dispute regarding the Contract Value.
If such dispute has not been settled within such 30 business day period, the
dispute shall be settled in accordance with the arbitration provision of
paragraph 11.
(b) Upon rights represented by this Warrant becoming exercisable in accordance
with paragraph 1(a) hereof, this Warrant may be exercised by the holder hereof,
in whole or in part, by written notice of exercise delivered to the principal
office of the Company, accompanied by this Warrant (properly endorsed if
required) and the warrant purchase price in the form of (i) check, (ii) the
Company's Common Stock or (iii) a combination of the payment forms in (i) and
(ii); provided, however, that if any shares of the Company's Common stock are
used for such payment, the value of each share surrendered by the Purchaser
shall be equal to the market price (as defined in paragraph 3(f) hereof) per
share of the Company's Common Stock on the date such shares are mailed or
otherwise dispatched by the Purchaser. The Company agrees that the shares so
purchased shall be and are deemed to be issued to the holder hereof as the
record owner of such shares as of the close of business on the date on which
this Warrant shall have been surrendered and payment made for such shares as
aforesaid. Certificates for the shares of stock so purchased shall be delivered
to the holder hereof within a reasonable time, not exceeding ten business days,
after the rights represented by this Warrant shall have been so exercised, and,
unless this Warrant has expired, a new Warrant representing the number of
shares, if any, with respect to which this Warrant shall not then have been
exercised shall also be delivered to the holder hereof within such time.
2. Covenants of the Company. The Company covenants and agrees that all shares
------------------------
which may be issued upon the exercise of the rights represented by this Warrant
will, upon issuance, be duly authorized and issued, fully paid and
nonassessable. The Company further covenants and agrees that during the period
within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized, and reserved for the purpose of issue
or transfer upon exercise of the subscription rights evidenced by this Warrant,
a sufficient number of shares of its Common Stock to provide for the exercise of
the rights represented by this Warrant.
3. Anti-Dilution Adjustments. The above provisions are, however, subject to
-------------------------
the following:
(a) The warrant purchase price shall, from and after the date of issuance of
this Warrant, be subject to adjustment from time to time as hereinafter
provided. Upon each adjustment of the warrant purchase price, the holder of this
Warrant shall thereafter be entitled to purchase, at the warrant purchase price
resulting from such adjustment, the number of shares obtained by multiplying the
warrant purchase price in effect immediately prior to such adjustment by the
number of shares purchasable pursuant hereto immediately prior to such
adjustment and dividing the product thereof by the warrant purchase price
resulting from such adjustment.
(b) In case the Company shall at any time subdivide its outstanding shares of
Common Stock into a greater number of shares, including any dividend declared to
effect a subdivision of the outstanding shares of Common Stock, the warrant
purchase price in effect immediately prior to such subdivision
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<PAGE>
shall be proportionately reduced, and conversely, in case the outstanding shares
of Common Stock of the Company shall be combined into a smaller number of
shares, the warrant purchase price in effect immediately prior to such
combination shall be proportionately increased.
(c) If any capital reorganization or reclassification of the capital stock of
the Company, or consolidation or merger of the Company with another corporation,
or the sale of all or substantially all of its assets to another corporation
shall be effected in such a way that holders of Common Stock shall be entitled
to receive stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provision shall be made
whereby the holder hereof shall thereafter have the right to purchase and
receive, upon the basis and upon the terms and conditions specified in this
Warrant and in lieu of the shares of Common Stock of the Company immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby, such shares of stock, securities or assets as may be issued
or payable with respect to or in exchange for a number of outstanding shares of
such Common Stock equal to the number of shares of such stock immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby had such reorganization, reclassification, consolidation,
merger or sale not taken place, and in any such case appropriate provision shall
be made with respect to the rights and interests of the holder of this Warrant
to the end that the provisions hereof (including without limitation provisions
for adjustments of the warrant purchase price and of the number of shares
purchasable upon the exercise of this Warrant) shall thereafter be applicable,
as nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise hereof. The Company shall not effect
any such consolidation, merger or sale, unless prior to the consummation thereof
the successor corporation (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing such assets shall assume,
by written instrument executed and mailed to the registered holder hereof at the
last address of such holder appearing on the books of the Company, the
obligation to deliver to such holder such shares of stock, securities or assets
as, in accordance with the foregoing provisions, such holder may be entitled to
purchase.
(d) Upon any adjustment of the warrant purchase price, then and in each such
case the Company shall give written notice thereof, by first-class mail, postage
prepaid, addressed to the registered holder of this Warrant at the address of
such holder as shown on the books of the Company, which notice shall state the
warrant purchase price resulting from such adjustment and the increase or
decrease, if any, in the number of shares purchasable at such price upon the
exercise of this Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
(e) If any event occurs as to which the other provisions of this paragraph 3 are
not strictly applicable or if strictly applicable would not fairly protect the
purchase rights of the holder of this Warrant or of Common Stock in accordance
with the essential intent and principles of such provisions, then this Warrant
shall be adjusted in the application of such provisions, in accordance with such
essential intent and principles, so as to protect such purchase rights as
aforesaid.
(f) No fractional shares of Common Stock shall be issued upon the exercise of
this Warrant, but, instead of any fraction of a share which would otherwise be
issuable, the Company shall pay a cash adjustment (which may be effected as a
reduction of the amount to be paid by the holder hereof upon such exercise) in
respect of such fraction in an amount equal to the same fraction of the market
price per share of Common Stock on the date of the written notice of exercise
required by paragraph 1 above. "Market price" for purposes of this paragraph
3(f), paragraph 1 and paragraph 9(d) hereof, and for the purpose of determining
the warrant purchase price shall mean, if the Common Stock is traded on a
securities exchange or on the Nasdaq National Market, the closing price of the
Common Stock on such
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exchange or the Nasdaq National Market, or, if the Common Stock is otherwise
traded in the over-the-counter market, the closing bid price, in each case
averaged over a period of 5 consecutive business days prior to the date as of
which "market price" is being determined. If at any time the Common Stock is not
traded on an exchange or the Nasdaq National Market, or otherwise traded in the
over-the-counter market, the "market price" shall be deemed to be the higher of
(i) the book value thereof as determined by any firm of independent public
accountants of recognized standing selected by the Board of Directors of the
Company as of the last day of any month ending within 60 days preceding the date
as of which the determination is to be made, or (ii) the fair value thereof
determined in good faith by the Board of Directors of the Company as of a date
which is within 15 days of the date as of which the determination is to be made.
4. Common Stock. As used herein, the term "Common Stock" shall mean and
------------
include the Company's presently authorized Common Stock and shall also include
any capital stock of any class of the Company hereafter authorized which shall
not be limited to a fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Company; provided that the shares purchasable pursuant to this Warrant shall
include shares designated as Common Stock of the Company on the date of original
issue of this Warrant or, in the case of any reclassification of the outstanding
shares thereof, the stock, securities or assets provided for in paragraph 3(c)
above.
5. No Voting Rights. This Warrant shall not entitle the holder hereof to any
----------------
voting rights or other rights as a shareholder of the Company.
6. Notice of Transfer of Warrant or Resale of Shares. The holder of this
-------------------------------------------------
Warrant, by acceptance hereof, agrees to give written notice to the Company
before transferring this Warrant or transferring any Common Stock issuable or
issued upon the exercise hereof of such holder's intention to do so, describing
briefly the manner of any proposed transfer of this Warrant or such holder's
intention as to the disposition to be made of shares of Common Stock issuable or
issued upon the exercise hereof. Such holder shall also provide the Company with
written representations from the holder and the proposed transferee satisfactory
to the Company regarding the transfer or, at the election of the Company, an
opinion of counsel reasonably satisfactory to the Company to the effect that the
proposed transfer of this Warrant or disposition of shares may be effected
without registration or qualification (under any Federal or State law) of this
Warrant or the shares of Common Stock issuable or issued upon the exercise
hereof. Upon receipt of such written notice and either such representations or
opinion by the Company, such holder shall be entitled to transfer this Warrant,
or to exercise this Warrant in accordance with its terms and dispose of the
shares received upon such exercise or to dispose of shares of Common Stock
received upon the previous exercise of this Warrant, all in accordance with the
terms of the notice delivered by such holder to the Company, provided that an
appropriate legend, if any, respecting the aforesaid restrictions on transfer
and disposition may be endorsed on this Warrant or the certificates for such
shares.
7. Transferability. Subject to the provisions of paragraph 6 hereof, this
---------------
Warrant and all rights hereunder are transferable, in whole or in part, at the
principal office of the Company by the holder hereof in person or by duly
authorized attorney, upon surrender of this Warrant properly endorsed. Each
taker and holder of this Warrant, by taking or holding the same, consents and
agrees that the bearer of this Warrant, when endorsed, may be treated by the
Company and all other persons dealing with this Warrant as the absolute owner
hereof for any purpose and as the person entitled to exercise the rights
represented by this Warrant, or to the transfer hereof on the books of the
Company, any
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notice to the contrary notwithstanding; but until such transfer on such books,
the Company may treat the registered holder hereof as the owner for all
purposes.
This Warrant is exchangeable, upon the surrender hereof by the holder hereof at
the principal office of the Company, for new Warrants of like tenor representing
in the aggregate the right to subscribe for and purchase the number of shares
which may be subscribed for and purchased hereunder, each of such new Warrants
to represent the right to subscribe for and purchase such number of shares as
shall be designated by said holder hereof at the time of such surrender.
8. Registration Rights. The holder of this Warrant and of the Common Stock
-------------------
issuable or issued upon the exercise hereof shall be entitled to the
registration rights set forth in that certain Investment and Registration Rights
Agreement, dated December 31, 1996, by and between the Purchaser and the Company
9. Optional Conversion.
-------------------
(a) In addition to and without limiting the rights of the holder of this Warrant
under the terms of this Warrant, the holder of this Warrant shall have the right
(the "Conversion Right") to convert this Warrant or any portion thereof into
shares of Common Stock as provided in this paragraph 9 at any time from and
after the Issuance Date and to and including the Expiration Date, subject to the
restrictions set forth in paragraph (c) below. Upon exercise of the Conversion
Right with respect to a particular number of shares subject to this Warrant (the
"Converted Warrant Shares"), the Company shall deliver to the holder of this
Warrant, without payment by the holder of any exercise price or any cash or
other consideration, that number of shares of Common Stock equal to the quotient
obtained by dividing the Net Value (as hereinafter defined) of the Converted
Warrant Shares by the fair market value (as defined in paragraph (d) below) of a
single share of Common Stock, determined in each case as of the close of
business on the Conversion Date (as hereinafter defined). The "Net Value" of the
Converted Warrant Shares shall be determined by subtracting the aggregate
warrant purchase price of the Converted Warrant Shares from the aggregate fair
market value of the Converted Warrant Shares. Notwithstanding anything in this
paragraph 9 to the contrary, the Conversion Right cannot be exercised with
respect to a number of Converted Warrant Shares having a Net Value below $100.
No fractional shares shall be issuable upon exercise of the Conversion Right,
and if the number of shares to be issued in accordance with the foregoing
formula is other than a whole number, the Company shall pay to the holder of
this Warrant an amount in cash equal to the fair market value of the resulting
fractional share.
(b) The Conversion Right may be exercised by the holder of this Warrant by the
surrender of this Warrant at the principal office of the Company together with a
written statement specifying that the holder thereby intends to exercise the
Conversion Right and indicating the number of shares subject to this Warrant
which are being surrendered (referred to in paragraph (a) above as the Converted
Warrant Shares) in exercise of the Conversion Right. Such conversion shall be
effective upon receipt by the Company of this Warrant together with the
aforesaid written statement, or on such later date as is specified therein (the
"Conversion Date"), but not later than the expiration date of this Warrant.
Certificates for the shares of Common Stock issuable upon exercise of the
Conversion Right, together with a check in payment of any fractional share and,
in the case of a partial exercise, a new warrant evidencing the shares remaining
subject to this Warrant, shall be issued as of the Conversion Date and shall be
delivered to the holder of this Warrant within 7 days following the Conversion
Date.
________________________________________________________________________________
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<PAGE>
(c) In the event the Conversion Right would, at any time this Warrant remains
outstanding, be deemed by the Company's independent certified public accountants
to give rise to a charge to the Company's earnings for financial reporting
purposes, then the Conversion Right shall automatically terminate upon the
Company's written notice to the holder of this Warrant of such adverse
accounting treatment.
(d) For purposes of this paragraph 10, the "fair market value" of a share of
Common Stock as of a particular date shall be its "market price", calculated as
described in paragraph 4(g) hereof.
10. Governing Law. All questions concerning this Warrant will be governed and
-------------
interpreted and enforced in accordance with the internal law of the State of
Minnesota without regard for principles of conflict of law.
11. Final and Binding Arbitration. Any dispute, claim or controversy arising
-----------------------------
out of or in connection with this Warrant which has not been settled through
negotiation within a period of thirty (30) days after the date on which either
party shall first have notified the other party in writing of the existence of a
dispute shall be settled by final and binding arbitration under the then
applicable Commercial Arbitration Rules of the American Arbitration Association
("AAA"). Any such arbitration shall be conducted by three (3) arbitrators
appointed by mutual agreement of the parties or, failing such agreement, in
accordance with such AAA Rules. At least one (1) arbitrator shall be an
experienced computer software professional, and at least one (1) arbitrator
shall be an experienced business attorney with background in the licensing and
distribution of computer software. Any such arbitration shall be conducted in
Minneapolis, Minnesota, if initiated by the holder hereof and in Durham, North
Carolina, if initiated by the Company. An arbitral award may be enforced in any
court of competent jurisdiction. Notwithstanding any contrary provision in the
AAA Rules, the following additional procedures and rules shall apply to any such
arbitration:
(a) Each party shall have the right to request from the arbitrators, and the
arbitrators shall order upon good cause shown, reasonable and limited pre-
hearing discovery, including (i) exchange of witness lists, (ii) depositions
under oath of named witnesses at a mutually convenient location, (iii) written
interrogatories, and (iv) document requests.
(b) Upon conclusion of the pre-hearing discovery, the arbitrators shall promptly
hold a hearing upon the evidence to be adduced by the parties and shall promptly
render a written opinion and award.
(c) The arbitrators may not award or assess punitive damages against either
party.
(d) Each party shall bear its own costs and expenses of the arbitration and one-
half (1/2) of the fees and costs of the arbitrators, subject to the power of the
arbitrators, in their sole discretion, to award all such reasonable cots,
expenses and fees to the prevailing party.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly
authorized officer and this Warrant to be dated as of December 31, 1996.
SUMMIT MEDICAL SYSTEMS, INC.
By___________________________
Name:
Title:
________________________________________________________________________________
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<PAGE>
RESTRICTION ON TRANSFER
THIS WARRANT OR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF MAY NOT
BE RESOLD OR TRANSFERRED UNLESS SUCH RESALE OR TRANSFER IS EXEMPTED FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
AND ANY APPLICABLE STATE SECURITIES LAWS ("LAWS"), AND THE COMPANY RECEIVES,
PRIOR TO RESALE OR TRANSFER, WRITTEN REPRESENTATIONS OF THE HOLDER AND PROPOSED
TRANSFEREE SATISFACTORY TO THE COMPANY REGARDING SUCH TRANSFER OR, AT THE
ELECTION OF THE COMPANY, AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
COMPANY TO THE EFFECT THAT THE PROPOSED TRANSFER OF THIS WARRANT OR OF SUCH
SHARES MAY BE EFFECTED WITHOUT REGISTRATION UNDER THE ACT OR QUALIFICATION UNDER
THE LAWS , OR THE RESALE OR TRANSFER OF THIS WARRANT OR OF SUCH SHARES IS
REGISTERED UNDER THE ACT AND ANY APPLICABLE LAWS.
________________________________________________________________________________
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<PAGE>
FORM OF ASSIGNMENT
(To Be Signed Only Upon Assignment)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
__________________________ Warrant, and appoints _________________________
transfer this Warrant on the books of the Company with the full power of
substitution in the premises.
Dated:
In the presence of:
Signature:______________________________
Note: The signature must conform in all
respects to the name of the holder as
written on the face of this Warrant
without alteration, enlargement or any
change whatsoever, and the signature
must be guaranteed in the usual manner.
________________________________________________________________________________
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<PAGE>
SUBSCRIPTION FORM
To be Executed by the Holder of this Warrant if such Holder
Desires to Exercise this Warrant in Whole or in Part:
Summit Medical Systems, Inc. (the "Company")
The undersigned,___________________________, hereby irrevocably elects to
exercise the right of purchase represented by this Warrant for, and to
purchase thereunder, _________________ shares of Common Stock provided for
therein and tenders payment herewith to the order of the Company in the
amount of $__________________, such payment being made as provided on the
face of this Warrant.
Please insert Social Security or other identifying number of the
undersigned:
________________________________________
The undersigned requests that certificates for such shares of Common Stock
be issued as follows:
Name:____________________________________
Address:_________________________________
Deliver to:______________________________
Address:_________________________________
and, if such number of shares of Common Stock shall not be all the shares of
Common Stock purchasable hereunder, that a new Warrant for the balance
remaining of the shares of Common Stock purchasable under this Warrant be
registered in the name of, and delivered to, the undersigned at the address
stated above.
Dated:
Signature:_____________________________________
Note: The signature must conform in all respects to the name of the
holder as written on the face of this Warrant
without alteration, enlargement or any change
whatsoever.
________________________________________________________________________________
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<PAGE>
EXHIBIT A
CONTRACT VALUE
The Contract Value of each On-line Outcomes Registry Agreement shall be
determined in accordance with the following procedures. The Contract Value of
each On-line Outcomes Registry Agreement shall equal the sum of (a) the Fixed
Fees (as hereinafter defined) and (b) the Variable Fees (as hereinafter
defined). "Fixed Fees" shall mean the sum of all sponsorship fees, periodic
site license fees or other fixed fees to be paid to the Company during the term
of the On-line Outcomes Registry Agreement for which a cash payment of an amount
certain is specified in such agreement. "Variable Fees" shall mean the product
of the Estimated Fees (as hereinafter defined) multiplied by .75. "Estimated
Fees" shall mean the sum of all usage, encounter, inquiry, training, service and
other variable fees, based on usage of the registry and related services by
participants, to be paid to the Company during the term of the On-line Outcomes
Registry Agreement. The Company shall estimate the Estimated Fees in good faith
as of the date the On-line Outcomes Registry Agreement is executed and
delivered. The Company represents, warrants and covenants that it will have a
reasonable basis for its estimate of Estimated Fees and that such estimate will
be prepared on a basis consistent with the internal projections of the Company.
The estimate of Estimated Fees will be prepared using the pricing terms as set
forth in the On-line Outcomes Registry Agreement, including, without limitation,
estimates of any volume discounts, based on the usage estimates made in
accordance with the following sentence. The Company shall prepare in good faith
an estimate of the usage of the registry and related services by participants
over the term of the On-line Outcomes Registry Agreement. By way of example
only, an estimate of the Estimated Fees for a stent registry would include (i)
an estimate of the number of cardiac catheter laboratories ("cath labs") to be
covered by the agreement, (ii) an estimate of the size distribution of such cath
labs, (iii) an estimate of usage of the registry and related services by each
cath lab based on its size, and (iv) an estimate of any volume discounts based
on the foregoing. The foregoing procedure shall be applied in a manner similar
to the illustration attached hereto as Exhibit B subject to the specific terms
and conditions of the applicable On-line Outcomes Registry Agreement; provided,
that in Exhibit B the calculation of Contract Value illustrated therein shall
not include the Net Present Value discount shown, but, rather, shall include the
multiplication of any Estimated Fees by the factor of .75.
________________________________________________________________________________
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EXHIBIT K
THE DONALD F. FORTIN, M.D. PROFESSORSHIP
IN CARDIOLOGY ENDOWMENT FUND
Summit Medical Systems, Inc. does hereby give $1.5 million to Duke
University.
The gift may, for investment purposes, be merged with the general
investment assets of Duke University, but the gift shall be entered in the
University's books and records as THE DONALD F. FORTIN, M.D. PROFESSORSHIP
IN CARDIOLOGY ENDOWMENT FUND.
The spendable income of the Fund, but not the principal, shall be directed
first toward paying the salary and fringe benefits of the holder of the
Chair; and next, toward defraying library, secretarial, travel and other
expenses relating to his or her teaching and research. Selection of the
professor will be made in accordance with University guidelines and
procedures then in effect. The Professorship will be awarded to a scholar
of true eminence and excellence in the field of Cardiology. Any proportion
of the spendable income not expended in any given year may be (1)
accumulated and temporarily invested and used in subsequent years for the
purpose set forth above, or (2) added to the principal of the Fund.
If, at some future time, the purpose designated for the spendable income
from this Fund no longer exists, then at the direction of the Trustees of
the University, the spendable income shall be used to further the
objectives and purposes of Duke University, giving due consideration to my
original intent.
The Fund shall be administered in accordance with the policies and
procedures of Duke University then in effect.
Summit Medical Systems, Inc.
by:
___________________________
RECEIVED and ACCEPTED this 31st day of December 1996.
DUKE UNIVERSITY
By: _________________________________________ By:_________________________
John F. Adcock John Strohbehn
Vice President and Corporate Controller Provost
________________________________________________________________________________
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<PAGE>
THE SUMMIT MEDICAL SYSTEMS, INC. ENDOWMENT FUND
Summit Medical Systems, Inc. does hereby give $500,000 to Duke University.
The gift may, for investment purposes, be merged with the general
investment assets of Duke University, but the gift shall be entered in the
University's books and records as THE SUMMIT MEDICAL SYSTEMS, INC.
ENDOWMENT FUND.
The spendable income of the Fund, but not the principal, shall be used to
provide fellowship support to postdoctoral M.D. fellows in the Division of
Cardiology. Expenditures may be made at the discretion of the Chair of the
Department of Medicine. Any portion of the spendable income not expended in
any given year may be (1) accumulated and temporarily invested and used in
subsequent years for the purpose set forth above, or (2) added to the
principal of the Fund.
If, at some future time, the purpose designated for the spendable income
from this Fund no longer exists, then at the direction of the Trustees of
the University, the spendable income shall be used to further the
objectives and purposes of Duke University, giving due consideration to the
original intent.
The Fund shall be administered in accordance with the policies and
procedures of Duke University then in effect.
Summit Medical Systems, Inc.
by:_________________________
RECEIVED AND ACCEPTED this 31st day of December, 1996.
DUKE UNIVERSITY
By:_______________________
John F. Adcock
Vice President and Corporate Controller
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<PAGE>
Exhibit 10.33
EMPLOYMENT AGREEMENT
AGREEMENT, dated December 31, 1996 (the "Effective Date"), by and
between Summit Medical Systems, Inc., a Minnesota corporation ("Summit") and
Donald F. Fortin, M.D., an individual resident of the state of North Carolina
("Executive").
WHEREAS, Executive has heretofore been employed as an executive
officer of Cordillera, LLC, a Delaware limited liability corporation (the
"Company");
WHEREAS, Summit has agreed to acquire the Company pursuant to a
Reorganization Agreement of even date herewith (the "Reorganization Agreement")
by and among Summit, Company, DR Ware LLC and Duke University, which provides
for the purchase by Summit of all other parties' member units, and options for
member units, in Company, and the wind-up and transfer of the Company's business
to Summit (the "Reorganization");
WHEREAS, the parties to the Reorganization Agreement have agreed that
execution of this Agreement is a condition of closing the Reorganization; and
WHEREAS, the Summit desires to retain the services of Executive
subsequent to the consummation of the Reorganization, and Executive desires to
be employed by the Summit, on the terms and subject to the conditions set forth
in this Agreement.
NOW, THEREFORE, in consideration of the respective covenants and
commitments of Summit and Executive set forth below, and as an inducement to
Summit to consummate the Reorganization, the Executive and Summit hereby agree
as follows:
1. Employment. Summit hereby employs Executive, and Executive
----------
accepts such employment and shall perform services for Summit, for the period
and upon the other terms and conditions set forth in this Agreement.
2. Term. Unless terminated at an earlier date in accordance
----
with Section 9 of this Agreement, the term of Executive's employment hereunder
shall commence on the Effective Date and shall extend for a continuous period
until four (4) years from the date thereof. Thereafter, the terms of this
Agreement shall be extended for successive one year periods unless Summit or
Executive objects to such extension by written notice to the other party at
least ninety (90) days prior to the expiration of such initial term or any
extension thereof.
<PAGE>
3. Position and Duties.
-------------------
3.1 Service with Summit. During the term of this
-------------------
Agreement, Executive agrees to serve as Vice-President and Chief Scientific
Officer of Summit and to perform such employment duties, consistent with such
position, as Summit shall reasonably assign to him from time to time.
3.2 Performance of Duties. Executive agrees to serve
---------------------
Summit faithfully and to the best of his ability and, except as provided in
Section 3.3 below, to devote his full time, attention and efforts to the
business and affairs of Summit during the term of his employment. Executive
hereby confirms that he is under no contractual commitments inconsistent with
his obligations set forth in this Agreement and that, during the term of his
employment, except as provided in Section 3.3 below, he shall not render or
perform any services for any other corporation, firm, entity or person which are
inconsistent with the provisions of this Agreement or which would otherwise
impair his ability to perform his duties hereunder.
3.3 Other Employment. Summit acknowledges and agrees that
----------------
Executive shall continue to be employed at Duke University or a practice group
affiliated therewith for one (1) day per week.
4. Compensation.
------------
4.1 Base Salary. As base compensation for all services to
-----------
be rendered by Executive under this Agreement during the term of this Agreement,
Summit shall pay to Executive an annual salary of One Hundred Fifty Thousand
Dollars ($ 150,000) in accordance with normal payroll procedures and policies.
4.2 Incentive Compensation. Executive shall be entitled to
----------------------
participate in such bonus or incentive compensation plans as may be established
by Summit's Board of Directors from time to time for Summit's executive level
employees.
4.3 Option. On the Closing Date (as defined in the
------
Reorganization Agreement), Summit shall grant to Executive a nonstatutory stock
option (the, "Option") to subscribe for and purchase common stock of Summit up
to the aggregate amount of 300,000 shares, subject to the terms and conditions
of the Nonstatutory Stock Option Agreement between Summit and the Executive of
even date herewith.
4.4 Participation in Benefit Plans. During the term of
------------------------------
Executive's employment by Summit, Executive shall be entitled to receive such
life, disability, medical, dental and other insurance coverage as are being
provided by
-2-
<PAGE>
Summit to its executive level employees from time to time to the extent that
Executive's age, position or other factors qualify him for such fringe benefits.
Nothing in this Agreement is intended to or shall in any way restrict Summit's
right to amend, modify or terminate any of its benefit plans during the term of
Executive's employment.
4.5 Expenses. In accordance with Summit's normal policies
--------
for expense verification, Summit shall pay or reimburse Executive for all
reasonable and necessary out-of-pocket expenses incurred by him in the
performance of his duties under this Agreement, subject to the presentment of
appropriate documentation in accordance with Summit's normal policy for expense
verification.
4.6 Signing Bonus. Summit agrees to pay Executive a
-------------
signing bonus on January 2, 1997, in the amount of $129,371.
5. Confidential Information. Except as permitted or directed
------------------------
by Summit, during the term of this Agreement or at any time thereafter,
Executive shall not divulge, furnish or make accessible to anyone or use in any
way (other than in the ordinary course of the business of Summit) any
confidential or secret knowledge or information of Company, Summit or Summit
Affiliates which Executive has acquired or become acquainted with prior to the
term of this Agreement while working for the Company, or shall acquire or become
acquainted with during the term of this Agreement in the course of Executive'
employment, whether or not during regular working hours, in each case, whether
developed by himself or by others, concerning any trade secrets, confidential or
secret designs, processes, formulae, plans, algorithms, software, devices or
material (whether or not patented or patentable) directly or indirectly useful
in any aspect of the business of Summit or of any Summit Affiliate, any customer
or supplier lists of Summit or of any Summit Affiliate, any confidential or
secret development or research work of Summit or of any Summit Affiliate, or any
other confidential information or secret aspects of the business of Summit or
any Summit Affiliate. As used herein, "Summit Affiliate" shall mean any entity
that controls or is controlled by Summit, with "control" meaning the ownership
of 50% or more of the voting securities in such entity. Executive acknowledges
that the above-described knowledge or information constitutes a unique and
valuable asset of Summit and of the respective Summit Affiliates and represents
a substantial investment of time and expense by Summit and the Summit Affiliates
and that any disclosure or other use of such knowledge or information other than
for the sole benefit of Summit or of any Summit Affiliate would be wrongful and
would cause irreparable harm to Summit or such Summit Affiliate. Both during
and after the term of this Agreement, Executive shall not intentionally act in
any manner that is reasonably likely to reduce the value of such knowledge or
information to Summit or any Summit Affiliate. The foregoing obligations of
confidentiality shall not apply to any
-3-
<PAGE>
knowledge or information that (a) is at the time acquired by Executive, or
thereafter becomes, a part of the public domain other than through the act or
omission of Executive, (b) is provided by Summit or any Summit Affiliate to a
third party without any obligation of confidentiality, or (c) is required by law
to be disclosed.
6. Ventures. If, during the term of Executive's employment pursuant
--------
to this Agreement, Executive is engaged in or associated with the planning or
implementing of any project, program or venture involving Summit and a third
party or parties, all rights in such project, program or venture shall belong to
Summit. Except as formally approved by Summit's Board of Directors, Executive
shall not be entitled to any interest in such project, program or venture or to
any commission, finder's fee or other compensation in connection therewith other
than the salary to be paid to Executive as provided in this Agreement.
7. Intellectual Property.
---------------------
7.1 Assignment. Executive hereby assigns to Summit, to the
----------
extent such rights are not already owned by the Company or Summit, (a) all
tangible embodiments of and intellectual property rights in developments made or
conceived by Executive in the course of his employment solely or in
collaboration with others during his employment at Company, and (b) all
intellectual property rights in developments made or conceived by Executive in
the course of his employment solely or in collaboration with others during the
term of his employment by Summit. Executive further agrees that all
copyrightable works made by Executive for Summit shall be considered "works made
for hire" for the benefit of Summit and, to the extent not qualifying as "works
made for hire," all rights in such copyrightable works are hereby assigned to
Summit. Executive shall disclose promptly and fully to Summit all developments
owned by Summit under this Agreement. Executive warrants that his rights in
developments assigned to Summit by this Agreement have not been previously
licensed, pledged, assigned or encumbered by Executive other than as may have
been assigned to the Company.
7.2 Records. Executive shall keep complete and accurate
-------
accounts, notes, data and records of all developments in the manner and form
reasonably requested by Summit. Such accounts, notes, data and records shall be
the property of Summit, and, upon request by Summit, Executive shall promptly
surrender the same to it or, if not previously surrendered upon its request or
otherwise, Executive shall surrender the same, and all copies thereof, to Summit
upon the conclusion of his employment.
8. Non-competition and Non-solicitation Covenants.
----------------------------------------------
8.1 Agreement Not to Compete. Executive agrees that during
------------------------
the term of his employment by Summit and for eighteen (18) months thereafter
(whether termination of employment is with or without cause, or whether it is
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<PAGE>
occasioned by Executive or Summit)(the "Restricted Period"), he shall not,
directly or indirectly, engage in competition with Summit or any Summit
Affiliate in any manner or capacity (e.g. as an adviser, principal, agent,
partner, officer, director, stockholder employee, member of an association or
otherwise) in any phase of the business which Summit or any Summit Affiliate is
conducting during the term of this Agreement or any extensions thereof.
Notwithstanding the foregoing, Summit acknowledges and agrees that none of the
following shall constitute a breach of this Section 8.1: (a) Executive's
employment at Duke University, in any capacity; (b) Executive's practice of
medicine, in any capacity; or (c) Executive's performance of services, in any
capacity, for any healthcare system, managed care system, insurer, or other
entity engaged in the provision or management of healthcare services, so long as
such entity does not market, license or sell, or develop with a view toward
marketing, licensing or selling, to any third party, other than its own members
or constituents, products or services competitive with those marketed, licensed
or sold by Summit or any Summit Affiliates.
8.2 Geographic Extent of Covenant. The obligations of
-----------------------------
Executive under Section 8.1 shall apply to all markets, domestic or foreign, in
which Summit or any Summit Affiliate has engaged in business during the term of
this Agreement or any extensions thereof, through production, promotional sales
or marketing activities or has otherwise established substantial goodwill,
business reputation or any customer or supplier relationships.
8.3 Non-solicitation; Non-hire and Non-interference.
-----------------------------------------------
During the term of this Agreement and for the Restricted Period, Executive shall
not (a) induce or attempt to induce any employee of Summit or of any Summit
Affiliate to leave the employ of Summit or such Summit Affiliate, respectively,
or in any way interfere adversely with the relationship between any such
employee and Summit or such Summit Affiliate, (b) induce or attempt to induce
any employee of Summit or of any Summit Affiliate to work for, render services
or provide advice to or supply confidential business information or trade
secrets of Summit or any Summit Affiliate to any third person, firm or
corporation, (c) employ, or otherwise pay for services rendered by, any employee
of Summit or any Summit Affiliate in any business enterprise with which
Executive may be associated, connected or affiliated, or (d) induce or attempt
to induce any customer, supplier, licensee, licensor or other business relation
of Summit or of any Summit Affiliate to cease doing business with the Company or
such Summit Affiliate, respectively, or in any way interfere with the
relationship between any such customer, supplier, licensee, licensor or other
business relation and the Summit or such Summit Affiliate.
8.4 Indirect Competition or Solicitation. Executive agrees
------------------------------------
that, during the term of this Agreement and the period covered by Sections 8.1
or 8.3 hereof, he shall not, directly or indirectly, assist or encourage any
other person in carrying out, directly or indirectly, any activity that would be
prohibited by the provisions of Sections 8.1 or 8.3 if such activity were
carried out by Executive, either
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<PAGE>
directly or indirectly; and, in particular, Executive agrees that he shall not,
directly or indirectly, induce any employee of Summit or of any Summit Affiliate
to carry out, directly or indirectly, any such activity.
9. Termination.
-----------
9.1 Grounds for Termination. This Agreement shall
-----------------------
terminate prior to the expiration of the initial term set forth in Section 2 or
any extension thereof in the event that at any time during such initial term or
any extension thereof:
(a) Executive dies; or
(b) Executive becomes disabled (as defined below), so that he
cannot perform the essential functions of his position with
reasonable accommodation; or
(c) The Board of Directors of Summit elects to terminate this
Agreement for "cause" and notifies Executive in writing of
such election; or
(d) The Board of Directors of Summit elects to terminate this
Agreement without "cause" and notifies Executive in writing
of such election; or
(e) Executive elects to terminate this Agreement and notifies
Summit in writing of such election.
Any such termination shall be effective immediately.
9.2 "Cause" Defined.
---------------
(a) Executive has breached in any material respect the provision
of Sections 5, 6, 7 or 8 of this Agreement in any material
respect and has failed to cure such breach within thirty
(30) days after written notice thereof to Executive; or
(b) Executive has engaged in willful and material misconduct,
including willful and material failure to perform
Executive's duties as an officer or employee of Summit and
has failed to "cure" such default within thirty (30) days
after receipt of written notice of default from the
President of Summit; or
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<PAGE>
(c) Executive has committed material fraud, misappropriation or
embezzlement in connection with Summit's business; or
(d) Executive has been convicted or has pleaded nolo contendere
to criminal misconduct (except for parking violations and
occasional minor traffic violations); or
(e) Executive's use of narcotics, liquor or illicit drug has a
materially detrimental effect on the performance of his
employment responsibilities, as reasonably determined by
Summit's Board of Directors.
In the event that Summit terminates Executive's employment for "cause"
pursuant to subsection 9.1(c) and Executive objects in writing to the Board's
determination that there was proper "cause" for such termination within thirty
(30) days after Executive is notified of such termination, the matter shall be
resolved by arbitration in accordance with the provisions of Section 10.1. If
Executive fails to object to any such determination of "cause" in writing within
such thirty (30) day period, he shall be deemed to have waived his right to
object to that determination. If such arbitration determines that there was not
proper "cause" for termination, such termination shall be deemed to be a
termination pursuant to Subsection 9.1(d) and Executive's sole remedy shall be
to receive the wage continuation benefits contemplated by Section 9.6.
9.3 Effect of Termination Notwithstanding any termination
---------------------
of this Agreement, the parties hereto shall remain bound by the provisions of
this Agreement which specifically relate to periods, activities or obligations
upon, or subsequent to, the termination of Executive's employment.
9.4 "Disability" Defined. For the purposes of this
--------------------
Agreement, the term "disability" shall mean the physical or mental illness or
disability of the Executive, which renders him unable to perform his duties
hereunder for a period of at least two consecutive months or for shorter periods
totaling more than ninety (90) days during any 365 day period.
9.5 Surrender of Records and Property. Upon termination of
---------------------------------
his employment with Summit, Executive shall deliver promptly to Summit all
records, manuals, books, blank forms, documents, letters, memoranda, notes,
notebooks, software, algorithms, reports, data, tables, calculations and all
other information, or copies thereof, which are the property of Summit or any
Summit Affiliate, or which relate in any way to the business, products,
practices or techniques of Summit or any Summit Affiliate, and all other
property, trade secrets and confidential information of Summit or any Summit
Affiliate, including, but not limited to, all documents which in whole or in
part contain any trade secrets or
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<PAGE>
confidential information of Summit or any Summit Affiliate, which in any of
these cases are in his possession or under his control.
9.6 Wage Continuation. If Executive's employment by Summit
-----------------
is terminated pursuant to Subsection 9.1(d), Summit shall continue to pay to
Executive his base salary and shall continue to provide health insurance
benefits for Executive for eighteen (18) months following termination of this
Agreement. If this Agreement is terminated pursuant to subsection 9.1(a),
9.1(b), 9.1(c) or 9.1(e), Executive's right to base salary and benefits shall
immediately terminate, except as may otherwise be required by applicable law.
10. Settlement of Disputes.
----------------------
10.1 Arbitration. Except as provided in Section 10.2, any
-----------
claims or disputes of any nature between Summit and Executive arising from or
related to the performance, breach, termination, expiration, application, or
meaning of this Agreement or any matter relating to Executive's employment and
the termination of that employment by Summit shall be resolved exclusively by
arbitration in Durham, North Carolina, in accordance with the applicable rules
then obtaining of the American Arbitration Association. The fees of the
arbitrator(s), reasonable attorneys' fees and other costs incurred by Executive
and Summit in connection with such arbitration shall be recovered by the
prevailing party in such arbitration.
The decision of the arbitrator(s) shall be final and binding upon
both parties. Judgment of the award rendered by the arbitrator(s) may be entered
in any court having jurisdiction thereof. In the event of submission of any
dispute to arbitration, each party shall, not later than thirty (30) days prior
to the date set for hearing, provide to the other party and to the arbitrator(s)
a copy of all exhibits upon which the party intends to rely at the hearing and a
list of all persons each party intends to call at the hearing.
10.2 Resolution of Certain Claims - Injunctive Relief.
------------------------------------------------
Section 10.1 shall have no application to claims by Summit asserting a violation
of Sections 5, 6, 7, 8 or 9.5 or seeking to enforce, by injunction or otherwise,
the terms of Sections 5, 6, 7, 8 or 9.5. Such claims may be maintained by
Summit in a lawsuit subject to the terms of Section 10.3. Executive agrees
that, in addition to, but not to the exclusion of, any other available remedy,
Summit shall have the right to enforce the provisions of Sections 5, 6, 7, 8 and
9.5 by applying for and obtaining temporary and permanent restraining orders or
injunctions from a court of competent jurisdiction subject to filing a bond
therefor, and the prevailing party shall be entitled to recover from the other
party its reasonable attorneys' fees and costs in any action related to
enforcement of the provisions of Sections 5, 6, 7, 8 and 9.5.
10.3 Venue. Any action or proceeding arising under Section
-----
10.2 of this Agreement shall be litigated only in the federal or state courts
located in
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<PAGE>
the State of Minnesota, County of Hennepin. Executive agrees such a venue is
reasonable and convenient and waives any right the Executive may have to
transfer or change the venue of any litigation brought against Executive by
Summit pursuant to such Section 10.2.
10.4 Severability. To the extent any provision of this
------------
Agreement shall be invalid or unenforceable, it shall be considered deleted
herefrom and the remainder of such provision and of this Agreement shall be
unaffected and shall continue in full force and effect.
11. Miscellaneous.
-------------
11.1 Governing Law. This Agreement is made under and shall
-------------
be governed by and construed in accordance with the laws of the State of
Minnesota, excluding its choice of law rules.
11.2 Prior Agreements. This Agreement (including the
----------------
Options and Stock Option Agreement) contains the entire agreement of the parties
relating to the employment of Executive by Summit and the ancillary matters
discussed herein and supersedes all prior agreements and understandings with
respect to such matters, whether oral or written, and the parties hereto have
made no agreements, representations or warranties relating to such employment or
ancillary matters which are not set forth herein.
11.3 Withholding Taxes. Summit may withhold from any
-----------------
benefits payable under this Agreement all federal, state, city or other taxes as
shall be required pursuant to any law or governmental regulation or ruling.
11.4 Amendments. No amendment or modification of this
----------
Agreement shall be deemed effective unless made in writing and signed by the
both Executive and Summit.
11.5 No Waiver. No term or condition of this Agreement
---------
shall be deemed to have been waived, nor shall there be any estoppel to enforce
any provisions of this Agreement, except by a statement in writing signed by the
party against whom enforcement of the waiver or estoppel is sought. Any written
waiver shall not be deemed a continuing waiver unless specifically stated, shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
11.6 Assignment. The rights and duties of Executive under
----------
this Agreement are personal and may not be assigned, in whole or in part,
without the written consent of Summit, in its sole discretion. Subject to the
foregoing, this
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<PAGE>
Agreement shall be binding upon and inure to the benefit of, and be enforceable
against, the parties hereto and any permitted assignees or successors.
11.7 Counterparts. This Agreement may be simultaneously
------------
executed in any number of counterparts, and such counterparts executed and
delivered, each as an original, shall constitute but one and the same
instrument.
11.8 Captions and Headings. The captions and paragraph
---------------------
headings used in this Agreement are for convenience of reference only, and shall
not affect the construction or interpretation of this Agreement or any of the
provisions hereof.
11.9 Notices. All notices and other communications
-------
hereunder shall be in writing and shall be deemed given if delivered personally
or by facsimile transmission (receipt verified), telexed, or sent by express
courier service, to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice; provided, that notices
of a change or address shall be effective only upon receipt thereof):
If to Summit, addressed to:
Summit Medical Systems, Inc.
10900 Red Circle Drive, Suite 100
Minneapolis, Minnesota 55343-9106.
Fax: (612) 939-2790
Attn: Chief Financial Officer
If to Fortin, addressed to:
Donald F. Fortin, M.D.
6330 Quadrangle Drive, Suite 300
Durham, North Carolina 27514
Fax:(919)419-9555
IN WITNESS WHEREOF, Executive and Summit have executed this Agreement
as of the Effective Date.
SUMMIT MEDICAL SYSTEMS, INC.
_______________________________ By________________________________
Donald F. Fortin, M.D.
Name______________________________
Title_____________________________
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<PAGE>
Exhibit 10.34
SUMMIT MEDICAL SYSTEMS INC.
NONSTATUTORY STOCK OPTION AGREEMENT
This Nonstatutory Stock Option Agreement is made this 31st day of
December 1996 (the "Effective Date"), by and between Summit Medical Systems,
Inc. (the "Company") and Donald F. Fortin, M.D. (the "Employee").
WHEREAS, the Company and Employee desire to enter into an Employment
Agreement of even date herewith (the "Employment Agreement"), pursuant to which
Employee would serve as Vice-President and Chief Scientific Officer of the
Company; and
WHEREAS, an option to purchase shares of the Company's common stock is
an essential inducement for Employee to enter into the Employment Agreement.
NOW THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
1. Grant of Option. The Company hereby grants to the Employee an option
---------------
(the "Option") to purchase 300,000 shares of the Company's Common Stock on the
terms and conditions set forth herein.
2. Purchase Price. The purchase price of the Company's Common Stock
--------------
shall be $7.50 per share (subject to adjustment as noted below).
3. Nonstatutory Option. The Option is not intended to be an incentive
-------------------
stock option within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended.
4. Exercise. The holder hereof may exercise this Option for up to
--------
300,000 shares of the Company's Common Stock in cumulative installments, each
exercisable in whole or in part, at any time from the date first exercisable up
to ten (10) years from the Effective Date (the "Expiration Date"), as follows:
<TABLE>
<CAPTION>
Number of shares as to
Date First Exercisable which Option is exercisable
---------------------- ---------------------------
<S> <C>
Effective Date 45,000
December 31, 1997 85,000
December 31, 1998 85,000
December 31, 1999 85,000
</TABLE>
<PAGE>
The Option may be exercised only while the Employee is actively employed by the
Company, or alternatively as provided in Section 6, dealing with termination of
employment.
5. Transferability. This Option is not transferable except by will or the
---------------
laws of descent and distribution, or with the prior written consent of the
Company.
6. Termination of Employment. The holder hereof shall have the right to
-------------------------
exercise the Option only to the extent of the full number of shares of the
Company's Common Stock the Employee was entitled to purchase under the Option on
the effective date of termination of the Employment Agreement; provided,
however, that if Employee's employment with the Company terminates due to
Employee's death, disablement or without cause in accordance with Sections
9.1(a), (b) or (d), respectively, of the Employment Agreement, the Option shall
be exercisable as to all 300,000 shares of the Company's Common Stock
immediately upon the effective date of such termination, notwithstanding Section
4 above. In the event of termination of Employee's employment with the Company
for any and all reasons, the Option may be exercised by the holder hereof until
the Expiration Date, subject to the extent provided in this Section 6.
7. Service. This Agreement shall in no way restrict the right of the
-------
Company or Summit Affiliate to terminate Employee's employment at any time.
8. Method of Exercise. The Option may be exercised, subject to the terms
------------------
and conditions of this Agreement by written notice to the Company. The notice
shall be in the form attached to this Agreement and will be accompanied by
payment by check (bank check, certified check or personal check) or by delivery
to the Company for cancellation shares of Common Stock having a Market Price
(defined in Section 11(f) below) equal to the full purchase price of the shares
to be issued on the date the notice of exercise is received by the Company, and
in the event of an exercise by an executor or administrator or other person
authorized under Section 5, appropriate proof of the right of such person to
exercise the Option. The Company will issue and deliver certificates
representing the number of shares purchased under the Option, registered in the
name of the holder hereof as soon as practicable after receipt of the notice.
9. Withholding. In any case where withholding is required or advisable
-----------
under federal, state or local law in connection with any exercise by the
Employee hereunder, Employee may elect to (i) authorize the Company to withhold
appropriate amounts from amounts payable to the Employee, (ii) remit to the
Company an amount equal to such appropriate withholding, or (iii) have the
Company withhold a portion of the shares of Common Stock otherwise to be
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<PAGE>
delivered upon exercise of such option having a Market Price equal to the amount
of such appropriate withholding.
10. Registration. Company shall use commercially reasonable efforts to
------------
register the shares of Common Stock that Employee obtains pursuant to an
exercise of the Option on a registration statement on Form S-8 (or any successor
form) and the Company shall use commercially reasonable efforts to maintain the
effectiveness of such registration statement for so long as any portion of the
Option remains exercisable by Employee hereunder.
11. Anti-Dilution Adjustments. The above provisions are, however, subject
-------------------------
to the following:
(a) The purchase price set forth in Section 2 above shall, from and
after the date of issuance of this Option, be subject to adjustment from
time to time as hereinafter provided. Upon each adjustment of the purchase
price, the holder hereof shall thereafter be entitled to purchase, at the
purchase price resulting from such adjustment, the number of shares
obtained by multiplying the purchase price in effect immediately prior to
such adjustment by the number of shares purchasable pursuant hereto immedi
ately prior to such adjustment and dividing the product thereof by the
purchase price resulting from such adjustment.
(b) In case the Company shall at any time subdivide its outstanding
shares of Common Stock into a greater number of shares, including any
dividend declared to effect a subdivision of the outstanding shares of
Common Stock, the purchase price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding shares of Common Stock of the Company shall be combined into a
smaller number of shares, the purchase price in effect immediately prior to
such combination shall be proportionately increased.
(c) If any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale of all or substantially all of its assets
to another corporation shall be effected in such a way that holders of
Common Stock shall be entitled to receive stock, securities or assets with
respect to or in exchange for Common Stock, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby the holder hereof shall thereafter
have the right to purchase and receive, upon the basis and upon the terms
and conditions specified in this Option and in lieu of the shares of Common
Stock of the
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<PAGE>
Company immediately theretofore purchasable and receivable upon the
exercise of the rights represented hereby, such shares of stock, securities
or assets as may be issued or payable with respect to or in exchange for a
number of outstanding shares of such Common Stock equal to the number of
shares of such stock immediately theretofore purchasable and receivable
upon the exercise of the rights represented hereby had such reorganization,
reclassification, consolidation, merger or sale not taken place, and in any
such case appropriate provision shall be made with respect to the rights
and interests of the holder hereof to the end that the provisions hereof
(including without limitation provisions for adjustments of the purchase
price and of the number of shares purchasable upon the exercise of this
Option) shall thereafter be applicable, as nearly as may be, in relation to
any shares of stock, securities or assets thereafter deliverable upon the
exercise hereof. The Company shall not effect any such consolidation,
merger or sale, unless prior to the consummation thereof the successor
corporation (if other than the Company) resulting from such consolidation
or merger or the corporation purchasing such assets shall assume, by
written instrument executed and mailed to the registered holder hereof at
the last address of such holder appearing on the books of the Company, the
obligation to deliver to such holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such holder may be
entitled to purchase.
(d) Upon any adjustment of the purchase price, then and in each such
case the Company shall give written notice thereof, by first-class mail,
postage prepaid, addressed to the registered holder of this Option at the
address of such holder as shown on the books of the Company, which notice
shall state the purchase price resulting from such adjustment and the
increase or decrease, if any, in the number of shares purchasable at such
price upon the exercise of this Option, setting forth in reasonable detail
the method of calculation and the facts upon which such calculation is
based.
(e) If any event occurs as to which the other provisions of this
Section 11 are not strictly applicable or if strictly applicable would not
fairly protect the purchase rights of the holder of this Option or of
Common Stock in accordance with the essential intent and principles of such
provisions, then this Option shall be adjusted in the application of such
provisions, in accordance with such essential intent and principles, so as
to protect such purchase rights as aforesaid.
(f) No fractional shares of Common Stock shall be issued upon the
exercise of this Option, but, instead of any fraction of a share which
would otherwise be issuable, the Company shall pay a cash adjustment (which
may
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<PAGE>
be effected as a reduction of the amount to be paid by the holder hereof
upon such exercise) in respect of such fraction in an amount equal to the
same fraction of the Market Price per share of Common Stock on the date of
the written notice of exercise required by Section 8 above. "Market Price"
for purposes of this Section 11(f), Sections 8 and 9 hereof, and for the
purpose of determining the option purchase price shall mean, if the Common
Stock is traded on a securities exchange or on the Nasdaq National Market,
the closing price of the Common Stock on such exchange or the Nasdaq
National Market, or, if the Common Stock is otherwise traded in the over-
the-counter market, the closing bid price, in each case averaged over a
period of 5 consecutive business days prior to the date as of which "Market
Price" is being determined. If at any time the Common Stock is not traded
on an exchange or the Nasdaq National Market, or otherwise traded in the
over-the-counter market, the "Market Price" shall be deemed to be the
higher of (i) the book value thereof as determined by any firm of
independent public accountants of recognized standing selected by the Board
of Directors of the Company as of the last day of any month ending within
60 days preceding the date as of which the determination is to be made, or
(ii) the fair value thereof determined in good faith by the Board of
Directors of the Company as of a date which is within 15 days of the date
as of which the determination is to be made.
12. Common Stock. As used herein, the term "Common Stock" shall mean and
-------------
include the Company's presently authorized Common Stock and shall also include
any capital stock of any class of the Company hereafter authorized which shall
not be limited to a fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Company; provided that the shares purchasable pursuant to this Option shall
include shares designated as Common Stock of the Company on the date of original
issue of this Option or, in the case of any reclassification of the outstanding
shares thereof, the stock, securities or assets provided for in Section 11(c)
above.
13. No Voting Rights. This Option shall not entitle the holder hereof to
----------------
any voting rights or other rights as a shareholder of the Company.
14. Optional Conversion.
-------------------
(a) In addition to and without limiting the rights of the holder of
this Option under the terms of this Option, such holder shall have the
right (the "Conversion Right") to convert this Option or any portion
thereof into shares of Common Stock as provided in this Section 14 at any
time from and
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<PAGE>
after the Effective Date and to and including the Expiration Date, subject
to the restrictions set forth in Section 4. Upon exercise of the Conversion
Right with respect to a particular number of shares subject to this Option
(the "Converted Option Shares"), the Company shall deliver to the holder of
this Option, without payment by the holder of any exercise price or any
cash or other consideration, that number of shares of Common Stock equal to
the quotient obtained by dividing the Net Value (as hereinafter defined) of
the Converted Option Shares by the Market Price of a single share of Common
Stock, determined in each case as of the close of business on the
Conversion Date (as hereinafter defined). The "Net Value" of the Converted
Option Shares shall be determined by subtracting the aggregate option
purchase price of the Converted Option Shares from the Market Price of the
Converted Option Shares. Notwithstanding anything in this Section 14 to the
contrary, the Conversion Right cannot be exercised with respect to a number
of Converted Option Shares having a Net Value below $100. No fractional
shares shall be issuable upon exercise of the Conversion Right, and if the
number of shares to be issued in accordance with the foregoing formula is
other than a whole number, the Company shall pay to the holder of this
Option an amount in cash equal to the fair market value of the resulting
fractional share.
(b) The Conversion Right may be exercised by the holder of this
Option by the surrender of this Option at the principal office of the
Company together with a written statement specifying that the holder
thereby intends to exercise the Conversion Right and indicating the number
of shares subject to this Option which are being surrendered (referred to
in paragraph (a) above as the Converted Option Shares) in exercise of the
Conversion Right. Such conversion shall be effective upon receipt by the
Company of this Option together with the aforesaid written statement, or on
such later date as is specified therein (the "Conversion Date"), but not
later than the Expiration Date. Certificates for the shares of Common Stock
issuable upon exercise of the Conversion Right, together with a check in
payment of any fractional share and, in the case of a partial exercise, a
new option evidencing the shares remaining subject to this Option, shall be
issued as of the Conversion Date and shall be delivered to the holder of
this Option within 7 days following the Conversion Date.
15. Governing Law. All questions concerning this Option will be governed
-------------
and interpreted and enforced in accordance with the internal law of the State of
Minnesota without regard for principles of conflict of law.
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<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
ACCEPTED: By____________________________________
Its_________________________________
_______________________________
Donald F. Fortin, M.D.
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<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
----------------------------
NOTICE OF EXERCISE OF STOCK OPTION
----------------------------------
To: Board of Directors
SUMMIT MEDICAL SYSTEMS, INC.
I hereby exercise my Option dated __________ to purchase _____ shares of
$.01 par value common stock of the Company at the option exercise price of
$__________ per share. Enclosed is a certified or cashier's check in the total
amount of $__________, or payment in such other form as the Company has
specified.
I request that my shares be issued in my name as follows:
________________________________________________________________________
(Print your name in the form in which you wish to
have the shares registered)
________________________________________________________________________
(Social Security Number)
________________________________________________________________________
(Street and Number)
________________________________________________________________________
(City) (State) (Zip Code)
Dated: __________, 19__.
Signature:_______________________________
<PAGE>
Exhibit 10.35
SUMMIT MEDICAL SYSTEMS INC.
NONSTATUTORY STOCK OPTION AGREEMENT
This Nonstatutory Stock Option Agreement is made this 31st day of
December 1996 (the "Effective Date"), by and between Summit Medical Systems,
Inc. (the "Company") and Robert M. Califf, M.D. (the "Consultant").
WHEREAS, the Company and Consultant desire to enter into an Consulting
Agreement of even date herewith (the "Consulting Agreement") pursuant to which
Consultant would provide certain consulting services to the Company; and
WHEREAS, an option to purchase shares of the Company's common stock is
an essential inducement for Consultant to enter into the Consulting Agreement.
NOW THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
1. Grant of Option. The Company hereby grants to Consultant an option (the
---------------
"Option") to purchase up to an aggregate amount of 150,000 shares of the
Company's Common Stock on the terms and conditions set forth herein.
2. Exercise. (a) Consultant may exercise this Option for up to 112,500 shares
--------
of the Company's Common Stock in cumulative installments, each exercisable in
whole or in part, from the date first exercisable up to the Expiration Date, as
follows:
<TABLE>
<CAPTION>
Number of shares as to
Date First Exercisable which Option is exercisable
---------------------- ---------------------------
<S> <C>
Effective Date 16,875
December 31, 1997 31,875
December 31, 1998 31,875
December 31, 1999 31,875
</TABLE>
(b) Consultant may exercise this Option for up to 37,500 additional shares of
the Company's Common Stock as follows:
In the event that (i) prior to the fifth anniversary of the Effective Date,
the Company shall have entered into On-line Outcomes Registry Agreements
(as hereinafter defined) which have in the aggregate Contract Values (as
hereinafter defined) of at least $40 million, and (ii) as of the date, if
any, on which clause (i) is satisfied, the average of the
<PAGE>
last reported sale prices of the Company's common stock on the Nasdaq
National Market during the period of the thirty (30) most recent trading
days, ending on the date on which clause (i) is satisfied, is less than
$28.00 per share, this Option may be exercised by Consultant, in whole or
in part, as to 18,750 shares of the Company's Common Stock. Notwithstanding
the foregoing, in the event that, prior to the fifth anniversary of the
Effective Date, the Company shall have entered into On-line Outcomes
Registry Agreements which have in the aggregate Contract Values of at least
$75 million, this Option may be exercised, in whole or in part, as to
37,500 shares of the Company's Common Stock. "On-line Outcomes Registry
Agreements" shall mean any written agreement, understanding or arrangement
pursuant to which the Company will develop, maintain, manage, operate, or
otherwise provide services related to, a central registry or database (a
"registry") that collects clinical medical data from participants in the
registry or database, primarily using On-line Technologies (as hereinafter
defined) to receive data into the registry, to process queries to the
registry, and to deliver reports and responses to the participants in the
registry. "On-line Technologies" shall mean software products and related
services that require a participant in the registry to access an off-site
central processing unit or server maintained by the Company or a third
party in order to input, aggregate, access and/or process the participant's
clinical medical data and other data from, or reports based on, the
clinical medical data in the registry. "Contract Value", as to any On-line
Outcomes Registry Agreement, shall be determined in accordance with Exhibit
A hereto. The Company agrees that within twenty (20) business days of the
execution and delivery of each On-line Outcomes Registry Agreement, the
Company will determine in good faith the Contract Value of such On-line
Outcomes Registry Agreement in accordance with the provisions of Exhibit A
and will give written notice to Consultant, which notice shall state the
Contract Value for such On-line Outcomes Registry Agreement as determined
by the Company and the aggregate Contract Values for all On-line Outcomes
Registry Agreements as of the date of such notice. The calculation of
Contract Value set forth in this notice shall be certified by Donald
Fortin, M.D. as Chief Scientific Officer of the Company. If Consultant
objects to the determination of Contract Value within thirty (30) business
days following the date of the notice, the Company and Consultant shall
negotiate in good faith for a period of thirty (30) business days to settle
any dispute regarding the Contract Value. If such dispute has not been
settled within such thirty (30) business day
-2-
<PAGE>
period, the dispute shall be settled in accordance with the arbitration
provision of Section 11 below.
3. Purchase Price. The purchase price of the stock shall be $7.50 per share
--------------
(subject to adjustment as noted below).
4. Nonstatutory Option. The Option is not intended to be an incentive stock
-------------------
option within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended.
5. Period of Exercise. The Option will expire on the date (the "Expiration
------------------
Date") ten (10) years from the Effective Date. The Option may be exercised only
while the Consulting Agreement is in effect between the Company and Consultant,
or alternatively as provided in Section 7, which deals with termination of the
Consulting Agreement; provided, however, that the Option shall not be
exercisable after the Expiration Date.
6. Transferability. This Option is not transferable except by will or the laws
---------------
of descent and distribution, or with the prior written consent of the Company.
7. Termination of Consulting Agreement. The holder hereof shall have the
-----------------------------------
right to exercise the Option only to the extent of the full number of shares of
the Company's Common Stock the Consultant was entitled to purchase under the
Option on the effective date of termination of the Consulting Agreement;
provided, however, that if the Consulting Agreement terminates for any reason
other than Consultant's material breach thereof, or Consultant's voluntary
termination thereof other than as a result of Company's uncured material breach,
the Option shall be exercisable as to all 150,000 shares of the Company's Common
Stock immediately upon the effective date of such termination, notwithstanding
Section 2 above. In the event of termination of the Consulting Agreement for any
and all reasons, the Option may be exercised by the holder hereof until the
Expiration Date, subject to the extent provided in this Section 7.
8. Service. This Agreement shall in no way restrict the right of the Company
-------
or Consultant to terminate the Consulting Agreement in accordance with its
terms.
9. Method of Exercise. The Option may be exercised, subject to the terms and
------------------
conditions of this Agreement, by written notice to the Company. The notice
shall be in the form attached to this Agreement and will be accompanied by
payment by check (bank check, certified check or personal check) or by delivery
to the Company for cancellation shares of Common Stock having a Market Price
(defined in Section 13(f) below) equal to the full purchase price of the shares
to be issued on the date the
-3-
<PAGE>
notice of exercise is received by the Company, and in the event of an exercise
by an executor or administrator or other person authorized under Section 6
hereof appropriate proof of the right of such person to exercise the Option. The
Company will issue and deliver certificates representing the number of shares
purchased under the Option, registered in the name of the holder hereof as soon
as practicable after receipt of the notice.
10. Withholding. In any case where withholding is required under federal,
-----------
state or local law in connection with any exercise by the Consultant hereunder,
Consultant may elect to (i) authorize the Company to withhold appropriate
amounts from amounts payable to the Consultant, (ii) remit to the Company an
amount equal to such appropriate withholding, or (iii) have the Company withhold
a portion of the shares of Common Stock otherwise to be delivered upon exercise
of such option having a Market Price equal to the amount of such appropriate
withholding.
11. Arbitration. Any dispute, claim or controversy arising out of or in
-----------
connection with this Agreement or this Option which has not been settled through
negotiation within a period of thirty (30) days after the date on which either
party shall first have notified the other party in writing of the existence of a
dispute shall be settled by final and binding arbitration under the then
applicable Commercial Arbitration Rules of the American Arbitration Association
("AAA"). Any such arbitration shall be conducted by three (3) arbitrators
appointed by mutual agreement of the parties or, failing such agreement, in
accordance with such AAA Rules. At least one (1) arbitrator shall be an
experienced computer software professional, and at least one (1) arbitrator
shall be an experienced business attorney with background in the licensing and
distribution of computer software. Any such arbitration shall be conducted in
Durham, North Carolina. An arbitral award may be enforced in any court of
competent jurisdiction. Notwithstanding any contrary provision in the AAA Rules,
the following additional procedures and rules shall apply to any such
arbitration:
(a) Each party shall have the right to request from the arbitrators, and
the arbitrators shall order upon good cause shown, reasonable and limited pre-
hearing discovery, including (i) exchange of witness lists, (ii) depositions
under oath of named witnesses at a mutually convenient location, (iii) written
interrogatories, and (iv) document requests.
(b) Upon conclusion of the pre-hearing discovery, the arbitrators shall
promptly hold a hearing upon the evidence to be adduced by the parties and shall
promptly render a written opinion and award.
-4-
<PAGE>
(c) The arbitrators may not award or assess punitive damages against
either party.
(d) Each party shall bear its own costs and expenses of the arbitration
and one-half (1/2) of the fees and costs of the arbitrators, subject to the
power of the arbitrators, in their sole discretion, to award all such reasonable
cots, expenses and fees to the prevailing party.
12. Registration. Company shall use commercially reasonable efforts to
------------
register the shares of Common Stock that Consultant obtains pursuant to an
exercise of the Option on a registration statement on Form S-8 (or any successor
form) and the Company shall use commercially reasonable efforts to maintain the
effectiveness of such registration statement for so long as any portion of the
Option remains exercisable by Consultant hereunder.
13. Anti-Dilution Adjustments. The above provisions are, however, subject to
-------------------------
the following:
(a) The purchase price set forth in Section 3 above shall, from and
after the date of issuance of this Option, be subject to adjustment from
time to time as hereinafter provided. Upon each adjustment of the purchase
price, the holder hereof shall thereafter be entitled to purchase, at the
purchase price resulting from such adjustment, the number of shares
obtained by multiplying the purchase price in effect immediately prior to
such adjustment by the number of shares purchasable pursuant hereto
immediately prior to such adjustment and dividing the product thereof by
the purchase price resulting from such adjustment.
(b) In case the Company shall at any time subdivide its outstanding
shares of Common Stock into a greater number of shares, including any
dividend declared to effect a subdivision of the outstanding shares of
Common Stock, the purchase price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding shares of Common Stock of the Company shall be combined into a
smaller number of shares, the purchase price in effect immediately prior to
such combination shall be proportionately increased.
(c) If any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale of all or substantially all of its assets
to another corporation shall be effected in such a way that holders of
Common Stock shall be entitled to receive stock, securities or assets with
respect to or in
-5-
<PAGE>
exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate
provision shall be made whereby the holder hereof shall thereafter have the
right to purchase and receive, upon the basis and upon the terms and
conditions specified in this Option and in lieu of the shares of Common
Stock of the Company immediately theretofore purchasable and receivable
upon the exercise of the rights represented hereby, such shares of stock,
securities or assets as may be issued or payable with respect to or in
exchange for a number of outstanding shares of such Common Stock equal to
the number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby had such
reorganization, reclassification, consolidation, merger or sale not taken
place, and in any such case appropriate provision shall be made with
respect to the rights and interests of the holder hereof to the end that
the provisions hereof (including without limitation provisions for
adjustments of the purchase price and of the number of shares purchasable
upon the exercise of this Option) shall thereafter be applicable, as nearly
as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise hereof. The Company shall not
effect any such consolidation, merger or sale, unless prior to the
consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation purchasing
such assets shall assume, by written instrument executed and mailed to the
registered holder hereof at the last address of such holder appearing on
the books of the Company, the obligation to deliver to such holder such
shares of stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to purchase.
(d) Upon any adjustment of the purchase price, then and in each such
case the Company shall give written notice thereof, by first-class mail,
postage prepaid, addressed to the registered holder of this Option at the
address of such holder as shown on the books of the Company, which notice
shall state the purchase price resulting from such adjustment and the
increase or decrease, if any, in the number of shares purchasable at such
price upon the exercise of this Option, setting forth in reasonable detail
the method of calculation and the facts upon which such calculation is
based.
(e) If any event occurs as to which the other provisions of this
Section 13 are not strictly applicable or if strictly applicable would not
fairly protect the purchase rights of the holder of this Option or of
Common Stock in accordance with the essential intent and principles of such
provisions, then this Option shall be adjusted in the application of such
provisions, in
-6-
<PAGE>
accordance with such essential intent and principles, so as to protect such
purchase rights as aforesaid.
(f) No fractional shares of Common Stock shall be issued upon the
exercise of this Option, but, instead of any fraction of a share which
would otherwise be issuable, the Company shall pay a cash adjustment (which
may be effected as a reduction of the amount to be paid by the holder
hereof upon such exercise) in respect of such fraction in an amount equal
to the same fraction of the Market Price per share of Common Stock on the
date of the written notice of exercise required by Section 9 above. "Market
Price" for purposes of this Section 13(f), Sections 9 and 10 hereof, and
for the purpose of determining the option purchase price shall mean, if the
Common Stock is traded on a securities exchange or on the Nasdaq National
Market, the closing price of the Common Stock on such exchange or the
Nasdaq National Market, or, if the Common Stock is otherwise traded in the
over-the-counter market, the closing bid price, in each case averaged over
a period of 5 consecutive business days prior to the date as of which
"Market Price" is being determined. If at any time the Common Stock is not
traded on an exchange or the Nasdaq National Market, or otherwise traded in
the over-the-counter market, the "Market Price" shall be deemed to be the
higher of (i) the book value thereof as determined by any firm of
independent public accountants of recognized standing selected by the Board
of Directors of the Company as of the last day of any month ending within
60 days preceding the date as of which the determination is to be made, or
(ii) the fair value thereof determined in good faith by the Board of
Directors of the Company as of a date which is within 15 days of the date
as of which the determination is to be made.
14. Common Stock. As used herein, the term "Common Stock" shall mean
------------
and include the Company's presently authorized Common Stock and shall also
include any capital stock of any class of the Company hereafter authorized which
shall not be limited to a fixed sum or percentage in respect of the rights of
the holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Company; provided that the shares purchasable pursuant to this Option shall
include shares designated as Common Stock of the Company on the date of original
issue of this Option or, in the case of any reclassification of the outstanding
shares thereof, the stock, securities or assets provided for in Section 13(c)
above.
15. No Voting Rights. This Option shall not entitle the holder hereof to
----------------
any voting rights or other rights as a shareholder of the Company.
-7-
<PAGE>
16. Optional Conversion.
-------------------
(a) In addition to and without limiting the rights of the holder of
this Option under the terms of this Option, such holder shall have the
right (the "Conversion Right") to convert this Option or any portion
thereof into shares of Common Stock as provided in this Section 16 at any
time from and after the Effective Date and to and including the Expiration
Date, subject to the restrictions set forth in Section 5. Upon exercise of
the Conversion Right with respect to a particular number of shares subject
to this Option (the "Converted Option Shares"), the Company shall deliver
to the holder of this Option, without payment by the holder of any exercise
price or any cash or other consideration, that number of shares of Common
Stock equal to the quotient obtained by dividing the Net Value (as
hereinafter defined) of the Converted Option Shares by the Market Price of
a single share of Common Stock, determined in each case as of the close of
business on the Conversion Date (as hereinafter defined). The "Net Value"
of the Converted Option Shares shall be determined by subtracting the
aggregate option purchase price of the Converted Option Shares from the
Market Price of the Converted Option Shares. Notwithstanding anything in
this Section 16 to the contrary, the Conversion Right cannot be exercised
with respect to a number of Converted Option Shares having a Net Value
below $100. No fractional shares shall be issuable upon exercise of the
Conversion Right, and if the number of shares to be issued in accordance
with the foregoing formula is other than a whole number, the Company shall
pay to the holder of this Option an amount in cash equal to the fair market
value of the resulting fractional share.
(b) The Conversion Right may be exercised by the holder of this
Option by the surrender of this Option at the principal office of the
Company together with a written statement specifying that the holder
thereby intends to exercise the Conversion Right and indicating the number
of shares subject to this Option which are being surrendered (referred to
in paragraph (a) above as the Converted Option Shares) in exercise of the
Conversion Right. Such conversion shall be effective upon receipt by the
Company of this Option together with the aforesaid written statement, or on
such later date as is specified therein (the "Conversion Date"), but not
later than the Expiration Date. Certificates for the shares of Common Stock
issuable upon exercise of the Conversion Right, together with a check in
payment of any fractional share and, in the case of a partial exercise, a
new option evidencing the shares remaining subject to this Option, shall be
issued as of the Conversion Date and shall be delivered to the holder of
this Option within 7 days following the Conversion Date.
-8-
<PAGE>
17. Governing Law. All questions concerning this Option will be governed
-------------
and interpreted and enforced in accordance with the internal law of the State of
Minnesota without regard for principles of conflict of law.
ACCEPTED: SUMMIT MEDICAL SYSTEMS, INC.
By_____________________________
______________________________
Robert M. Califf, M.D.
Its____________________________
-9-
<PAGE>
EXHIBIT A
CONTRACT VALUE
The Contract Value of each On-line Outcomes Registry Agreement shall
be determined in accordance with the following procedures. The Contract Value of
each On-line Outcomes Registry Agreement shall equal the sum of (a) the Fixed
Fees (as hereinafter defined) and (b) the Variable Fees (as hereinafter
defined). "Fixed Fees" shall mean the sum of all sponsorship fees, periodic site
license fees or other fixed fees to be paid to the Company during the term of
the On-line Outcomes Registry Agreement for which a cash payment of an amount
certain is specified in such agreement. "Variable Fees" shall mean the product
of the Estimated Fees (as hereinafter defined) multiplied by .75. "Estimated
Fees" shall mean the sum of all usage, encounter, inquiry, training, service and
other variable fees, based on usage of the registry and related services by
participants, to be paid to the Company during the term of the On-line Outcomes
Registry Agreement. The Company shall estimate the Estimated Fees in good faith
as of the date the On-line Outcomes Registry Agreement is executed and
delivered. The Company represents, warrants and covenants that it will have a
reasonable basis for its estimate of Estimated Fees and that such estimate will
be prepared on a basis consistent with the internal projections of the Company.
The estimate of Estimated Fees will be prepared using the pricing terms as set
forth in the On-line Outcomes Registry Agreement, including, without limitation,
estimates of any volume discounts, based on the usage estimates made in
accordance with the following sentence. The Company shall prepare in good faith
an estimate of the usage of the registry and related services by participants
over the term of the On-line Outcomes Registry Agreement. By way of example
only, an estimate of the Estimated Fees for a stent registry would include (i)
an estimate of the number of cardiac catheter laboratories ("cath labs") to be
covered by the agreement, (ii) an estimate of the size distribution of such cath
labs, (iii) an estimate of usage of the registry and related services by each
cath lab based on its size, and (iv) an estimate of any volume discounts based
on the foregoing. The foregoing procedure shall be applied in a manner similar
to the illustration attached hereto as Exhibit B, subject to the specific terms
and conditions of the applicable On-Line Outcomes Registry Agreement; provided,
that in Exhibit B the calculation of Contract Value illustrated therein shall
not include the Net Present Value discount shown, but, rather, shall include the
multiplication of such Estimated Fees by the factor of .75.
-10-
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
----------------------------
NOTICE OF EXERCISE OF STOCK OPTION
----------------------------------
To: Board of Directors
SUMMIT MEDICAL SYSTEMS, INC.
I hereby exercise my Option dated __________ to purchase _____ shares of
$.01 par value common stock of the Company at the option exercise price of
$__________ per share. Enclosed is a certified or cashier's check in the total
amount of $__________, or payment in such other form as the Company has
specified.
I request that my shares be issued in my name as follows:
_____________________________________________________________________
(Print your name in the form in which you wish to
have the shares registered)
_____________________________________________________________________
(Social Security Number)
_____________________________________________________________________
(Street and Number)
_____________________________________________________________________
(City) (State) (Zip Code)
Dated: __________, 19__.
Signature:____________________________
-11-
<PAGE>
Exhibit 10.36
SUMMIT MEDICAL SYSTEMS INC.
NONSTATUTORY STOCK OPTION AGREEMENT
This Nonstatutory Stock Option Agreement is made this 31st day of
December 1996 (the "Effective Date"), by and between Summit Medical Systems,
Inc. (the "Company") and Harry R. Phillips, III, M.D. (the "Consultant").
WHEREAS, the Company and Consultant desire to enter into an Consulting
Agreement of even date herewith (the "Consulting Agreement") pursuant to which
Consultant would provide certain consulting services to the Company; and
WHEREAS, an option to purchase shares of the Company's common stock is
an essential inducement for Consultant to enter into the Consulting Agreement.
NOW THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
1. Grant of Option. The Company hereby grants to Consultant an option (the
---------------
"Option") to purchase up to an aggregate amount of 150,000 shares of the
Company's Common Stock on the terms and conditions set forth herein.
2. Exercise. (a) Consultant may exercise this Option for up to 112,500 shares
--------
of the Company's Common Stock in cumulative installments, each exercisable in
whole or in part, from the date first exercisable up to the Expiration Date, as
follows:
<TABLE>
<CAPTION>
Number of shares as to
Date First Exercisable which Option is exercisable
---------------------- ---------------------------
<S> <C>
Effective Date 16,875
December 31, 1997 31,875
December 31, 1998 31,875
December 31, 1999 31,875
</TABLE>
(b) Consultant may exercise this Option for up to 37,500 additional shares of
the Company's Common Stock as follows:
In the event that (i) prior to the fifth anniversary of the Effective
Date, the Company shall have entered into On-line Outcomes Registry
Agreements (as hereinafter defined) which have in the aggregate
Contract Values (as hereinafter defined) of at least $40 million, and
(ii) as of the date, if any, on which clause (i) is satisfied, the
average of the
<PAGE>
last reported sale prices of the Company's common stock on the Nasdaq
National Market during the period of the thirty (30) most recent
trading days, ending on the date on which clause (i) is satisfied, is
less than $28.00 per share, this Option may be exercised by
Consultant, in whole or in part, as to 18,750 shares of the Company's
Common Stock. Notwithstanding the foregoing, in the event that, prior
to the fifth anniversary of the Effective Date, the Company shall have
entered into On-line Outcomes Registry Agreements which have in the
aggregate Contract Values of at least $75 million, this Option may be
exercised, in whole or in part, as to 37,500 shares of the Company's
Common Stock. "On-line Outcomes Registry Agreements" shall mean any
written agreement, understanding or arrangement pursuant to which the
Company will develop, maintain, manage, operate, or otherwise provide
services related to, a central registry or database (a "registry")
that collects clinical medical data from participants in the registry
or database, primarily using On-line Technologies (as hereinafter
defined) to receive data into the registry, to process queries to the
registry, and to deliver reports and responses to the participants in
the registry. "On-line Technologies" shall mean software products and
related services that require a participant in the registry to access
an off-site central processing unit or server maintained by the
Company or a third party in order to input, aggregate, access and/or
process the participant's clinical medical data and other data from,
or reports based on, the clinical medical data in the registry.
"Contract Value", as to any On-line Outcomes Registry Agreement, shall
be determined in accordance with Exhibit A hereto. The Company agrees
that within twenty (20) business days of the execution and delivery of
each On-line Outcomes Registry Agreement, the Company will determine
in good faith the Contract Value of such On-line Outcomes Registry
Agreement in accordance with the provisions of Exhibit A and will give
written notice to Consultant, which notice shall state the Contract
Value for such On-line Outcomes Registry Agreement as determined by
the Company and the aggregate Contract Values for all On-line Outcomes
Registry Agreements as of the date of such notice. The calculation of
Contract Value set forth in this notice shall be certified by Donald
Fortin, M.D. as Chief Scientific Officer of the Company. If Consultant
objects to the determination of Contract Value within thirty (30)
business days following the date of the notice, the Company and
Consultant shall negotiate in good faith for a period of thirty (30)
business days to settle any dispute regarding the Contract Value. If
such dispute has not been settled within such thirty (30) business day
-2-
<PAGE>
period, the dispute shall be settled in accordance with the
arbitration provision of Section 11 below.
3. Purchase Price. The purchase price of the stock shall be $7.50 per share
--------------
(subject to adjustment as noted below).
4. Nonstatutory Option. The Option is not intended to be an incentive stock
-------------------
option within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended.
5. Period of Exercise. The Option will expire on the date (the "Expiration
------------------
Date") ten (10) years from the Effective Date. The Option may be exercised only
while the Consulting Agreement is in effect between the Company and Consultant,
or alternatively as provided in Section 7, which deals with termination of the
Consulting Agreement; provided, however, that the Option shall not be
exercisable after the Expiration Date.
6. Transferability. This Option is not transferable except by will or the laws
---------------
of descent and distribution, or with the prior written consent of the Company.
7. Termination of Consulting Agreement. The holder hereof shall have the
-----------------------------------
right to exercise the Option only to the extent of the full number of shares of
the Company's Common Stock the Consultant was entitled to purchase under the
Option on the effective date of termination of the Consulting Agreement;
provided, however, that if the Consulting Agreement terminates for any reason
other than Consultant's material breach thereof, or Consultant's voluntary
termination thereof other than as a result of Company's uncured material breach,
the Option shall be exercisable as to all 150,000 shares of the Company's Common
Stock immediately upon the effective date of such termination, notwithstanding
Section 2 above. In the event of termination of the Consulting Agreement for
any and all reasons, the Option may be exercised by the holder hereof until the
Expiration Date, subject to the extent provided in this Section 7.
8. Service. This Agreement shall in no way restrict the right of the Company
-------
or Consultant to terminate the Consulting Agreement in accordance with its
terms.
9. Method of Exercise. The Option may be exercised, subject to the terms and
------------------
conditions of this Agreement, by written notice to the Company. The notice
shall be in the form attached to this Agreement and will be accompanied by
payment by check (bank check, certified check or personal check) or by delivery
to the Company for cancellation shares of Common Stock having a Market Price
(defined in Section 13(f) below) equal to the full purchase price of the shares
to be issued on the date the
-3-
<PAGE>
notice of exercise is received by the Company, and in the event of an
exercise by an executor or administrator or other person authorized under
Section 6 hereof appropriate proof of the right of such person to exercise
the Option. The Company will issue and deliver certificates representing
the number of shares purchased under the Option, registered in the name of
the holder hereof as soon as practicable after receipt of the notice.
10. Withholding. In any case where withholding is required under federal,
-----------
state or local law in connection with any exercise by the Consultant hereunder,
Consultant may elect to (i) authorize the Company to withhold appropriate
amounts from amounts payable to the Consultant, (ii) remit to the Company an
amount equal to such appropriate withholding, or (iii) have the Company withhold
a portion of the shares of Common Stock otherwise to be delivered upon exercise
of such option having a Market Price equal to the amount of such appropriate
withholding.
11. Arbitration. Any dispute, claim or controversy arising out of or in
-----------
connection with this Agreement or this Option which has not been settled through
negotiation within a period of thirty (30) days after the date on which either
party shall first have notified the other party in writing of the existence of a
dispute shall be settled by final and binding arbitration under the then
applicable Commercial Arbitration Rules of the American Arbitration Association
("AAA"). Any such arbitration shall be conducted by three (3) arbitrators
appointed by mutual agreement of the parties or, failing such agreement, in
accordance with such AAA Rules. At least one (1) arbitrator shall be an
experienced computer software professional, and at least one (1) arbitrator
shall be an experienced business attorney with background in the licensing and
distribution of computer software. Any such arbitration shall be conducted in
Durham, North Carolina. An arbitral award may be enforced in any court of
competent jurisdiction. Notwithstanding any contrary provision in the AAA
Rules, the following additional procedures and rules shall apply to any such
arbitration:
(a) Each party shall have the right to request from the arbitrators, and
the arbitrators shall order upon good cause shown, reasonable and limited pre-
hearing discovery, including (i) exchange of witness lists, (ii) depositions
under oath of named witnesses at a mutually convenient location, (iii) written
interrogatories, and (iv) document requests.
(b) Upon conclusion of the pre-hearing discovery, the arbitrators shall
promptly hold a hearing upon the evidence to be adduced by the parties and shall
promptly render a written opinion and award.
-4-
<PAGE>
(c) The arbitrators may not award or assess punitive damages against
either party.
(d) Each party shall bear its own costs and expenses of the
arbitration and one-half (1/2) of the fees and costs of the arbitrators,
subject to the power of the arbitrators, in their sole discretion, to award
all such reasonable cots, expenses and fees to the prevailing party.
12. Registration. Company shall use commercially reasonable efforts to
------------
register the shares of Common Stock that Consultant obtains pursuant to an
exercise of the Option on a registration statement on Form S-8 (or any successor
form) and the Company shall use commercially reasonable efforts to maintain the
effectiveness of such registration statement for so long as any portion of the
Option remains exercisable by Consultant hereunder.
13. Anti-Dilution Adjustments. The above provisions are, however, subject to
-------------------------
the following:
(a) The purchase price set forth in Section 3 above shall, from and
after the date of issuance of this Option, be subject to adjustment from
time to time as hereinafter provided. Upon each adjustment of the purchase
price, the holder hereof shall thereafter be entitled to purchase, at the
purchase price resulting from such adjustment, the number of shares
obtained by multiplying the purchase price in effect immediately prior to
such adjustment by the number of shares purchasable pursuant hereto immedi
ately prior to such adjustment and dividing the product thereof by the
purchase price resulting from such adjustment.
(b) In case the Company shall at any time subdivide its outstanding
shares of Common Stock into a greater number of shares, including any
dividend declared to effect a subdivision of the outstanding shares of
Common Stock, the purchase price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding shares of Common Stock of the Company shall be combined into a
smaller number of shares, the purchase price in effect immediately prior to
such combination shall be proportionately increased.
(c) If any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale of all or substantially all of its assets
to another corporation shall be effected in such a way that holders of
Common Stock shall be entitled to receive stock, securities or assets with
respect to or in
-5-
<PAGE>
exchange for Common Stock, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale,
lawful and adequate provision shall be made whereby the holder hereof
shall thereafter have the right to purchase and receive, upon the
basis and upon the terms and conditions specified in this Option and
in lieu of the shares of Common Stock of the Company immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares
of such stock immediately theretofore purchasable and receivable upon
the exercise of the rights represented hereby had such reorganization,
reclassification, consolidation, merger or sale not taken place, and
in any such case appropriate provision shall be made with respect to
the rights and interests of the holder hereof to the end that the
provisions hereof (including without limitation provisions for
adjustments of the purchase price and of the number of shares
purchasable upon the exercise of this Option) shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise hereof.
The Company shall not effect any such consolidation, merger or sale,
unless prior to the consummation thereof the successor corporation (if
other than the Company) resulting from such consolidation or merger or
the corporation purchasing such assets shall assume, by written
instrument executed and mailed to the registered holder hereof at the
last address of such holder appearing on the books of the Company, the
obligation to deliver to such holder such shares of stock, securities
or assets as, in accordance with the foregoing provisions, such holder
may be entitled to purchase.
(d) Upon any adjustment of the purchase price, then and in each such
case the Company shall give written notice thereof, by first-class mail,
postage prepaid, addressed to the registered holder of this Option at the
address of such holder as shown on the books of the Company, which notice
shall state the purchase price resulting from such adjustment and the
increase or decrease, if any, in the number of shares purchasable at such
price upon the exercise of this Option, setting forth in reasonable detail
the method of calculation and the facts upon which such calculation is
based.
(e) If any event occurs as to which the other provisions of this
Section 13 are not strictly applicable or if strictly applicable would not
fairly protect the purchase rights of the holder of this Option or of
Common Stock in accordance with the essential intent and principles of such
provisions, then this Option shall be adjusted in the application of such
provisions, in
-6-
<PAGE>
accordance with such essential intent and principles, so as to protect
such purchase rights as aforesaid.
(f) No fractional shares of Common Stock shall be issued upon the
exercise of this Option, but, instead of any fraction of a share which
would otherwise be issuable, the Company shall pay a cash adjustment (which
may be effected as a reduction of the amount to be paid by the holder
hereof upon such exercise) in respect of such fraction in an amount equal
to the same fraction of the Market Price per share of Common Stock on the
date of the written notice of exercise required by Section 9 above.
"Market Price" for purposes of this Section 13(f), Sections 9 and 10
hereof, and for the purpose of determining the option purchase price shall
mean, if the Common Stock is traded on a securities exchange or on the
Nasdaq National Market, the closing price of the Common Stock on such
exchange or the Nasdaq National Market, or, if the Common Stock is
otherwise traded in the over-the-counter market, the closing bid price, in
each case averaged over a period of 5 consecutive business days prior to
the date as of which "Market Price" is being determined. If at any time
the Common Stock is not traded on an exchange or the Nasdaq National
Market, or otherwise traded in the over-the-counter market, the "Market
Price" shall be deemed to be the higher of (i) the book value thereof as
determined by any firm of independent public accountants of recognized
standing selected by the Board of Directors of the Company as of the last
day of any month ending within 60 days preceding the date as of which the
determination is to be made, or (ii) the fair value thereof determined in
good faith by the Board of Directors of the Company as of a date which is
within 15 days of the date as of which the determination is to be made.
14. Common Stock. As used herein, the term "Common Stock" shall mean
-------------
and include the Company's presently authorized Common Stock and shall also
include any capital stock of any class of the Company hereafter authorized which
shall not be limited to a fixed sum or percentage in respect of the rights of
the holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Company; provided that the shares purchasable pursuant to this Option shall
include shares designated as Common Stock of the Company on the date of original
issue of this Option or, in the case of any reclassification of the outstanding
shares thereof, the stock, securities or assets provided for in Section 13(c)
above.
15. No Voting Rights. This Option shall not entitle the holder hereof to
----------------
any voting rights or other rights as a shareholder of the Company.
-7-
<PAGE>
16. Optional Conversion.
-------------------
(a) In addition to and without limiting the rights of the holder of
this Option under the terms of this Option, such holder shall have the
right (the "Conversion Right") to convert this Option or any portion
thereof into shares of Common Stock as provided in this Section 16 at any
time from and after the Effective Date and to and including the Expiration
Date, subject to the restrictions set forth in Section 5. Upon exercise of
the Conversion Right with respect to a particular number of shares subject
to this Option (the "Converted Option Shares"), the Company shall deliver
to the holder of this Option, without payment by the holder of any exercise
price or any cash or other consideration, that number of shares of Common
Stock equal to the quotient obtained by dividing the Net Value (as
hereinafter defined) of the Converted Option Shares by the Market Price of
a single share of Common Stock, determined in each case as of the close of
business on the Conversion Date (as hereinafter defined). The "Net Value"
of the Converted Option Shares shall be determined by subtracting the
aggregate option purchase price of the Converted Option Shares from the
Market Price of the Converted Option Shares. Notwithstanding anything in
this Section 16 to the contrary, the Conversion Right cannot be exercised
with respect to a number of Converted Option Shares having a Net Value
below $100. No fractional shares shall be issuable upon exercise of the
Conversion Right, and if the number of shares to be issued in accordance
with the foregoing formula is other than a whole number, the Company shall
pay to the holder of this Option an amount in cash equal to the fair market
value of the resulting fractional share.
(b) The Conversion Right may be exercised by the holder of this Option
by the surrender of this Option at the principal office of the Company
together with a written statement specifying that the holder thereby
intends to exercise the Conversion Right and indicating the number of
shares subject to this Option which are being surrendered (referred to in
paragraph (a) above as the Converted Option Shares) in exercise of the
Conversion Right. Such conversion shall be effective upon receipt by the
Company of this Option together with the aforesaid written statement, or on
such later date as is specified therein (the "Conversion Date"), but not
later than the Expiration Date. Certificates for the shares of Common
Stock issuable upon exercise of the Conversion Right, together with a check
in payment of any fractional share and, in the case of a partial exercise,
a new option evidencing the shares remaining subject to this Option, shall
be issued as of the Conversion Date and shall be delivered to the holder of
this Option within 7 days following the Conversion Date.
-8-
<PAGE>
17. Governing Law. All questions concerning this Option will be governed
-------------
and interpreted and enforced in accordance with the internal law of the State of
Minnesota without regard for principles of conflict of law.
ACCEPTED: SUMMIT MEDICAL SYSTEMS, INC.
___________________________________ By ___________________________
Harry R. Phillips, III, M.D.
Its __________________________
-9-
<PAGE>
EXHIBIT A
CONTRACT VALUE
The Contract Value of each On-line Outcomes Registry Agreement shall
be determined in accordance with the following procedures. The Contract Value
of each On-line Outcomes Registry Agreement shall equal the sum of (a) the Fixed
Fees (as hereinafter defined) and (b) the Variable Fees (as hereinafter
defined). "Fixed Fees" shall mean the sum of all sponsorship fees, periodic site
license fees or other fixed fees to be paid to the Company during the term of
the On-line Outcomes Registry Agreement for which a cash payment of an amount
certain is specified in such agreement. "Variable Fees" shall mean the product
of the Estimated Fees (as hereinafter defined) multiplied by .75. "Estimated
Fees" shall mean the sum of all usage, encounter, inquiry, training, service and
other variable fees, based on usage of the registry and related services by
participants, to be paid to the Company during the term of the On-line Outcomes
Registry Agreement. The Company shall estimate the Estimated Fees in good faith
as of the date the On-line Outcomes Registry Agreement is executed and
delivered. The Company represents, warrants and covenants that it will have a
reasonable basis for its estimate of Estimated Fees and that such estimate will
be prepared on a basis consistent with the internal projections of the Company.
The estimate of Estimated Fees will be prepared using the pricing terms as set
forth in the On-line Outcomes Registry Agreement, including, without limitation,
estimates of any volume discounts, based on the usage estimates made in
accordance with the following sentence. The Company shall prepare in good faith
an estimate of the usage of the registry and related services by participants
over the term of the On-line Outcomes Registry Agreement. By way of example
only, an estimate of the Estimated Fees for a stent registry would include (i)
an estimate of the number of cardiac catheter laboratories ("cath labs") to be
covered by the agreement, (ii) an estimate of the size distribution of such cath
labs, (iii) an estimate of usage of the registry and related services by each
cath lab based on its size, and (iv) an estimate of any volume discounts based
on the foregoing. The foregoing procedure shall be applied in a manner similar
to the illustration attached hereto as Exhibit B, subject to the specific terms
and conditions of the applicable On-Line Outcomes Registry Agreement; provided,
that in Exhibit B the calculation of Contract Value illustrated therein shall
not include the Net Present Value discount shown, but, rather, shall include the
multiplication of such Estimated Fees by the factor of .75.
-10-
<PAGE>
SUMMIT MEDICAL SYSTEMS, INC.
----------------------------
NOTICE OF EXERCISE OF STOCK OPTION
----------------------------------
To: Board of Directors
SUMMIT MEDICAL SYSTEMS, INC.
I hereby exercise my Option dated __________ to purchase _____ shares of
$.01 par value common stock of the Company at the option exercise price of
$__________ per share. Enclosed is a certified or cashier's check in the total
amount of $__________, or payment in such other form as the Company has
specified.
I request that my shares be issued in my name as follows:
_____________________________________________________________________
(Print your name in the form in which you wish to
have the shares registered)
_____________________________________________________________________
(Social Security Number)
_____________________________________________________________________
(Street and Number)
_____________________________________________________________________
(City) (State) (Zip Code)
Dated: __________, 19__.
Signature:____________________________
<PAGE>
Exhibit 10.37
AMENDMENT
THIS AMENDMENT is made and entered into as of December 31, 1996 (the
"Effective Date"), by and between DUKE UNIVERSITY ("Duke"), a North Carolina
not-for-profit corporation, having its principal office at Durham, North
Carolina 27708, and SUMMIT MEDICAL SYSTEMS, INC. ("Summit"), a Minnesota
corporation, having its principal offices at 10900 Red Circle Drive, Suite 100,
Minneapolis, Minnesota 55343-9106.
Recitals
--------
WHEREAS, Duke and Summit entered into a License Agreement dated December
29, 1995 (the "License Agreement"), pursuant to which Summit was granted an
exclusive license to the Software and Derivative Works (as defined in the
License Agreement), with a requirement to grant a sublicense to Cordillera LLC,
a Delaware limited liability corporation ("Cordillera");
WHEREAS, Summit has agreed to acquire Cordillera pursuant to a
Reorganization Agreement of even date herewith (the "Reorganization Agreement"),
by and among Summit, Cordillera, DR Ware L.L.C. and Duke, which provides for
Summit's purchase of all other parties' member units, and options for member
units, in Cordillera, and the wind-up and transfer of Cordillera's business to
Summit (the "Reorganization");
WHEREAS, as a result of the Reorganization, certain modifications to the
License Agreement are required; and
WHEREAS, Duke, Summit and the other parties to the Reorganization Agreement
have agreed that execution of this Amendment by Summit and Duke is a condition
of closing the Reorganization.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
herein contained, the parties do hereby agree:
1. License Grant. The first sentence of Section 2.1 of the License Agreement
-------------
is modified by substituting the words "fully-paid" for "royalty-bearing".
2. Sublicenses. The second sentence of Section 2.2 of the License Agreement
-----------
is deleted in its entirety. In addition, at the beginning of the third sentence
of Section 2.2 in the License Agreement, the following clauses are deleted: "In
addition, subject to the prior written consent of the Joint Venture,".
<PAGE>
3. Right of First Negotiation. The right of first negotiation to New
--------------------------
Technology granted to Summit pursuant to Section 2.7 of the License Agreement
shall not extend to any data or databases collected with such New Technology;
provided, however, that Duke acknowledges that Summit's license to the Duke
Databank discussed in Section 2.6 of the License Agreement shall not in any way
be affected by the foregoing.
4. Running Royalties. Duke and Summit acknowledge that, as of the Closing
-----------------
Date (as that term is defined in the Reorganization Agreement), the license to
the Software and Derivative Works granted to Summit in Section 2.1 of the
Agreement is fully-paid and that no additional running royalties are due or
payable to Duke, Cordillera or any other third party therefor. Accordingly,
Sections 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 3.8 and 3.10 of the License Agreement are
deleted in their entirety.
5. Infringement by Licensed Software. The second sentence of Section 5.4 of
---------------------------------
the License Agreement is deleted in its entirety and replaced by the following:
However, in the event there are no running royalties owed to Duke at the
time of such a Legal Action, within a reasonable time Duke shall have the
option of paying any sum owed to the third party due to such
indemnification or, in lieu of such cash payment, of transferring to Summit
the equivalent fair market value therefor in the form of (i) the New
Warrants (issued pursuant to Section 2.2 of the Reorganization Agreement
dated December 31, 1996 by and between Summit, Duke, Cordillera LLC and DR
Ware LLC), or any portion thereof that has not been exercised by Duke, (ii)
any Summit common stock received by Duke pursuant to its exercise of all or
any portion of the New Warrants (the "Duke Securities") which Duke holds,
or (iii) the net value realized by Duke for all or any portion of the New
Warrants or the Duke Securities which Duke has assigned, sold or otherwise
transfered to a third party. The fair market value of the New Warrants and
Duke Securities transferred to Summit shall be determined as of the date
liability is imposed on Duke under this Section 5.4. Notwithstanding the
foregoing, Duke's indemnification obligation under this Section 5.4 shall
be limited to the total value of the New Warrants, including any Duke
Securities received by Duke pursuant to its exercise thereof that are held
by Duke, and the net value realized by Duke for any portion thereof
assigned, sold or otherwise transferred to a third party.
In addition, the last sentence of Section 5.4(c) of the License Agreement is
deleted in its entirety and replaced by the following:
In the event there are no running royalties owed to Duke at the time of
such a Legal Action, Duke shall transfer to Summit the equivalent fair
<PAGE>
market value of such license fee payment by Summit to the third party in
the form of (i) the New Warrants, or any portion thereof that has not been
exercised by Duke, (ii) any Duke Securities that Duke holds, or (iii) the
net value realized by Duke for all or any portion of the New Warrants or
the Duke Securities which Duke has assigned, sold or otherwise transfered
to a third party. The fair market value of the New Warrants and Duke
Securities transferred to Summit shall be determined as of the date
liability is imposed on Duke under this Section 5.4.
6. Reserved Duke Use Rights. Duke's right to a royalty-free license to the
------------------------
Site-Specific Products granted in Section 6.3 of the License Agreement shall be
modified to also include Summit's Crescendo product, including all commercially
available derivative works and new versions thereof, regardless of whether
Crescendo is part of Summit's Site-Specific Products or On-Line Products.
Notwithstanding the foregoing, Duke shall be required to pay for all consulting,
implementation or project management services related to Crescendo, which it
requests from Summit, on terms as the parties may then mutually agree. Further,
Duke shall use it best efforts to integrate Crescendo with all software and
applications currently a part of, or added to, the Duke Medical Center computing
systems, so as to ensure Crescendo's continued role as an integral part of the
Duke Medical Center's computing systems.
7. Termination. Section 7.2(f) of the License Agreement is deleted in its
-----------
entirety.
8. Assumption of Obligations. Summit shall assume all obligations and rights
-------------------------
of Cordillera as expressly stated in the License Agreement, except the audit
rights under Section 3.9 thereof which, as to Cordillera, shall be canceled.
9. Effect of Amendment. Except as expressly modified herein, the License
-------------------
Agreement shall remain in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed in
duplicate as of the Effective Date.
DUKE UNIVERSITY SUMMIT MEDICAL SYSTEMS, INC.
By_________________________ By______________________________
Name_______________________ Name____________________________
Title______________________ Title___________________________
___________________________ ________________________________
<PAGE>
Exhibit 10.38
AMENDMENT
THIS AMENDMENT is made and entered into as of December 31, 1996 (the
"Effective Date"), by and between SUMMIT MEDICAL SYSTEMS, INC., a Minnesota
corporation ("Summit") and DR WARE LLC, a North Carolina limited liability
company.
Recitals
--------
WHEREAS, Summit and DR Ware entered into the Limited Liability Company
Agreement of Cordillera LLC dated December 29, 1995 (the "LLC Agreement"),
pursuant to which Summit and DR Ware became the sole Members (as that term is
defined in the LLC Agreement) of Cordillera LLC, a North Carolina limited
liability company ("Cordillera");
WHEREAS, Summit has agreed to acquire all of Dr Ware's Member Units in
Cordillera pursuant to a Reorganization Agreement (the "Reorganization
Agreement") by and among Summit, Cordillera, DR Ware and Duke University, a
North Carolina not-for-profit company ("Duke");
WHEREAS, as a result of Summit becoming the sole Member of Cordillera,
certain modifications to the LLC Agreement are required.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
herein contained, the parties do hereby agree:
1. Names and Addresses of the Members. The name and address of DR Ware is
----------------------------------
deleted in its entirety from Section 1.3 of the LLC Agreement.
2. Capital Contribution of Duke. Section 4.2 of the LLC Agreement is deleted
----------------------------
in its entirety.
3. Additional Capital Contributions by Summit. Any and all obligations of
------------------------------------------
Summit to make any Capital Contributions to Cordillera, pursuant to Section 4.3
of the LLC Agreement, after the Effective Date are hereby extinguished.
4. Number of Managers. Section 6.3 of the LLC Agreement is deleted in its
------------------
entirety and replaced by the following:
The number of Managers shall, at all times, be two. The two Managers shall
be appointed by Summit. Summit, in its sole discretion, may remove one or
more of the Managers who were appointed by it and appoint a new Manager or
Managers.
<PAGE>
5. Purchase Option. Section 9.8 of the LLC Agreement is deleted in its
---------------
entirety.
6. Conversion to Corporation. Section 11.4(a) of the LLC Agreement is deleted
-------------------------
in its entirety.
7. Limitation on Benefits of this Agreement. All rights given to Duke (or its
----------------------------------------
assigns) to enforce the terms of the LLC Agreement are hereby deleted from
Section 14.8 of the LLC Agreement and extinguished as of the Effective Date.
8. Effect of Amendment. Except as expressly modified herein, the LLC
-------------------
Agreement shall remain in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed in
duplicate as of the Effective Date.
SUMMIT MEDICAL SYSTEMS, INC. DR WARE LLC
By_________________________ By___________________________________
Name_______________________ Name_________________________________
Title______________________ Title________________________________
___________________________ _____________________________________
SO AGREED:
DUKE UNIVERSITY
By_________________________
Name_______________________
Title______________________
___________________________
<PAGE>
EXHIBIT 10.39
MARFIELD, BELGARDE & YAFFE COMPANIES
MANAGED PROPERTIES
OFFICE/SERVICE BUILDING LEASE
This LEASE is made this 30th day of September, 1996, between RED CIRCLE
L.L.P. (as LANDLORD) and SUMMIT MEDICAL SYSTEMS, INC. (as TENANT).
WITNESSETH:
-----------
In consideration of the mutual covenants, promises, and agreements herein
contained, the parties agree as follows:
1. DESCRIPTION OF THE PREMISES
TENANT hereby leases from LANDLORD certain Premises (Leased Premises)
within the building (Building), to be renamed the Summit Medical building. The
Leased Premises are more specifically designated in Building Floor Plans
(Exhibit "A") which are made a part hereof. The Building is located on and for
purposes of this Lease is deemed to include the real property legally described
on the attached Exhibit "C." TENANT shall have exclusive access to the top floor
entrance and to the newly constructed lower level entrance referenced on Exhibit
"A." LANDLORD will also construct, as part of the Tenant Improvement Allowance,
a second floor exit to the outside grounds as shown on Exhibit "A." The Leased
Premises are measured from the outside of all exterior walls to the center of
tenant division and common area walls. The Leased Premises will be deemed to
initially contain:
Office, Restroom, entry and finished spaces 50,451 S.F.
Storage or service area 4,000 S.F.
--------------
Total Area 54,451 S.F.
The Leased Premises are made up of 8,809 square feet on the top floor, 34,612
square feet on the middle floor and 11,030 square feet on the lower floor.
On the later of the first day of the third Lease Year or the date LANDLORD
completes the construction thereof as required by Section 14 below (which may
not be later than the end of the third Lease Year), the Leased Premises will be
expanded to include an additional 10,549 rentable square feet, labelled
"Expansion Space" on Exhibit "A." The Expansion Space will be delivered to
Tenant on a "turnkey" basis finished as requested by TENANT, at LANDLORD's sole
expense (up to a maximum of $17.00 per rentable square foot multiplied by a
fraction, the numerator of which is the number of months remaining in the Lease
term at the time possession is tendered to TENANT and the denominator of which
is 108). Notwithstanding the foregoing, LANDLORD agrees to perform any
necessary Landlord's Work, as defined in Exhibit "E," with respect to the
Expansion Space at LANDLORD's sole
<PAGE>
expense, without diminishing the $17.00 per rentable square foot allowance
available for Tenant Improvements. The rent and the term with respect to the
Expansion Space will commence upon LANDLORD's delivery of exclusive possession
to TENANT after LANDLORD's completion of the tenant improvements required by
TENANT and delivery to TENANT of LANDLORD's architect's certificate of
completion and a certificate of occupancy by the City of Minnetonka. Rent will
be at the same per square foot rate, as that rate changes from time to time, as
provided in Section 2. LANDLORD will provide TENANT with at least 150 days prior
written notice of the date on which LANDLORD anticipates delivering possession
of the Expansion Space to TENANT. Notwithstanding anything to the contrary
contained in this Lease, at any time before the later of (i) the date 120 days
prior to the first day of the third Lease Year or (ii) the date 30 days after
LANDLORD notifies TENANT of the anticipated date of delivery of possession of
the Expansion Space, TENANT may terminate this Lease as to the Expansion Space
by giving written notice to LANDLORD, together with the payment to LANDLORD of
$350,000.00, in which event TENANT shall have no right or obligation to add the
Expansion Space to the Leased Premises pursuant to this paragraph.
2. RENT
TENANT covenants to pay rent according to the following schedule:
<TABLE>
<CAPTION>
Annual Gross Rent
(for initial 54,451 s.f.,
subject to reduction
per Ex. E)
(excluding utility and
From and After: Until and Including: janitorial costs):
- -------------- -------------------- -------------------------
<S> <C> <C>
Rent Commencement Date The last day of the
first Lease Year $435,000
The first day of the second The last day of the
Lease Year second Lease Year 562,000
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
From and After: Until and Including: Annual Base Rent:
- --------------- ------------------- ----------------
<S> <C> <C>
The first day of the The last day of the third $8.93 per rentable
third Lease Year Lease Year square foot (for
initial 54,451 s.f.,
plus the 10,549 s.f. of
the Expansion Space,
as and when added,
subject to reduction
per Ex. E)
(for 65,000 s.f.,
subject to reduction,
per Ex. E or
reduction (on a pro
rata basis) by reason
of termination of
the Expansion Space,
per Sec. 1):
-----------
The first day of the The last day of the fourth $644,220
fourth Lease Year Lease Year
The first day of the The last day of the fifth $644,220
fifth Lease Year Lease Year
The first day of the The last day of the sixth $644,220
sixth Lease Year Lease Year
The first day of the The last day of the seventh $682,872
seventh Lease Year Lease Year
The first day of the The last day of the eighth $682,872
eighth Lease Year Lease Year
The first day of the The last day of the ninth $682,872
ninth Lease Year Lease Year
</TABLE>
In addition to the foregoing Base Rent, TENANT will pay rent, in accordance with
Section 5 of this Lease, for any storage space leased pursuant thereto. However,
in calculating the per square foot Base Rent for purposes of Section 1 or
Section 36, the parties will consider only the Leased Premises (and the Base
Rent payable thereon), exclusive of the storage space added pursuant to Section
5 (and the Base Rent payable thereon). TENANT shall pay annual Gross Rent or
annual Base Rent, as applicable, to LANDLORD, or to any other entity designated
by LANDLORD, without further notice, in equal monthly installments, subject to
proration in the case of the first and last months of the Lease term on the
first business day of each month during the full term hereof. Rent for partial
calendar months during the Lease term will be prorated on a per diem basis. See
Section 7 for TENANT's
-3-
<PAGE>
Additional Rent obligations. TENANT's obligation to pay Gross Base, Base Rent
and Additional Rent is unconditional and independent of any other provision of
this Lease. TENANT agrees not to withhold Gross Base, Base Rent or Additional
Rent for any reason, except as specifically provided by this Lease. The first
month's Gross Rent will be paid by TENANT to LANDLORD as soon as the contingency
set forth in Exhibit "E" below is satisfied.
3. TERM OF LEASE
At or prior to the delivery of possession of the Leased Premises (including
any subsequent expansions thereto) to TENANT, LANDLORD will provide to TENANT a
certificate of LANDLORD's architect certifying completion of the Leased Premises
pursuant to this Lease and of the parking lot and driveway serving the Leased
Premises and a certificate of occupancy by the City of Minnetonka for the Leased
Premises. LANDLORD agrees to keep TENANT apprised of the progress of
construction so that TENANT may make plans for a smooth and swift move into the
Leased Premises. The Lease shall commence on the earlier of the date seven days
after LANDLORD delivers to TENANT the two certificates referred to in the
preceding sentence or the date TENANT opens for business in the Leased Premises
(the "Rent Commencement Date"), and expire on the last day of the ninth Lease
Year. "Lease Year," for the purposes of this Lease, shall mean the period from
and after the Rent Commencement Date until and including the day prior to the
first anniversary of the Rent Commencement Date; and each period of one year
thereafter (e.g., if the Rent Commencement Date is November 15, 1996, the first
Lease Year would end November 14, 1997 and the second Lease Year would begin
November 15, 1997 and end November 14, 1998).
4. USE OF PREMISES
TENANT agrees to use the Leased Premises for general office purposes and
other "clean and quiet" uses related to TENANT's business and no other purpose;
subject to all local, state, and federal laws regulating such use. Such use
shall not cause excessive odors, humidity, noise or vibrations which may injure
the Building, cause harm to, or disrupt other tenants. LANDLORD agrees to limit
tenants in the remainder of the Building to uses compatible with TENANT, which
uses must be "clean and quiet" and not adversely affect TENANT's parking areas.
LANDLORD will require in all other leases in the Building that the tenant not
use more than a specified allotment of parking stalls, and will ensure that such
allotment, for all such leases in the aggregate, does not exceed 3.3 parking
stalls per 1,000 square feet.
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5. PARKING AND COMMON AREAS
TENANT, its employees and invitees shall have the exclusive use of the
upper parking area. TENANT shall have use of at least 3.3 parking stalls per
1,000 square feet contained in the Leased Premises, without charge (other than
Additional Rent). The exclusive spaces referred to above will count towards the
3.3 parking stalls per 1,000 square feet requirement. TENANT may erect signs
identifying TENANT's exclusive parking stalls in the upper parking area (some of
which signs may designate certain employees or TENANT's visitors). LANDLORD
shall enforce the exclusivity of TENANT's parking stalls for TENANT's benefit.
LANDLORD will designate by signs as "visitor" stalls at least 15 parking stalls
in the lower parking lot, in a location approved by TENANT. If TENANT finds that
its visitors are frequently unable to find visitor parking stalls available,
LANDLORD agrees, upon written notice by TENANT, to promptly take action to
assure visitor parking is available, either by adding additional visitor parking
stall signs and/or enforcing the use of the existing visitor parking stalls by
only visitors of the Building. TENANT shall also have the nonexclusive right to
use the common areas, loading dock, adjacent loading area, sidewalks, driveways
and parking spaces other than TENANT's exclusive spaces along with the other
tenants of the Building and their employees and invitees. The use of common
areas, and the portion of the land set aside by LANDLORD for nonexclusive use of
tenants, is subject to such reasonable rules and regulations as the LANDLORD may
impose from time to time. Overnight parking of vehicles (except for employees
then working at the Leased Premises) and the storage, at any time, of any other
property in the common areas of the Building is prohibited. To accommodate
TENANT's storage needs, LANDLORD agrees to lease to TENANT, on request by
TENANT, on a space available basis, such storage space as required by TENANT, up
to 1,000 square feet, in a location reasonably convenient to the loading dock,
at the going rental rate for storage space in the Building, not to exceed $4.50
per square foot net. Any lease by TENANT of such storage space shall expire at
the expiration or earlier termination of this Lease. Notwithstanding the "space
available" provision contained above, LANDLORD agrees to offer the storage space
depicted on Exhibit "A" to TENANT pursuant to the balance of the two preceding
sentences before leasing it to third parties. If LANDLORD identifies a
prospective tenant for the storage space depicted on Exhibit "A," LANDLORD will
first offer such space to TENANT pursuant to this Section 5. If TENANT does not
accept LANDLORD's offer within 10 business days after receipt of LANDLORD's
offer, TENANT's right of first offer with respect to such space shall terminate.
6. NET LEASE
Beginning the first day of the third Lease Year, this Lease will be a "net"
Lease, and LANDLORD shall not be required to provide any services or do any acts
in connection with the Leased Premises not specifically set forth in this Lease.
As
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hereinafter further described in this Lease, TENANT is responsible for and shall
pay its utility charges, trash removal and interior of the Leased Premises
cleaning and maintenance expenses. Beginning the first day of the third Lease
Year, TENANT shall also pay its proportionate share of real estate taxes
including installments of assessments and its proportionate share of the
Building's Operating Expenses (collectively, the "Additional Rent").
7. ADDITIONAL RENT
"Additional Rent" is defined in Section 6 above. Commencing on the first
day of the third Lease Year, TENANT's proportionate share for purposes of
allocating real estate taxes and assessments and Operating Expenses will be a
fraction, the numerator of which is the number of rentable square feet in the
Leased Premises from time to time and the denominator of which is the rentable
square feet in the Building from time to time, which denominator shall never be
less than 95,000 absent casualty or condemnation, and shall be calculated by
LANDLORD's professional architect.
8. REAL ESTATE TAXES
Real estate taxes include the following:
(a) all real estate taxes payable during the Lease Term.
(b) all installments of assessments, general or special, levied
against the Building, payable with the real estate taxes
described above, except as provided below.
TENANT will not be obligated to pay any special assessments levied or pending as
of the Rent Commencement Date. The payment of any future special assessments
will be spread over the longest period possible. TENANT will be entitled to a
prompt refund of its pro rata share of any tax refund attributable to the Term,
even after the expiration or termination of this Lease. TENANT will have the
right to contest the real estate taxes or special assessments with the
appropriate governmental authority, by giving LANDLORD written notice of
TENANT's desire to contest taxes at least 60 days prior to the filing deadline
with respect to the taxes in question, unless LANDLORD elects to contest such
taxes by written notice to TENANT at least 30 days prior to such filing
deadline. Any party contesting the taxes will be entitled to reimbursement of
its costs associated with such contest before the balance is split among the
parties entitled thereto. Partial calendar years during the Lease term will be
prorated on a per diem basis.
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9. OPERATING EXPENSES
Operating Expenses include the following:
(a) City water and sewer charges, except where used by tenants in
substantial amounts for production and is therefore separately metered, and the
monitoring surveillance of the fire protection system; (b) Lawn care, snow and
litter removal, and the repair, replacement and maintenance as reasonably
required for: parking lots, drives, sidewalks, landscaped areas, HVAC systems,
roofing system (excluding the structural components of the roof), garage doors
and garage door openers, and exterior panes of exterior windows and foyer glass;
(c) Electrical service for the trash room (if any) and mechanical rooms and for
exterior lighting, replacement of bulbs used for exterior lighting and trash
removal from the common area trash room serving TENANT, if any; (d) Insurance
for all risks or fire and extended coverage, loss of rents and general
liability; (e) All other maintenance, repair, replacement and miscellaneous
operating expenses except structural items (the roofing system (excluding the
structural components of the roof) not being deemed structural for this purpose)
and that which is covered by manufacturer or subcontractor warranties; (f)
Property management expenses of four percent of the Base Rents and Additional
Rents collected (except as provided in Section 39 below); (g) Such other
expenses incurred in operating the Building generally, if of a type normally
incurred in the operating of similar buildings; and (h) Maintenance of
vestibules. Notwithstanding the foregoing, all repairs, replacements or
maintenance to the HVAC systems will be capped at $0.15 per square foot per
year, with any unused amount carried over to subsequent years and with LANDLORD
entitled to recover any costs incurred in any year during the Lease term in
excess of the cap from the allowances available in subsequent years. The $0.15
amount will be adjusted annually by any annual increases or decreases in the CPI
Index (based on the percentage of change from one year to the next). "CPI Index"
shall mean the "Consumer Price Index, All Urban Consumers, U.S. City Average,
All Items, Standard Reference Base 1982-84 = 100." If the CPI is discontinued,
comparable statistics on the purchasing power of the consumer dollar as
published at the time of said discontinuation by a responsible financial
periodical of recognized authority selected by LANDLORD, shall be used for
making the above computation. If the Standard Reference Base used in computing
the CPI is changed such that the CPI for the 1982- 84 = 100 Standard Reference
Base is no longer published, the figures used in making the foregoing
adjustments shall accordingly be changed so that all increases in the CPI are
taken into account notwithstanding any change in the Standard Reference Base. In
addition, LANDLORD may charge TENANT as an Operating Expense TENANT's
proportionate share of any costs related to Hazardous Substances found on the
common areas during the Lease Term, unless such Hazardous Substances represent
Existing Contamination, LANDLORD contamination or contamination by other tenants
in the Building; provided, however, in no event may LANDLORD charge TENANT more
than $20,000.00 per
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Lease Year, which amount (if not used) may not be carried over to subsequent
years nor be available to cover costs in excess of the cap from prior years.
Operating Expenses exclude:
(a) real estate taxes and special assessments which are separately
addressed in this Lease; (b) all costs incurred in connection with or directly
related to the original construction (as distinguished from operation,
maintenance, repair and replacement) of the Leased Premises and/or the Building
or any expansion or renovation thereof; (c) depreciation; (d) financing and
refinancing costs, interest on debt or amortization payments on any mortgage or
mortgages, and rental under any ground or underlying leases or lease together
with all costs incidental to the items mentioned in this item (d); (e) costs of
correcting defects covered by the warranty granted in this Lease in the design
or construction of any of the new construction with respect to the Leased
Premises or the Building or the material used in any of the new construction
with respect to the Leased Premises or the Building (including latent defects in
any of the new construction with respect to the Leased Premises or the Building
or the inadequacy of design of any of the new construction with respect to the
Leased Premises or the Building) or in the equipment or appurtenances to any of
the new construction with respect to the Leased Premises or the Building, except
that for the purposes of this section conditions (not occasioned by design or
construction defects) resulting from ordinary wear and tear and use will not be
deemed defects; (f) the cost of any repair to remedy damage caused by or
resulting from the negligence of any other tenants or occupants in the Building,
including their agents, servants, employees or invitees, if and to the extent
LANDLORD recovers the cost thereof from such parties in excess of costs and
expenses of recovery incurred by LANDLORD; (g) legal and other fees, leasing
commissions, so-called "take-over" or "buy out" obligations, advertising
expenses and other costs incurred in connection with acquisition of the
Building, or the original development or original leasing of the Building, or
future releasing of the Building, or disputes with tenants; (h) costs incurred
in renovating or otherwise improving or decorating or redecorating space for
tenants or other occupants in the Building or vacant space in the Building or
costs related thereto; (i) any items not otherwise excluded to the extent
LANDLORD is reimbursed by insurance (or would have been reimbursed by insurance
if LANDLORD carried the insurance required by this Lease) or otherwise
compensated, including direct reimbursement by any tenant, less the out-of-
pocket cost of collection; (j) a bad debt loss, rent loss or reserves for bad
debts or rent loss, or any other reserve for anticipated future expenses; (k)
any item of cost (other than management fees) which is includable in Operating
Expenses, but which represents an amount paid to an affiliate of LANDLORD or an
affiliate of any partner or shareholder of LANDLORD, to the extent the same is
in excess of the fair market value of said item or service; (1) all interest or
penalties incurred as a result of LANDLORD's failure to pay any costs as the
same become due, except resulting from the failure of TENANT to pay rent in a
timely manner; (m) management fees
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in excess of 4% of the gross rents from the Building (except as provided in
Section 39 below); (n) any and all costs associated with the operation of the
business of the entity which constitutes LANDLORD (excluded items specifically
include, but are not limited to, formation of the entity, internal accounting
and legal matters, including but not limited to preparation of tax returns and
financial statements and gathering of data therefor, costs of defending any
lawsuits with any mortgagee, costs of selling, syndicating, financing,
mortgaging or hypothecating any of the LANDLORD's interests in the Building,
costs of any disputes between LANDLORD and its employees, disputes between
LANDLORD and managers of the Building, and disputes between LANDLORD and tenants
or occupants within the Building including, without limitation, TENANT); (o) the
wages, salaries, bonuses and benefits of all management personnel above the
level of any on-site building manager and the costs of preparation and handling
of accounts receivable and accounts payable; (p) any expense incurred as a
direct result of the negligence of LANDLORD, its agents, servants, or employees
or arising out of LANDLORD's negligent failure to manage the Building
consistently with the standards required by this Lease; (q) any cost or expense
incurred as a direct result of renovating, painting, decorating, carpet
shampooing, drapery cleaning or wall washing within the rentable areas of the
Building or utility work related to vacant or vacated space; (r) environmental
costs, including costs of removal and/or abatement of hazardous or toxic
substances, wastes or materials from or within the Building, fines, penalties,
and liens in excess of the cap set forth above, unless TENANT is responsible for
bringing any such items onto the Building, in which event TENANT will pay the
cost of removal; and (s) LANDLORD's maintenance and repair costs pursuant to
Section 12 of this Lease. Notwithstanding the foregoing, where this Lease
expressly allows LANDLORD to require TENANT to pay more than its proportionate
share of a particular expense (e.g., elevator-related expenses) or limits the
amount that LANDLORD may require TENANT to pay as regards a particular expense
(e.g., certain environmental-related expenses), those specific provisions will
control TENANT's allocation of those expenses.
Except with respect to HVAC-related capital expenditures, which are
specifically addressed by the $0.15 per square foot per year cap set forth above
and Hazardous Substances-related capital expenditures, which are specifically
addressed by the $20,000 per Lease Year cap set forth above, with respect to
costs which may be capitalized for income tax purposes, including capital costs
related to the elevators within the Leased Premises, LANDLORD may only charge
TENANT monthly the amount necessary to amortize TENANT's proportionate share of
such costs incurred by LANDLORD during the Lease term, at 10% per annum, over
the useful life of each item resulting in a capital expenditure. With respect to
the elevators, TENANT'S proportionate share is 100%. LANDLORD's annual
statements to TENANT shall detail any such amortized costs charged to TENANT,
indicating each item resulting in a capital expenditure, the date of the
expenditure, the useful life of such item and the calculation of TENANT's
portion of such expenditure.
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Commencing with the Operating Expenses incurred and real estate taxes
payable on and after the third Lease Year and each subsequent year during the
Lease term, TENANT will pay, in equal monthly installments, payable in advance
on the first day of each calendar month, its estimated monthly proportionate
share of all such real estate taxes and Operating Expenses. As the actual amount
will not be known at the beginning of each calendar year, LANDLORD shall make a
reasonable estimate, to the best of its knowledge, of what the amount will be
for that year, and TENANT will pay its estimated proportionate share each month.
In no way should LANDLORD's estimate be construed as actual or as a guarantee.
After the actual real estate tax statement is received, LANDLORD shall have
the right to make adjustments for any difference between that which TENANT has
paid and that which it should have paid. TENANT shall then start paying its
proportionate share based upon the actual tax statement. LANDLORD shall promptly
provide TENANT with a copy of the actual tax statement after LANDLORD's receipt
thereof.
LANDLORD shall have the right to make adjustments periodically (but at
least annually) to the Operating Expenses, and adjust accordingly. When actual
Operating Expenses have been compiled, a prompt final year-end adjustment will
be made, and either a charge or credit will be issued. Partial calendar years
during the Lease term will be prorated on a per diem basis. LANDLORD agrees to
exercise due care and diligence to obtain Operating Expenses, services and
supplies at competitive and reasonable market costs with acceptable quality and
service standards.
TENANT may, at any reasonable time, upon at least ten (10) days' prior
notice to LANDLORD, cause an audit to be made of LANDLORD's books and records
and other documentation pertaining to Operating Expenses and LANDLORD's
allocation thereof among the tenants in the Building. TENANT may use
independent auditors or its own employees to perform such audit. If such audit
discloses that LANDLORD overcharged TENANT by three percent (3%) or more for any
annual period, LANDLORD will promptly pay to TENANT the reasonable cost of said
audit, in addition to the amount overcharged, plus accrued interest on the
amount overcharged at the rate of 10% per annum, which amount overcharged and
accrued interest will be paid to TENANT in any event.
TENANT may have been given projections for real estate taxes by LANDLORD's
agents. LANDLORD does not warrant that these projections are correct or that
they even approximate the amounts shown. TENANT is encouraged to call the city
assessor to verify the real estate tax projections before executing the Lease.
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10. UTILITIES
TENANT is responsible and shall pay for all of its utility services.
LANDLORD may elect either to submeter TENANT for electricity or to separately
meter TENANT for electricity and require TENANT to contract with the utility
companies for service requirements and billing. If LANDLORD submeters TENANT for
electricity, TENANT will pay LANDLORD for TENANT's actual usage of electricity
at the rates charged to LANDLORD by the utility company, without markup. TENANT
is also responsible for its own telephone service. Heating and cooling will be
provided by LANDLORD to the entire Building, with TENANT paying its
proportionate share through the Operating Expenses.
LANDLORD reserves the right to protect its property and interest with
respect to utilities in any way it sees fit should TENANT not pay utility
charges.
In the event TENANT uses water and sewer in substantial amounts or for
production purposes, LANDLORD shall install at TENANT's expense a water meter to
sub-meter said water, and shall charge TENANT for said water and sewer at rates
as charged by the City. TENANT shall pay to the City any water availability
charge (WAC) and sewer availability charge (SAC) charges due to its high usage.
In addition, if any other occupant of the Building uses heating, cooling, water
or sewer in substantial amounts or for production purposes, LANDLORD shall
install a water meter to sub-meter said heating, cooling or water, and TENANT
shall not be required to pay any part of the cost of heating, cooling, water or
sewer charged with respect to such occupant or any WAC or SAC charges related to
such occupant.
LANDLORD shall, under no circumstances, be liable for: a) physical loss
arising from any failure to furnish heating, cooling, water, electricity,
telephone, or any other utility; b) any consequential damages, regardless of the
cause; (c) any loss or damages of any kind; unless resulting from LANDLORD's
willful nonperformance or negligent performance of its duties hereunder.
11. INSURANCE
TENANT shall maintain in full force and effect during the term hereof, a
policy of public liability insurance under which LANDLORD and TENANT are named
insureds. The minimum limits of liability of such insurance shall be
$1,000,000.00 combined single limit for bodily injury and property damage, and
in addition TENANT shall carry a policy of property insurance for fire and
extended coverage including an all risk endorsement and necessary coverage for
any type of water damage on TENANT's personal property, trade fixtures and
contents on a replacement cost basis. TENANT agrees to deliver a duplicate copy
of said policy, or a certificate of insurance evidencing such coverage, to
LANDLORD. Such policy
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shall contain a provision requiring ten (10) days' written notice to LANDLORD
before cancellation of the policy can be effected.
LANDLORD shall carry and cause to be in full force and effect an all risks
or fire and extended coverage insurance policy on the Building and leasehold
improvements on a full replacement cost basis; but not on TENANT's personal
property, trade fixtures or contents. Such policy shall contain a provision that
the policy shall not be canceled except upon ten (10) days' written notice to
TENANT. LANDLORD will be deemed to be a self-insurer as to the deductible or any
coinsurance applicable to such insurance coverage and will pay any deductible or
coinsurance amount applicable in the event of loss or damage, which amount may
not be included as an Operating Expense.
Each insurance policy carried by either LANDLORD or TENANT covering the
Leased Premises or its contents shall provide that the insured party has
relinquished all rights to recover against the other party for loss or damage
resulting from perils insured against by the policy. LANDLORD and TENANT each
hereby waive any claim based upon liability which may arise against the other so
far as the claim relates to loss or damage to the premises or contents which is
covered by insurance or coverable under the aforementioned insurance policies,
whether maintained or not.
12. MAINTENANCE
Except as provided otherwise in this Lease, TENANT shall be wholly
responsible for the maintenance and repair of the interior of the Leased
Premises, and will keep it in as good condition as when turned over to TENANT,
reasonable wear and tear and damage by fire and the elements or other casualty
excepted.
TENANT agrees to keep the Leased Premises in a clean, orderly and sanitary
condition and will neither do nor permit to be done therein anything which is in
violation of insurance policies on the Building or that is contrary to law.
TENANT, at TENANT's option, may contract directly for janitorial services for
the Leased Premises or may require LANDLORD to provide janitorial services for
the Leased Premises, which LANDLORD will bill to TENANT. TENANT will neither
commit nor suffer waste to the Building or to the Leased Premises.
The maintenance and repair obligations of TENANT specifically extend to all
interior walls, interior doors, interior windows, plumbing and electrical
fixtures within the Leased Premises, except as these obligations may be covered
by manufacturer or contractor warranties. LANDLORD agrees to cooperate with and
reasonably assist TENANT in pursuing such warranties which are still in effect.
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LANDLORD agrees to manage, operate and maintain the Building (including the
common areas, the grounds and all Building systems) (including repair and
replacement, as necessary) except any portion which any tenant is obligated to
maintain (which portion LANDLORD will cause to be maintained by such tenant), as
a first-class office-showroom building, in a manner and with expenditures
consistent with first-class office-showroom buildings of similar size and age in
the Minneapolis-St. Paul metropolitan area such as Baker Plaza and Rowland Pond.
LANDLORD will provide inspections and maintain, repair and replace any elevator
(or part thereof) serving the Leased Premises exclusively, and will have the
right to bill 100% of the cost of doing so to TENANT, except for capital
expenditures which will be amortized as provided above.
LANDLORD will maintain in good condition and repair (including replacement,
if necessary) at its sole expense, all structural components and exterior
surfaces (including plate glass) of the Building and, in addition, will make all
repairs or replacements to the structures and improvements of the Leased
Premises and the Building, including without limitation, the surfaces of the
parking and outside areas, where such repairs or replacements are occasioned by
design or construction defects covered by the warranty granted in this Lease
with respect to any of the new construction with respect to the Leased Premises
or the Building or latent or inherent defects in the structures or improvements
or are covered by warranties. In addition, LANDLORD will make all replacements
to the Leased Premises or the Building which are reasonably necessary during the
Term. LANDLORD may not include any of the expenses arising under this paragraph
as an Operating Expense.
13. APPEARANCE AND ACCESS
LANDLORD and TENANT mutually agree to keep the grounds, Building, Leased
Premises and common areas in as good a condition of repair and appearance as
their respective responsibilities and rights may allow. LANDLORD shall provide
general access to TENANT and its invitees to the common areas except as
reasonable security requirements and temporary conditions may prevent, and shall
keep the common areas well maintained and free of nuisance, as required by
Section 12 above. LANDLORD may establish from time to time and TENANT will
abide by reasonable rules for parking (provided TENANT's exclusive rights to
certain parking stalls, as provided above, shall be respected by LANDLORD),
security, handling of trash and like procedures. LANDLORD may not impose any
charges for the use of the common areas (such as pay parking), except LANDLORD's
right to allocate Operating Expenses as provided in this Lease. LANDLORD will
cause the common areas to comply with the Americans with Disabilities Act and
all other laws, codes, ordinances, rules and regulations of governmental
authorities having jurisdiction (the "Laws") with respect to the common areas.
LANDLORD may not charge TENANT for any noncompliance of the common areas with
the Laws existing as of the Rent Commencement Date.
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TENANT agrees to keep all of its trash containers, pallets, dumpsters,
refuse and waste within its Leased Premises and not outside or in common areas
(except in any dumpsters provided by LANDLORD) and agrees not to litter any of
the grounds or entries. TENANT is responsible for the cost of the removal of its
trash as an Operating Expense
New window coverings, if desired by TENANT, are to be installed by LANDLORD
at TENANT's expense and must be horizontal levelour-type made of metal. TENANT
may elect to use the existing window coverings in the Leased Premises without
additional cost. LANDLORD shall provide and maintain fire extinguishers as
required for TENANT's particular use by the City.
TENANT agrees not to have or keep any animals, including dogs and/or cats,
within the Leased Premises, except for "seeing eye dogs."
TENANT agrees to use chair pads under any chairs within the Leased Premises
that are placed at a desk so that wear of the carpet is minimal.
14. LANDLORD'S RESPONSIBILITY FOR CONSTRUCTION
LANDLORD agrees that prior to the commencement of the term hereof, at its
sole cost and expense (subject to the limitations in Exhibit E on LANDLORD's
responsibility for the cost of the Tenant Improvements), it will construct the
Building(s), and will also finish the Leased Premises substantially in
accordance with the Building Floor Plan (Exhibit "A") and the Construction
Schedule (Exhibit "E") attached and made a part hereof. It is understood and
agreed that minor changes from any plans or specifications which may be
necessary during construction of the Leased Premises, whether initiated by
LANDLORD or TENANT, shall not affect or invalidate this Lease, provided no
change may be made by the initiating party without the written consent of the
other, such consent not to be unreasonably withheld or delayed. If the party
from whom consent is requested does not give its written consent to or
disapproval of a change order within 5 days after request by the initiating
party, the party from whom consent is requested shall be deemed to have given
its written consent.
TENANT agrees that, upon occupancy hereof, it will inspect the Leased
Premises in order to ascertain the condition thereof; that any objections
(except for latent deficiencies not then discoverable) thereto not delivered in
writing to LANDLORD within 60 days after occupancy shall be deemed waived; and
that no representations, either express or implied, have been made regarding the
quality or condition thereof except as specifically stated below.
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LANDLORD warrants and represents to TENANT that:
(a) The Leased Premises, at the time of initial occupancy, shall
comply with applicable building codes and the Americans with
Disabilities Act;
(b) The Leased Premises will be completed substantially as agreed to
in this Lease;
(c) The mechanical system serving the Leased Premises will have been
checked and found to be operating satisfactorily; and
(d) The Leased Premises and the Building comply with all applicable
laws, statutes, rules, regulations and ordinances, and the Leased
Premises are properly zoned and permitted for use of the Leased
Premises as intended by TENANT, as described in Section 4 above.
LANDLORD agrees to correct all uncompleted or defective items objected to by
TENANT, at LANDLORD's sole expense, as soon as reasonably possible, but in no
event more than thirty (30) days after receipt of notice from TENANT given
within such 60-day period. Notwithstanding the foregoing, LANDLORD will, at
LANDLORD's sole expense, correct any latent defect promptly after TENANT
notifies LANDLORD of any latent defect. TENANT will not be deemed to waive any
rights TENANT may have against LANDLORD under LANDLORD's warranties, as provided
below, by taking possession of the Leased Premises. LANDLORD warrants all of the
new construction work related to the Leased Premises and the Building to be free
of defects in both design and construction for the first Lease Year. TENANT will
have no obligation to pay or reimburse LANDLORD for any costs related to any
defect described in the preceding sentence, whether directly or through the
Operating Expenses.
15. CONDEMNATION LOSS
Should all of the Leased Premises or more than 25% of the parking stalls be
taken in condemnation proceedings or by exercise of any right of eminent domain,
then either party may terminate this Lease as of the date the condemning
authority or the authority exercising its right of eminent domain takes
possession of the Leased Premises, by written notice to the other party within
thirty (30) days after the taking. If, as a result of a partial taking, the
Leased Premises is no longer reasonably useable for the purposes specified in
this Lease, in TENANT's judgment, then, in any such case, TENANT or LANDLORD may
terminate this Lease as of the date the condemning authority or the authority
exercising its right of eminent domain takes possession of the property. If
this Lease is so terminated, any rents and other
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payments will be prorated as of the termination and will be proportionately
refunded to TENANT, or paid to LANDLORD, as the case may be. If this Lease is
not terminated, LANDLORD will immediately make all repairs reasonably necessary
to make the Leased Premises a complete architectural unit and tenantable and all
rent will be abated for the period of time the space is untenantable in
proportion to the square foot area untenantable. LANDLORD shall be specifically
entitled to all awards for condemnation, except in the case of awards made
specifically for loss or damage to TENANT's property or TENANT's business or
TENANT's relocation expenses.
16. TENANT ASSIGNMENT
TENANT shall not assign this Lease, and shall not sublet any part of the
Leased Premises without the prior written consent of LANDLORD. Said consent
will not be unreasonably withheld or delayed. Any such assignment or subletting
will not release TENANT from its responsibilities under this Lease, unless
expressly agreed to in writing by LANDLORD.
No consent will be required in connection with an assignment related to the
sale of all or substantially all of TENANT's business or a merger or
consolidation or an assignment to a parent, subsidiary or affiliate of TENANT.
No assignment or subletting will release TENANT of any of its obligations under
this Lease; provided, however, if the assignee has a tangible net worth of at
least $50,000,000 according to a recent audited financial statement of assignee,
the assigning TENANT will be relieved of any liability under this Lease accruing
after the assignment of this Lease.
If TENANT shall be declared bankrupt, shall have a receiver appointed of
its property, shall make an assignment for the benefit of creditors, or its
rights hereunder shall be taken under execution, it shall be construed as an
assignment of this Lease within the meaning hereof, and LANDLORD shall have the
right to terminate this Lease.
17. DEFAULT BY TENANT
It is a Default for TENANT: (a) if Gross Rent, Base Rent, Additional Rent,
or any other sum due by TENANT under this Lease shall be unpaid for a period of
ten (10) days after notice from LANDLORD that payment is required; (b) if TENANT
fails to perform any of the other terms, conditions, covenants and obligations
of this Lease to be observed or performed by TENANT for more than thirty (30)
days after LANDLORD gives TENANT written notice of such Default (it being agreed
that a Default, other than failure to pay Gross Rent, Base Rent, Additional Rent
or other sums due, which is of such a character that the cure thereof reasonably
requires longer than thirty (30) days, shall be deemed cured within said period,
if TENANT in good faith commences a cure within the thirty (30) day period and
diligently
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undertakes to complete the cure with reasonably dispatch); (c) if TENANT
abandons the Leased Premises (it being agreed that the Leased Premises shall be
considered abandoned should TENANT fail to openly conduct business from the
aforementioned premises for a period of seven (7) calendar days, TENANT fails to
keep the Leased Premises locked and TENANT provides LANDLORD with no forwarding
address prior to vacating the Leased Premises); (d) if TENANT or guarantor
knowingly misrepresents any material fact in any written statement provided to
LANDLORD or at its request, pursuant to or in connection with this Lease; or (e)
if TENANT, any guarantor or general partner becomes insolvent or the subject of
a bankruptcy petition.
A Default gives LANDLORD the right (without further notice except as
hereinafter expressly provided) to: (a) immediately reenter the Leased Premises,
change the locks, and remove all persons and property; (b) at TENANT's expense,
store or sell said property for TENANT's account; (c) treat said property as
abandoned upon TENANT's failure to remove it within ten (10) days of written
demand to remove; (d) make alternations and repairs; (e) without terminating the
Lease, relet all or part of the Leased Premises, at TENANT's expense and for its
account, on such terms, for such rentals, and for such a term as LANDLORD in its
sole discretion deems advisable and/or (f) resort to any other remedy authorized
by this Lease or by statute, law or equity.
Whether or not LANDLORD reenters and/or relets the Leased Premises, TENANT
will remain liable for all periods in which this Lease is in full force and not
terminated, for the Gross Rent, Base Rent, Additional Rent and utilities due
hereunder, subject only to a credit for rentals received from a substitute
tenant over and above expenses of reletting and other sums due hereunder.
Additionally, whether or not LANDLORD has already resorted to any other above-
mentioned right, LANDLORD may elect, by giving a written notice, to terminate
the Lease effective as of any date specified in the notice. No act, including
the re-entering and/or reletting, except the giving of such notice, shall be
deemed a termination, or acceptance of surrender of the Lease. Upon said
effective date, TENANT will comply with any surrender provisions.
TENANT will be liable for (a) all expenses and damages incurred by LANDLORD
resulting, whether before or after termination, from a Default, including
without limitation reasonable attorney's fees and brokers' fees to obtain a new
tenant, reclaiming possession and alteration or repair costs to obtain a new
tenant and (b) 10% interest on any sum due under the Lease, from the date 10
days after the date due.
Whether or not LANDLORD terminates the Lease, LANDLORD may elect, by giving
written notice, to accelerate unaccrued rent and hold TENANT immediately liable
for the net present value of the excess of the Gross (if applicable) and Base
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rents payable during the remainder of the Lease term over the reasonable rental
value (on a triple net basis) of the Lease Premises for such period, using a 10%
discount rate, plus LANDLORD's cost to relet the Leased Premises and to prepare
the Leased Premises for a new tenant and other reasonable expenses in obtaining
a new tenant who would pay such reasonable rental value.
18. ALTERATIONS
TENANT shall not make any alterations to the Leased Premises which affect
the structural integrity of the Building or which cost in excess of ten thousand
dollars ($10,000) without the written consent of LANDLORD, such consent not to
be unreasonably withheld or delayed. If LANDLORD does not give its written
consent within 5 days after request by TENANT, LANDLORD shall be deemed to have
given its written consent. If TENANT shall desire to make any such alterations
requiring LANDLORD's consent, it shall furnish plans and specifications of the
work to be so performed together with a construction statement containing a
complete breakdown of the cost of all labor and material included therein, and
if the cost should exceed one hundred thousand dollars ($100,000.00), together
with an escrow of cash with Title Services, Inc. in an amount equal to the
estimated cost of all such work or other security reasonably required by
LANDLORD. TENANT agrees to obtain a building permit from the city for any
alterations requiring such a permit. TENANT agrees that all such work shall be
done in a good, workmanlike manner, and in compliance with applicable building
codes and all applicable laws, including, without limitation, the Americans with
Disabilities Act, that the structural integrity of the Building shall not be
impaired, and that no filed liens shall attach to the Building or Leased
Premises by reason thereof. No such alteration(s) shall change the
office/finished area to storage/service area ratio without LANDLORD's
permission.
TENANT shall, before the expiration of the Lease, restore the Leased
Premises to its condition prior to such alteration if LANDLORD conditioned its
approval of such alteration on TENANT's agreement to remove such alteration
prior to the expiration of the term. Any such alterations shall become the
property of LANDLORD as soon as they are affixed to the Leased Premises and all
right, title and interest therein of TENANT shall immediately cease unless
otherwise stated in writing. TENANT, however, shall remain the owner of any
installed trade fixtures and shall have the right to remove such trade fixtures
at the expiration of this Lease Agreement, so long as the Leased Premises and/or
Building are materially restored to their condition prior to such installation.
TENANT agrees that, if by reason of TENANT's particular operations, the
particular use to which TENANT puts the space, or any alterations made by TENANT
(whether or not approved unconditionally by LANDLORD), applicable law,
including, without limitation, the Americans with Disabilities Act, requires
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further alterations or modifications of the Leased Premises or the Building,
TENANT will make such alterations or modifications so as to promptly address
such requirements, or, if TENANT fails to do so, TENANT will reimburse LANDLORD
promptly for the cost of such alterations or modifications as LANDLORD may make
upon TENANT's default (LANDLORD having the right but not the obligation to make
such alterations or modifications under that circumstance); and that this
provision shall survive termination or expiration of the Lease.
19. SIGNS
TENANT may, at TENANT's expense, place a sign on the face of the Building
and/or on TENANT's entrance canopy, identifying the Building as "Summit
Medical," with, at TENANT's election, TENANT's logo incorporated into the
design, with LANDLORD's consent, which shall not be unreasonably withheld or
delayed. LANDLORD, at LANDLORD's expense, will install a monument sign at the
lower level parking lot entrance identifying the Building as "Summit Medical"
with, at TENANT's election, TENANT's logo. TENANT may, at TENANT's expense,
install a monument sign for TENANT's exclusive use at the upper parking lot
entrance with LANDLORD's consent, which will not be unreasonably withheld or
delayed. LANDLORD agrees to keep such signs (except any upper level parking area
signs) which involve lighting lit from one half hour before sunset until one
half hour after sunrise, 365 days per year. At TENANT's request, LANDLORD will
provide and install, at LANDLORD's expense, and TENANT shall maintain in good
repair, one standard exterior entry sign at the TENANT's front entry. The sign
described in the previous sentence will remain the property of LANDLORD.
LANDLORD shall also provide one standard rear-entry sign to be installed by
LANDLORD near the rear door serving the Leased Premises. No other signage,
including no soliciting or other directional type signage, promotional material,
or identification of any type shall be placed in, on, or externally visible
from, any entry, window, outer door, or exterior surface without the written
consent of LANDLORD, which consent shall not be unreasonably withheld or
delayed. Except as provided in Section 5 above, TENANT agrees that no visitor
parking or other parking signage will be installed on any part of the parking or
common areas without the written consent of LANDLORD. Exceptions to this are
security system signs not to exceed sixty (60) square inches in size. No signs
identifying or advertising any other tenants or occupants or any party other
than TENANT shall be located on or at the Building (including on the land
associated therewith), except for Building standard entry signs or sign panels
on the lower level monument sign located beneath TENANT's name and with smaller
sized letters. LANDLORD agrees to forthwith develop a sign package for the
Building, which will include criteria and scaled drawings for all exterior
signage, excluding any sign identifying TENANT on the face of the Building. Such
signage package will be consistent with this Section 19 and will be subject to
TENANT's consent, which consent shall not be unreasonably withheld or
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delayed. After TENANT approves the signage package, LANDLORD agrees that all
exterior signage for the Building will conform to such package.
LANDLORD reserves the right to remove all unauthorized signs installed by
TENANT, at the expense of TENANT.
20. ENTRY
TENANT agrees that no additional locks will be placed on any of TENANT's
doors without the written consent of LANDLORD. LANDLORD, its agents, and its
employees shall have the right to enter the Leased Premises at all reasonable
times and upon reasonable prior notice to TENANT and, at TENANT's option,
accompanied by an escort provided by TENANT, to inspect them, to make repairs,
and to maintain the Building of which the Leased Premises are part. During the
one hundred and eighty (180) days prior to the expiration of the term, LANDLORD
or its agents may exhibit the Leased Premises to prospective tenants at
reasonable times and upon reasonable prior notice to TENANT and, at TENANT's
option, accompanied by an escort provided by TENANT. LANDLORD shall also have
the right of entry as provided in Paragraph 17.
21. SUBORDINATION
It is mutually agreed that this Lease shall be subordinate to any and all
mortgages, ground leases, or other securities, including any renewals,
modifications, consolidations, replacements and extensions thereof now or
hereafter recorded against the Leased Premises by LANDLORD. TENANT's right to
quiet possession of the Leased Premises shall not be disturbed if TENANT is not
in Default beyond any applicable grace periods and so long as TENANT shall pay
the Gross, Base and Additional Rents and observe and perform all of the
provisions of this Lease, unless this Lease is otherwise terminated pursuant to
its terms. Notwithstanding the foregoing, LANDLORD shall obtain a nondisturbance
agreement reasonably satisfactory to TENANT from any current ground lessor or
mortgagee of the Leased Premises as a condition precedent to TENANT being bound
by this Lease and TENANT shall not be required to subordinate to any future
ground lessor or mortgagee unless TENANT receives a reasonably satisfactory
nondisturbance agreement from such ground lessor or mortgagee.
22. NOTICES
All notices, consents, demands and requests which may be or are required to
be given by either party to the other, shall be in writing, and sent by United
States registered or certified mail, with return receipt requested, addressed to
TENANT at the Leased Premises to the attention of Anthony W. Rees and to
LANDLORD in care of Marfield, Belgarde and Yaffe Companies, 7841 Wayzata
Boulevard,
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Minneapolis, Minnesota 55426 or to such other addresses as TENANT or
LANDLORD may direct in writing in the future.
The date which said registered or certified mail is mailed by LANDLORD or
TENANT shall be conclusively deemed to be the date two days after the date on
which a notice, consent, demand, or request is given or made.
The above address of a party may be changed at any time or from time to
time by notice given by said party to the other party in the manner herein above
provided.
23. SHORT FORM LEASE
The parties hereto shall, at the option of either party, execute a short
form of Lease for recording purposes and, in such event, the terms thereof shall
constitute a part of this Lease as fully as though recited at length herein.
24. LANDLORD ASSIGNMENT
LANDLORD may assign its right, title and interest in this Lease, and such
assignment shall then terminate all LANDLORD's further obligations so long as
LANDLORD is not in default when such assignment is made and the assignee assumes
LANDLORD's responsibilities thereafter.
25. OCCUPANCY
LANDLORD agrees to use its best efforts to deliver possession of the Leased
Premises in the condition required by this Lease on or before November 15, 1996.
LANDLORD shall not be liable to TENANT for any loss or damage resulting if the
Leased Premises are not ready for occupancy on or before 5:00 p.m., Minneapolis
time, on November 22, 1996. If LANDLORD does not tender exclusive possession of
the Leased Premises to TENANT in the condition required by this Lease and has
not delivered to TENANT the two certificates required by Section 3 above on or
before 5:00 p.m., Minneapolis time, on November 22, 1996, LANDLORD shall pay
TENANT as liquidated damages the amount of $25,000 on November 22, 1996 and
TENANT shall not be required to take occupancy and the Rent Commencement Date
shall be the earlier of February 1, 1997 or the date TENANT opens for business
in the Leased Premises. For the purpose of enabling LANDLORD to avoid having to
pay $25,000 in liquidated damages, TENANT agrees that LANDLORD will be deemed to
have met the November 22, 1996 deadline if the only items not completed as of
such deadline (other than minor punchlist items) are the items listed on the
attached Exhibit "H," provided LANDLORD completes such items as soon as
reasonably possible thereafter and does such work at such times and subject to
such security precautions as reasonably required by TENANT to avoid disruption
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of TENANT's business. If LANDLORD does not tender exclusive possession of the
Leased Premises to TENANT in the condition required by this Lease, together with
such two certificates, on or before January 15, 1997, TENANT may terminate this
Lease by written notice to LANDLORD, in which event neither party shall have any
further liability under this Lease, provided LANDLORD has paid to TENANT the
liquidated damages required above.
26. FIRE REPAIR
In the event of damage to the Leased Premises by fire, the elements or
other casualty, LANDLORD shall repair the damage with reasonable dispatch (with
all rent to abate in the meantime if TENANT is forced to abandon all of the
Leased Premises).
LANDLORD will begin repairs within 30 days after the casualty and complete
the repairs within 120 days after the casualty. If LANDLORD fails to begin or
complete the repairs as required, TENANT may give LANDLORD notice to do so. If
LANDLORD has not begun the repairs or completed the repairs, as applicable,
within 30 days after TENANT's notice, TENANT may terminate this Lease by written
notice to LANDLORD given within 30 days after expiration of the 30-day period.
If this Lease is terminated because of the casualty, rents and other payments
will be prorated as of the later of the date of such casualty or the date when
TENANT ceased doing business in the Leased Premises and will be proportionately
refunded to TENANT or paid to LANDLORD, as the case may be.
If the damage renders the Leased Premises untenantable in part but TENANT
continues to occupy them in part, the Gross, Base and Additional Rent shall be
reduced in an equitable manner.
27. QUIET ENJOYMENT
TENANT, upon payment of the Gross, Base and Additional Rent herein reserved
and upon performance of all of the terms, covenants and conditions of this Lease
by it to be kept and performed, shall at all times during the term hereof or
during any extension or renewal hereof, peaceably and quietly enjoy the Leased
Premises without any disturbance from LANDLORD or from any other person claiming
through LANDLORD. Upon expiration or sooner of the term hereof, TENANT shall
surrender the Leased Premises in good condition and repair, except for
reasonable wear and tear, condemnation and casualty.
28. HOLDING OVER
If TENANT shall hold over the Leased Premises or any part thereof after the
expiration of the term hereof, or any extension thereof, such holding over shall
be
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construed only to be a tenancy from day to day subject to all of the covenants,
conditions and obligations hereof except that the Base Rent shall be 125% of the
rent normally due. Nothing herein shall be construed to give TENANT any rights
to hold over and to continue in possession of the Leased Premises after
expiration of the term hereof.
29. DEPOSIT
On the Rent Commencement Date, TENANT will deposit with LANDLORD the sum of
$100,000.00. Said amount shall be held by LANDLORD as security for the faithful
performance by TENANT of all the terms, covenants, and conditions of this Lease
to be kept and performed by TENANT. The security deposit shall not bear
interest. If TENANT shall fully and faithfully perform every provision of this
Lease to be performed by it, the security deposit or any balance thereof shall
be resumed to TENANT at the expiration of the Lease term. On the date two (2)
years after the Rent Commencement Date (provided TENANT is not then in default
or has not received a default notice pertaining to a condition then uncured),
LANDLORD will refund to TENANT $51,656.00 of the security deposit, leaving
LANDLORD with a security deposit of $48,344.00. To the extent LANDLORD resorts
to the security deposit, TENANT will, on demand, replenish the same.
30. OTHER PROVISIONS
The invalidity or unenforceability of any provisions hereof shall not
affect or impair the validity of any other provision. The headings herein are
inserted only for convenience and reference and shall have no substantive
import. Where necessary, the singular imports the plural and vice-versa, and
masculine, feminine and neuter pronouns and expressions are interchangeable.
The Lease shall bind and inure to the benefit of LANDLORD and TENANT, their
respective heirs, administrators, legal representatives, successors and assigns.
During the term of the Lease, LANDLORD's acceptance of an amount which is
less than the amount due at that time, will be deemed partial payment only, not
payment in full.
This Lease shall be governed by Minnesota law.
One or more waivers of any provision by either party shall not be construed
as a waiver of subsequent breach of same. Failure to enforce or delay in
enforcing any right hereunder will not be construed as a waiver thereof. Each
party expressly (a) consents to the maintaining of any such action in any court
of competent subject matter jurisdiction, and (b) agrees that the mailing, with
postage prepaid, registered or certified mail, of any complaint or other legal
process to it, at either the address stated in this Lease for notices or any
other address where that party is then actually
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residing or doing business, constitutes legally sufficient service of the same
upon that party as of the postmark date of the mailing, it being each party's
intent to waive in the event of such a mailing, any insufficiency of service of
process, lack of personal jurisdiction claim, or the like that might otherwise
arise from provisions of the law otherwise requiring a different form of
personal service.
TENANT and any guarantors agree to provide LANDLORD with a current
financial statement on or before four (4) months after the end of their fiscal
year. The financial statement shall meet generally accepted accounting
principles.
EXHIBITS
This instrument contains all of the agreements made between the parties and
may not be modified orally or in any manner other than by agreement in writing
signed by all parties to this Lease. The following exhibits are attached and
hereby made a part of this Lease:
_______________ Exhibit "A" Building Floor Plan
_______________ Exhibit "B" Intentionally Omitted
_______________ Exhibit "C" Legal Description
_______________ Exhibit "D" Intentionally Omitted
_______________ Exhibit "E" Construction
_______________ Exhibit "F" Intentionally Omitted
_______________ Exhibit "G" Material Use Rider
_______________ Exhibit "H" Permissible Post Occupancy Construction Work
_______________ Exhibit "I" New Windows
The signataries below warrant that they are duly authorized to enter into
this Lease representing the parties hereto.
31. ENVIRONMENTAL
LANDLORD has supplied to TENANT a true and complete copy of a current Phase
I environmental assessment for the Building (the "Report"). LANDLORD has made
arrangements so that TENANT may rely on the Report. LANDLORD represents and
warrants to TENANT that LANDLORD does not have and does not know of any other
environmental reports, studies or tests which have been prepared or conducted
with respect to the land on which the Building has been constructed, other than
the Report and the tests identified therein. LANDLORD represents and warrants
that, except as provided in the Report, to the best of LANDLORD's knowledge: (i)
the Building site is in compliance with all Environmental Regulations and (ii)
no Hazardous Substances have been stored, used or otherwise located on, in or
under the Leased Premises or the Building. LANDLORD agrees to indemnify, defend
and hold TENANT harmless against any
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and all Environmental Damages incurred or to be incurred as a result of the
breach by LANDLORD of its representations or with respect to Existing
Contamination or LANDLORD Contamination or failure to comply with any
Environmental Regulations, including reasonable attorneys' fees. "Existing
Contamination" means contamination, if any, which exists on, in, below, or is
migrating on, under or in the direction of the Leased Premises, whether known or
unknown on the date TENANT takes possession of the Leased Premises. "LANDLORD
Contamination" means contamination at the Leased Premises which is caused by or
arises out of any act, omission, neglect or fault of LANDLORD or its agents,
employees, contractors or invitees. "Contamination" means the uncontained or
uncontrolled presence of or release of Hazardous Substances into any
environmental media from, upon, within, below, into or on the Leased Premises.
"Hazardous Substances" means any toxic or hazardous chemicals, wastes, materials
or substances, including, without limitation, lead, radon, asbestos, asbestos
containing materials, polychlorinated biphenyls, dioxin, urea-formaldehyde,
nuclear fuel or waste, radioactive materials, explosives, carcinogens, petroleum
products, or any pollutants or contaminants, as those terms are defined in any
applicable federal, state, local or other governmental law, statute, ordinance,
code, rule or regulation. "Environmental Regulations" means all laws, statutes,
ordinances, codes, rules and regulations relating to Hazardous Substances or the
protection of the environment. "Environmental Damages" means all claims,
judgments, losses, penalties, fines, liabilities, encumbrances, liens, costs and
reasonable expenses of investigation, defense or good faith settlement resulting
from violations of Environmental Regulations, and including, without limitation:
(i) damages for personal injury and injury to property or natural resources;
(ii) reasonable fees and disbursement of attorneys, consultants, contractors,
experts and laboratories; (iii) costs of any cleanup, remediation, removal,
response, abatement, containment, closure, restoration or monitoring work
required by any Environmental Regulation and other costs reasonably necessary to
restore full economic use of the Leased Premises or Building; and (iv) third-
party claims relating to the immediately preceding subsections (i) - (iii).
LANDLORD will perform any remediation required by any governmental authority in
such a manner as to have as little impact on TENANT's business being conducted
at the Leased Premises as reasonably possible. If Existing Contamination or
LANDLORD Contamination actually prevents TENANT, or its employees or customers,
from occupying any material part of the Leased Premises or the parking areas
serving the Leased Premises in a manner that materially adversely affects
TENANT's business being conducted at the Leased Premises for any period of 120
or more continuous calendar days, TENANT will have the right to terminate the
Lease by giving written notice to LANDLORD. LANDLORD's obligations and
liabilities under this Section will survive the expiration or termination of
this Lease.
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32. COMMUNICATION EQUIPMENT
TENANT will be entitled to place, at TENANT's expense, a satellite dish or
dishes and other communication equipment on the roof of the Building as needed
for the conduct of TENANT's business. TENANT agrees to comply with any
screening requirements of the City and any reasonable screening requirements of
LANDLORD in connection with the installation of any such communication
equipment. TENANT agrees to use LANDLORD's roofing contractor if TENANT
penetrates the roof in connection with the installation of any such
communication equipment.
33. INTERRUPTION OF BUSINESS
If an interruption or impairment of utilities or services provided by
LANDLORD materially impairs TENANT's ability to conduct its business and TENANT
closes its business in the Leased Premises by reason thereof and such impairment
and closure continues for three (3) consecutive days, beginning after the end of
such 3-day period, all rent will abate until such utilities or services are
reasonably restored to an extent to render the Leased Premises tenantable, if
LANDLORD's rent loss insurance covers such rent loss or if such utilities are
interrupted due to LANDLORD's failure to pay its utility bills. LANDLORD will
use reasonable efforts to cause such utilities or services to be restored as
soon as possible.
34. ESTOPPEL CERTIFICATES
Within 20 days after written request from either party, the other party
will execute, acknowledge and deliver a document furnished by the requesting
party, which statement may be relied upon by the requesting party and third
parties, stating (a) that this Lease is unmodified and in full force and effect
(or if modified, that this Lease is in full force and effect as modified and
stating the modifications), (b) the dates to which rent and other charges have
been paid, (c) the current Gross Rent or Base Rent and Additional Rent, as
applicable, (d) the dates on which the Term begins and ends, (e) that TENANT has
accepted the Leased Premises and is in possession, (f) that neither LANDLORD nor
TENANT is in default under this Lease, or specifying any such default, and (g)
such other and further information as may be reasonably requested.
35. LANDLORD DEFAULTS
If LANDLORD fails or neglects to keep and perform any of the covenants or
agreements in this Lease on the part of LANDLORD to be kept and performed,
TENANT may notify LANDLORD thereof and if LANDLORD does not cure such default
within thirty (30) days (or such shorter period as may be reasonable under the
circumstances, in the event of an emergency) after the date of receiving such
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notice (or if the default is of such a character as to require more than thirty
(30) days to cure, LANDLORD does not commence to cure such default within thirty
(30) days and proceed with the cure with reasonable diligence), TENANT may, in
addition to all other remedies now or hereafter afforded or provided by law,
perform such covenant or agreement for or on behalf of LANDLORD or make good any
such default, and any amount or amounts which TENANT advances on LANDLORD's
behalf will be repaid by LANDLORD to TENANT on demand, together with interest
thereon at the rate of 10% per annum from the date of such advance to the
repayment thereof in full, and if LANDLORD does not repay any such amount or
amounts upon demand, TENANT may, without forfeiture of its rights under this
Lease, deduct the same, together with interest thereon as provided above, from
the next installment or installments of rent to accrue under this Lease;
provided, however, unless TENANT obtains a judgment against LANDLORD, TENANT may
not offset in any one month more than 50% of the Gross Rent or Base Rent, as
applicable, owing for such month. LANDLORD agrees that, for the purposes of
this Lease, the clearing of snow from the driveways, sidewalks and parking and
loading areas serving the Leased Premises is an emergency and that four (4)
hours is a reasonable period for LANDLORD to remove snow following notice from
TENANT.
36. EXPANSION OPTIONS
TENANT shall have options to lease all or part of the space in the Building
not then included in the Leased Premises, as provided in this Section 36.
LANDLORD agrees to offer to TENANT, some time between the beginning of the
fourth Lease Year and the end of the sixth Lease Year, all of the space in the
Building not included in the Leased Premises (provided LANDLORD need not offer
common area space unless it is otherwise offering, at that time, all of the
remainder of the space in the Building). LANDLORD need not offer all of such
space to TENANT at one time. LANDLORD agrees not to enter into any leases with
third parties for such space for a term (including extension options) in excess
of five years, except as provided below. Upon request by TENANT, LANDLORD will
notify TENANT, with respect to any leases for such space, of the expiration
dates of such leases so that TENANT will be able to anticipate when such space
will be available. LANDLORD will offer all or a portion of such space to TENANT
by written notice to TENANT, identifying the anticipated date of delivery.
TENANT will have until the later of 30 days after receipt of LANDLORD's notice
or the date 60 days prior to the beginning of the fourth Lease Year to accept
such space as part of the Leased Premises, which acceptance shall be in writing.
If TENANT accepts LANDLORD's offer of any of the remaining space in the
Building, TENANT shall lease such space for a term equal to the greater of five
(5) years or the remaining term of this Lease at such time, upon the same terms
and conditions as contained in this Lease, with Base Rent for the period before
what prior to the expansion was the expiration of the term of this Lease to be
at the same per square foot rate, as it changes from time to time, as
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<PAGE>
applies to the balance of the Leased Premises, and with Base Rent for the period
after what prior to the expansion was the expiration of the term of this Lease
to be at the same per square foot rate as applies to the balance of the Leased
Premises immediately prior to such expiration date, and the Tenant Improvement
Allowance with respect to such space shall be $17.00 per rentable square foot
for office space and $2.00 per rentable square foot for storage space (with the
allocation of office and storage space designated by TENANT), multiplied by a
fraction, the numerator of which is the number of months of the term for such
expansion space and the denominator of which is 108. Notwithstanding anything in
this Section 36 to the contrary, (a) the Base Rent for expansion option space
shall never be less than the Base Rent calculated at the per square foot rate
prescribed in Section 2 for the ninth Lease Year; and (b) if TENANT takes
delivery of an expansion option space at a time when Market Rate Rent is already
in effect and when the Lease term has less than 2 years to run, the parties will
redetermine Market Rate Rent at the time that the Lease term would otherwise
have expired. If the term for the Leased Premises prior to the exercise of an
expansion option would expire prior to the expiration of the term with respect
to the space added by exercise of an expansion option, the term for the Leased
Premises prior to the exercise of an expansion option shall be automatically
extended to coincide with the term with respect to the expansion option space,
and the Base Rent per rentable square foot shall be computed on the same basis
as for the expansion option space. The rent and the term with respect to the
expansion option space will commence upon LANDLORD's delivery of exclusive
possession to TENANT after LANDLORD's completion of the tenant improvements
required by TENANT and delivery to TENANT of LANDLORD's architect's certificate
of completion and a certificate of occupancy by the City of Minnetonka. If
TENANT accepts LANDLORD's offer with respect of any of the expansion option
space and LANDLORD is unable to deliver exclusive possession of such space to
TENANT in the condition required, together with the two required certificates,
on or before the date 180 days after LANDLORD's anticipated date of delivery set
forth in LANDLORD's offer, TENANT may terminate this Lease by giving 150 days'
prior written notice to LANDLORD within 90 days after the end of such 180-day
period, in which event neither party shall have any further obligations under
this Lease, except for LANDLORD's obligation to return the security deposit as
required herein and other obligations which expressly survive the termination or
expiration of this Lease. If TENANT does not exercise its option as to any
portion of the expansion option space within the period provided above or if
TENANT terminates its expansion option with respect to the Expansion Space
pursuant to Section 1 above, LANDLORD may offer such space to third parties for
any term desired by LANDLORD. If LANDLORD does not lease a portion of the
expansion option space (including the Expansion Space) not accepted by TENANT
within 6 months after the expiration of TENANT's period to exercise its option,
LANDLORD shall again offer such space to TENANT on the same terms and conditions
set forth above, except TENANT must exercise its option within 10 days after
LANDLORD's offer. LANDLORD shall also offer any portion of the expansion option
space
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<PAGE>
(including the Expansion Space) not accepted by TENANT which LANDLORD leases to
third parties when such space again becomes available on the same terms and
conditions set forth above, except TENANT must exercise its option within 10
days after LANDLORD's offer. Notwithstanding anything to the contrary contained
in this Section 36, the Base Rent for all of the Leased Premises will be
computed based on the Market Rate Rent, as defined in Section 38 below, if this
Lease remains in existence (other than by reason of an extension pursuant to
Section 37 below) after the end of the fourteenth Lease Year. If TENANT
exercises any expansion option, LANDLORD shall build out such space from its
then "as is" condition, at LANDLORD's expense, using the Tenant Improvement
Allowance set forth above. Any costs in excess of the Tenant Improvement
Allowance shall be for TENANT's account. Notwithstanding the foregoing, LANDLORD
agrees to perform any necessary Landlord's Work, as defined in Exhibit E, with
respect to any expansion option space at LANDLORD's sole expense, without
diminishing the Tenant Improvement Allowance established above for Tenant
Improvements.
37. EXTENSION OPTIONS
TENANT has two (2) extension options to extend the Lease term for five (5)
years each, if TENANT notifies LANDLORD in writing at least one hundred twenty
(120) days prior to the expiration of the Lease term, as the same may have been
previously extended. All extensions under this Section 37 are on an "as is"
basis. TENANT may not exercise its second extension option for the second
extension term if it has not exercised its first extension option for the first
extension term. If TENANT exercises any of its extension options, this Lease
will be in full force and effect during the Lease term, as so extended, subject
to all of the terms and conditions of this Lease, except that the annual Base
Rent will be the Market Rate Rent. Any exercise of any such option applies to
the entirety of the Leased Premises, and TENANT shall have no right to exercise
any such option as to only a part thereof. If TENANT exercises one of its
extension options pursuant to this Section 37 and LANDLORD thereafter offers
space to TENANT pursuant to Section 36 which TENANT accepts prior to what would
have been the expiration of the Lease term prior to TENANT's extension under
this Section 37, the extension pursuant to Section 36 shall apply and TENANT's
extension pursuant to this Section 37 shall be deemed rescinded, provided such
extension option pursuant to this Section 37 shall remain available at the end
of the Lease term, as so extended pursuant to Section 36.
38. MARKET RATE RENT
"Market Rate Rent" is hereby defined for all purposes of this Lease as the
annual base or net rent for the space in question as of the commencement of the
period in question, as determined by reference to comparable spaces in
comparable locations in southwest suburban Minneapolis, Minnesota, for renewing
tenants whose total leased space is similar to that of TENANT, and is understood
to be the
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<PAGE>
amount, including free rent, leasehold improvement allowances (taking into
account the value of TENANT's then existing leasehold improvements) and other
rent inducements for which a willing landlord would lease the space in question
to a willing and creditworthy tenant for the period in question, assuming the
same terms and conditions as contained in this Lease, except for the annual base
or net rent.
The Market Rate Rent shall be determined by agreement of LANDLORD and
TENANT and upon the failure of the parties to agree on the Market Rate Rent
within thirty (30) days after the date on which TENANT shall have given notice
exercising its option with respect to the space in question or the first date of
the fifteenth Lease Year (if the last sentence of Section 36 applies), it shall
be determined by three appraisers, selected as provided below, each of whom must
have at least five years experience in appraising fair rental values in
comparable buildings and knowledge of the rental real estate market in suburban
Minneapolis, Minnesota. Each party shall hire and name one disinterested,
independent M.A.I. appraiser and the two such appraisers shall pick a third.
Such appraisers shall be instructed to make such appraisal independently without
consulting each other and taking into account all relevant circumstances, and
thereafter, on the same day, all three appraisers shall submit appraisals to
LANDLORD and TENANT in writing. The appraisers are instructed to complete their
appraisals within 30 days of their appointment, and sooner if practicable. The
annual base or net rent for the period in question shall be the mean of (i) all
the appraisals in the event the highest is not more than 10% higher than the
lowest of such appraisals, or the mean of (ii) the two appraisals which are
closest in amount to each other in the event the highest is more than 10% higher
than the lowest. Upon the determination of the Market Rate Rent, the parties
shall execute an appropriate document evidencing such Market Rate Rent for the
space and period in question. Each party shall pay the costs of its own
appraiser. The cost of the third appraiser and all other costs incurred in
connection with the appraisal process shall be shared equally between LANDLORD
and TENANT.
39. TENANT'S RIGHT TO TERMINATE
INTENTIONALLY OMITTED
40. SELF MANAGEMENT
At such time as TENANT occupies 100% of the Building, TENANT may elect to
manage the Building itself on behalf of LANDLORD, in which event LANDLORD shall
be entitled to a management fee of only 1%.
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<PAGE>
41. BUILDING NAME
So long as TENANT is an occupant of the Building, the Building shall be
named the "Summit Medical" building. After Tenant has ceased to be an occupant
of the Building, LANDLORD agrees to immediately cease using the name "Summit
Medical" and to remove all signs identifying the Building by such name.
42. ASSUMPTION OF EXISTING LEASE OBLIGATIONS
LANDLORD agrees to assume TENANT's rent obligation under its two leases at
One Carlson Parkway (the "Carlson Leases," being the lease dated October 27,
1988, as amended from time to time thereafter, and the lease dated February 2,
1993, as amended from time to time thereafter), for the period beginning with
the Rent Commencement Date and ending April 30, 1997 (the "Assumption Period").
TENANT hereby warrants that it is not at present in default under the Carlson
Leases; that the present amount of gross rent (base rent and additional rent)
due under the Carlson Leases is $33,247.56 per month; that the Carlson Leases do
not provide for any increase in monthly base rent for any period between the
date hereof and April 30, 1997; and that the amount of additional rent is
scheduled to change as of January 1, 1997. Notwithstanding anything herein to
the contrary, LANDLORD is not assuming (a) TENANT's monthly obligation to pay
rent to the extent in excess of $33,247.56 per month, except for LANDLORD's pro
rata share of any additional rent billed after the end of calendar year 1996 for
calendar year 1996, plus any increase in additional rent in calendar year 1997
through April 30, 1997, and (b) any sum due under the Carlson Leases by reason
of TENANT's past, present or future default or TENANT's expansion of the space
beyond that covered by the Carlson Leases as of August 1, 1996. Furthermore, if
the landlord under the Carlson Leases (the "Carlson landlord") retroactively
adjusts additional rent, pursuant to the last paragraph of section 27B of the
Carlson Leases, LANDLORD's rights and obligations extend only to the credit or
debit attributable to the Assumption Period.
At LANDLORD's option, TENANT will assign the Carlson Leases to LANDLORD,
provided the Carlson landlord consents to the assignment, to the extent the
Carlson Leases require such consent, and provided TENANT consents to the terms
of such assignment, which consent shall not be unreasonably withheld. TENANT
will use its best efforts to obtain that consent and to do so in a timely
manner, and to cooperate with any efforts of LANDLORD to obtain that consent,
provided TENANT shall not be required to expend any monies or incur any
additional liabilities or obligations in connection therewith. In the event of
any such assignment, LANDLORD will assume TENANT's obligations, going forward,
from and after the effective date of the assignment, with respect to the Carlson
Leases, but will assume no liability for any damage occurring by reason of
TENANT's occupancy of those premises prior to that effective date.
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<PAGE>
Whether or not such an assignment occurs, LANDLORD will have the right to
negotiate with the Carlson landlord to cancel the Carlson Leases, effective
prior to April 30, 1997, and TENANT will cooperate fully with such efforts of
LANDLORD, provided TENANT shall not be required to expend any monies or incur
any additional liabilities or obligations in connection therewith. TENANT will
consent to any such proposed cancellation, provided that TENANT is relieved of
all obligations under the Carlson Leases except obligations (a) arising from
physical damage to the Carlson Leases premises occurring by reason of TENANT's
occupancy prior to the effective date, (b) arising from TENANT's failure to
vacate those premises, upon expiration, cancellation, or termination of the
Carlson Leases, in accordance with Section 7G of the Carlson Leases, and (c)
otherwise arising by reason of TENANT's occupancy prior to the effective date of
the cancellation, and provided further that TENANT is not required to pay any of
the cost of any inducement required by the Carlson landlord as a condition to
the Carlson landlord agreeing to such cancellation.
TENANT and not LANDLORD shall be entitled to the return of any security
deposit made by TENANT under the Carlson Leases at the expiration or earlier
termination of the Carlson Leases.
IN WITNESS WHEREOF, the parties hereto have caused this Lease to be
executed the day and year first above written.
LANDLORD TENANT
RED CIRCLE L.L.P. SUMMIT MEDICAL SYSTEMS, INC.
By_________________________ By_________________________
___________________________ ___________________________
(Please Print) (Please Print)
Its Authorized Agent Its________________________
(Please Print)
Date_______________________ Date_______________________
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<PAGE>
EXHIBIT A
[Building Floor Plan]
<PAGE>
EXHIBIT C
Legal Description
Lots 7 and 8, Block 1; and That part of Lot 6, Block 1, which lies Westerly of
the following described line:
Beginning at a point on the South line of said Lot 6, distant 123.00 feet
Westerly from the Southeast corner of said Lot 6; thence North 1 degree, 09
minutes, 15 seconds East, a distance of 391.08 feet to a point on the North
line of said Lot 6, distant 127.43 feet Westerly from the Northeast corner
of said Lot 6, and said line there terminating, Opus 2 Eighth Addition,
according to the plat thereof on file or of record in the office of the
Registrar of Titles in and for said County.
Together with the right of the Owner of all of Lots 6 and 7, Block 1, Opus 2
Eighth Addition to an easement for road purposes as provided in Document No.
1086026, Files of the Registrar of Titles.
<PAGE>
EXHIBIT "E"
CONSTRUCTION
------------
LANDLORD agrees to deliver the Leased Premises to TENANT on a so-
called "turn key" basis, as described in this Exhibit E. LANDLORD will provide,
construct and/or install (i) the site improvements for and other improvements to
the Building, (ii) the systems to serve the Leased Premises, and (iii) Tenant
Improvements and other TENANT related items, all in accordance with final plans
and specifications prepared by LANDLORD's architect (Design Partnership or other
architect selected by LANDLORD) and reviewed and approved by TENANT, as
described below.
LANDLORD agrees to perform all of Landlord's Work as provided in the
final plans and specifications, at LANDLORD's sole cost and expense, which shall
not be included in computing TENANT's utilization of the Tenant Improvement
Allowance. "Landlord's Work" shall mean all work required to the base Building,
Building systems and the grounds, including, without limitation, resurfacing the
parking lot, certain new sidewalks, new windows in the altered portions of the
Building as shown on the attached Exhibit "I", any necessary roof repairs, any
necessary structural repairs, certain landscaping, signage to the extent of
LANDLORD's obligation under this Lease, HVAC replacement or repair (as
necessary), HVAC cooling tower replacement, HVAC thermostats and interior system
repairs; retrofitting HVAC to an open plan, building standard lighting, ceiling
grids and ceiling tiles for areas designated for office use currently without
ceilings; one new lower level entry, new foyer and skylight on the lower level,
sheetrock (taped, sanded and ready for paint) on all exposed cinder block in the
Leased Premises (excluding option storage areas or fire stairwells),
retrofitting bathrooms, access control at freight elevator and stair and
preparation of the plans and specifications (including all work of LANDLORD's
architect for the preparation of preliminary plans and specifications, but not
the work of TENANT's architect). "Tenant Improvements" shall mean the work
required to finish the interior of the Leased Premises for TENANT's use and
occupancy. Tenant Improvements shall be in addition to Landlord's Work.
LANDLORD's architect will prepare and submit to TENANT a preliminary
floor plan for the Building. Based on the preliminary floor plan, TENANT's
architect (Wheeler Hildebrandt or other architect selected by Tenant) will
prepare and submit to LANDLORD a layout for the Leased Premises. LANDLORD's
architect will prepare preliminary plans and specifications inclusive of all
items required by the layout. TENANT and TENANT's architect will review the
preliminary plans and specifications for conformance to the layout. If TENANT or
TENANT's architect requires any changes to the preliminary plans and
specifications, LANDLORD and LANDLORD's architect will work with TENANT and
TENANT's architect until TENANT approves a set of preliminary plans and
specifications.
<PAGE>
LANDLORD agrees to provide to TENANT a schedule of values for the
various components of the work, including copies of actual bids for the
mechanical and electrical work. If TENANT is not satisfied with the schedule of
values or the mechanical and electrical bids, LANDLORD will obtain unit pricing
bids for all items, to refine the estimates, for TENANT's approval. If TENANT is
still not satisfied with the pricing, TENANT may bid Tenant Improvements itself
and/or work with LANDLORD to amend the preliminary plans and specifications to
reduce costs. LANDLORD's pricing may include an allowance for overhead and
profit of 10%, which shall be shown as a separate line item. LANDLORD agrees to
pay for Tenant Improvements up to a maximum of $865,667 ($17.00 per square foot
for office and $2.00 per square foot for storage) (the "Tenant Improvement
Allowance"). Once TENANT is satisfied with the pricing for Tenant Improvements
and the preliminary plans and specifications for all of the work, the approved
plans and specifications will become the final plans and specifications and
LANDLORD and TENANT will sign them, as provided below. LANDLORD and TENANT agree
to sign at least two copies of a complete set of both the final plans and the
final specifications and each party will be given at least one complete signed
copy thereof. The plans and specifications will not be deemed final and approved
by LANDLORD and TENANT until LANDLORD and TENANT have signed at least two
copies, as provided above. If the pricing approved by TENANT for Tenant
Improvements is in excess of the Tenant Improvement Allowance, TENANT shall pay
to LANDLORD an amount equal to such excess within fifteen (15) days after being
invoiced therefor. If the pricing approved by TENANT for Tenant Improvements is
less than the Tenant Improvement Allowance, then TENANT's annual rent obligation
shall be reduced by an amount equal to the unused Tenant Improvement Allowance
multiplied by 14% (Example: if $100,000 of the Tenant Improvement Allowance is
not used, TENANT's annual rent would be reduced by $14,000, or $1,166.67 per
month). After TENANT has approved the pricing for Tenant Improvements, TENANT's
usage of the Tenant Improvement Allowance will be deemed fixed based on such
pricing and LANDLORD will complete the work on a "turn key" basis, regardless of
the actual costs. This Lease is contingent upon LANDLORD and TENANT agreeing on
the pricing and the final plans and specifications on or before September 30,
1996. If LANDLORD and TENANT have not agreed upon the pricing and the final
plans and specifications on or before September 30, 1996 at 12:00 noon, which
agreements will be evidenced by a letter agreement executed by LANDLORD and
TENANT fixing TENANT's utilization of the Tenant Improvement Allowance and
detailing the impact on TENANT's rental obligation, and LANDLORD and TENANT
signing the final plans and specifications as required above, this Lease shall
be automatically null and void, and neither party shall have any rights or
obligations hereunder. Notwithstanding any provision in the Lease to the
contrary, if there is unused Tenant Improvement Allowance, the parties will
calculate the actual Tenant Improvement Allowance for the office space (for
which purpose they will assume LANDLORD spent the full $2 per square foot for
storage space), per square foot of office space; that figure will replace $17
per square foot where used elsewhere in the Lease; and the Base Rent rental
rates will
<PAGE>
reflect the amounts shown in Section 2 of the Lease, as reduced by the rent
reduction to which TENANT is entitled, as provided for earlier in this
provision. Such per square foot rent reduction shall also apply to the Expansion
Space and any expansion option space added pursuant to Section 36.
LANDLORD will perform all of the work required by the final plans and
specifications in a good and worker-like manner, using materials specified by
TENANT, in accordance with all applicable building and zoning codes and
regulations and the Laws. LANDLORD warrants that the heating, ventilating and
air conditioning unit(s) and distribution system for the Leased Premises will be
professionally engineered and adequately sized to provide comfortable heating,
ventilating and cooling year-round.
LANDLORD also agrees to pay to TENANT, upon TENANT taking occupancy of
the Leased Premises, the additional sum of $5,000 for TENANT's construction
consultant. LANDLORD hereby authorizes TENANT to have TENANT's construction
consultant oversee all construction pricing to ensure that such pricing is
accurate and competitive and to oversee construction to ensure that all work is
constructed in accordance with the final plans and specifications. In addition
to the Tenant Improvement Allowance, LANDLORD agrees to pay TENANT, upon TENANT
taking occupancy of the Leased Premises, the additional sum of $86,665 to
reimburse TENANT for other "soft costs" associated with the execution of this
Lease, including, without limitation, any brokerage fees not the obligation of
LANDLORD, moving expenses and outside design services (including TENANT's
architect).
TENANT will be provided reasonable access to the Leased Premises
during construction and the right to install any items not to be installed by
LANDLORD. LANDLORD agrees not to unreasonably withhold its consent to
reasonable changes requested by TENANT during construction, providing said
changes do not result in net additional expense to LANDLORD or increase the time
required for LANDLORD to perform its construction responsibilities. If any
TENANT-proposed changes result in net additional expense to LANDLORD, LANDLORD
will not withhold its consent to any such changes if TENANT agrees to reimburse
LANDLORD for the cost of such net additional expense. If any TENANT-proposed
changes increase the time required for LANDLORD to perform its construction
responsibilities by an amount not to exceed 45 days, LANDLORD will not withhold
its consent to any such changes if TENANT agrees to postpone the penalty that
would otherwise be imposed on November 22, 1996 at 5:00 p.m. one day for each
day of delay caused by TENANT's proposed changes. LANDLORD will clean the
Leased Premises "mop clean" before turning over possession to TENANT, with all
window surfaces washed (inside and out).
<PAGE>
EXHIBIT "G"
MATERIAL USE RIDER
TENANT, its employees and/or invitees will not, without LANDLORD's prior
written consent, bring onto the Leased Premises, common area, or allow thereon,
any "hazardous substance" within the meaning of any federal or state statute,
"release", within the meaning of the Minnesota Environmental Response and
Liability Act, or any successor statute, thereon or within 200 feet thereof any
"hazardous substance" or natural gas or petroleum product, or refuel any vehicle
thereon or within 200 feet thereof.
LANDLORD may withhold or condition consent as it sees fit, in its absolute
discretion. Notwithstanding any termination of the Lease, TENANT will indemnify
and hold LANDLORD harmless from any cost, expense, or damage resulting from a
violation of this paragraph, and will, upon request from LANDLORD promptly
remove, at its sole expense, any material so brought or released in violation of
this paragraph. LANDLORD may, from time to time inspect the Leased Premises to
determine compliance with this paragraph, and require TENANT to certify to such
compliance. A violation of this paragraph is a breach for which LANDLORD need
not provide notice or a period to cure, and any contrary provision in this Lease
is hereby modified to so provide.
Notwithstanding the foregoing, TENANT may use immaterial amounts of
hazardous substances normally used by office tenants (e.g., white out, toner,
janitorial supplies) if used in compliance with all applicable laws and
regulations.
EACH ITEM ON THE FOLLOWING CHECKLIST MUST BE ANSWERED.
1. Will any chemicals be used or stored on the premises?
YES NO If yes, list all chemicals that are to be used or stored in the
--
premises (except as set forth in the third grammatical paragraph above)
-----------------------------------------------------------------------
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
2. Will any materials be used or stored on the premises that appear on any
local, state or federal list of "HAZARDOUS SUBSTANCES"? YES NO
--
If yes, list all items in the space provided. (except as set forth in the third
---------------------------------
grammatical paragraph above
- --------------------------------------------------------------------------------
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
<PAGE>
3. Do you have permits to handle, use or store "HAZARDOUS SUBSTANCES?"
YES NO If yes, attach copies of these permits to this exhibit.
--
4. Will any flammables be used or stored on premises? YES NO
--
If yes, list type, quantities and how the flammable will be stored._____________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
I certify that the above information is true, complete and correct.
Further, I understand and agree that no substance other than those listed above
and approved by LANDLORD may be used or stored on the Leased Premises and that
any additions to the above list must be approved in writing by LANDLORD or its
authorized agent.
TENANT:
SUMMIT MEDICAL SYSTEMS, INC.
By_________________________
___________________________
(Please Print)
Its_________________________
(Please Print)
Date_______________________
<PAGE>
EXHIBIT "H"
1. Exercise Room
2. New Exterior Windows (south side expansion)
13. New stairway
<PAGE>
EXHIBIT I
[Plan of New Windows]
<PAGE>
Exhibit 10.40
(SUMMIT MEDICAL LETTERHEAD)
March 26, 1997
Richard Willemin
76 Cross Ridge Road
Chappaqua, NY 10514
Dear Richard:
This letter confirms our offer to you as interim Vice President of Finance and
Chief Financial Officer, effective March 17, 1997, reporting directly to me.
For matters relating to the filing of the 10K and other SEC items you will
report to Hud Connery, Interim Chairman of the Board.
The following covers the details of the arrangement we discussed:
1. Effective March 17, 1997 you have assumed the role of interim Vice
President of Finance and Chief Financial Officer for Summit Medical for an
anticipated period of four months to July 17, 1997. This position is a
regular, full-time position, and you will be eligible to participate under
Summit's benefit programs.
2. During this interim period your compensation will be $6,730.76 gross on a
bi-weekly basis ($175,000 annualized).
3. We will provide you with an incentive stock option of 50,000 shares equal
to the fair market value on March 17, 1997 ($3.4375). Ten thousand
(10,000) of these 50,000 shares will vest immediately, and the remaining
40,000 shares will vest over the next four months (10,000 per month), and
as detailed in the Stock Option Plan of 1993. If you were terminated other
than for cause during this interim period all options would vest.
4. During this interim period, we will determine your role beyond the four
months period, and to the extent it continues we will revisit compensation
and stock options on a going forward basis.
5. This offer is contingent upon your immediate execution of Summit's Non-
Competition and Confidentiality Agreement.
<PAGE>
6. This offer letter is not to be construed as an employment contract between
you and Summit Medical and your employment is at-will.
Richard, we are excited to have you join Summit Medical, and look forward to
working with you to improve the overall effectiveness of your financial area and
have your perspectives become a key part of this management team going forward.
Sincerely
s/ Kevin Green
Kevin Green
President and Chief Executive Officer
Accepted By:
s/ Richard Willemin 3/26/97
- ----------------------------------
Richard Willemin Date
<PAGE>
Exhibit 10.41
June 12, 1997
Via Home Facsimile: 602-661-8497
CONFIDENTIAL
David Teckman
11270 E. Del Timbre
Scottsdale, AZ 85259
Dear Dave,
This letter confirms our formal offer to you to join Summit Medical Systems as
Vice President of Sales reporting to me. Your employment would officially begin
as of August 6, 1996.
The following points cover the details of our proposal. I have worked through
these items with you and regard this letter as a firm proposal, other than
possible 'form' changes to point number 3.
1. Upon joining Summit you will receive an incentive stock option (ISO) equal
to 120,000 shares at the market price as of your start date ($18.50). As
per our present plan they will vest equally over 5 years. With a "change
of control" all unvested options would vest immediately.
2. For fiscal years 1997 and 1998 we are working on putting in place a
performance option program for Senior Management that will be based on
achieving annual earnings (purchase) goals. The performance grant would be
made at the beginning of each fiscal year.
3. Your annualized salary and bonus program for 1996 and 1997 will consist of
a $130,000 base and $70,000 incentive compensation piece both payable in
the form of options. We propose that a small portion of your base salary
(approximately $500 per month) be paid in cash to cover payment of
employee/dependent medical coverage. For 1996, this total compensation,
prorata from your start date, will be guaranteed assuming continued
employment. For 1997 we will guarantee base $130,000 and $20,000 of
incentive compensation. Vesting for 1996 and 1997 will occur in January
1997 and January 1998, respectively. The remaining incentive compensation
of $50,000 will be awarded in the form of stock options with normal five
year vesting, but would vest immediately as of January 1998 in the event
you achieve 90% of sales quota. For every 10% over quota, an additional
7,500 options will be issued to you at the then current market price.
<PAGE>
In the event you were to depart Summit for reasons that were your own or
performance related, the guaranteed portion of 1996 would be base salary.
The prorata incentive would be paid based on percent of quota achieved for
the second half of 1996.
Options will be awarded at a ratio of 3x. This is determined by taking
your remuneration (e.g., $200,000) divided by the option price (e.g.,
$18.50) which would equal the option number (e.g., 10,810). This would
then be multiplied by 3x to derive the number of options you would be
awarded (e.g., 32,430).
4. Regarding compensation for moving and relocation expenses it is with an
understanding to have you family move to Minnesota as soon as possible.
Summit is willing to subsidize if necessary an interim living allowance.
The intention with this program is to take the "pain" out of your move
(e.g., closing costs, moving).
5. We will provide a car allowance of $400 per month.
6. In the event your employment is terminated any time during the first twelve
months, Summit would provide your salary compensation for an additional
twelve months or until you found employment, whichever occurs first. In
the event you were terminated after twelve months, Summit would provide
salary compensation for up to six months or until you found employment. In
the event there was a change of control, compensation would be covered for
twelve months.
7. Your employment is contingent upon signing a mutually acceptable noncompete
agreement and a confidentiality agreement.
8. Your employment at Summit Medical and the terms of this letter are
contingent upon your finalizing your transition from your current position
and joining Summit by September 1, 1996. We want to insure that we take
all measures such that you leave your current employment under good terms
and that neither you, nor Summit, or I are viewed as having done anything
inappropriate.
<PAGE>
Dave, we are very excited about your plans to join Summit. We believe your
contribution to the company will be significant and our offer reflects our
serious commitment to support your professional and financial goals long term.
Please sign both copies and retain one for your records.
Sincerely,
Kevin R. Green
Accepted by:
_______________________________ ____________________________________
David Teckman Date
KRG/vjr
cc: Kathy Pinger, Human Resources Manager
Tony Rees, Chief Financial Officer
<PAGE>
EXHIBIT 11.1
SUMMIT MEDICAL SYSTEMS, INC.
STATEMENT RE: SUPPLEMENTAL COMPUTATION OF NET
INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------
1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Weighted average shares outstanding 9,398,931 5,884,570 4,223,339
SAB No. 83 shares--for stock options granted
at exercise prices less than the 12 months
preceding the initial public offering
using the treasury method - 64,048 115,524
Additional shares from the conversion of
all series of convertible preferred stock - 628,304 591,050
---------------------------------------------------
9,398,931 6,580,922 4,929,913
===================================================
Net loss $ (12,836,132) $ (9,023,854) $ (1,173,190)
===================================================
Net loss per share $ (1.37) $ (1.37) $ (0.24)
===================================================
FULLY DILUTED EARNINGS PER SHARE:
Weighted average shares outstanding 9,398,931 5,884,570 4,223,339
SAB No. 83 shares--for stock options granted
at exercise prices less than the 12 months
preceding the initial public offering
using the treasury method - 68,048 115,524
Additional shares from the conversion of
all series of convertible preferred stock - 626,304 591,050
---------------------------------------------------
9,396,931 6,580,922 4,929,913
===================================================
Net loss $ (12,836,132) $ (9,023,854) $ (1,173,190)
Net loss per share $ (1.37) $ (1.37) $ (0.24)
===================================================
</TABLE>
<PAGE>
EXHIBIT 23.1
Consent of Ernst & Young LLP
We consent to the incorporation by reference in the Registration Statement
(Form, S-8 No. 33-80927) pertaining to the 1993 Stock Option Plan, 1995 Employee
Stock Purchase Plan and the 1995 Non-Employee Director Stock Option Plan of our
report dated April 3, 1997, with respect to the consolidated financial
statements and schedule of Summit Medical Systems, Inc. for the three years
ended December 31, 1996, included in its Annual Report (Form 10-K) filed with
the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
April 3, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 9,386,069 2,202,004
<SECURITIES> 35,243,624 20,718,674
<RECEIVABLES> 4,426,351 4,412,561
<ALLOWANCES> (650,000) (100,397)
<INVENTORY> 103,030 29,074
<CURRENT-ASSETS> 575,597 702,344
<PP&E> 5,309,365 2,663,588
<DEPRECIATION> (2,105,434) (1,179,906)
<TOTAL-ASSETS> 53,487,175 29,551,149
<CURRENT-LIABILITIES> 7,377,456 3,688,062
<BONDS> 0 0
0 0
0 0
<COMMON> 103,438 84,920
<OTHER-SE> 45,979,762 25,749,448
<TOTAL-LIABILITY-AND-EQUITY> 53,487,175 29,551,149
<SALES> 17,171,434 15,482,111
<TOTAL-REVENUES> 17,171,434 15,482,111
<CGS> 7,680,856 5,944,112
<TOTAL-COSTS> 7,680,856 5,944,112
<OTHER-EXPENSES> 24,196,012 19,136,446
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (12,817,506) (9,023,854)
<INCOME-TAX> 18,629 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (12,836,132) (9,023,854)
<EPS-PRIMARY> (1.37) (1.37)
<EPS-DILUTED> 9,398,931 6,580,922
</TABLE>
<PAGE>
Exhibit 99
CAUTIONARY STATEMENT
Summit Medical Systems, Inc. ("Summit" or the "Company"), or persons acting
on behalf of the Company, or outside reviewers retained by the Company making
statements on behalf of the Company, or underwriters, from time to time, may
make, in writing or orally, "forward-looking statements" as defined under the
Private Securities Litigation Reform Act of 1995 (the "Act"). This Cautionary
Statement, when used in conjunction with an identified forward-looking
statement, is for the purpose of qualifying for the "safe harbor" provisions of
the Act and is intended to be a readily available written document that contains
factors which could cause results to differ materially from such forward-looking
statements. The following matters, among others, may have a material adverse
effect on the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company. Reference to this Cautionary
Statement in the context of a forward-looking statement or statements shall be
deemed to be a statement that any one or more of the following factors may cause
actual results to differ materially from those in such forward-looking statement
or statements. These factors are in addition to any other cautionary statements,
written or oral, which may be made or referred to in connection with any such
forward-looking statement.
DEPENDENCE ON CORPORATE MARKETING PARTNERS. A substantial portion of the
Company's total revenue has depended on sales to the Company's corporate
marketing partners. The Company has corporate marketing relationships with
Boston Scientific Corporation ("Boston Scientific"), including SciMed Life
Systems, Inc. ("SciMed"), a wholly owned subsidiary of Boston Scientific,
Allergan, Inc. ("Allergan") and Smith & Nephew Richards, Inc. ("Smith & Nephew
Richards"). The Company historically has relied on its corporate marketing
partners to provide substantial supplemental resources to the Company's sales
and marketing efforts with respect to the Vista product. A significant portion
of the Company's revenue is, therefore, dependent upon the Company's ability to
develop products that meet the requirements of its joint marketing partners and
upon the marketing efforts of these corporate marketing partners.
In 1996, Allergan and Smith & Nephew Richards each purchased less than the
minimum requirements under their marketing contracts in order to maintain their
exclusivity in ophthalmology and orthopaedics, respectively. As a consequence,
the Company modified its exclusive marketing arrangement with Allergan in 1996
pursuant to the terms of its agreement. The Company continues to sell Vista
ophthalmology products through Allergan under a non-exclusive arrangement. The
Company also is in discussions with Smith & Nephew Richards regarding disputes
under their marketing arrangement, including allegations of material breaches
under the arrangement and requests for certain payments. There can be no
assurance that the Company will successfully negotiate a resolution of these
disputes or that the Company and Smith & Nephew Richards will continue their
marketing relationship.
The Company's strategy of reselling its software through corporate
marketing partners is subject to risks and uncertainties. The Company's
database software is not the corporate marketing partners' primary product and
the amount of resources they devote to marketing the database software and the
timing of their marketing efforts are not within the control of the Company.
Moreover, the Company's database software is often sold by the corporate
marketing partners as part of a package of goods and services that includes the
corporate marketing partners' products. As a result, sales of the Company's
database software depends, in part, on demand for the corporate marketing
partners' products and, in general, the effectiveness of a corporate marketing
partner depends on the success of that partner's products in the medical
specialty market. Upon termination of the corporate marketing arrangements under
certain circumstances, the Company's corporate marketing partners would obtain
certain rights to use the DOS and/or Vista source code of the software that is
the subject of the applicable agreement. The
<PAGE>
failure of these corporate marketing partners to market successfully the
Company's database software, or the termination of these corporate marketing
arrangements, could have a material adverse effect on the Company's business,
financial condition and results of operations.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY. The
Company has experienced operating losses for each of the past five years. The
Company anticipates that it will continue to experience operating losses through
1997 and that its profitability in later periods will depend on market
acceptance of its new client/server technology, on-line registry services and
CQS package. In addition, the Company's profitability would be adversely
affected by a continued deterioration of Vista products sales and by a failure
of the Company to implement successfully a strategy to migrate its Vista product
customers to Crescendo! products. The Company has limited operating experience
with this technology, product and service program, and there can be no assurance
that the Company will generate revenue sufficient to achieve profitability.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company has experienced
variations in quarterly operating results. Quarterly variations may result from
the timing of the completion of large software installations or the development
and release of new products. Due to the relatively fixed nature of most of the
Company's costs, including personnel and facilities costs, any unanticipated
shortfall in revenue in any fiscal quarter would have an adverse effect on the
Company's results of operations in that quarter. In general, quarterly revenue
is difficult to forecast because the market for the Company's products and
services are evolving rapidly and much of the Company's sales are through
indirect channels such as the Company's marketing partners. Due to all of the
foregoing factors, it is possible that in some future quarters the Company's
results of operations will be below the expectations of public market analysts
and investors. In such event, the price of the Company's common stock would be
adversely affected.
UNCERTAINTY OF ENTRANCE INTO NEW MARKETS AND ACCEPTANCE OF NEW PRODUCTS. In
1996, the Company substantially restructured its products and services,
including the introduction of a new client/server technology, registry services
and CQS package. The Crescendo! products for cardiovascular specialties
are currently installed at four sites and the Company's initial pilot program
with Eli Lilly for registry services is in the development stage. The Company
also has not yet completed the six-month installation and training period for a
customer under the CQS package. In addition, the Company intends to replace the
Vista products installed at each CQS site during 1996 with a Crescendo! product.
The Company has limited operating experience with these new products and
services. In order to develop and introduce these new products and services, the
Company will have to invest a significant portion of its resources in research
and development and to hire additional personnel to market and manage the new
products. The Company's future success will depend heavily on sales of new
products and services, and the failure of these products and services to achieve
market acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations. These products, when
first released by the Company, may also contain undetected difficulties or
defects that, despite testing by the Company, are discovered only after they
have been installed and used by customers. There can be no assurance that such
difficulties or defects will not be discovered in the future, causing
significant customer relations issues, delays in product introduction and
shipments, or requiring design modifications that could adversely affect the
Company's competitive position, business, financial condition and results of
operations.
DEPENDENCE ON DATABASE SPONSORS; CONTROL OF NATIONAL DATABASES. The Company
believes that the acceptance of its products by healthcare providers in the
cardiac and thoracic surgery, cardiology and ophthalmology markets is
significantly enhanced by the endorsement or certification of the Company's
products by the American College of Cardiology ("ACC"), the Society of
Thoracic Surgeons ("STS") and the American Society of Cataract and
Refractive Surgery ("ASCRS")
99-2
<PAGE>
(collectively, the "Medical Association Partners"), respectively. The Company
believes that the ability of the Company's customers to participate in and
receive benchmark data from the national database sponsored by the Medical
Association Partners providers substantial value to the Company's customers.
Accordingly, termination of one or more of its relationships with a Medical
Association Partner may have a material adverse effect on the Company's
business, financial condition and results of operations.
The agreements with the Medical Association Partners do not give the
Company exclusive rights to the applicable national database. Each of the
Medical Association Partners allows data to be entered using software other than
the Company's, including software sold by the Company's competitors. There can
be no assurance that in the future the Company will not experience greater
competition in connection with the STS and ACC national databases. The terms of
the Company's agreements with the Medical Association Partners limit the
Company's ability to derive commercial products from the national databases.
Although the Company maintains the STS and ASCRS national databases, the Company
does not have ownership rights to develop commercial products, such as
statistical algorithms, from the data in the national database. In the case of
the ACC national database, the Company does not manage such database and has no
rights to the data harvested to the ACC national database. In addition, the
Medical Association Partners may permit access to their respective national
databases by third parties to perform analyses, generate reports and for other
purposes, which could diminish the value of and reports provided by the Company.
If the Medical Association Partners were to permit access to the databases to
Company competitors for these purposes, the Company's business could be
materially and adversely affected.
INTEGRITY OF DATABASES. The Company's success depends significantly on the
integrity of the clinical outcomes data and statistical tools that are based on
the patient records entered into the national databases. Although the Company
believes that it takes adequate precautions to safeguard the validity of the
information entered into the national databases, including testing data for
completeness and consistency, the Company does not obtain independent audits of
the information provided by its customers. If a statistically significant number
of patient records were found to have been altered or entered incorrectly, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
INTEGRATION OF ACQUISITIONS. The Company's success will also depend on its
ability to integrate the businesses of CLMA and Cordillera into the Company's
operations. There can be no assurance that the anticipated benefits from the
acquisitions of CLMA and Cordillera will be realized. Additionally, there can be
no assurance that the Company will be able to effectively market existing
products and services of CLMA or that Cordillera will be able to develop
products that will achieve market acceptance. The integration of CLMA and
Cordillera requires substantial attention from management. The diversion of
management's attention, the process of integrating the businesses and any
difficulties encountered in the transition process could cause an interruption
of business, and could have a material adverse effect on the Company's
operations and financial performance.
CHANGES IN GOVERNMENT REGULATION. The confidentiality of patient records
and the circumstances under which such records may be released to the national
databases is subject to substantial regulation by state governments. These state
laws and regulations govern both the disclosure and use of confidential patient
medical record information. Minnesota, for instance, prohibits "release" of
"health records" unless the patient has consented or a statutory exception has
been met. One such exception is a release for scientific medical research.
Although the Minnesota statute does not define either "health records" or
"release" the statute appears to apply only to records that are patient
identifiable.
Although compliance with these laws and regulations is principally the
responsibility of the hospital, physician or other healthcare provider supplying
the data to the Company, the national databases have been designed to enable
healthcare providers to comply with the confidentiality requirements of state
law. To protect patient confidentiality, data entries to the national databases
delete any patient identifiers, including name, address, hospital and physician.
The Company believes that its procedures comply with the laws and
99-3
<PAGE>
regulations regarding the collection of patient data in substantially all
jurisdictions, but regulations governing patient confidentiality rights are
evolving rapidly.
Additional legislation governing the dissemination of medical record
information has been proposed at both the state and federal level. In general,
this legislation may require holders of such information to implement security
measures that may be of substantial cost to the Company. One bill currently
pending in Congress would protect and regulate the confidentiality of medical
record information. The bill would prohibit the disclosure of individually
identifiable health information, except with the patient's consent. Without the
patient's consent, medical record information may be disclosed only for other
limited purposes, including disclosures to permit the creation of
nonidentifiable health information and to facilitate medical research. The bill
would preempt most state laws regarding access to, and the use and disclosure
of, medical record information. The Company presently collects, compiles and
discloses health care information which it believes is not individually
identifiable and therefore would not be protected health information under the
bill. The Company cannot accurately assess the likelihood that the bill will
become law, or the final scope of any law. There can be no assurance that the
bill, or other changes to state or federal laws, will not materially restrict
the ability of healthcare providers to submit information from patient records
to the Company.
The healthcare industry is subject to changing regulatory influences that
may affect the procurement practices and operations of healthcare industry
participants. During the past several years, the healthcare industry has been
subject to an increase in government regulation of, among other things,
reimbursement rates and certain capital expenditures. Many lawmakers have
proposed programs to reform the United States healthcare system. These programs
may contain proposals to increase governmental involvement in healthcare, lower
reimbursement rates and otherwise change the operating environment for the
Company's customers. Healthcare industry participants may react to these
proposals by curtailing or deferring investments, including investments in the
Company's products. The Company cannot predict what impact, if any, such factors
may have on its business, financial condition and results of operations.
Although the Company is not currently subject to regulation by the United
States Food and Drug Administration (the "FDA"), the FDA could determine in
the future that the predictive applications of the Company's software make it a
clinical decision tool, and thus subject to FDA regulation. In that event, the
Company could experience delays in developing and marketing new software and an
increase in research and development costs which could have a material adverse
effect on the Company's business, financial condition and results of operations.
HIGHLY COMPETITIVE INDUSTRY. The market for healthcare information systems
and services is highly competitive. The Company believes that the principal
competitive factors for clinical outcomes database software are the quality and
depth of the underlying clinical outcomes database, the usefulness of the data
and reports generated by the software, customer service and support, ease-of-
use, compatibility with the customer's existing information systems, potential
for product enhancements, and vendor reputation. The Company's competitors
include other providers of clinical outcomes software, healthcare consulting
firms, and providers of medical information derived from databases
99-4
<PAGE>
based on claims data. Many of the Company's competitors and potential
competitors have greater financial, development, technical, marketing and
selling resources than the Company, and have substantial installed customer
bases in the healthcare industry. The Company also faces significant competition
from internal information services at hospitals, many of which have developed
their own outcomes databases. As the market for outcomes software develops,
additional competitors may enter the market and competition may intensify. There
can be no assurance that the Company's business will not be materially and
adversely affected by such competition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company relies on a combination
of trade secrets, copyright and trademark laws, nondisclosure and other
contractual provisions, and technical measures to protect its proprietary rights
in its products. There can be no assurance that these protections will be
adequate or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. Although the Company believes that its products do not infringe upon
the proprietary rights of third parties, and it is not aware of any threatened
patent infringement claims relating to its products, there can be no assurance
that third parties will not assert infringement claims against the Company in
the future or that a license or similar agreement will be available on
reasonable terms in the event of an unfavorable ruling on any such claim. In
addition, any such claim may require the Company to incur substantial litigation
expenses or subject the Company to significant liabilities and could have a
material adverse effect on the Company's business.
SHAREHOLDER LITIGATION. The Company has been named as a defendant in two
federal court securities putative class actions captioned, Jong E. Lee v. Summit
---------------------
Medical Systems, Inc., Mathias Faue, George E. and Patricia E. Faue, Janice
- --------------------- ----------------------------------------------------
McQuiston V. Summit Medical Systems, Inc., Edward F. Sweeney, Kevin R. Green,
- -----------------------------------------------------------------------------
Anthony W. Rees, Kent J. Thiry, Dennis H. Powers, John M. Nehra, and Judith Anne
- --------------------------------------------------------------- -----------
Jacobson V. Summit Medical Systems, Inc. Each class action alleges that the
- ----------------------------------------
Company made misleading public disclosures relating to its financial statements.
These actions are in the preliminary stages and the parties to the actions have
not begun discovery. The Company believes each of these actions are without
merit and intends to defend them vigorously. However, there is no assurance that
any judgment, order or decree against the Company arising out of these class
actions will not have a material adverse effect on the Company or its business.
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION. The Company has been
informed by the Division of Enforcement of the Securities and Exchange
Commission (the "Commission") that the Commission is conducting an investigation
of the Company, relating to the Company's restatement of certain financial
statements. The Company is cooperating fully with the Commission and its
investigation and intends to continue to do so. As of the date hereof, the
Commission's investigation is in the preliminary stage and the Company is unable
to identify the scope of the investigation. There can be no assurance that any
order, decree or other action issued or taken by the Commission arising out of
its investigation will not result in sanctions against the Company or certain
individuals that could have a material adverse effect on the Company or its
business.
99-5
