-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WqNiQRk5u4dDryP4iggJIGZo7fd8WsFGVIVqnk4riWVUel40CTURNcUV2rV5hViy 3jYf91VJc5YwxMvOsjEIaQ== 0000895755-99-000100.txt : 19991214 0000895755-99-000100.hdr.sgml : 19991214 ACCESSION NUMBER: 0000895755-99-000100 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAVION TECHNOLOGIES INC CENTRAL INDEX KEY: 0001081938 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 841472763 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-27055 FILM NUMBER: 99773595 BUSINESS ADDRESS: STREET 1: 7475 DAKIN STREET STREET 2: SUITE 607 CITY: DENVER STATE: CO ZIP: 80221 BUSINESS PHONE: 3036578212 MAIL ADDRESS: STREET 1: CAVION TECHNOLOGIES INC STREET 2: 7475 DAKIN ST STE 607 CITY: DENVER STATE: CO ZIP: 80221 10QSB 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission File No. 0-23866 September 30, 1999 CAVION TECHNOLOGIES, INC. (Exact name of Small Business Issuer as specified in its charter.) Colorado 84-1472763 -------- ----------- (State of Incorporation) (I.R.S. Employer Identification No.) 7475 Dakin Street, Suite 607 Denver, Colorado 80221 ----------------------- (Address of Principal Executive Offices) (303) 657-8212 -------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] The number of shares outstanding of each of the issuer's classes of common stock, as of December 9, 1999: Class of Securities Outstanding Securities ------------------ ---------------------- $.0001 par value 4,696,826 shares Class A Common Stock $.0001 par value 28,648 shares Class B Common Stock CAVION TECHNOLOGIES, INC. (d/b/a cavion.com) INDEX ----- Page ---- Part I. Financial Information Item 1. Unaudited Financial Statements: Cavion Technologies, Inc. (Formerly Network Acquisitions, Inc.) Balance Sheets as of September 30, 1999 and December 31, 1998 3 Statements of Operations for the three months and nine months ended September 30, 1999 and the period from inception (August 18, 1998) to September 30, 1998 5 Statements of Cash Flows for the nine months ended September 30, 1999 and the period from inception (August 18, 1998) to September 30, 1998 6 LanXtra, Inc. (Formerly Cavion Technologies, Inc. and Sigmacom Corporation) Statements of Operations for the three months and nine months ended September 30, 1998 (Unaudited) 8 Statements of Cash Flows for the nine months ended September 30, 1998 9 Notes to Financial Statements 10 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations 21 Part II. Other Information Item 1 Legal Proceedings 31 Item 2 Changes in Securities and Use of Proceeds 31 Item 3 Defaults Upon Senior Securities 31 Item 4 Submission of Matters to a Vote of Security Holders 31 Item 5 Other Information 31 Item 6 Exhibits and Reports on Form 8-K 31 Signatures ------------------------------- This report contains forward-looking statements within the meaning of Section 221E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities of the Securities Act of 1933, as amended, and is subject to the safe harbors created by those sections. These forward-looking statements are subject to significant risks and uncertainties, including those identified in the section of this form 10- QSB entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors That May Affect Future Operating Results," which my cause actual results to differ materially from those discussed in such forward-looking statements. The forward-looking statements within this Form 10-QSB are identified by words such as "believes," "anticipates," "expects," "intends," "may," "will" and other similar expressions. However, these words are not the exclusive means of identifying such statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-QSB with the Securities and Exchange Commission ("SEC"). Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company's other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect the Company's business. PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Page 1 of 2 CAVION TECHNOLOGIES, INC. ------------------------- (Formerly Network Acquisitions, Inc.) BALANCE SHEETS -------------- (UNAUDITED)
ASSETS September 30, December 31, ------ 1999 1998 ------------- ------------ CURRENT ASSETS: Cash and cash equivalents $ 249,217 $ 19,735 Accounts receivable 43,709 - Prepaid assets 80,529 - Inventories 5,832 - Deferred offering costs 458,883 - ---------- ---------- Total current assets 838,170 19,735 ---------- ---------- PROPERTY AND EQUIPMENT, at cost: Leasehold improvements 19,634 - Furniture and fixtures 42,970 - Network equipment and licensed software 465,440 - ---------- ---------- 528,044 - Less - Accumulated depreciation (79,282) - ---------- ---------- Property and equipment, net 448,762 - ---------- ---------- DEBT ISSUANCE COSTS, net of accumulated amortization of $76,761, and $4,232, respectively 16,902 49,412 DEPOSIT FOR LETTER OF CREDIT 20,000 - DEFERRED LANXTRA ACQUISITION COSTS - 2,204,814 GOODWILL AND OTHER INTANGIBLE ASSETS, net of accumulated amortization of $635,369 and $0, respectively 4,129,899 - OTHER ASSETS 51,599 - ---------- ---------- TOTAL ASSETS $5,505,332 $2,273,961 ========== ==========
The accompanying notes to financial statements are an integral part of these balance sheets. Page 2 of 2 CAVION TECHNOLOGIES, INC. ------------------------- (Formerly Network Acquisitions, Inc. ) BALANCE SHEETS -------------- (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY September 30, December 31, ------------------------------------ 1999 1998 ------------- ------------ CURRENT LIABILITIES: Accounts payable $ 571,981 $ - Accrued liabilities 351,928 31,185 Accrued interest 92,148 2,116 Deferred revenue and deposits 363,532 - Deferred revenue - license agreements 300,000 - Related party collateralized loans 13,152 - Current portion of capital lease obligations 44,824 - Notes payable to stockholders 300,000 - Bridge loan 283,437 - Revolving line of credit 600,000 - ---------- ---------- Total current liabilities 2,921,002 33,301 ---------- ---------- LONG-TERM LIABILITIES: Capital lease obligations 51,513 - Notes payable 451,165 252,833 ---------- ---------- Total long-term liabilities 502,678 252,833 ---------- ---------- PUTABLE CLASS B COMMON STOCK: 30,000 shares authorized; 28,648, and 0 shares issued and outstanding, respectively (stated at accreted value; total redemption value of $200,536) 196,577 - COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Series A Convertible Preferred Stock; $.0001 par value, 10,000,000 shares authorized; 700,000 and 0 issued and outstanding, respectively (liquidation value of $4,200,000 and $0) 1,848,000 - Class A Common Stock; $.0001 par value, 19,970,000 shares authorized; 2,706,326 and 2,625,356 issued and outstanding, respectively 271 263 Warrants 33,127 13,284 Additional paid-in capital 3,188,765 2,010,224 Accumulated deficit (3,185,088) (35,944) ---------- ---------- Total stockholders' equity 1,885,075 1,987,827 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,505,332 $ 2,273,961 ========== ===========
The accompanying notes to financial statements are an integral part of these balance sheets. CAVION TECHNOLOGIES, INC. ------------------------- (Formerly Network Acquisitions, Inc. ) STATEMENTS OF OPERATIONS ------------------------ (UNAUDITED)
Period from Inception Three Months Nine Months (August 18, Ended Ended 1998) to September 30, September 30, December 31, 1999 1999 1998 ------------- ------------- ------------ REVENUE: Network access and connectivity fees $ 123,128 $ 273,335 $ - Installation services 52,256 103,481 - Software licensing fees 4,092 7,993 - ------------ ------------ ---------- Total revenue 179,476 384,809 - ------------ ------------ ---------- COST OF REVENUE: Network access and connectivity 79,369 179,303 - Installation services 70,481 104,164 - ------------ ------------ ---------- Total cost of revenue 149,850 283,467 - ------------ ------------ ---------- Gross profit 29,626 101,342 - ------------ ------------ ---------- OPERATING EXPENSES: Selling and marketing 544,270 957,590 - General and administrative 237,137 886,896 6,877 Research and development 161,872 323,960 - Amortization of goodwill 240,860 635,370 - ------------ ------------ ---------- Total operating expenses 1,184,139 2,803,816 6,877 ------------ ------------ ---------- LOSS FROM OPERATIONS (1,154,513) (2,702,474) (6,877) INTEREST EXPENSE (167,835) (391,966) (29,067) ------------ ------------ ---------- NET LOSS $(1,322,348) $(3,094,440) $ (35,944) ============ ============ ========== NET LOSS APPLICABLE TO COMMON SHAREHOLDERS: Net loss $(1,322,348) $(3,094,440) $ (35,944) Dividends, convertible preferred stock (26,250) (54,704) - ------------ ------------ ---------- NET LOSS APPLICABLE TO COMMON STOCKHOLDERS (1,348,598) (3,149,144) $ (35,944) ============ ============= ========== BASIC AND DILUTED NET LOSS PER SHARE $ (.50) $ (1.12) $ (0.02) ============ ============= ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED 2,706,326 2,806,287 2,078,170 ============ ============ ==========
The accompanying notes to financial statements are an integral part of these statements. Page 1 of 2 CAVION TECHNOLOGIES, INC. ------------------------- (Formerly Network Acquisitions, Inc.) STATEMENTS OF CASH FLOWS ------------------------ (UNAUDITED)
Period from Inception Three Months Nine Months (August 18, Ended Ended 1998) to September 30, September 30, December 31, 1999 1999 1998 ------------- ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,322,348) $(3,094,440) $ (35,944) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 276,945 722,522 - Accretion of debt discount 140,260 267,162 16,608 Accretion of putable stock 11,880 29,380 4,232 Change in operating assets and liabilities- Accounts receivable (17,507) (27,251) - Prepaids and inventories (17,480) (47,409) - Other assets (40,301) (29,784) - Accounts payable 186,252 286,372 - Accrued liabilities 52,220 144,382 2,116 Deferred revenue 420,567 448,820 - ------------ ------------ ---------- Net cash used in operating activities (309,512) (1,300,246) (12,988) ------------ ------------ ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (46,205) (133,220) - Acquisition of LanXtra - - (335,000) ------------ ------------ ---------- Net cash used in investing activities (46,205) (133,220) (335,000) ------------ ------------ ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable 300,000 400,000 370,000 Repurchases of common stock - (31) - Proceeds from issuance of Common Stock - 178 6,898 Proceeds from issuance of Series A Preferred Stock - 2,100,000 - Series A Preferred Stock offering costs - (252,000) - Payment of debt issuance costs (31,045) (67,612) (9,175) Principal payments on capital leases (10,067) (32,454) - Deferred offering costs (86,585) (458,883) - Payment of dividends (26,250) (26,250) - ------------ ------------ ---------- Net cash provided by financing activities 146,053 1,662,948 367,723 ------------ ------------ ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (209,664) 229,482 19,735 CASH AND CASH EQUIVALENTS, beginning of period 458,881 19,735 - ------------ ------------ ---------- CASH AND CASH EQUIVALENTS, end of period $ 249,217 $ 249,217 $ 19,735 ============ ============ ==========
The accompanying notes to financial statements are an integral part of these statements. Page 2 of 2 CAVION TECHNOLOGIES, INC. ------------------------- (Formerly Network Acquisitions, Inc.) STATEMENTS OF CASH FLOWS ------------------------
Period from Inception Three Months Nine Months (August 18, Ended Ended 1998) to September 30, September 30, December 31, 1999 1999 1998 ------------- ------------- ------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 34,814 $ 98,992 $ 6,111 ============ ============ ========== SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: Value of warrants to purchase common stock issued to placement agent in conjunction with bridge loan $ 33,127 $ 33,127 $ - ============ ============ ========== Accrued dividends $ 26,250 $ 26,250 $ - ============ ============ ========== Property acquired with capital leases $ - $ 63,804 $ = ============ ============ ========== Value of warrants to purchase common stock issued to note holders $ - $ 35,885 $ 133,775 ============ ============ ========== Value of warrants to purchase common stock issued to Selling Agent $ - $ 3,590 $ 13,284 ============ ============ ========== Debt issuance costs included in accrued liabilities $ - $ - $ 31,185 ============ ============ ========== Estimated value of shares issued to LanXtra management shareholders $ - $ - $1,876,068 ============ ============ ==========
The accompanying notes to financial statements are an integral part of these statements. LANXTRA, INC. ------------- (Formerly Cavion Technologies, Inc. and Sigmacom Corporation ) STATEMENTS OF OPERATIONS ------------------------ (UNAUDITED) -----------
Three Months Nine Months Ended Ended September 30, September 30, 1998 1998 ------------- ------------- REVENUE: Network access and connectivity fees $ 30,513 $ 102,970 Installation services 19,468 38,695 Software licensing fees 1,060 2,297 ---------- ----------- Total revenue 51,041 143,962 ---------- ----------- COST OF REVENUE: Network access and connectivity 28,334 94,732 Installation services 16,523 34,522 ---------- ----------- Total cost of revenue 44,857 129,254 ---------- ----------- Gross profit 6,184 14,708 ---------- ----------- OPERATING EXPENSES: General and administrative 206,456 555,415 Research and development 72,343 192,520 ---------- ----------- Total operating expenses 278,799 747,935 ---------- ----------- LOSS FROM OPERATIONS (272,615) (733,227) INTEREST EXPENSE (245,161) (628,734) OTHER INCOME (LOSS) (20,986) - ---------- ----------- NET LOSS $(538,762) $(1,361,961) ========== =========== BASIC AND DILUTED NET LOSS PER SHARE $ (2.00) $ (5.40) ========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED 256,464 256,464 ========== ==========
LANXTRA, INC. ------------- (Formerly Cavion Technologies, Inc. and Sigmacom Corporation ) STATEMENT OF CASH FLOWS ----------------------- (UNAUDITED) ----------
Nine Months Ended September 30, 1998 ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,386,961) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization 46,501 Accretion of putable stock 577,500 Accretion of loan discounts 133,067 Change in operating assets and liabilities- Accounts receivable 76,911 Prepaids and inventories (41,182) Other assets (1,169) Accounts payable 43,161 Accrued liabilities 32,589 Deferred revenue 48,094 ------------ Net cash used in operating activities (471,489) ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (56,071) ------------ Net cash used in investing activities (56,071) ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 286 Proceeds from related party loans 260,000 Proceeds from notes payable 35,000 Payments on related party loans (61,780) Payment on capital lease obligations (20,584) ------------ Net cash provided by financing activities 212,922 ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS (314,638) CASH AND CASH EQUIVALENTS, beginning of period 350,443 ------------ CASH AND CASH EQUIVALENTS, end of period $ 35,805 ============ SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: $ 16,881 ============ Property acquired with capital leases Putable common stock issued in conjunction with stockholder notes $ 200,536 ============ Cash paid for interest $ 66,703 ============
CAVION TECHNOLOGIES, INC. ------------------------- (Formerly Network Acquisitions, Inc.) NOTES TO FINANCIAL STATEMENTS ----------------------------- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND ------------------------------------------------ FOR THE PERIOD FROM INCEPTION (AUGUST 18, 1998 ---------------------------------------------- TO DECEMBER 31, 1998 -------------------- (1) DESCRIPTION OF BUSINESS ----------------------- Organization ------------ The Company was incorporated in Colorado on August 18, 1998 as Network Acquisitions, Inc. to acquire the assets of Cavion Technologies, Inc., now known as LanXtra, Inc. ("LanXtra"), which was engaged in providing internet, intranet, and extranet services to the credit union industry. On February 1, 1999, the Company acquired the business of LanXtra, and the Company changed its name to Cavion Technologies, Inc., doing business as cavion.com. Prior to funds raised in an Initial Public Offering, effective October 29, 1999, the Company financed its operations through a private placement of its 15% notes, which were offered commencing on October 20, 1998 (the "Offering"), the sale of Series A Preferred Stock and funding through a Bridge Loan. The Company advanced a portion of the proceeds from the Offering to LanXtra in anticipation of the acquisition of LanXtra. Through December 31, 1998, the Company had raised $370,000 in the private placement and had advanced LanXtra a total of $335,000 under an agreement dated September 14, 1998. In the Initial Public Offering, the Company issued 1,200,000 shares of Class A common stock for $6.50 per share raising net proceeds, after offering costs, of $6,279,000. In addition, in November 1999, the representative of the underwriters exercised a portion of their overallotments option, resulting in additional gross proceeds of approximately $588,000 (See note 9). Purchase of LanXtra's Assets, Liabilities and Operations -------------------------------------------------------- In August 1998, the Company signed a letter of intent to purchase LanXtra's business. In December 1998, the Company signed an Asset Purchase Agreement (the "Purchase Agreement") with LanXtra to purchase substantially all the assets of LanXtra in exchange for approximately 375,214 shares and 28,648 shares of the Company's Class A and B common stock, respectively, and the assumption by the Company of certain liabilities of LanXtra. The number of Class A common stock shares issued to LanXtra represented approximately 12% of the Company's equity interest at the time of the purchase agreement. The Purchase Agreement was consummated on February 1, 1999 and the Company assumed the operations of LanXtra on that date. Upon consummation, significant modifications were made to LanXtra's capital structure. On December 21, 1998, the Company issued 625,356 shares to certain shareholders of LanXtra who could continue as management of the Company. One of these shareholders held directly and through irrevocable proxies sufficient voting shares to approve the transaction. The shares are non-forfeitable and not contingent upon the management's continued employment with the Company. As a result, the shares have been considered additional purchase consideration and are recorded at their estimated fair value of $3 per share. The estimated fair value of assets acquired, liabilities assumed, and consideration issued in the transaction with LanXtra are as follows:
Consideration: Class A common stock $3,001,710 Class B common stock 167,197 Cash 338,735 ---------- 3,507,642 Add: Net liabilities (assets) assumed: Working capital deficit assumed 706,044 Property and equipment (331,020) Borrowings assumed 924,417 Other assets (41,815) ---------- Goodwill and other intangible assets $4,765,268 ==========
The Company has recorded the fair value of its stock issued to LanXtra at $3 per share based principally upon its private placement of Series A Preferred Stock completed in February 1999. The transaction with LanXtra resulted in approximately $4,760,000 of intangible assets (primarily technology, customer lists and goodwill). These intangible assets will be amortized over five years. The purchase price allocation is subject to adjustment based on the final determination of the fair value of the assets and liabilities assumed, which could take as long as one year from February 1, 1999. Because the business now operated by the Company has never been profitable, and due to the other risks and uncertainties discussed herein, it is reasonably possible that an analysis of these long- lived assets in future periods could result in a conclusion that they are impaired, and the amount of the impairment could be substantial. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Interim Financial Statements (Unaudited) ---------------------------------------- The interim financial statements of the Company as of and for the nine months ended September 30, 1999, and the financial statements of LanXtra for the three and nine months ended September 30, 1999 are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company's management, the unaudited interim financial statements contain all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation. The results of operations for the interim period is not necessarily indicative of the results of the entire year. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents ------------------------- The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Concentration of Credit Risk ---------------------------- Financial instruments which subject the Company to concentrations of credit risk are accounts receivable and cash equivalents. The Company's receivables are concentrated among credit unions. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral. Additionally, the Company manages a portion of its credit risk by billing certain services in advance. The Company has no significant financial instruments with off-balance sheet risk of accounting loss, such as foreign exchange contracts, option contracts or other hedging arrangements. The Company's cash balances are maintained in demand deposits at financial institutions that the Company believes to be creditworthy. Fair Value of Financial Instruments ----------------------------------- The Company's financial instruments consist of cash, accounts receivable, short-term trade payables, putable common stock and borrowings. The carrying values of the instruments acquired from LanXtra approximate the fair value placed upon them on February 1, 1999, in connection with their assumption. Fair values were principally determined by discounting expected future cash flows at a market cost of debt. The fair value of the Company's other borrowings approximates their carrying values based upon current market rates of interest. Property and Equipment ---------------------- Property and equipment acquired from LanXtra was recorded at its estimated fair value. Additions are recorded at cost. Property and equipment are depreciated using the straight-line method over the lesser of the lease term or their estimated lives as follows: Furniture and fixtures 7 years Computer equipment 3 - 5 years Licensed software 3 years Leasehold improvements Life of the lease Impairment of Long-Lived Assets ------------------------------- The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from future undiscounted cash flows. Impairment losses are recorded for the difference between the carrying value and fair value of the long-lived assets. The acquisition of LanXtra generated approximately $4,760,000 of intangible assets which are continuously reviewed by the Company for impairments. Deferred Offering Costs ----------------------- The Company has recorded deferred offering costs totaling $458,883 at September 30, 1999. Such costs represent legal and other professional fees incurred related to the Company's proposed initial public offering. Such costs were offset against the initial public offering proceeds upon the consummation of the offering on October 29, 1999 (see Note 9). Accrued Liabilities ------------------- Accrued liabilities consist of the following:
September 30, December 31, 1999 1998 ------------- ------------ (unaudited) Accrued vendor payable $ 78,673 $ - Accrued professional fees 172,620 - Accrued wages and other liabilities 100,635 31,185 ---------- ---------- Total accrued liabilities $ 351,928 $ 31,185 ========== ==========
Income Taxes ------------ A current provision for income taxes is recorded for actual or estimated amounts payable or refundable on tax returns filed or to be filed for each year. Deferred income tax assets and liabilities are recorded for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities and carryforwards. The overall change in deferred tax assets and liabilities for the period measures the deferred tax expense for the period. Effects of changes in tax laws on deferred tax assets and liabilities are reflected as adjustments to tax expense in the period of enactment. Deferred tax assets are recognized for the expected future tax effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefits which, more likely than not based on current circumstances, are not expected to be realized. Net Loss Per Share ------------------ The Company reports net loss per share in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" which requires the presentation of both basic and diluted earnings (loss) per share. Basic net loss per common share has been computed based upon the weighted average number of shares of common stock outstanding during the period. Weighted average common shares excludes 28,648 shares of putable Class B common stock as an assumed cash settlement is more dilutive. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and potential common shares outstanding during the period if the effect of the potential common shares is dilutive. The Company has also excluded the weighted average effect of common stock issuable upon exercise of all warrants, options and convertible preferred stock from the computation of diluted earnings per share as the effect of all such securities is anti-dilutive for the periods presented. The shares excluded related to outstanding options, warrants and convertible preferred stock (without regard to the treasury stock method) at December 31, 1998 were 1,075,000 and 4,440, respectively. Stock Based Compensation ------------------------ The Company accounts for its employee stock option plan and other employee stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and related interpretations. The Company adopted the disclosure-only provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees and provide pro forma disclosures for employee stock grants as if the fair-value-based method of accounting in SFAS No. 123 had been applied to these transactions. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123. Revenue Recognition ------------------- The Company generates revenue from three sources: (1) service revenue for the installation of internet access equipment at customer sites, (2) software license fees, and (3) recurring monthly network access and connectivity fees. Service revenue is recognized as the services are performed. Software license arrangements typically provide for enhancements over the term of the arrangement, and software license fees are generally received in advance, deferred and recognized ratably over the term of the arrangement. Network access and connectivity fees are typically billed in advance and recognized in the month that the access/connectivity is provided. Software Development Costs -------------------------- The Company capitalizes software development costs when a software product is determined to be technologically feasible. The Company's software products are deemed to be technologically feasible at the point the Company commences field testing of the software. The period from field testing to general customer release of the software has been brief and the costs incurred during this period were insignificant. Accordingly, the Company has not capitalized any qualifying software development costs. Comprehensive Income -------------------- The Company has adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting comprehensive income and its components in the financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. From inception through September 30, 1999, there have been no differences between the Company's comprehensive loss and its net loss. Segment Information ------------------- In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS No. 131"). This statement establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company believes it has one reportable segment. Recently Issued Accounting Pronouncements ----------------------------------------- Statement of Financial Accounting Standards No. 133 --------------------------------------------------- In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), and in June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB 133" ("SFAS No 134"). SFAS No. 134 requires the Company to adopt SFAS No. 133 for all quarters in the year ended December 31, 2001. SFAS No. 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. To date, the Company has not entered into any derivative financial instruments or hedging activities. (3) BORROWINGS ---------- The Company's borrowings at September 30, 1999 and December 31, 1998, consisted of the following:
September 30, 1999 December 31, 1998 ---------------------- ---------------------- Unamortized Unamortized Face Value Discount Face Value Discount ---------- ----------- ---------- ----------- *Bridge Loan $ 300,000 $ - $ - $ - Notes payable 470,000 (18,835) 370,000 (117,167) *Revolving line of credit 600,000 - - - *Notes payable to stockholders 300,000 - - - *Related party collateralized loans 13,410 (258) - - ---------- -------- -------- ---------- $1,683,410 $(19,093) $370,000 $(117,167) ========== ======== ======== ==========
*The entire amount of borrowings that mature in 1999 were paid in full after the Initial Public Offering. Bridge Loan ----------- In August 1999, the Company raised $300,000 through Neidiger, Tucker, Bruner, Inc. and First Capital Investments, Inc. (the "Placement Agents"). The bridge loan bears interest at 14% and matures upon the earlier of the closing of Company's Initial Public Offering or one year from the date of the note. The loan was paid in full upon closing of the Initial Public Offering (see Note 9). First Capital Investment, Inc., ("FCI"), is a related party through its substantial ownership of the Company's common stock. At the closing date, the notes were discounted to reflect their fair value net of the value of the warrants issued to the note holders. The discount is being amortized as interest expense over the estimated term of the notes. Debt issuance costs in the amount of $31,045 were paid in conjunction with the Initial Public Offering and are also being amortized as interest expense over the estimated term of the notes. Note Payable - ------------ Beginning on October 20, 1998, the Company offered through its officers, directors and FCI (the "Selling Agent"), up to $2,000,000 of 15% secured notes due October 19, 2000 (the "Notes") along with warrants to purchase Class A common stock (the "Warrants"). At December 31, 1998, the Company had raised $370,000 through the Offering. The Company raised a total of $470,000 as of March 31, 1999 and the Offering closed on February 8, 1999. The Notes are secured by substantially all of the assets now owned and hereafter acquired by the Company, including the assets acquired from LanXtra in February 1999. There is no pre-payment penalty. In connection with the Offering, the Company granted note holders warrants to purchase 1,200 shares of the Company's Class A common stock for every $10,000 of Notes Payable purchased. Accordingly, at December 31, 1998, the Company had issued warrants for 44,400 shares, and in February 1999, issued warrants for an additional 12,000 shares. Such warrants had an exercise price of $0.01 per share. These detachable warrants were valued at a total of $169,660 utilizing the Black-Scholes option pricing model, assuming a volatility factor of 70%, a risk free interest rate of 4.31% and a fair market value of the underlying common stock of $3 per share. All warrants were exercised in early 1999. Revolving Line of Credit ------------------------ As part of the Purchase Agreement, a $600,000 Revolving Line of Credit was assumed by the Company. The maturity date of the line of credit was extended to December 31, 1999 and interest accrues at a rate equal to the Bank's reference rate plus 1.5% (9.75% and 9.25% at September 30, 1999 and December 31, 1998, respectively). The Revolving Line of Credit is collateralized by letters of credit issued by the Company and certain LanXtra stockholders as well as by agreements among certain LanXtra stockholders. No additional amounts may be drawn upon the line of credit. The Line of Credit was paid in full and cancelled after the Initial Public Offering proceeds were received (see Note 9), and the corresponding collateralized letters of credit were released. Notes Payable to Stockholders ----------------------------- The Company assumed notes payable to certain LanXtra stockholders as part of the Purchase Agreement. The maturity date on these notes was extended to the date on which Cavion obtains 100 credit union customers (the "100 Credit Union Date"). Management believes the 100 Credit Union Date will be reached on or before December 31, 1999. In addition, interest terms were amended such that no interest will accrue for the remaining term of the notes payable. At the acquisition date, the notes were discounted to reflect their fair value. The discount is being amortized as interest expense over the remaining estimated term of the notes. The notes payable to stockholders were repaid in full after the Initial Public Offering proceeds were received (see Note 9). As additional consideration for shareholder notes with a face value of $240,000, LanXtra issued 28,648 shares of its putable common stock. These putable shares were exchanged for 28,648 shares of the Company's Class B putable common stock. The Lenders have the right to sell these shares back to the Company for a purchase price of $7 per share, 30 days after the 100 Credit Union Date is reached, or can convert these shares into equivalent shares of Class A common stock. As a result of this transaction, the Class B shares have been recorded at their estimated fair value of $167,197. The difference between this amount and the put value is being accreted as interest expense over the estimated term of the notes. Related Party Collateralized Loans ---------------------------------- The Company also assumed certain factoring agreements (the "Agreements") with management and a stockholder of the Company as part of the Purchase Agreement. The interest terms were amended such that no interest will be accrued for the remaining term of the loans and the maturity of these loans was extended to the 100 Credit Union Date. The related party collateralized loans were paid in full after the Initial Public Offering proceeds were received (see Note 9) and cancelled. Maturities of Borrowings - ------------------------ The maturities of the Company's borrowings as of September 31, 1999 are as follows: 1999 $1,213,410* 2000 470,000 ---------- 1,683,410 Less-debt discounts (18,577) ---------- $1,664,833 ========== *The entire amount of borrowing that mature in 1999 were paid in full after the Initial Public Offering. (4) RELATED PARTY TRANSACTIONS -------------------------- MoneyLine America, LLC ---------------------- In August 1999, the Company entered into an agreement with MoneyLine America, LLC, ("MoneyLine Agreement"), which provides that the Company will receive payments under an agreement with MoneyLine to provide on-line mortgage lending services for credit unions and their members through the Company's network. This agreement calls for a minimum annual payments to us of $300,000 in the first year, beginning September 1999, escalating to $1,000,000 in years six through ten, provided the Company has at least 1,500 credit unions, or 12% of the U.S. credit unions on our network by the end of year three. The amounts received are reflected as deferred revenue - license agreements in the accompanying balance sheets. Fifty percent of MoneyLine America is owned by Boutine Capital, LLC, a principal shareholder of the Company. (5) CAPITAL LEASE OBLIGATIONS ------------------------- The Company assumed several capital lease agreements related to computers and various office equipment in conjunction with the Purchase Agreement. The Company has also entered into additional capital lease agreements during the nine months ended September 30, 1999. The capital leases have terms ranging from 24 to 36 months with interest rates ranging between 9% and 20.3%. As of September 30, 1999, the present value of future minimum lease payments are as follows: Period ending September 30, 2000 $ 44,824 2001 51,100 2002 11,060 -------- 106,984 Less: amounts representing interest (10,647) -------- 96,337 Less: current portion (44,824) -------- Long-term capital lease obligation $ 51,513 ======== The net book value of assets under capital lease obligations as of September 30,1999 was approximately $92,000. (6) STOCKHOLDERS' EQUITY -------------------- The Company is authorized to issue 20,000,000 shares of common stock, par value $.0001 per share. The common stock is segregated into two classes; Class A and Class B. Of the 20,000,000 shares of common stock, 19,970,000 are designated as Class A and 30,000 are designated as Class B. Class A Common Stock -------------------- At September 30, 1999, 2,706,326 shares of Class A common stock were issued and outstanding. Two million shares were issued for consideration of $.0001 per share (par value). Certain LanXtra shareholders and management were issued 625,356 shares for cash consideration of $.01 per share. The estimated fair value assigned to these shares was $3 per share which is consistent with the value assigned to the 375,214 shares issued to LanXtra in February 1999. The holders of Class A common stock are entitled to one vote for each share held on record on each matter submitted to a vote of shareholders. Cumulative voting for election of directors is not permitted. Holders of Class A common stock have no preemptive rights or rights to convert their Class A common stock into any other securities. Class B Common Stock -------------------- As of September 30, 1999, there were 28,648 shares of the Class B voting common stock issued and outstanding. These shares were issued in exchange for similar securities of LanXtra as partial consideration for the purchase of LanXtra's business, and are callable by the Company at $7 per share. The holders of Class B common stock have the right to sell the Class B common stock to the Company at $7 per share or convert their shares to equivalent units of Class A common stock at the 100 Credit Union Date. The Class B common stock was authorized so that the Company could exchange its Class B common stock for LanXtra's existing nonvoting putable common stock with similar terms. Preferred Stock --------------- In February 1999, the Board of Directors authorized the Company, without further action by the shareholders, to issue 10,000,000 shares of one or more series of preferred stock at a par value of $.0001, all of which is nonvoting. The Board of Directors may, without shareholder approval, determine the dividend rates, redemption prices, preferences on liquidation or dissolution, conversion rights, voting rights and any other preferences. In addition, the Company authorized the sale of 700,000 shares of Series A convertible preferred stock in conjunction with a private placement offering of the stock. Each share of the Series A preferred stock is convertible at any time at the holder's option into an equal number of shares of Class A common stock of the Company at a conversion price initially equal to the offering price, which was established at $3 per share. Each share of the Series A preferred stock is automatically convertible into an equal number of Class A shares. In addition, each share of the Series A preferred stock is convertible into Class A shares at the option of the Company beginning on January 1, 2004. The Series A preferred stock will entitle each holder to receive cumulative preferential dividends at the rate of 5% per year, payable in cash or in shares of the Company's Class A common stock quarterly. The Series A preferred stock also entitles the holder to a liquidation preference at a liquidation value which is initially equal to two times the offering price. The Company sold 700,000 shares of Series A preferred stock at $3 per share, raising proceeds of $2,100,000. All Series A preferred shares were converted to Class A common stock on the effective date of the Initial Public Offering. Warrants -------- In conjunction with the issuance of the August 1999 Bridge Loan, the Company granted the Bridge Loan holders warrants to purchase 5,000 shares of the Company's Class A common stock for every $50,000 of notes purchased. The warrants are exercisable for a period of five years beginning on the earlier to occur of (i) the closing of the Initial Public Offering or (ii) one year form the date of the warrant. These detachable warrants were valued at a total of $33,127 utilizing the Black-Scholes option pricing model, assuming a volatility factor of 70%, a risk free rate of 6.22% and a fair value of the underlying common stock of $6.75 per share. The Company issued warrants with the private placements of notes payable in October 1998 which allow the purchase of 1,200 shares of the Company's Class A common stock for every $10,000 of notes payable. The exercise price was $0.01 per share. Originally, the warrant exercise period was for a period of one year beginning on the maturity date of the notes payable. On December 22, 1998, the Company accelerated the exercise period to begin immediately and end one year after each note's issuance date. All holders of warrants at that date elected to immediately exercise their warrants. Warrants for 44,400 shares of Class A common stock were issued and exercised at December 31, 1998. In the nine months ended September 30, 1999, warrants for an additional 12,000 shares of Class A common stock were issued and immediately exercised. The Company redeemed 17,640 and 44,400 shares of Class A common stock from its existing shareholders for a redemption price of $.0001 per share during the nine-months ended September 30, 1999 and December 31, 1998, respectively. The redeemed shares were reissued in connection with the exercise of the warrants issued to note holders and the Selling Agent (discussed below). As part of the Selling Agent's compensation, the Company agreed to issue additional warrants for the Company's Class A common stock. The warrants are exercisable at any time during a five-year term at 110% of the price paid by the holders of the Notes for the Class A common stock. At December 31, 1998, the Selling Agent earned the right to purchase 4,440 shares of the Company's Class A common stock at an exercise price of $.011 per share. At September 30, 1999, the Selling Agent earned the right to purchase an additional 1,200 shares under the same terms. The 4,440 warrants outstanding at December 31, 1998, were valued at a total of $13,284 and the additional 1,200 warrants were valued at $3,590, utilizing the Black-Scholes option pricing model assuming a volatility factor of 70%, a risk free interest rate of 4.31% and a fair market value of the underlying shares of $3 per share. The warrants were recorded as debt issuance costs and are being amortized into interest expense over the life of the debt. All such warrants have been exercised. Stock Options ------------- Effective March 19, 1999, the Company adopted a stock option plan (the "Plan"). The Plan provides for grants of incentive stock options, nonqualified stock options and restricted stock to designated employees, officers, directors, advisors and independent contractors. The Plan authorizes the issuance of up to 750,000 shares of Class A common stock. Under the Plan, the exercise price per share of a non-qualified stock option must be equal to at least 50% of the fair market value of the common stock at the grant date, and the exercise price per share of an incentive stock option must equal the fair market value of the common stock at the grant date. Through September 30, 1999, options for 345,000 shares of Class A common stock have been issued under the Plan. The outstanding stock options have an exercise price of $3.00 per share and vest over various terms with a maximum vesting period of 18 months and expire after a maximum of 10 years. In March 1999, the Company granted options for 65,000 shares of Class A common stock to non-employees in exchange for services. The fair value of these options on the date of grant was approximately $47,000. Expense related to such options will be recorded over the term the services are provided. The fair value of each non-employee option grant was estimated on the date of the grant using the Black-Scholes option pricing model. Assumptions used to calculate the fair value were risk free interest rates of 4.48% to 4.99%, no dividend yields, an expected life of five years and volatility of 100%. (7) COMMITMENTS AND CONTINGENCIES ----------------------------- Legal Matters ------------- In connection with the Purchase Agreement transaction, a shareholder of LanXtra exercised his rights as a dissenting shareholder. The Company assumed LanXtra's obligation (if any) to this dissenting shareholder. If the shareholder is permitted to pursue his claim in a legal proceeding, LanXtra could be required to pay the shareholder the fair value of his shares immediately before the closing date of the Purchase Agreement. The Company's and LanXtra's management believes that the value paid on account of these shares pursuant to the Purchase Agreement is greater than the amount which the dissenting shareholder could recover under Colorado law. The dissenting shareholder has asserted that the value of his 50,000 LanXtra shares immediately before the closing date of the Purchase Agreement would be approximately $250,000. The ultimate resolution of the matter, which is expected to occur within one year, could result in an obligation to such shareholder. Further, should LanXtra, or Cavion as successor, be required to make a payment to this shareholder, such payment could result in the purchase transaction being treated as a taxable transaction which could subject Cavion to a significant tax liability. In accordance with the Purchase Agreement, the Company may become legally obligated to satisfy additional liabilities of LanXtra, including liabilities arising on or after the closing date with respect to LanXtra's assets or business. To date, no liabilities other than those identified in the Purchase Agreement have arisen, however, other liabilities could arise in the future. Any such liabilities would be evaluated in the Company's determination of the fair value of liabilities assumed from LanXtra. The Company is exposed to legal claims arising in the ordinary course of business. In management's opinion, none of the claims currently asserted will result in a material liability or change to earnings. (8) ACQUISITION OF LANXTRA BUSINESS ------------------------------- As discussed above, the Company acquired the business of LanXtra on February 1, 1999. The following is pro forma operating information. For purposes of the pro forma statement of operations, the transaction was assumed to be consummated on January 1, 1998. Pro forma earnings per share are calculated as if the Purchase Agreement was completed on January 1, 1998 and the related 1,029,218 shares of common stock were issued on that date. The pro forma statement of operations for the nine months ended September 30, 1998 is as follows:
Pro Forma LanXtra Cavion Adjustments Pro Forma ------------ ------------ ----------- ----------- Revenue $ 143,962 $ - $ - $ 143,962 Cost of revenue 129,254 - - 129,254 ------------ ------------ --------- ----------- Gross profit 14,708 - - 14,708 Operating expenses 747,935 - 714,790 (1) 1,433,545 Nonoperating expenses 653,734 - (438,360)(2) 215,374 ------------ ------------ --------- ----------- Loss from continuing operations $(1,386,961) $ - $(276,430) $(1,634,211) ============ ============ ========= =========== Unaudited pro forma net loss from continuing operations per basic and diluted share $(.54) ===== Weighted average shares outstanding 3,029,218 =========
The pro forma statement of operations for the nine months ended September 30, 1999 is as follows:
Pro Forma LanXtra Cavion Adjustments Pro Forma ------------ ------------ ----------- ----------- Revenue $ 37,850 $ 384,809 $ - $ 422,659 Cost of revenue 31,898 283,467 - 315,365 ------------ ------------ --------- ----------- Gross profit 5,952 101,342 - 107,294 Operating expenses 213,311 2,803,816 79,421 (1) 3,096,548 Interest expense and other 64,069 391,966 (52,932)(2) 403,103 ------------ ------------ --------- ------------ Net loss $ (271,428) $(3,094,440) $(26,489) $(3,392,357) ============ ============ ========= ============ Net loss per basic share $(1.22) ====== Weighted average shares outstanding 2,830,600 =========
Adjustments ----------- (1) Amortization of goodwill (2) Reduction of interest expense to reflect Cavion's capital structure (9) SUBSEQUENT EVENTS ----------------- Initial Public Offering ----------------------- On October 29, 1999, the Company's public offering became effective. The number of shares offered and sold were 1,200,000, with an underwriter's over allotment option for an additional 180,000 shares. Total gross proceeds of $7,800,000 were raised in the offering and the Company, after offering expenses, netted $6,279,000. In addition, in November 1999, the Company sold additional shares, ("Firm Shares"), to the Representative of the underwriter of 90,500 raising an additional gross proceeds of $approximately $588,000, and netting approximately $513,000. The total number of shares outstanding after the offering was 4,696,826, including the conversion of the 700,000 convertible preferred stock upon the closing of the offering and the additional shares issued to the Representative of the underwriter subsequent to the original offering. In addition, at the closing of the Initial Public Offering, the Company sold warrants to purchase 120,000 shares of the Company's Common Stock to the Representative at the price of 125% of the Initial Public Offering price, or $8.125 per share. Convergent Communications Services, Inc. ---------------------------------------- Effective October 22, 1999, the Company entered into a five-year agreement with Convergent Communications Services, Inc., ("Convergent"). Under this agreement, Convergent will establish, maintain and support network connectivity between our network and our customers, including providing, equipment, maintenance and related services for the network. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Cavion.com offers products and services for business to business communications, secure Internet financial products such as online banking and bill paying services, and secure Internet access and services for our customers. We are also building and managing a secure private communications network exclusively for the credit union industry. Our network acts as a communication platform for the delivery of services and information to and from credit unions and related businesses. Our products and services utilize our proprietary software. As of September 30, 1999, 61 credit unions and two credit union leagues had contracted for our services. As of the date of this filing, 80 credit unions, three credit union leagues, one corporate credit union, and two credit union vendors have subscribed to our products and services. Through our e- commerce program, we are planning to launch during the first quarter of 2000 our affinity marketing plan to market third-party products and services to credit union members. We market our products and services to credit unions and related entities, such as credit union leagues, that are located in key geographic areas across the United States which have been selected due to their high concentration of credit unions. We intend to focus our marketing efforts on credit unions with $5 million or more in assets, and geographic markets with an average concentration of more than 300 credit unions. PRODUCTS AND SERVICES We provide numerous products and services to the credit union industry, such as: o unions to offer their services to their members via the Internet or an intranet. This network also facilitates business to business communication. o Secure Internet financial products, such as transactional banking services, that enable credit union members to view their account and loan balances and to make transfers between accounts, as well as bill paying services which allow credit union members to pay their bills online. o Secure Internet access for credit unions, with multiple layers of security features and dedicated connections designed to satisfy credit unions' need for confidential communications and secure transactional processing with one connection. o Secure consumer loan application and approval products, with the required secure data feeds for multiple credit bureau. o E-commerce services to credit union members, including our Preferred Merchant Programs (i.e. mortgage loan services and retail ISP services), Co-branded Portals (i.e. personal start pages, shopping and travel online) and Web Site Promotion and Traffic Control Tools for vendors (i.e. ad serving, search engine placement, and visitor analysis). Our products are priced in a way that permits our credit union customers to offer Internet banking services to their members at a flat monthly rate. CREDIT UNION INDUSTRY A credit union is a non-profit, cooperative financial institution, owned and controlled by the members who use its services. Credit unions are either state or federally chartered. The Credit Union Membership Access Act of 1998 allows credit unions to solicit new members outside a once-restricted field of membership, and allows credit unions to offer generally the same products and services as other financial institutions such as banks and savings and loan institutions. In the United States: o there are approximately 12,600 credit unions with combined assets of over $375 billion o these 12,600 credit unions service approximately 73 million members o approximately 6,100 of these credit unions have assets of over $5 million o these larger credit unions service approximately 70 million members and have combined assets of approximately $366 billion INTERNET PHENOMENON The widespread adoption in recent years of public and private electronic communications networks, including the Internet, intranets and extranets, has impacted the manner in which organizations communicate and conduct business. These advanced networks provide an attractive medium for communications and commerce because of their widespread reach, accessibility, use of open standards and ability to permit interactions on a real-time basis. At the same time, they offer businesses a user- friendly, low-cost way to conduct a wide variety of commercial functions electronically. In March, 1999 Nielsen/NetRatings estimated that the number of online computer users in the United States by the end of March 1999 to have exceeded 95 million or nearly 40% of the U.S. population. In recent years, the development of the Internet, intranets and extranets has enabled users of personal computers to access and interact with a broad range of information sources. Financial institutions are rapidly adopting network communications to conduct electronic banking and provide customers with access to their account information. According to International Data Corporation estimates of February, 1999, U.S. banks will spend $326 million on Internet banking technology in 1999 alone, more than double the amount spent in 1998, to accommodate the expected sharp increases in online banking. THE INTERNET AND CREDIT UNIONS We believe financial institution customers will increasingly demand more convenient and interactive access to financial information and services. Competitive pressures are driving banks and credit unions to increase the quality and cost-effectiveness of such services. New opportunities exist to employ available and emerging technologies to automate and enhance a credit union's interactions with its members. Traditionally, credit unions have used trained service representatives to serve as the link between their customers and the information systems that stored and processed the customers' account information. Reliance on people alone to perform service functions is expensive and limits growth. Labor costs tend to grow proportionately with increased demands for service. In addition, the time required to hire and train service personnel limits the speed with which credit unions can respond to customer demand or new competitive service offerings. Our solution is to provide credit unions with network-based technologies that enable their members to serve themselves through automated, interactive access to financial information and services. As technologies continue to advance for network-based solutions, financial institutions will be able to deploy increasingly sophisticated network applications. Given its relatively late arrival, online banking is just now beginning to build momentum. A study conducted by Gomez Advisors found that as of the first quarter of 1999, nearly 40% of the top 100 banks in the United States are offering online services. Online Banking Report of January, 1998 estimates that by the end of 2000, 17.5 million households will be using online banking and/or a bill payment application. Despite this momentum, the market for Internet based network financial services is new and uncertain. Currently, our products and services have been sold to credit unions located in Colorado and 18 other states. While we are marketing our products and services across the country, we cannot be sure that they will sell as well in the new markets as they have in Colorado. Important questions remain about the use of the Internet for financial services, such as security, reliability, ease of access, cost of access, quality of service and costs of service. The answers to those questions may affect the growth of Internet use in ways we can't predict today. As a result, we also can not accurately predict the size of the market for Internet based financial services or the rate at which the market will grow. If it fails to grow, or grows more slowly than we expect, or it is becomes saturated with competitors, our business, financial condition and operating results will be materially and adversely affected. The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes included in another part of this report. Those financial statements and notes should be considered to be incorporated into this section. This discussion contains forward looking statements that involve risk and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements. We completed our acquisition of the assets of LanXtra on February 1, 1999 as described in the Asset Purchase Agreement. Prior to the acquisition, we did not conduct any operations except financing activities and other preparations for the acquisition. The following discussion relates to LanXtra's historical results of operations since January 1, 1998, the date on which LanXtra commenced the business we acquired, our operations of the business that we acquired and our plan of operation following our initial public offering, which was declared effective on October 29,1999. In the following discussion, "we" refers both to our business as operated by LanXtra prior to February 1, 1999, and to our business as operated by us after February 1, 1999. Since January 1, 1998, we have been engaged in building a suite of network products and services for the credit union industry that includes: o a secure network that enables access to our credit union customers' products and services via the Internet or an intranet o secure Internet financial products, including Internet banking software o secure Internet access services for credit unions o secure Internet automated loan application and approval o E-commerce services We are in the start-up phase of our operations and generated a net loss of $3,094,440 for the nine-months ended September 30, 1999 ($3,130,384 combined). For the year ended December 31, 1998, we generated a net loss of $2,006,446, comprised of a $35,944 net loss for Cavion and a net loss of $1,970,502 for LanXtra. We expect to incur substantial monthly operating losses through most of the year 2000. Since January 1, 1998, our revenues have been derived from recurring monthly connectivity fees, installation services and monthly recurring revenue associated with our secure Internet access services and secure Internet financial products. As of November 30, 1999, 80 credit unions, three credit union leagues, two of which provides check clearing services to credit unions, one corporate credit union, which provides liquidity services to credit unions, and two credit union vendors of which one is a provider of website design, development and hosting services to credit unions and the other provides electronic archiving service to credit unions, have subscribed to our products and services. Approximately 40% of these customers are located in Colorado, and the other 60% are located in 18 other states. Prior to our initial public offering, we financed the development of our products and services with: o capital provided by the sale of LanXtra's unrelated business o a bank loan o loans from shareholders and employees of LanXtra o two private placements of promissory notes and related warrants o private placement of preferred stock RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 During the three and nine months ended September 30, 1999, we generated $179,476 and $384,809, respectively, in revenue. This revenue was derived from a variety of Internet/intranet activities, including secure Internet access for credit unions utilizing dedicated lines, secure credit union network services, secure Internet financial products such as Internet banking software, sales of related equipment, and installation fees charged for these services. Cost of sales during these periods were $149,850 and $283,467, or 84% and 74%, respectively, of revenue. These costs include Internet access fees, telephone company charges for frame relay lines, equipment purchased for resale, service personnel and occupancy costs, hardware repair and maintenance expenses. We believe that our margins will improve in the future as sales discounts for installations diminish for our customers and our connectivity costs diminish due to the agreement with Convergent Communications Services, Inc. Selling and marketing expenses for these periods were $544,270 and $957,590 or 303% and 249%, respectively, of revenue. Of these expenses, $198,760 or 111% of revenue was attributable to salaries and wages for the three months ended, and $418,347 or 109% of revenue of the nine months ended. In addition, of these expenses, $21,919 or 12% of revenue was attributable to rent payments for our sales offices around the country for the three months ended and $39,742 or 10% of revenue was attributable to rent payments for the nine months ended. General and administrative expenses for these periods were $237,137 and $886,896 or 132% and 230%, respectively, of revenue. Of these expenses, $91,793 or 51% of revenue was attributable to salaries for the three months ended, and $253,846 or 66% of revenue of the nine months ended. Additionally, we incurred $161,872 and $323,960, respectively, in research and development costs during this period, which represented an allocation of programmers' and engineers' salaries applicable to the amount of time they devoted to development activities. We anticipate that our salaries and wages expense will increase as we hire additional employees to handle the expected growth of our business. In May 1998, LanXtra issued Class B common stock which the holders can require cavion.com to repurchase at $7.00 per share during a 60-day exercise period beginning on the date that is 30 days after the date we have 100 Credit Union customers on our network. For financial accounting purposes, the cost of this "putable" common stock from its issuance price to its redemption value is treated as interest expense. After the closing of our initial public offering, we offered the former LanXtra shareholders, who have rights to our Class B common stock the option to redeem their Class B shares at $7.00 per share, or to convert each Class B share into one share of our Class A common stock. To date, no Class B shares have been redeemed or converted by the former LanXtra shareholders. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND COMPARISONS TO NINE MONTHS ENDED SEPTEMBER 30, 1998 The following discussion relates to our operations for the nine months ended September 30, 1999. In 1998, LanXtra operated the business since acquired by us, and LanXtra's operations during the nine months ended September 30, 1998 were substantially limited due to an ongoing liquidity shortage. Further, cavion.com was formed as Network Acquisitions, Inc. on August 18, 1998, and our activities from that date through September 30, 1998 consisted entirely of organizational and initial capital formation activities, and have not been included herein as such information is not considered meaningful for comparative purposes. During the nine months ended September 30, 1999, we recognized $384,809 ($422,659 when combined with LanXtra) in revenue, as compared to $143,962 during the nine months ended September 30, 1998. Our revenue was derived from a variety of Internet/intranet activities, including secure Internet access for credit unions utilizing dedicated lines, secure credit union network services, secure Internet financial products such as Internet banking software, sales of related equipment, and installation fees charged for these services. The increase in revenue was primarily due to additional credit union customers, and increases in our marketing activity made possible by the funds provided by recent offerings of equity and issuances of debt. Cost of sales during the nine months ended September 30, 1999 was $283,467 ($315,365 combined), or 74%, compared to $129,254, or 90%, for the nine months ended September 30, 1998. These costs include Internet access fees, telephone company charges for frame relay lines, equipment purchased for resale, service personnel and occupancy costs, hardware repair and maintenance expenses. The increase in revenue is due to the increase in the number of credit unions using our network and products. The decrease in the cost of sales as a percentage of sales is due to economies of scale in delivering our services to a larger number of installed customers. Selling and marketing expenses for the nine months ended September 30, 1999 were $957,590 ($1,030,090 combined) or 249% of revenue, compared to $194,300 or 135 % of revenue for the nine months ended September 30, 1998. Of these 1999 expenses, $418,347 or 109% of gross revenue was attributable to salaries and wages. We believe that selling and marketing expenses will continue to increase, although their percentage of revenue will decrease based on our expected revenue growth. General and administrative expenses for the nine months ended September 30, 1999 were $886,896 ($996,127 combined) or 230% of revenue, compared to $361,115 or 251% of revenue for the nine months ended September 30, 1998. Of these 1999 expenses, $253,846 or 66% of gross revenue was attributable to salaries and wages. Additionally, we incurred $323,960 ($355,540 combined) in research and development costs during the nine months ended September 30, 1999, which represented an allocation of programmers' and engineers' salaries applicable to the amount of time they devoted to development activities. During the nine months ended September 30, 1998, we incurred $192,520 of research and development costs. We anticipate that our salaries and wages expenses will continue to increase as we hire additional employees to handle the expected growth of our business. As we expand our operations nationwide, our depreciation expense will increase because we will be purchasing additional equipment and infrastructure. With the proceeds from our initial public offering, our revolving line of credit, notes payable to former shareholders of LanXtra, back pay to former employees and equipment purchases were paid off and, because of that, interest expense will be reduced. As compared to the nine months ended September 30, 1998, where interest expense was $628,734, our interest expense was $456,035 combined, for the nine months ended September 30, 1999. We were also required to pay dividends on our Series A preferred stock, which totaled $54,704 for the nine months ended September 30, 1999. These dividends were paid in cash. Our Series A preferred stock converted to Class A common stock upon the completion date of our initial public offering on November 3, 1999. The final dividend payment of $9,195 was made on November 3, 1999 and was also paid in cash. We expect to invest at least an additional $150,000 in research and development during the fourth quarter of 1999. We have just completed developing software for an Internet-enabled automated loan application and approval system. We are in the early stages of designing stored value or "smart card" capabilities for our network. We expect in the near future to begin development of two or more additional interfaces for credit union host data processing systems not yet supported by our network as well as an additional Internet bill pay vendor interface. We are continuously evaluating possible enhancements to the security and functionality of our existing products and services. In addition, we expect to incur development costs in launching our affinity marketing program, through which we plan to offer products and services to credit union members via our credit unions' websites. We expect our product development focus to evolve continuously in the future based on guidance from our customers. The transaction with LanXtra resulted in approximately $4,763,000 of intangible assets, primarily technology, customer lists and goodwill. These intangible assets will be amortized over five years. The purchase price allocation is subject to adjustment based on the final determination of the fair value of the assets and liabilities assumed, which could take as long as one year from February 1, 1999. The realization of these intangible assets is dependent upon the attainment of positive cash flows from such assets. The business now operated by us has never generated positive cash flows, and it is reasonably possible that our future assessments of such cash flows could indicate that such assets are impaired, with a resulting write-down. LIQUIDITY AND CAPITAL RESOURCES As of the nine-month period ended September 30, 1999, we have funded our cash requirements primarily through the sale of equity, debt, cash flow from operations and the proceeds from the sale of LanXtra's prior business. On September 30, 1999, cavion.com had $249,217 in cash, current assets of $838,170, and current liabilities of $2,921,002. We raised $300,000 in a private offering of 14% notes and warrants to purchase common stock which ended on August 31, 1999. The effective interest rate of the notes was 36% because of the warrants and the expense of the offering. Each $50,000 note entitled the purchaser to a warrant to purchase 5,000 shares of common stock. The warrants are exercisable for a period of five years which commenced on November 3, 1999. The warrants are exercisable at $6.50, the price per share of the shares of common stock offered in our initial public offering. These notes were repaid and retired with the proceeds from that offering. We have received payments under an agreement with MoneyLine America, LLC to provide online mortgage lending services for our credit unions and their members through our network. This agreement calls for minimum annual payments to us of $300,000 in the first year, which began in September 1999, escalating to $1,000,000 in years six through ten, provided we have at least 1,500 credit unions, or 12% of the U.S. credit unions on our network by the end of year three. Fifty percent of MoneyLine America is owned by Boutine Capital, LLC, a principal shareholder of cavion.com. In October 1999, we entered into a five-year agreement with Convergent Communications Services, Inc. under which Convergent will establish, maintain and support network connectivity between our network and our customers, including providing equipment, maintenance and related services for the network. We will pay Convergent a monthly service fee for these services, which began at approximately $28,000 per month and increasing as new credit unions are added to the network. The portion of this fee relating to each credit union telecommunications circuit will be passed through to the customer. On October 22, 1999, the effective date of the agreement, Convergent purchased our network equipment from us for $286,000. We expect to incur substantial costs in connection with expanding our telecommunications infrastructure, establishing a sales presence in key strategic markets, and developing new products. We also expect to incur increased marketing, costs and general and administrative expenses in connection with the growth of our secure network for the credit union industry. We plan to seek additional bank financing. If we are successful in obtaining such financing, we expect our cash needs will be satisfied for at least the next two years. Our September 30, 1999 balance sheet shows approximately $3.4 million in liabilities and approximately $1.9 million of stockholders' equity. Approximately $1.2 million of our liabilities represent obligations to shareholders, as described in the following section. SECURED NOTES PAYABLE. Prior to our acquisition of LanXtra's assets, we agreed to provide bridge funding to LanXtra for its business operations pending the raising of equity financing. In order to provide the bridge funding, we raised $370,000 in 1998 through the issuance of 15% secured notes due on October 19, 2000, along with warrants to purchase 2,400 shares of our Class A common stock for every $20,000 in subscriptions at an exercise price of $.01 per share. The notes are secured by substantially all of our assets, now owned or acquired after October 19, 1998, including, cash, equipment, fixtures, general intangibles, and all products and proceeds of the foregoing collateral, accounts receivable, inventory, work in process and service contracts receivables. The October 20, 1998 security agreement contains a covenant which prevents us from incurring any other liens on our assets. We raised an additional $100,000 through this offering in 1999. The warrants were originally exercisable only after payment of the notes. However, we subsequently agreed to permit early exercise, and all of the warrants had been exercised for 56,400 shares, as of February 1999. In connection with our acquisition of LanXtra's assets, we assumed approximately $1.8 million in existing liabilities of LanXtra, not including the bridge funding described in the preceding paragraph. Approximately $1.1 million of these amounts became payable 15 days after the closing of our initial public offering and have been repaid. These obligations are described below. In August 1996, LanXtra had obtained a $600,000 line of credit from US Bank, Denver, Colorado in connection with its previous business. LanXtra shareholders British Far East Holdings, Ltd., William M.B. Berger Living Trust, Martin Cooper, and Fairway Realty Associates, provided cash collateral for the loan. In May 1998, this line of credit was extended to January 31, 1999. At the February 1, 1999 closing of the Asset Purchase Agreement between us and LanXtra, we effectively assumed the loan by entering into a loan agreement with US Bank on the same terms as the loan from US Bank to LanXtra, with a maturity date of December 31, 1999, using the proceeds of our loan to pay off the US Bank loan to LanXtra. The LanXtra shareholders who provided cash collateral for the US Bank loan agreed, however, to keep their collateral in place until the completion of our initial public offering. All amounts available under this line of credit were utilized. Interest accrued on all outstanding balances at the rate of 1.5% over the reference rate, as established by US Bank, from time to time. The reference rate closely tracked the prevailing prime rate. On November 5, 1999, the loan agreement was repaid in full and all of the collateral was released. On May 28, 1998, LanXtra borrowed $260,000 from three of its shareholders and three of our employees - David J. Selina, Jeff Marshall and Randal Burtis - for working capital purposes. In the aggregate, we owed these shareholders, directors and managers $260,000 in principal and $59,480 in interest. However, an agreement was reached to defer payment of these amounts, without the accrual of further interest, until the completion of our initial public offering. LanXtra also issued putable stock in connection with this debt offering. We agreed to assume LanXtra's obligations with respect to the put agreements by issuing to LanXtra at the closing of the Asset Purchase Agreement 28,648 shares of our Class B common stock, which are subject to economically equivalent put provisions. By its terms, the put feature of our Class B common stock becomes exercisable 30 days after the date when we have 100 credit union industry customers on our network, the 100 Credit Union Date. We had agreed with the former LanXtra shareholders who have rights to the Class B stock that their put rights would mature upon completion of our initial public offering. After completion of that offering we have offered these shareholders the option to redeem their Class B shares at $7.00 per share, or to convert each Class B share into one share of our Class A common stock. Between September 8 and October 15, 1997, Herman Axelrod, a former president and director of LanXtra, and Mr. Lassen, also a former president and director of LanXtra, made various factoring loans to LanXtra in the amounts of $50,190 and $25,000, respectively. Such loans were secured by an account receivable for computer network integration work LanXtra performed for Questar Infocomm and bore interest at the rate of 3% of the factoring loan amount for the first 30 days and 1% for each additional 10 days until the factoring loan was paid in full. Questar disputed LanXtra's invoice and the dispute was settled in September of 1998 for a payment of $61,780. This amount was paid against the factoring loans on September 21, 1998 as follows: $41,238 to Mr. Axelrod and $20,542 to Mr. Lassen. Accordingly, as of February 1, 1999, LanXtra owed Mr. Axelrod $28,331 and Mr. Lassen $13,441, and we assumed such obligations. Mr. Axelrod and Mr. Lassen had agreed that the remaining balance of these loans would be deferred until the completion of our initial public offering and would not accrue additional interest in the interim. The final payments were made on November 5, 1999. On July 1 and August 1, 1992, LanXtra executed promissory notes for $25,000 in favor of Mr. Axelrod and Mr. Lassen, respectively, each bearing interest at the rate of 2% over prime. The principal amounts of these notes reflected $20,000 in cash loaned by each and $5,000 each of co- signer liability on a $10,000 credit line at the Bank of Boulder that LanXtra took out at its inception. The credit line was paid off in August 1996, leaving an aggregate principal balance of $40,000 on the notes. We assumed the obligation to pay Mr. Axelrod and Mr. Lassen the principal balance of the notes together with interest as stated above. Mr. Axelrod and Mr. Lassen, agreed that the remaining balance of these loans would be deferred until the completion of our initial public offering, and interest would continue to be paid on a quarterly basis until the notes were paid in full. The notes were paid on November 5, 1999. We owed Convergent Communications, Inc. $78,673 for equipment purchased in connection with a customer network upgrade performed by LanXtra in December 1997, while Convergent was completing the purchase of LanXtra's network integration business. Convergent agreed that payment of this amount would be deferred until the completion of our initial public offering. We paid Convergent in full on November 5, 1999. In addition to the obligations described above, upon the closing of the Asset Purchase Agreement, we assumed any potential liability under a lawsuit threatened against LanXtra by a dissenting shareholder. Although we believe the claim in this lawsuit does not have a substantial basis in fact, we cannot assure you that we will not be required to make a payment to the dissenter. We have not reserved any funds to cover payment of this liability or of the potential tax liability if such a payment is necessary. If we are required to make such a payment, it could result in significant adverse tax consequences to the original shareholders. INFLATION. Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on the results of our operations during the fiscal year ended December 31, 1998, or on the nine-month period ended September 30, 1999, nor do we expect that inflation will have a material effect on the results of our future operations. In April 1999 we completed a private placement of our Series A preferred stock in which we raised net proceeds of approximately $1.8 million. These funds were used primarily to fund expansion of our credit union industry network to key markets across the United States. The net proceeds from our initial public offering was $6,279,000, or approximately $6,792,000 with the proceeds from the partial over-allotment option exercised by our underwriters, and we expect to use these proceeds primarily for the same purpose. TRENDS Management expects that we will continue to operate at a loss as additional credit unions are solicited and enter into contracts with us. We are optimistic about our ability to add to the number of credit unions under contract. We cannot give you any assurance, however, that actual operating results will be as we predict today. We plan to continue to expand our network of credit union clients. These expansion efforts are likely to cause us to incur significant increases in expenses, both in absolute terms and as a percentage of revenue, as we prepare for the anticipated future growth in our credit union customer base. Expenses will increase because of the need to increase staffing in all categories, acquire additional equipment, and provide for additional telephone connections. We believe our operating results may fluctuate significantly as a result of a variety of factors, some of which are outside of our control. Because of that, we cannot assure you that we will achieve profitable operations even with a significant increase in our credit union customer base. YEAR 2000 DISCLOSURE Many uncertainties exist within the computer hardware and software and electronic networking industries about the changeover from the 1999 to 2000 calendar years. In 1998, we initiated a comprehensive program to assess, plan and manage our Y2K compliance effort. The risks posed to us by possible Y2K related problems could be significant. Our operations rely on continuous Internet connectivity, availability of power and communications systems, computer systems in use by our credit union customers and their members and, in some cases, computer systems in use by vendors to credit unions, as well as on our own internal computer systems. Any extended damage to any of the foregoing could have a material adverse effect on our business and operations. While we are confident in the operability of our products, services, and our own internal systems after the year 2000 date change, there is still some risk that credit unions will encounter difficulties with one or more of our products and services because of Y2K issues. Further, we cannot accurately predict the effect of the Y2K problem on our business due to our interdependence with numerous other systems. In assessing the Y2K compliance of our products, services and systems, we have identified the following seven distinct areas of focus: o Products and services: We completed testing of all products and services by May 1, 1999 and to our knowledge, these systems are Y2K compliant. o Business computer systems: This category includes computer systems and applications relating to operations such as financial reporting, human resources, marketing and sales, product engineering and design, phone systems, and purchasing. We have completed testing of these systems and believe them to be Y2K compliant. o Suppliers: We rely on approximately 12 critical suppliers, including computer hardware and software vendors and telecommunications providers. We have contacted our critical suppliers to determine whether plans are in place to achieve timely Y2K compliance. As of the date of this report, none of our suppliers have informed us of any Y2K related problems which are expected to have an adverse effect on our operations. o Business affiliates: M&I Data Services, formerly Travelers Express, provides our customers' members with bill payment data. We have received documentation from M&I stating that they are Y2K compliant. o Product development test equipment: This category includes equipment and systems for testing software and hardware. All of our product development equipment has been tested and, to our knowledge, is Y2K compliant. o End-user computing: We use desktop and laptop computers throughout our operations. These computers have been tested and, to our knowledge, are Y2K compliant. o Physical properties and infrastructure: We have assessed the impact of Y2K on all building systems. Included in our assessment were fire and security systems in our facilities. To our knowledge, these systems are Y2K compliant. We have completed our compliance efforts for existing systems. Newly acquired facilities and equipment will require evaluation and possibly remediation through the end of the year, and we anticipate a need to support credit union testing and remediation efforts through the first quarter of 2000 or beyond. We estimate these future expenditures to be less than $50,000. Our most likely worst case scenario with respect to the Y2K problem is the failure of a supplier, including an energy supplier, to be Y2K compliant so that its supply of needed products or services to one of our facilities is interrupted. As a result, we could be unable to service our customers for a period of time, which could then cause us to lose customers, revenue and profits. While we are monitoring the preparedness plans of our utility suppliers and other critical vendors, in many cases we have little leverage or bargaining power to ensure their Y2K readiness. We are establishing a Y2K contingency plan to evaluate business disruption scenarios, coordinate responses to such scenarios, and identify and implement preemptive strategies. We have established detailed contingency plans for critical business processes. cavion.com's critical business processes rely on Sun Microsystems, Cisco Systems and Motorola to provide both Internet banking and ISP. Should any of these hardware manufacturers experience an inability to supply product, this may have an adverse effect on our business. Under normal situations cavion.com would order hardware from Cisco Systems, Sun Microsystems and Motorola 30 days or more after the credit union customer places their order for ISP or Internet banking. As the turn of the century approaches, cavion.com will order immediately on receipt of a customer order. This will ensure at least 30 days of critical hardware and software in the supply line. In addition, we have evaluated the impact of Y2K issues on our customers. Based on our evaluations, we do not expect our current or potential customers to reduce their capital expenditures budgets or to defer the purchase of cavion.com products and services because of concern about potential Y2K issues. The National Credit Union Association, which insures the deposits of most credit unions in the United States, has established detailed requirements with regard to Y2K compliance of its member credit unions. NCUA requires its members to roll forward the clocks on their critical systems past the year 2000 and to conduct real- time dynamic testing prior to January 1, 2000. We are prepared to participate in our clients' Y2K testing upon request. We have tested all critical third party elements used in delivering our products and services and are satisfied they are Y2K compliant. We are, of course, reliant on infrastructure-level suppliers such as utility companies and telecommunications carriers. We have not been able to test the Y2K readiness of these entities nor do we have a contingency plan in the event of a catastrophic failure of the power and/or telecommunication infrastructure. PART II OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10. Office Lease with NY/BDP Flex I.,LLC. dated October 29, 1999. 27. Financial Data Schedule (b) Reports on Form 8-K. There were no reports on Form 8-K filed by the Company during the quarter ended September 30, 1999. SIGNATURES In accordance with the requirements of the Securities Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CAVION TECHNOLOGIES, INC. Date: December 13, 1999 By:/s/Marshall E. Aster Marshall E. Aster, Chief Financial Officer and Principal Financial and Accounting Officer EX-27 2
5 9-MOS DEC-31-1999 SEP-30-1999 249,217 0 43,709 0 5,832 838,170 528,044 (79,282) 5,505,332 2,921,002 0 0 196,577 271 1,688,227 5,505,332 0 384,809 0 283,467 2,803,816 0 391,966 (3,094,440) 0 (3,094,440) 0 0 0 (3,094,440) (1.12) (1.12)
EX-10 3 BASIC LEASE INFORMATION ----------------------- (Industrial Service Center Lease Agreement-Net) LANDLORD: MONY/BDP Flex I, L.L.C. A. BUILDING: Arapahoe Service Center 2 B. ADDRESS (for notices): c/o Transwestern Commercial Services 600 Grant Street, Suite 630 Denver, CO 80203 C. TELEPHONE: 303 864 1795 TENANT: CAVION TECHNOLOGIES, INC. A. PREMISES: The space containing approximately 14,400 square feet, as shown on EXHIBIT "B" hereto. B. ADDRESS (for notices): Prior to occupancy: After occupancy: Cavion.com Cavion.com 7475 Dakin Street 6446 South Kenton Street Suite 607 Unit ---- Denver, CO 80221-6920 Englewood, CO 80111 Attn: Mr. Marshall Aster Attn: Mr. Marshall Aster Telephone: 3036578212 Telephone: 303 ------- BASE RENTAL: - -----------
TOTAL MONTHLY ANNUAL RENT RENT -------- -------- Year 1: Month 1 $-0- Months 2-12 $15,000 $165,000 Year 2: Months 13-24 $15,300 $183,600 Year 3: Months 26-36 $15,600 $187,200 Year 4: Months 37-48 $15,900 $190,800 Year 5: Months 49-60 $16,200 $194,400 Year 6: Months 61-72 $16,500 $198,000 Year 7: Month 73 $16,500 $16,500 Total Rent for the Lease Term $1,135,600
INITIAL ESTIMATED OPERATING EXPENSE RENTAL: $3.38 per square foot year SECURITY DEPOSIT: $15,600 due and payable upon execution of the Lease. PREPAID RENTAL: $15,000 due and payable upon execution of the Lease. TENANT'S PRO RATA SHARE: 18.18 percent (18.18%) COMMENCEMENT DATE: The earlier of January 1, 2000 or the date Tenant occupies the Premises, subject to modification pursuant to Paragraph 3(a) of the Lease. LEASE TERM: A period of seventy-three (73) months from the Commencement Date; provided that if the Commencement Date is a date other than the first day of a calendar month the Lease Term shall consist of seventy- three (73) calendar months in addition to the remainder of the calendar month in which the Commencement Date occurs. APPROXIMATE RENTABLE AREA IN THE PREMISES: 14,400 square feet of Rentable Area APPROXIMATE RENTABLE AREA IN THE PROJECT: 79,200 square feet of Rentable Area LANDLORD'S AGENT(S): Transwestern Property Company Colorado, LLC TENANT'S AGENT(S): CRESA Partners GUARANTORS(S): None PERMITTED USE: Office/showroom use for Internet services provider, which shall include but not be limited to offices, conference roams, computer rooms, lunchrooms, copy rooms and related uses. The foregoing Basic Lease Information shall be construed in conjunction with the references thereto contained in other provisions of the Lease and shall be limited by such other provisions. Each reference in the Lease to any of the foregoing Basic Lease Information shall be construed to incorporate each term set forth hereinabove as so limited. In the event of any conflict between any Basic Lease Information and the Lease, the terms of the Lease shall control. TABLE OF CONTENTS ----------------- Page ---- 1. DEFINITION 1 2. LEASE GRANT 2 3. DECLARATION OF COMMENCEMENT 2 4. USE 3 5. BASE RENTAL AND OPERATING EXPENSE RENTAL 3 6. SECURITY DEPOSIT 4 7. LANDLORD'S MAINTENANCE 4 8. TENANT'S MAINTENANCE AND REPAIR OBLIGATIONS 5 9. ALTERATIONS 5 10. SIGNS 6 11. UTILITIES 6 12. ENTRY BY LANDLORD 6 13. ASSIGNMENT AND SUBLETTING 6 14. MECHANIC'S LIENS 8 15. PROPERTY INSURANCE 8 16. LIABILITY INSURANCE 8 17. FORMS OF POLICIES; INCREASE IN PREMIUMS, WAIVER OF CLAIMS 8 18. INDEMNITY 9 19. CASUALTY DAMAGE 9 20. DAMAGES FROM CERTAIN CAUSES 10 21. CONDEMNATION 10 22. HAZARDOUS SUBSTANCES 11 23. AMERICANS WITH DISABILITIES ACT 12 24. EVENTS OF DEFAULT/REMEDIES 12 25. TENANT REMEDIES 14 26. NO WAIVER 14 27. EVENT OF BANKRUPTCY 15 28. PEACEFUL ENJOYMENT 16 29. PARKING 16 30. REMOVAL OF PROPERTY AT EXPIRATION OF LEASE; HOLDING OVER 16 31. SUBORDINATION TO MORTGAGE 16 32. ESTOPPEL CERTIFICATE 17 33. ATTORNEY'S FEES 17 34. NOTICE 17 35. SEVERABILITY 17 36. RECORDATION 17 37. GOVERNING LAW 17 38. FORCE MAJEURE 17 39. TIME OF PERFORMANCE 17 40. TRANSFERS BY LANDLORD 17 41. COMMISSIONS 18 42. JOINT AND SEVERAL LIABILITY 18 43. AUTHORITY 18 44. FINANCIAL CONDITION OF TENANT 18 45. EFFECT OF DELIVERY OF THIS LEASE 18 46. ENTIRE AGREEMENT 18 47. NO PRESUMPTION AGAINST DRAFTER 18 48. LANDLORD'S LIEN 18 49. WARRANTY WAIVER 19 50. SUBSTITUTION 19 EXHIBIT "A" - Property Description EXHIBIT "B" - Outline and Location of Premises EXHIBIT "C" - Operating Expense Rental EXHIBIT "D" - Work Letter EXHIBIT "D-1" - Base Building Shell and Core Condition EXHIBIT "D-2" - Tenant Improvement Allowance EXHIBIT "D-3" - Landlord's Building Standard Materials EXHIBIT "E" - Rules and Regulations EXHIBIT "G" - Option to Renew EXHIBIT "H" - Letter of Credit EXHIBIT H-1 - Form of Demand Letter of Credit EXHIBIT "I" - Parking Agreement LEASE AGREEMENT This Lease Agreement (the "Lease") is made and entered effective October 29, 1999 between MONY/BDP FLEX I, L.L.C., a Delaware limited liability corporation ("Landlord") and CAVION TECHNOLOGIES, INC., a Colorado corporation d/b/a cavion.com ("Tenant"). W I T N E S S E T H: 1. DEFINITION: The following are definitions of some of the defined terms used in this Lease. The definition of other defined terms are found throughout this Lease. (a) "Building" shall mean the industrial building located upon the real property (the "Property") described in EXHIBIT "A" attached hereto and incorporated herein together with all appurtenances thereto, (b) "Base Rental" shall mean:
TOTAL MONTHLY ANNUAL RENT RENT -------- -------- Year 1: Month 1 $-0- Months 2-12 $15,000 $165,000 Year 2: Months 13-24 $15,300 $183,600 Year 3: Months 26-36 $15,600 $187,200 Year 4: Months 37-48 $15,900 $190,800 Year 5: Months 49-60 $16,200 $194,400 Year 6: Months 61-72 $16,500 $198,000 Year 7: Month 73 $16,500 $16,500
For a total of not less than $1,135,500.00 during the Lease Term as adjusted pursuant to Paragraph 3 hereto. Tenant shall pay the Base Rental due for the SECOND month during the "Lease Term" (hereinafter defined) to Landlord contemporaneously with the execution hereof. (c) "Operating Expenses" shall mean all direct and indirect costs and expenses incurred in connection with the Project as more fully defined in EXHIBIT "C" attached hereto. (d) "Security Deposit" shall mean the sum of $15,600.00 unless increased at some future time pursuant to the terms herein. (e) "Commencement Date" shall mean the earlier of the date that Tenant actually occupies the Premises or January 1, 2000 (except as the same may be delayed pursuant to the provisions of Paragraph 3(a) hereof). (f) "Lease Term": A period of SEVENTY-THREE (73) months from the Commencement Date; provided that if the Commencement Date is a date other than the first day of a calendar month the Lease Term shall consist of SEVENTY-THREE (73) calendar months in addition to the remainder of the calendar month in which the Commencement Date occurs. (g) "Premises" shall mean the space located within the Building and outlined on EXHIBIT "B" to this Lease. The Premises are stipulated for all purposes to contain approximately 14,400 square feet of "Rentable Area" (as defined below). (h) "Approximate Rentable Area in the Premises" shall mean the area contained within the demising walls of the Premises and any other area designated for the exclusive use of Tenant. For purposes of the tease it is agreed and stipulated by both Landlord and Tenant that the Approximate Rentable Area in the Promises is 14,400 square feet. The Approximate Rentable Area in the Project is approximately 79,200 square feet. The estimates of Rentable Area within the Premises and within the Project as set forth herein may be revised at Landlord's election if Landlord's architect determines such estimate to be inaccurate in any material degree after examination of the final drawings of the Premises and/or the Project. ALL BUILDING MEASUREMENTS SHALL BE IN ACCORDANCE WITH BOMA STANDARDS. (i) "Common Areas" shall mean the portions of the Project which are made available by Landlord for use by more than one tenant, including without limitation (and where applicable) driveways, parking areas and landscaping. (j) "Building Standard", when used herein, shall mean the type, brand, quality and/or quantity of materials Landlord designates from time to time to be the minimum quality and/or quantity to be used in the Building or the exclusive type, grade, quality and/or quantity of material to be used in the Building and shall include, but not be limited to, the Building Standard Materials defined in the Work Letter Agreement attached hereto as EXHIBIT "D". (k) "Maximum Rate", when used herein, shall mean the greatest of the rates of interest from time to time permitted under applicable federal and state law. To the extent of the applicable state and federal law, the Maximum Rate shall be the highest permitted rate based upon the "indicated rate ceiling", but to the extent now or hereafter permitted by law, Landlord may from time to time implement, withdraw and reinstate any ceiling as an alternative to the indicated rate ceiling, including the right to reinstate the indicated rate ceiling. (l) "Prime Rate" shall mean the per annum interest rate announced by and quoted by Chase Bank (or another money center bank selected by Landlord) from time to time (whether or not charged in each instance) as its prime or base rate. (m) "Guarantor(s)" shall mean NONE and any other party required by Landlord to guarantee Tenant's obligations under the Lease. (n) "Project" means the Property, all improvements on the Property including without limitation the Building and any parking area or facilities thereon, and any adjacent land (and the improvements thereon) owned or leased by Landlord and either used for additional parking for the benefit of the Building or otherwise operated by Landlord (together with the Property) as an integrated project. (o) "Default Rate" means the lower of (i) the Prime Rate plus six percent (6%) or (ii) the Maximum Rate. (p) "State" means the state in which the Project is located. (q) "Tenant's Pro Rata Share" means the fraction, the numerator of which is the Rentable Area of the Premises and the denominator of which is the Rentable Area of the Project, expressed as a percentage. 2. LEASE GRANT. Subject to and upon the terms herein set forth, Landlord leases to Tenant and Tenant leases from Landlord the Premises. 3. DECLARATION OF COMMENCEMENT. (a) Subject to and upon the terms and conditions set forth in this Lease, this Lease shall continue in force for the Lease Term. Notwithstanding the Commencement Date provided in Paragraph 1(e) of this Lease, Tenant's obligation for the payment of rent and the Lease Term shall not commence until Landlord has substantially completed all work to be performed by Landlord as set forth in the Work Letter Agreement attached hereto as EXHIBIT "D"; provided, however, that it Landlord shall be delayed in substantially completing said work as a result of any of the following (a "Delay"): (i) Tenant's failure to furnish information in accordance herewith or to respond to any request by Landlord for any approval or information within any time period prescribed, or if no time period is prescribed, then within two Business Days of such request; or (ii) Tenant's insistence on materials, finishes or installations other than Landlord's Building Standard after having first been informed by Landlord in writing at or before the time of delivery to Tenant of final construction pricing for Tenant's approval that such materials, finishes or installations will cause a Delay; or (iii) Tenant's changes in any plans and specifications; or (iv) The performance by a person, firm or corporation employed by Tenant in the completion of any work by said person, firm or corporation (all such work and such persons, firms or corporations being subject to the approval of Landlord); or (v) Any request by Tenant that Landlord delay the completion of any of Landlord's work; or (vi) Any breach or default by Tenant in the performance of Tenant's obligations under this Lease; or (vii) Any delay resulting from Tenant's having taken possession of the Premises prior to its being substantially completed, as defined below; or (viii) Any reasonably necessary displacement of any of Landlord's work from its place in Landlord's construction schedule resulting from any of the causes for Delay; or (ix) Any other delay chargeable to Tenant, its agents, employees or independent contractors; then the commencement of the Lease Term and the payment of rent shall be accelerated by the number of days of such Delay but in no event shall such commencement be prior to the Commencement Date stipulated in Paragraph l(e) hereof. The Premises shall be deemed to be substantially completed on the date that Landlord or Landlord's architect reasonably determines that all work to be performed by Landlord pursuant to this Lease has been performed other than punch list items. The term "punch list items" as used herein shall mean any details of construction, mechanical adjustment or other MINOR matters, the noncompletion of which does not materially interfere with Tenant's use of the Premises. The abatement of rent shall be Tenant's sole remedy and shall constitute full settlement of all claims that Tenant might otherwise have against Landlord by reason of the Premises not being ready for occupancy by Tenant on the Commencement Date. If for any reason Tenant takes possession of the Premises prior to substantial completion, Tenant's obligation to pay rent shall commence upon the date Tenant takes possession of the Premises and Tenant shall indemnify and hold Landlord harmless from any liability as a result of Tenant's early occupancy of the Premises. NOTWITHSTANDING THE FOREGOING PROVISION, IF TENANT'S INITIAL OCCUPANCY IS FOR A PARTIAL MONTH, TENANT SHALL BE ENTITLED TO ONE FULL MONTH OF EXCUSED RENT. Landlord's determination of the Commencement Date shall be final and binding on all parties for all purposes hereof, including, without limitation, determination of the date of commencement of the Lease Term and of Tenant's obligation to pay rent hereunder. (b) The taking of possession of the Premises by Tenant shall be conclusive evidence against Tenant that, except for the completion of any PUNCH LIST ITEMS AND ANY items which Landlord stipulates in writing are remaining to be done or corrected by Landlord, (i) Tenant warrants and represents to Landlord that it has conducted its own independent investigation of the Premises and the Project and that the Promises and the Project are suitable for the purpose for which the same are leased, subject to any latent defect which is not discoverable upon reasonable inspection, (ii) the Premises and the Project and each and every part and appurtenance thereof are in good and satisfactory condition, except for any latent defect which is not discoverable upon a reasonable inspection, and (iii) Tenant waives any defects in the Premises and its appurtenances and in all other parts of the Project and the appurtenances thereto, except for any latent defect which is not discoverable upon a reasonable inspection. 4. USE. (a) The Premises shall be used for the Permitted Use and for no other purpose. No retail sales may be made from the Premises (other than incidental retail sales from a showroom area). Tenant shall not use the Premises to receive, store or handle any product, material or merchandise that is explosive or highly inflammable or hazardous. Outside storage is prohibited. Tenant shall be solely responsible (at Tenant's sole cost and expense) for complying with all laws applicable to ITS use, AND occupancy of the Premises, including without limitation obtaining all required building permits and/or certificates of occupancy FOR THE PREMISES. Tenant shall not permit any objectionable or unpleasant odors, smoke, dust, gas, light, noise or vibrations to emanate from the Premises; nor take any other action that would in Landlord's sole judgment constitute a nuisance or would disturb, unreasonably interfere with, or endanger Landlord or any other person; nor permit the Premises to be used for any purpose or in any manner that would (1) void the insurance thereon, (2) increase the insurance risk, or (3) cause the disallowance of any sprinkler credits. Tenant shall pay to Landlord on demand any increase in the cost of any insurance on the Premises or the Building incurred by Landlord which is caused by Tenant's use of the Premises or because Tenant vacates the Premises IN VIOLATION OF THIS LEASE. Tenant agrees not to use or permit the use of the Premises for any purpose which is illegal or dangerous to life, limb or property; (b) Tenant will conduct its business and control its agents, servants, employees, customers, licensees, and invitees in such a manner as not to interfere with, annoy or disturb other tenants or Landlord. Tenant will maintain the Premises in a clean and healthful condition, and comply with all laws, ordinances, orders, rules and regulations of any governmental entity with reference to ITS use AND occupancy of the Premises. Tenant, at his expense, will comply with the rules and regulations of the Building adopted and altered by Landlord from time to time and will cause all of its agents, employees, invitees and visitors to do so. ANY FURTHER REVISIONS OF THE RULES AND REGULATIONS SHALL APPLY UNIFORMLY TO ALL TENANTS IN THE BUILDING AND SHALL BE UNIFORMLY ENFORCED. A copy of the existing rules and regulations is attached hereto as EXHIBIT "E" and made a part hereof. Tenant agrees not to commit or allow any waste to be committed on any portion of the Premises, and at the termination of this Lease to deliver up the Premises to Landlord in as good condition as at the Commencement Date, ordinary wear and tear excepted, AND SUBJECT TO THE PROVISIONS OF THE LEASE CONCERNING DAMAGE AND CASUALTY. 5. BASE RENTAL AND OPERATING EXPENSE RENTAL. (a) Tenant covenants and agrees to pay during the Lease Term, to Landlord, without any setoff or deduction except as otherwise expressly provided herein, the Base Rental, and all such other sums of money as shall become due hereunder as additional rent, all of which are sometimes herein collectively called "rent," In the event of nonpayment of any such rent, Landlord shall be entitled to exercise all such rights and remedies as are herein provided in the case of the nonpayment of Base Rental. Except as otherwise provided herein, the annual Base Rental for each calendar year or portion thereof during the Lease Term, together with any estimated Operating Expense Rental pursuant to EXHIBIT "C" hereof then in effect, shall be due and payable in advance in twelve (12) equal installments on the first day of each calendar month during the initial term of this Lease and any extensions or renewals hereof, and Tenant hereby agrees to pay such Base Rental and Operating Expense Rental to Landlord at Landlord's address provided herein (or such other address as may be designated by Landlord in writing from time to time) monthly, in advance, and without demand. If the term of this Lease commences an a day other than the first day of a month or terminates on a day other than the last day of a month, then the installments of Base Rental and Operating Expense Rental for such month or months shall be prorated, based on the number of days in such month. The Base Rental and Operating Expense Rental for the first partial month, if any, shall be payable at the beginning of said period. All such payments shall be by a good and sufficient check (subject to collection). No payment by Tenant or receipt or acceptance by Landlord of a lesser amount than the correct installment of rent due under this Lease shall be deemed to be other than a payment on account of the earliest rent due hereunder, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance or pursue any other remedy provided by this Lease or applicable law. The acceptance by Landlord of an installment of rent on a date after the due date of such payment shall not be construed to be a waiver of Landlord's right to declare a default for any other late payment. If Tenant fails to timely pay any two (2) installments of rent, Landlord at its sole option may 1) require Tenant to pay rent (as estimated by Landlord, if necessary) quarterly in advance, and, in such event, all future payments shall be made on or before the due date in cash or by cashier's check or money order, and the delivery of Tenant's collectible personal or corporate check shall no longer constitute payment thereof or, 2) Landlord may require that the Tenant deposit an additional Security Deposit equal to 3 months rent, from which Landlord, at his or her sole discretion, may satisfy any future late payments made by Tenant, and Tenant shall be required to maintain such additional Security Deposit levels throughout the remaining Security Deposit as described in subsection 2) above, then Tenant shall have 5 days to deposit such additional Security Deposit as required above. Nothing in this section shall relieve Tenant from its duties to pay Late Charges as hereinafter provided. Any acceptance of Tenant's collectible personal or corporate check thereafter by Landlord shall not be construed as a waiver of the requirement that such payments be made in cash or by cashier's check or money order. All amounts received by Landlord from Tenant hereunder shall be applied first to the earliest accrued and unpaid rent then outstanding. (b) To the extent allowed by law: all installments of rent not paid when due shall bear interest at the Default Rate from the date due until paid; and, in addition, all installments of rent not paid within seven (7) days of when due and payable shall incur a Late Charge equal to five percent (5%) of the outstanding balance due. (c) Tenant agrees to pay Operating Expense Rental (as defined in EXHIBIT "C") in accordance with such Exhibit and subsection 5(a) above. 6. SECURITY DEPOSIT. The Security Deposit shall be held by Landlord without liability for interest and as security for the performance by Tenant of Tenant's covenants and obligations under this Lease, it being expressly understood that the Security Deposit shall not be considered an advance payment of rent or a measure of Tenant's liability for damages in case of default by Tenant. Landlord may, from time to time, without prejudice to any other remedy and without waiving such default, use the Security Deposit to the extent necessary to cure any default of Tenant hereunder. Following any such application of the Security Deposit, Tenant shall pay to Landlord on demand the amount so applied in order to restore the Security Deposit to its original amount. If Tenant is not in default at the termination of this Lease, the balance of the Security Deposit remaining after any such application shall be returned by Landlord to Tenant WITHIN 30 DAYS AFTER THE TERMINATION OF THIS LEASE. If Landlord transfers its interest in the Premises during the term of this Lease, Landlord may assign the Security Deposit to the transferee and thereafter shall have no further liability for the return of such Security Deposit. Tenant agrees to look solely to such transferee or assignee or successor thereof for the return of the Security Deposit. Landlord and its successors and assigns shall not be bound by any actual or attempted assignment or encumbrance of the Security Deposit by Tenant. 7. LANDLORD'S MAINTENANCE. (a) This Lease is intended to be a PARTIAL not lease; accordingly, Landlord's maintenance obligations are limited to the replacement of the Building's roof and maintenance of the foundation and structural members of the exterior walls (collectively, the "BUILDING'S STRUCTURE"); however, Landlord shall not be responsible (i) for any such work until Tenant delivers to Landlord written notice of the need therefor or (ii) for alterations to the Building's Structure required by Law because of Tenant's use of the Premises (which alterations shall be performed by Tenant). The Building's Structure does not include PREMISES skylights, windows, glass or plate glass, doors, special store fronts or office entries, all of which shall be maintained by Tenant AS PART OF THE PREMISES. Landlord's liability for any defects, repairs, replacement or maintenance for which Landlord is responsible hereunder shall be limited to the cost of performing such work(INCLUDING ANY MATERIALS AND LABOR). (b) FOLLOWING 10 DAYS' NOTICE AND OPPORTUNITY TO CURE, Landlord may perform Tenant's maintenance, repair and replacement obligations and any other items that are otherwise Tenant's obligations under Paragraph 8, in which event Tenant shall pay to Landlord any cost incurred by Landlord in performing such obligations, together with FIVE percent (5%) thereof to cover Landlord's overhead, within FIFTEEN (15) days after Landlord's request therefor. (c) IN ADDITION TO THE OBLIGATIONS SET FORTH HEREINABOVE, LANDLORD SHALL AGREE TO PERFORM ALL WORK CALLED FOR UNDER EXHIBIT C, PARAGRAPH 3, SUBSECTIONS (a) THROUGH (j)TENANT'S MAINTENANCE AND REPAIR OBLIGATIONS. 8. TENANT'S MAINTENANCE AND REPAIR OBLIGATIONS. (a) Tenant shall maintain all parts of the Premises (except for maintenance work which Landlord is expressly responsible for under Paragraph 7 in good condition and promptly make all necessary repairs and replacements to the Premises. (b) Tenant shall KEEP the parking areas, driveways, alleys and grounds surrounding the Premises in a clean and sanitary condition, consistent with the operation of a first-class office/warehouse building, including, without limitations prompt maintenance, repairs and replacements of ANY DAMAGE CAUSED BY TENANT. Tenant shall repair and pay for any damage caused by a Tenant Party (defined below) or caused by Tenant's default hereunder. (c) Tenant shall maintain the hot water equipment and the heating, air condition, and ventilation equipment and system APPURTENANT TO THE PREMISES (the "HVAC SYSTEM") in good repair and condition and in accordance with applicable law and with such equipment manufacturers' suggested operation/maintenance service program. Within thirty (30) days after the Commencement Date, Tenant shall enter into regularly scheduled preventive maintenance/service contracts for such equipment, each in form and substance and with a contractor reasonably acceptable to Landlord, and deliver copies thereof to Landlord. At least 14 days before the end of the Term, Tenant shall deliver to Landlord a certificate from an engineer reasonably acceptable to Landlord certifying that the hot water equipment and the HVAC System are then in good repair and working order, NORMAL WEAR AND TEAR ACCEPTED. SINCE ALL ROOFTOP HVAC UNITS SHALL BE INSTALLED NEW, LANDLORD SHALL PERMIT TENANT TO BENEFIT FROM ANY MANUFACTURER'S WARRANTIES PROVIDED FOR SUCH ITEMS. 9. ALTERATIONS. (a) Except as otherwise provided in the Work Letter Agreement attached hereto as EXHIBIT "D", all installations and improvements now or hereafter placed on or in the Premises shall be subject to the provisions of this Paragraph 9 hereof and shall be for Tenant's account and at Tenant's cost land Tenant shall pay au valorem taxes and increased insurance thereon or attributable thereto), which cost shall be payable by Tenant to Landlord upon demand as additional rent. Such additional rent shall not be construed as including taxes assessed against improvements in the Premises which are subject to personal property taxes. Such personal property taxes shall remain the sole responsibility of the Tenant. (b) Tenant shall not make any alterations, additions or improvements to the Premises without the prior written consent of Landlord. Landlord shall not be required to notify Tenant of whether it consents to any alteration, addition or improvements until it (1) has received plans and specifications therefor which are sufficiently detailed to allow construction of the work depicted thereon to be performed in a good and workmanlike manner, and (2) has had a reasonable opportunity to review them. If the alteration, addition or improvement will affect the Building's Structure, HVAC System, or mechanical, electrical, or plumbing systems, then the plans and specifications therefor must be prepared by a licensed engineer reasonably acceptable to Landlord. Landlord's approval of any plans and specifications shall not be a representation that the plans or the work depicted thereon will comply with law or be adequate for any purpose, but shall merely be Landlord's consent to performance of the work. Upon completion of any alteration, addition, or improvement, Tenant shall deliver to Landlord accurate, reproducible as-built plans therefor. Tenant may erect shelves, bins, machinery and trade fixtures provided that such items (i) do not alter the basic character of the Premises or the Building; (ii) do not overload or damage the same; and (ii) may be removed without damage to the Premises. Unless Landlord specifies in writing otherwise, all alterations, additions, and improvements shall be Landlord's property when installed in the Premises. All work performed by a Tenant Party in the Premises (including that relating to the installations, repair, replacement, or removal of any item) shall be performed in accordance with applicable law and with Landlord's specifications and requirements, in a good and workmanlike manner, and so as not to damage or alter the Building's Structure or the Premises. (c) At least five (5) days prior to the commencement of any work permitted to be done by persons requested Tenant on the Premises, the Tenant shall notify Landlord of the proposed work and the names and addresses of the persons supplying labor and materials for the proposed work so that Landlord may avail itself of the provisions of statutes such as Section 38-22-105(2) of the Colorado Revised Statues (1973). During any such work on the Premises, Landlord, or its representatives, shall have the right to go upon and inspect the Premises at all reasonable times, and shall have the right to post and keep posted thereon notices such as those provided for by section 38-22-105(2) C.R.S. (1973) or to take further action which Landlord may deem to be proper for the protection of Landlord's interest in the Premises. 10. SIGNS. OTHER THAN BUILDING STANDARD SIGNAGE, Tenant shall not place, install or attach any signage, decorations, advertising media, blinds, draperies, window treatments, bars, or security installations to the Premises or the Building without Landlord's prior written approval. Tenant shall repair, paint, and/or replace any portion of the Premises or the Building damaged or altered as a result of its signage when it is removed (including, without limitation, any discoloration of the Building). Tenant shall not (a) make any changes to the exterior of the Premises or the Building, (b) install any exterior lights, decorations, balloons, flags, pennants, banners or paintings, or (c) erect or install any signs, windows or door lettering, decals, window or storefront stickers, placards, decorations or advertising media of any type that is visible from the exterior of the Premises without Landlord's prior written consent. Landlord shall not be required to notify Tenant of whether it consents to any sign until it (i) has received detailed, to-scale drawings thereof specifying design, material composition, color scheme, and method of installation, and (ii) has had a reasonable opportunity to review them. 11. UTILITIES. Tenant shall obtain and pay for all water, gas, electricity, heat, telephone, sewer, sprinkler charges and other utilities and services used at the Premises, together with any taxes, penalties, surcharges, maintenance charges, and the like pertaining to the Tenant's use of the Premises. Landlord may, at Tenant's expense, separately meter and bill Tenant directly for its use of any such utility service, in which case, the amount separately billed to Tenant for Building-standard utility service shall not be duplicated in Tenant's obligation to pay Operating Expense Rental. Landlord shall not be liable for any interruption or failure of utility service to the Premises. All amounts due from Tenant under this Paragraph 11 shall be payable within ten (10) days after Landlord's request therefor. 12. ENTRY BY LANDLORD. Landlord and Landlord's agents and representatives may enter the Premises during business hours to inspect the Premises; to make such repairs as may be required or permitted under this Lease SO LONG AS SUCH REPAIR DOES NOT UNREASONABLY INTERFERE WITH TENANT'S OPERATION; to perform any unperformed obligations of Tenant hereunder FOLLOWING 10 DAYS' NOTICE AND OPPORTUNITY TO CURE; and to show the Premises to prospective purchasers, mortgagees, ground lessors, and (during the last twelve (12) months of the Term) tenants, PROVIDED THAT TENANT HAS NOT EXERCISED IT RENEWAL OPTION SET FORTH HEREUNDER. During the last twelve (12) months of the Term (OR RENEWAL TERM, IF APPLICABLE), Landlord may erect a sign on the Premises indicating that the Premises are available. Tenant shall notify Landlord in writing of its intention to vacate the Promises at least sixty (60) days before Tenant will vacate the Premises; such notice shall specify the date on which Tenant intends to vacate the Premises (the "VACATION DATE"). At least thirty (30) days before the Vacation Date, Tenant shall arrange to meet with Landlord for a joint inspection of the Premises. After such inspection, Landlord shall prepare a list of items that LANDLORD AND Tenant AGREE THAT TENANT must perform before the Vacation Date. If Tenant fails to arrange for such inspection, then Landlord may conduct such inspection and Landlord's determination of the work Tenant is required to perform before the Vacation Date shall be conclusive. If Tenant fails to perform such work before the Vacation Date, then Landlord may perform) such work at Tenant's cost. Tenant shall pay all costs incurred by Landlord in performing such work within ten (10) days after Landlord's request therefor. 13. ASSIGNMENT AND SUBLETTING. (a) Tenant shall not assign, sublease, transfer or encumber this Lease or any interest therein or grant any license, concession, or other right of occupancy of the Premises or any portion thereof or otherwise permit the use of the Premises or any portion thereof by any party other than Tenant (any of which events is hereinafter called an "assignment") without the prior written consent of, Landlord, WHICH CONSENT SHALL NOT BE UNREASONABLY WITHHELD OR DELAYED. Any such attempted assignment in violation of the terms and covenants of this Paragraph shall, exercisable in Landlord's sale and absolute discretion, be voidable. NOTWITHSTANDING THE FOREGOING, TENANT MAY ASSIGN OR SUBLET TO A PARENT, SUBSIDIARY, OR AFFILIATE, OR A SUCCESSOR IN THE EVENT OF A MERGER OR SALE OF ALL OR SUBSTANTIALLY ALL OF THE TENANT'S ASSETS, UPON WHICH EVENT LANDLORD'S CONSENT (PROVIDED THAT SUCH PARTY IS, IN LANDLORD'S SOLE OPINION), FINANCIALLY ACCEPTABLE), SHALL NOT BE UNREASONABLY WITHHELD OR DELAYED. Consent by Landlord to one or more assignments shall not operate as a waiver of Landlord's rights as to any subsequent assignments. In addition, Tenant shall not, without Landlord's consent, publicly offer to assign the Lease nor advertise the Lease for assignment in any media, including but not limited to newspapers, periodicals, radio, television, circulars or brochures. In the event Tenant or any agent, representative or broker acting on behalf of Tenant or with Tenant's knowledge violates the provisions of the foregoing sentence, in addition to all of the remedies which Landlord may have at law, in equity, or pursuant to the terms of this Lease, Landlord shall be entitled to seek injunctive relief preventing such action and Tenant shall be responsible for all costs incurred by Landlord in connection with seeking such injunctive relief. (b) If Tenant requests Landlord's consent to an assignment or sublease, Tenant shall submit to Landlord, in writing, the name of the proposed assignee or subtenant and the nature and character of the business of the proposed assignee or subtenant, the term, use, rental rate and all other material terms and conditions of the proposed assignment or sublease including, without limitation, evidence satisfactory to Landlord that the proposed assignee or subtenant is financially responsible. Landlord shall within TEN (10) days after Landlord's receipt of such written request and information either (i) consent to or refuse to consent to such assignment or sublease in writing but no such consent to an assignment or sublease shall relieve Tenant or any guarantor of Tenant's obligations under this Lease of any liability hereunder) (ii) in the event of a proposed assignment of this Lease or a proposed sublease of the entire Premises for the entire remaining term of this Lease, terminate this Lease effective the first to occur of ninety (90) days following written notice of such termination or the date that the proposed assignment or proposed sublease would have come into effect. IF LANDLORD ELECTS TO TERMINATE THIS LEASE, THEN TENANT SHALL HAVE THE RIGHT TO WITHDRAW ITS REQUEST AND THE LEASE SHALL REMAIN IN FULL FORCE AND EFFECT. If Landlord should fail to notify Tenant in writing of its decision within such thirty (30) day period after the later of the date Landlord is notified in writing of the proposed assignment or sublease or the date Landlord has received all required information concerning the proposed assignee or subtenant and the proposed assignment or sublease, Landlord shall be deemed to have refused to consent to such assignment or sublease, and to have elected to keep this Lease in full force and effect. In the event Landlord consents to any such assignment, the assignment or sublease shall be on a form approved by Landlord, and Tenant shall bear all costs and expenses incurred by Landlord in connection with the review and approval of such documentation WHICH SHALL NOT EXCEED $2,000 FOR EACH REVIEW. In no event shall the proposed assignee or subtenant be an existing occupant of any space in the Building or an affiliate of such occupant. (c) All cash or other proceeds of any assignment of Tenant's interest in this Lease and/or the Premises, whether consented to by Landlord or not, shall be paid to Landlord notwithstanding the fact that such proceeds exceed the rentals called for hereunder, unless Landlord agrees to the contrary in writing, and Tenant hereby assigns all rights it might have or ever acquire in any such proceeds to Landlord. IF THERE IS AN APPROVED ASSIGNMENT ARISING OUT OF A SALE OF THE TENANT BUSINESS ENTITY, THE PURCHASE PRICE OF THE BUSINESS ENTITY SHALL NOT BE PAYABLE TO LANDLORD. IN THE CASE OF AN APPROVED SUBLEASE, In addition to the rent hereunder, Tenant hereby covenants and agrees to pay to Landlord all rent and other consideration which it receives which is in excess of the rent payable hereunder within ten (10) days following receipt thereof by Tenant. This covenant and assignment shall benefit Landlord and its successors in ownership of the Building and shall bind Tenant and Tenant's heirs, executors, administrators, personal representatives, successors and assigns. in addition to any other rights and remedies which Landlord may have hereunder, at law or in equity, in the event Tenant has failed to pay any rent due hereunder on or before five (5) days following the date on which it is due, Landlord shall have the right to contact any assignee and require that from that time forward all payments made pursuant to the assignment shall be made directly to the Landlord. Any assignee of Tenant's interest in this Lease (all such assignees being hereinafter referred to as "Successors"), by occupying the Premises and/or assuming Tenant's obligations hereunder, shall be deemed to have assumed liability to Landlord for all amounts paid to persons other than Landlord by such Successors in consideration of any such assignment in violation of the provisions hereof. (d) SUBJECT TO SECTION 13(a), If Tenant is a corporation and if at any time during the Lease Term the person or persons who own the voting shares at the time of the execution of this Lease cease for any reason, including but not limited to merger, consolidation or other reorganization involving another corporation, to own a majority of such shares or if Tenant is a partnership and if at any time during the Lease Term the general partner or partners who own the general partnership interests in the partnership at the time of the execution of this Lease, cease for any reason to own a majority of such interests (except as the result of transfers by gift, bequest or inheritance to or for the benefit of members of the immediate family of such original shareholders) or partner(s)), such an event shall be deemed to be an assignment. The preceding sentence shall not apply whenever Tenant is a corporation the outstanding stock of which is listed on a recognized security exchange, or if at least eighty per cent (80) of its voting stock is owned by another corporation, the voting stock of which is so listed. (e) Tenant shall, despite any permitted assignment or sublease, remain directly and primarily liable for the performance of all of the covenants, duties, and obligations of Tenant hereunder and Landlord shall be permitted to enforce the provisions of this Lease against Tenant or any assignee or sublessee without demand upon or proceeding in any way against any other person. Moreover, in the event that the rental due and payable by a sublessee (or a combination of the rental payable under such sublease, plus any bonus or other consideration) thereof incident thereto) exceeds the rent payable under this Lease, or if with respect to a permitted assignment, permitted license, or other transfer by Tenant permitted by Landlord, the total consideration payable to Tenant by the assignee, licensee or other transferee exceeds the rent payable under this Lease, then Tenant shall be bound and obligated to pay Landlord all such excess rental and other excess consideration within ten (10) days following receipt thereof by Tenant from such sublessee, assignee, licensee or other transferee, as the case may be. 14. MECHANIC'S LIENS. Tenant will not permit any mechanic's liens or other liens to be placed upon the Premises, the Building, or the Property and nothing in this Lease shall be deemed or construed in any way as constituting the consent or request of Landlord, express or implied, by inference or otherwise, to any person for the performance of any labor or the finishing of any materials to the Premises, the Building, or the Property or any part thereof, nor as giving Tenant any right, power, or authority to contract for or permit the rendering of any services or the furnishing of any materials that would give rise to any mechanic's or other liens against the Premises, the Building, or the Property. In the event any such lien is attached to the Premises, the Building, or the Property, then, in addition to any other right or remedy of Landlord, Landlord may, but shall not be obligated to, discharge the same. Any amount paid by Landlord for any of the aforesaid purposes including, but not limited to, attorneys fees, shall be paid by Tenant to Landlord promptly on demand as additional rent. In the event Landlord does consent to the performance of any labor or the furnishing of any materials to the Promises, the Building, or the Property by any party, which consent must be in writing, Tenant shall be responsible for insuring that all such persons procure and maintain insurance coverage against such risks, in such amounts and with such companies as Landlord may require, including, but not limited to, Builder's Risk and Worker's Compensation insurance. TENANT SHALL WITHIN TEN (10) DAYS OF RECEIVING SUCH NOTICE OF LIEN OR CLAIM (A) HAVE SUCH LIEN OR CLAIM RELEASED OR (B) DELIVER TO LANDLORD A BOND IN FORM, CONTENT, AMOUNT AND ISSUED BY A SURETY SATISFACTORY TO LANDLORD, INDEMNIFYING, PROTECTING, DEFENDING AND HOLDING HARMLESS THE INDEMNITIES AGAINST ALL COSTS AND LIABILITIES RESULTING FROM SUCH LIEN OR CLAIM AND THE FORECLOSURE OR ATTEMPTED FORECLOSURE THEREOF. 15. PROPERTY INSURANCE. (a) Landlord shall maintain fire and extended coverage insurance on the Building FOR ITS REPLACEMENT, WITH NO CO-INSURANCE. The cost of such insurance shall be included as a part of Operating Expenses and payments for losses thereunder shall be made solely to Landlord or the mortgagees of Landlord as their interests shall appear. (b) Tenant shall maintain at its expense, in an amount equal to full replacement cost, fire and extended coverage insurance on all of its personal property, including removable trade fixtures and leasehold and tenant improvements, located in the Premises and in such additional amounts as are required to meet Tenant's obligations pursuant to Paragraph 19 hereof and with deductibles in an amount reasonably satisfactory to Landlord. Tenant shall furnish evidence satisfactory to Landlord of the maintenance and timely renewal of such insurance, and Tenant shall obtain and deliver to Landlord a written obligation an the part of each insurer to notify Landlord at least sixty J60) days prior to the modification, cancellation or expiration of such insurance policies, In the event Tenant shall not have delivered to Landlord a policy or certificate evidencing such insurance at least sixty (60) days prior to the expiration date of each expiring policy, Landlord may obtain such insurance as Landlord may reasonably require to protect Landlord's interest (which obtaining of insurance shall not be deemed to be a waiver of Tenant's default hereunder). The cost to Landlord of obtaining such policies, plus an administrative fee in the amount of ten percent (10%) of the cost of such policies shall be paid by Tenant to Landlord as additional rent upon demand. 16. LIABILITY INSURANCE. Tenant and Landlord shall each maintain during The term of this Lease a policy or policies of commercial general liability insurance (including endorsement or separate policy for owned or non-owned automobile liability) with respect to the respective activities of each in the Building and on the Property, with the premiums thereon fully paid on or before the due date, issued by and binding upon an insurance company or companies REASONABLY approved by Landlord. Such insurance shall afford minimum protection of net less than $1,000,000.00 per occurrence per person coverage for bodily injury, property damage, personal injury, or combination thereof. The term "personal injury" herein used means false arrest, detention or imprisonment, malicious prosecution, wrongful entry, libel and slander. If only a combined single limit coverage is available, it shall be for at least $1,000,000.00 per occurrence with an umbrella policy of at least $3,000,000.00 combined single limit per occurrence. Tenant's insurance policy shall name Landlord as an additional insured and shall include coverage for the contractual liability of Tenant to indemnify Landlord pursuant to Paragraph 18 of this Lease and shall have deductibles in an amount reasonably satisfactory to Landlord. Tenant shall furnish certificates of such insurance and such other evidence satisfactory to Landlord of the maintenance of all insurance coverages required hereunder, and Tenant shall obtain a written obligation on the part of each insurance company to notify Landlord at least 30 days before cancellation of a material change of any such insurance. All such insurance policies shall be in form and issued by companies reasonably satisfactory to Landlord. The insurance carried by Tenant pursuant to this subparagraph shall be at Tenant's sole cost and expense; and the insurance carried by Landlord pursuant to this subparagraph shall be included in Operating Expenses. 17. FORMS OF POLICIES; INCREASE IN PREMIUMS; WAIVER OF CLAIMS. (a) The insurance requirements set forth in Paragraphs 15 and 16 are independent of the waiver, indemnification, and other obligations under this Lease and will not be construed or interpreted in any way to restrict, limit or modify the waiver, indemnification and other obligations or to in any way limit any party's liability under this Lease. In addition to the requirements set forth in Paragraphs 15 and 16, the insurance required of Tenant under this Lease must be issued by an insurance company, qualified to do business in the State of Colorado and with a rating of no less than A- VIII in the current Best's Insurance Guide, or A- in the current Standard & Poor Insurance Solvency Review, or that is otherwise acceptable to Landlord, and admitted to engage in the business of insurance in the State; be primary insurance for all claims under it and provide that any insurance carried by Landlord and Landlord's lenders is strictly excess, secondary and noncontributing with any insurance carried by Tenant; and provide that insurance may not be canceled, nonrenewed or the subject of material change in coverage or available limits of coverage, except upon thirty (30) days' prior written notice to Landlord and Landlord's lenders. Tenant will deliver either a duplicate original or a legally enforceable certificate of insurance on all policies procured by Tenant in compliance with Tenant's obligations under this Lease, together with evidence satisfactory to Landlord of the payment of the premiums therefor, to Landlord on or before the date Tenant first occupies any portion of the Premises, at least thirty (30) days before the expiration date of any policy and upon the renewal of any policy. Landlord must give its prior written approval to all deductibles and self-insured retentions under Tenant's policies. Tenant may comply with its insurance coverage requirements through a blanket policy, provided Tenant, at Tenant's sole expense, procures a "per location" endorsement, or equivalent reasonably acceptable to Landlord, so that the general aggregate and other limits apply separately and specifically to the Premises. (b) If Tenant's business operations, conduct or use of the Premises or any other part of the Project causes an increase in the premium for any insurance policy carried by Landlord, Tenant will, within ten (10) days after receipt of notice from Landlord, reimburse Landlord for the entire increase. (c) Notwithstanding anything herein to the contrary, each of Landlord and Tenant hereby waives all claims and causes of action (including claims of subrogation on behalf of its insurer) against the other and the other's agents, officers and employees to the extent that the loss or damage to any property, or bodily injury or personal injury, to which such claim or cause of action relates is covered by insurance carried or required to be carried by such waiving party. The parties expressly acknowledge and agree that such waiver extends to claims of negligence by such other party, its agents, officers and employees (and with respect to Landlord, the Project manager). 18. INDEMNITY. TO THE EXTENT NOT CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF LANDLORD, Neither Landlord nor any of its officers, directors, employees, or agents shall be liable to Tenant, or to Tenant's agents, servants, employees, customers, licensees, or invitees for any injury to person or damage to property caused by any act, omission, or neglect of Tenant, its agents, servants, employees, customers, invitees, licensees or any other person entering the Building or upon the Project under the invitation of Tenant or arising out of the use of the Project, Building or Promises by Tenant (each, a "TENANT PARTY") and the conduct of its business or out of a default by Tenant in the performance of its obligations hereunder. TO THE EXTENT NOT EXPRESSLY PROHIBITED BY LAW, LANDLORD AND TENANT EACH IN EITHER CASE, THE "INDEMNITOR") AGREE TO HOLD HARMLESS AND INDEMNIFY THE OTHER AND THE OTHER'S AGENTS, PARTNERS, SHAREHOLDERS, OFFICERS, DIRECTORS, BENEFICIARIES AND EMPLOYEES (COLLECTIVELY, THE "INDEMNITEES") FROM ANY LOSSES, DAMAGES, JUDGMENTS, CLAIMS, EXPENSES, COSTS AND LIABILITIES IMPOSED UPON OR INCURRED BY OR ASSERTED AGAINST THE INDEMNITEES, INCLUDING REASONABLE ATTORNEYS' FEES AND EXPENSES. FOR DEATH OR INJURY TO THIRD PARTIES OTHER THAN INDEMNITEES THAT MAY ARISE FROM WILLFUL MISCONDUCT OF INDEMNITOR OR ANY OF INDEMNITOR'S AGENTS, PARTNERS OR EMPLOYEES. SUCH THIRD PARTIES SHALL NOT BE DEEMED THIRD PARTY BENEFICIARIES OF THIS AGREEMENT. IN CASE ANY ACTION, SUIT OR PROCEEDING IS BROUGHT AGAINST ANY OF THE INDEMNITEES BY REASON OF ANY SUCH ACT OF INDEMNITOR OR ANY OF INDEMNITOR'S AGENTS OR EMPLOYEES, THEN INDEMNITOR WILL, AT INDEMNITOR'S EXPENSE AND AT THE OPTION OF SAID INDEMNITEES, BY COUNSEL REASONABLY APPROVED BY SAID INDEMNITEES, RESIST AND DEFEND SUCH ACTION, SUIT OR PROCEEDING. SUCH INDEMNITY FOR THE BENEFIT OF INDEMNITEES SHALL BE ENFORCEABLE EVEN IF INDEMNITEES, OR ANY ONE OR MORE OF THEM HAVE OR HAS CAUSED OR PARTICIPATED IN CAUSING SUCH LIABILITY AND CLAIMS BY THEIR JOINT OR CONCURRENT ACTS, NEGLIGENT OR INTENTIONAL, OR OTHERWISE. Notwithstanding the terms of this Lease to the contrary, the terms of this paragraph shall survive the expiration or earlier termination of this Lease. 19. CASUALTY DAMAGE. (a) If the Premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give prompt written notice thereof to Landlord. In case the Building shall be so damaged that substantial alteration or reconstruction of the Building shall, in Landlord's sole opinion, be required (whether or not the Premises shall have been damaged by such casualty) or in the event there is less than one (1) year of the Lease Term remaining or in the event any mortgagee of Landlord's should require that the insurance proceeds payable as a result of a casualty be applied to the payment of the mortgage debt or in the event of any material uninsured loss to the Building, Landlord may, at its option, terminate this Lease EFFECTIVE THE DATE OF THE DAMAGE BY CASUALTY, by notifying Tenant in writing of such termination within THIRTY (30) days after the date of such casualty. If Landlord does not thus elect to terminate this Lease, and the Lease is not terminated pursuant to subparagraph (c) below, Landlord shall commence and proceed with reasonable diligence to restore the Building, and the improvements located within the Premises to Building Standard condition (except that Landlord shall not be responsible for delays not within the control of Landlord). Notwithstanding the foregoing, Landlord's obligation to restore the Building, and the improvements located within the Premises, if any, for which Landlord had financial responsibility pursuant to the Work Letter Agreement, shall not require Landlord to expend for such repair and restoration work more than the insurance proceeds actually received by the Landlord as a result of the casualty. When the repairs described in the preceding two sentences have been completed by Landlord, Tenant shall complete the restoration of all improvements, including trade fixtures and equipment, which are necessary to permit Tenant's re-occupancy of the Premises TO THE EXTENT OF INSURANCE PROCEEDS ACTUALLY RECEIVED BY TENANT. Except as set forth above, all cost and expense of reconstructing the Premises shall be paid by Tenant, and Tenant shall present Landlord with evidence satisfactory to Landlord of Tenant's ability to pay such costs prior to Landlord's commencement of repair and restoration of the Premises. (b) Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from such damage or the repair thereof, except that, subject to the provisions of the next sentence, Landlord shall allow Tenant a fair diminution of rent during the time and to the extent the Premises are unfit for occupancy. If the Premises or any other portion of the Building is damaged by fire or other casualty resulting from the fault or negligence of Tenant or any Tenant Party, the rent hereunder shall not be diminished during the repair of such damage and Tenant shall be liable to Landlord for the cost of the repair and restoration of the Building caused thereby to the extent such cost and expense is not covered by insurance proceeds. (c) Notwithstanding anything in the Paragraph 19 to the contrary, if all or any portion of the Premises shall be made untenantable by a fire or other casualty, Landlord shall with reasonable promptness, cause an architect or general contractor selected by Landlord to estimate the amount of time required to substantially complete repair and restoration of the Premises and make the Premises tenantable again, using standard working methods (the "Completion Estimate"). If the Completion Estimate indicates that the Premises cannot be made tenantable within twelve (12) months from the date the repair and restoration is started, either party shall have the right to terminate this Lease by giving written notice to the other of such election within ten (10) days after its receipt of the Completion Estimate. Tenant, however, shall not have the right to terminate this Lease in the event that the fire or casualty in question was caused by the negligence or intentional misconduct of Tenant or any Tenant Party or if Tenant is then in default of this Lease. If the Completion Estimate indicates that the Premises can be made tenantable with twelve (12) months from the date the repair and restoration is started and Landlord has not otherwise exercised its right to terminate the Lease pursuant to the terms hereof, or if the Completion Estimate indicates that the Premises cannot be made tenantable with twelve (12) months but neither party terminates this Lease pursuant to this Paragraph 19, Landlord shall proceed with reasonable promptness to repair and restore the Premises. (d) If pursuant to subparagraph (c) Tenant was entitled to but elected not to exercise its right to terminate the Lease and Landlord does not substantially complete the repair and restoration of the Premises within two (21) months after the expiration of the estimated period of time set forth in the Completion Estimate, which period shall be extended to the extent of any Reconstruction Delays, then provided Tenant is not then in default hereunder) Tenant may terminate this Lease by written notice to Landlord within fifteen (15) days after the expiration of such period, as the same nay be extended (but in all events prior to substantial completion of such repair and restoration). For purposes of this Lease, the term "Reconstruction Delays" shall mean: (i) any delays caused by the insurance adjustment process; (ii) any delays caused by Tenant, and (iii) any delays caused by events of Force Majeure. 20. DAMAGES FROM CERTAIN CAUSES. SO LONG AS LANDLORD MAINTAINS THE INSURANCE COVERAGES REQUIRED UNDER THIS LEASE, Landlord shall not be liable to Tenant for any injury to person or damage to property sustained by Tenant or any person claiming through Tenant resulting from any accident or occurrence in the Premises or any other portion of the Project caused by the Premises or any other portion of the Building becoming out of repair or by defect in or failure of equipment, pipes, or wiring, or by broken glass, or by the backing up of drains, or by gas, water, steam, electricity, or oil leaking, escaping or flowing into the Premises, nor shall Landlord be liable to Tenant for any loss or damage that may be occasioned by or through the acts or omissions of other tenants of the Building or of any other persons whomsoever, including, but not limited to riot, strike, insurrection, war, court order, requisition, order of any governmental body or authority, acts of God, fire or theft. 21. CONDEMNATION. If more than 50 of the Premises is taken for any public or quasi-public use by right of eminent domain or private purchase in lieu thereof (a "TAKING"), and the Taking prevents or materially interferes with the use of the remainder of the Premises for the purpose for which they were leased to Tenant, either party may terminate this Lease by delivering to the other written notice thereof within thirty (30) days after the Taking, in which case rent shall be abated during the unexpired portion of the Term, effective on the date of such Taking. It (a) less than 50 of the Premises are subject to a Taking or (b) more than 500a of the Premises are subject to a Taking, but the Taking does not prevent or materially interfere with the use of the remainder of the Premises for the purpose for which they were leased to Tenant, then neither party may terminate this Lease, but the rent payable during the unexpired portion of the Term shall be reduced to such extent as may be fair and reasonable under the circumstances. All compensation awarded for any Taking shall be the property of Landlord and Tenant assigns any interest it may have in any such award to Landlord; however, Landlord shall have no interest in any award made to Tenant for loss of business or goodwill or for the taking of Tenant's trade fixtures, if a separate award for such items is made to Tenant. 22. HAZARDOUS SUBSTANCES. Tenant hereby represents and warrants to Landlord the following: (a) No toxic or hazardous substances or wastes, pollutants or contaminants (including, without limitation, asbestos, urea formaldehyde, the group of organic compounds known as polychlorinated biphenyls, petroleum products including gasoline, fuel oil, crude oil and various constituents of such products, radon, and any hazardous substance as defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. 9601-9657, as amended ("CERCLA") (collectively, "Environmental Pollutants") other than customary office supplies and cleaning supplies stored and handled within the Premises in accordance with all applicable laws, will generated, treated, stored, released or disposed of, or otherwise placed, deposited in or located on the Project, and no activity shall be taken on the Project, by Tenant or any Tenant Party that would cause or contribute to (i) the Project or any part thereof to become a generation, treatment, storage or disposal facility within the meaning of or otherwise bring the Premised within the ambit of the Resource Conservation and Recovery Act of 1976 ("RCRA"), 42 U.S.C. 5901 et. seq., or any similar state law or local ordinance, iii) a release or threatened release of toxic or hazardous wastes or substances, pollutants or contaminants, from the Project or any part thereof within the meaning of, or otherwise result in liability in connection with the Premises within the ambit of CERCLA, or any similar state law or local ordinance, or (iii) the discharge of pollutants or effluents into any water source or system, the dredging or filling of any waters, or the discharge into the air of any emissions, that would require a permit under the Federal Water Pollution Control Act, 33 U.S.C. 1251 et. seq., or the Clean Air Act, 42 U.S.C. 7401 et. seq. or any similar state law or local ordinance. (b) TENANT AGREES TO INDEMNIFY AND HOLD INDEMNITEES (AS DEFINED IN PARAGRAPH 17 HEREIN) HARMLESS FROM AND AGAINST AND TO REIMBURSE INDEMNITEES WITH RESPECT TO, ANY AND ALL CLAIMS, DEMANDS, CAUSES OF ACTION, LOSS, DAMAGE, LIABILITIES, COSTS AND EXPENSES (INCLUDING ATTORNEYS' FEES AND COURT COSTS) OF ANY AND EVERY KIND OR CHARACTER, KNOWN OR UNKNOWN, FIXED OR CONTINGENT, ASSERTED AGAINST OR INCURRED BY LANDLORD AT ANY TIME AND FROM TIME TO TIME BY REASON OF OR ARISING OUT OF THE BREACH OF ANY REPRESENTATION OR WARRANTY CONTAINED IN PARAGRAPH 22.(A) ABOVE. (c) Tenant shall immediately notify Landlord in writing of any release or threatened release of toxic or hazardous wastes or substances, pollutants or contaminants of which Tenant has knowledge whether or not the release is in quantities that would require under law the reporting of such release to a governmental or regulatory agency. (d) Tenant shall immediately notify Landlord in writing of any release or threatened release of toxic or hazardous wastes or substances, pollutants or contaminants whether or not the release is in quantities that would require under law the reporting of such release to a governmental or regulatory agency. (e) Tenant shall also immediately notify Landlord in writing of, and shall contemporaneously provide Landlord with a copy of: Any written notice of release of hazardous wastes or substances, pollutants or contaminants on the Project that is provided by Tenant or any subtenant or other occupant of the Premises to a governmental or regulatory agency: Any notice of a violation, or a potential or alleged violation, of any Environmental Law that is received by Tenant or any subtenant or other occupant of the Premises from any governmental or regulatory agency; Any inquiry, investigation, enforcement, cleanup, removal, or other action that is instituted or threatened by a governmental or regulatory agency against Tenant or any subtenant or other occupant of the Premises and that relates to the release or discharge of hazardous wastes or substances, pollutants or contaminants on or from the Project; Any claim that is instituted or threatened by any third party against Tenant or any subtenant or other occupant of the premises and that relates to any release or discharge of hazardous wastes or substances, pollutants or contaminants on or from the premises; and Any notice of the loss of any environmental operating permit by Tenant or any subtenant or other occupant of the Premises. Failure to comply with this section shall constitute a material default under the Lease. Notwithstanding the terms of this Lease to the contrary, the terms of this paragraph shall survive the expiration or earlier termination of this Lease. 23. AMERICANS WITH DISABILITIES ACT. Tenant agrees to comply with all requirements of this Americans with Disabilities Act (Public Law (July 26, 1990) applicable to the Premises and such other current acts or other subsequent acts, (whether federal or state) addressing like issues as are enacted or amended. Tenant agrees to indemnify and hold Landlord harmless from any and all expenses, liabilities, costs or damages suffered by Landlord as a result of additional obligations which may be imposed on the Building or the Property under of such acts by virtue of Tenant's operations and/or occupancy, including the alleged negligence of the Landlord. Tenant acknowledges that it will be wholly responsible for any provision of the Lease which could arguably be construed as authorizing a violation of either Act. Any such provision shall be interpreted in a manner which permits compliance with Such Act and is hereby amended to permit such compliance. LANDLORD AGREES TO COMPLY WITH ALL REQUIREMENTS OF THE AMERICANS WITH DISABILITIES ACT (PUBLIC LAW (JULY 26, 1990) APPLICABLE TO THE PROJECT AND SUCH OTHER CURRENT ACTS OR OTHER SUBSEQUENT ACTS, (WHETHER FEDERAL OR STATE) ADDRESSING LIKE ISSUES AS ARE ENACTED OR AMENDED 24. EVENTS OF DEFAULT/REMEDIES. (a) The following events shall be deemed to be events of default under this Lease: (i) Tenant shall fail to pay when due any Base Rental, Operating Expense Rental or other rent payable by Tenant to Landlord under this Lease (hereinafter sometimes referred to as a "Monetary Default"). NOTWITHSTANDING THE FOREGOING, LANDLORD SHALL PROVIDE TENANT WITH FIVE (5) DAYS' WRITTEN NOTICE OF SUCH DEFAULT (A "MONETARY DEFAULT NOTICE") BEFORE LANDLORD EXERCISES ITS REMEDIES FOR DEFAULT HEREUNDER; PROVIDED, HOWEVER, THAT LANDLORD SHALL NOT BE REQUIRED TO GIVE A MONETARY DEFAULT NOTICE MORE THAT ONE (1) TIME WITH RESPECT TO ANY PARTICULAR MONETARY DEFAULT NOR MORE THAT TWO (2) TIMES IN THE AGGREGATE DURING THE TERM OF THIS LEASE WITH RESPECT TO ANY MONETARY DEFAULT. (ii) Any failure by Tenant (other than a Monetary Default) to comply with any term, provision or covenant of this Lease, which failure is not cured within ten (10) days after delivery to Tenant of notice of the occurrence of such failure. HOWEVER, THE CURE PERIOD SHALL BE EXTENDED TO TWENTY (20) DAYS IF SUCH CURE IS NOT REASONABLY POSSIBLE WITHIN THE PRESCRIBED 10 DAY PERIOD AND TENANT DILIGENTLY AND CONTINUOUSLY WORKS TO CURE THE DEFAULT. (iii) Tenant or any Guarantor shall become insolvent, or shall make a transfer in fraud of creditors, or shall commit an act of bankruptcy or shall make an assignment for the benefit of creditors, or Tenant or any Guarantor she] admit in writing its inability to pay its debts as they become due. (iv) Tenant or any Guarantor shall file a petition under any section or chapter of the United States Bankruptcy Code, as amended, pertaining to bankruptcy, or under any similar law or statute of the United States or any State thereof, or Tenant or any Guarantor shall be adjudged bankrupt or insolvent in proceedings filed against Tenant or any Guarantor thereunder; or a petition or answer proposing the adjudication of Tenant or any Guarantor as a bankrupt or its reorganization under any present or future federal or state bankruptcy or similar law shall be filed in any court and such petition or answer shall not be discharged or denied within sixty (60) days after the filing thereof. (v) A receiver or trustee shall be appointed for all or substantially all of the assets of Tenant or any Guarantor or of the Premises or of any of Tenant's property located thereon in any proceeding brought by Tenant or any Guarantor, or any such receiver or trustee shall be appointed in any proceeding brought against Tenant or any Guarantor and shall not be discharged within sixty (60) days after such appointment or Tenant or such Guarantor shall consent to or acquiesce in such appointment. (vi) The leasehold estate hereunder shall be taken an execution or other process of law in any action against Tenant. (vii) IF FOLLOWING OCCUPANCY, Tenant shall abandon or vacate any substantial portion of the Premises without the prior written permission of Landlord AND WITHOUT THE TIMELY PAYMENT OF ALL SUMS DUE UNDER THIS LEASE. If Tenant or any other person acting on Tenant's behalf has removed, is removing or has made preparations to remove (other than in the normal course of business) goods, equipment, fixtures or other property from the Premises in amounts substantial enough to indicate a probable intent to abandon or vacate the Premises without the prior written permission of Landlord, Tenant's abandonment of the Premises shall be deemed conclusively established for all purposes. (viii) Tenant shall fail to take possession of and occupy the Premises within thirty (30) days following the Commencement Date or thereafter shall fail to conduct continuously its operations in the Premises for the Permitted Use as set forth in Paragraph 4 hereof. (ix) The liquidation, termination, dissolution, forfeiture of right to do business or death of Tenant or any Guarantor. (b) Upon the occurrence of any event or events of default under this Lease, whether enumerated in this Paragraph or not, Landlord shall have the option to pursue any one or more of the following remedies without any notice (except as expressly prescribed herein) or demand for possession whatsoever (and without limiting the generality of the foregoing, Tenant hereby specifically waives notice and demand for payment of rent or other obligations due and waives any and all other notices or demand requirements imposed by applicable law): (i) Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord. If Tenant fails to surrender the Premises upon termination of the Lease hereunder, Landlord may without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying said Premises, or any part thereof, by force, if necessary, without being liable for prosecution or any claim of damages therefor, and Tenant hereby agrees to pay to Landlord on demand the amount of all loss and damage which Landlord may suffer by reason of such termination, whether through inability to relet the Premises on satisfactory terms or otherwise, specifically including but not limited to all Costs of Reletting (hereinafter defined) and any deficiency that may arise by reason of any Reletting. If such termination is caused by the failure to pay rent and/or the abandonment of any substantial portion of the Premises, Landlord may elect, by sending written notice thereof to Tenant, to receive liquidated damages in an amount equal to the sum of the Base Rental, Operating Expense Rental and other rent payable hereunder for the month during which the Lease is terminated times the lesser of (A) twelve (12) or (B) the number of months remaining in the Lease Term as of the date of such failure to pay rent and/or abandonment of any substantial portion of the Premises. Such liquidated damages shall be in lieu of the payment of loss and damage Landlord may suffer by reason of such termination as provided in the preceding sentence but shall not be in lieu of or reduce in any way any amount (including accrued rent) or damages due to breach of covenant (whether or not liquidated) payable by Tenant to Landlord which is accrued and outstanding at the time of the termination of the Lease. (ii) Enter upon and take possession of the Premises and expel or remove Tenant or any other person who may be occupying said Premises, or any part thereof, by force, if necessary, without having any civil or criminal liability therefor and without terminating this Lease. Landlord may (but shall be under no obligation to) relet the Premises or any part thereof for the account of Tenant, in the name of Tenant or Landlord or otherwise, without notice to Tenant for such term or terms which may be greater or less than the period which would otherwise have constituted the balance of the Lease Term and on such conditions (which may include concessions or free rent) and for such uses as Landlord in its absolute discretion may determine, and Landlord may collect and receive any rents payable by reason of such reletting. Tenant agrees to pay Landlord on demand all Costs of Reletting and any deficiency that may arise by reason of such reletting. Landlord shall not be responsible or liable for any failure to relet the Premises or any part thereof or for any failure to collect any rent due upon any such reletting. No such re-entry or taking of possession of the Premises by Landlord shall be construed as an election on Landlord's part to terminate this Lease unless a written notice of such termination is given to Tenant. If Landlord elects to terminate Tenant's right to possession of the Premises without terminating this Lease, Tenant shall continue to be liable for all rent and Landlord shall use reasonable efforts to relet the Premises or any part thereof to a substitute tenant or tenants for a period of time equal to or lesser or greater than the remainder of the Term on whatever terms and conditions Landlord, in Landlord's good faith discretion, deems advisable. For purposes hereof, Landlord shall be deemed to have used "reasonable efforts" to relet if Landlord places its customary "For Lease" sign upon the Premises and places the Premises for lease with a reputable broker. In no event shall Landlord be obligated to lease the Premises in priority to other space within the Project. (iii) Enter upon the Premises by force if necessary without having any civil or criminal liability therefor, and do whatever Tenant is obligated to do under the terms of this Lease and Tenant agrees to reimburse Landlord on demand for any expense which Landlord may incur in thus affecting compliance with Tenant's obligations under this Lease together with interest at the Default Rate and Tenant further agrees that Landlord shall not be liable for any damages resulting to Tenant from such action, whether caused by the negligence of Landlord or otherwise. (iv) Terminate this Lease by giving Tenant written notice thereof, in which event, Tenant shall pay to Landlord the sum of (i) all rent accrued hereunder through the date of termination, (ii) all Costs of Reletting, and (iii) an amount equal to (A) the total rent that Tenant would have been required to pay for the remainder of the Lease Term discounted to present value minus (B) the then present fair rental value of the Premises for such period, similarly discounted. In order to regain possession of the Premises and to deny Tenant access thereto, Landlord or its agent may, at the expense and liability of the Tenant, alter or change any or all locks or other security devices controlling access to the Premises without posting or giving notice of any kind to Tenant. Landlord shall have no obligation to provide Tenant a key or grant Tenant access to the Premises so long as Tenant is in default under this Lease. Tenant shall not be entitled to recover possession of the Premises, terminate this Lease or recover any actual, incidental, consequential, punitive, statutory or other damages or award of attorneys' fees, by reason of Landlord's alteration or change of any luck or other security device and the resulting exclusion from the Premises of the Tenant or Tenant's agents, servants, employees, customers, licensees, invitees or any other persons from the Premises. Landlord may, without notice, remove and either dispose of or store, at Tenant's expense, any property belonging to Tenant that remains in the Premises after Landlord has regained possession thereof. (c) For purposes of this Lease, the term "Costs of Reletting" shall mean all costs and expenses incurred by Landlord in connection with the reletting of the Premises, including without limitation the cost of cleaning, renovation, repairs, decoration and alteration of the Premises for a new tenant or tenants, advertisement, marketing, brokerage and legal fees, the cost of protecting or caring for the Premises while vacant, the cost of removing and storing any property located on the Premises, any increase in insurance premiums caused by the vacancy of the Premises and any other out-of-pocket expenses incurred by Landlord including tenant inducements such as the cost of moving the new tenant or tenants and the cost of assuming any portion of the existing lease(s) of the new tenant(s). (d) Except as otherwise herein provided, no repossession or re- entering on the Premises or any part thereof pursuant to subparagraph (b) hereof or otherwise shall relieve Tenant or any Guarantor of its liabilities and obligations hereunder, all of which shall survive such repossession or re-entering. Notwithstanding any such repossession or re-entering on the Premises or any part thereof by reason of the occurrence of an event of default, Tenant will pay to Landlord the Base Rental, Operating Expense Rental and other rent or other sum required to be paid by Tenant pursuant to this Lease. (e) No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing by agreement, applicable law or in equity. In addition to other remedies provided in this Lease, Landlord shall be entitled, to the extent permitted by applicable law, to injunctive relief in case of the violation, or attempted or threatened violation, of any of the covenants, agreements, conditions or provisions of this Lease, or to a decree compelling performance of any of the other covenants, agreements, conditions or provisions of this Lease, or to any other remedy allowed to Landlord at law or in equity. Forbearance by Landlord to enforce one or more of the remedies herein provided upon an event of default shall not be deemed or construed to constitute a waiver of such default. (f) This Paragraph 24 shall be enforceable to the maximum extent such enforcement is not prohibited by applicable law, and the unenforceability of any portion thereof shall not thereby render unenforceable any other portion. To the extent permitted by applicable law, Tenant waives any statutory rights which conflict with this Paragraph 24. To the extent any provision of applicable law requires some action by Landlord to evidence or effect the termination of this Lease or to evidence the termination of Tenant's right of occupancy, Tenant and Landlord hereby agree that written notice by Landlord to any of Tenant's agents, servants or employees, which specifically sets forth Landlord's intention to terminate, shall be sufficient to evidence and effect the termination herein provided for. 25. TENANT REMEDIES. Except to the extent specifically provided herein, Tenant shall not have the right to an abatement of rent or to terminate this Lease as a result of Landlord's default as to any covenant or agreement contained in this Lease or as a result of the breach of any promise or inducement in connection herewith, whether in this Lease or elsewhere and Tenant hereby waives such remedies of abatement of rent and termination. Tenant hereby agrees that Tenant's remedies for default hereunder or in any way arising in connection with this Lease including any breach of any promise or inducement or warranty, express or implied, shall be limited to suit for direct and proximate damages AND INJUNCTIVE RELIEF provided that Tenant has given the notices as hereinafter required. Notwithstanding anything to the contrary contained in this Lease, the liability of Landlord to Tenant for any default by Landlord under the terms of this Lease shall be limited to the interest of Landlord in the Building and the Property and Tenant agrees to look solely to Landlord's interest in the Building and the Property for the recovery of any judgment against the Landlord, it being intended that Landlord shall not be personally liable for any judgment or deficiency. Tenant hereby covenants that, prior to the filing of any suit for direct and proximate damages, it shall give Landlord and all mortgagees whom Tenant has been notified hold mortgages or deed of trust liens on the Property, Building or Premises ("Landlord's mortgagees") notice and reasonable time to cure any alleged default by Landlord. Notwithstanding the foregoing, Tenant shall bring such suit within six months of the Landlord's default hereunder, unless agreed by the parties hereto to extend such time in writing. Tenant's failure to assert such rights within six months shall be construed as a waiver of Tenant's remedies herein. 26. NO WAIVER. Failure of Landlord to declare any default immediately upon its occurrence, or delay in taking any action in connection with an event of default, shall not constitute a waiver of such default, nor shall. It constitute an estoppel against Landlord, but Landlord shall have the right to declare the default at any time and take such action as is lawful or authorized under this Lease. Failure by Landlord to enforce its rights with respect to any one default shall not constitute a waiver of its rights with respect to any subsequent default. Receipt by Landlord of Tenant's keys to the Premises shall not constitute an acceptance of surrender of the Premises. 27. EVENT OF BANKRUPTCY. In addition to, and in no way limiting the other remedies set forth herein Landlord and Tenant agree that if Tenant ever becomes the subject of a voluntary or involuntary bankruptcy, reorganization, composition, or other similar type proceeding under the federal bankruptcy laws, as now enacted or hereinafter amended, then: (a) "Adequate protection" of Landlord's interest in the Premises pursuant to the provisions of Section 361 and 363 (or their successor sections) of the Bankruptcy Code, 11 U.S.C. Paragraph 101, et seq. (such Bankruptcy Code as amended from time to time being herein referred to as the "Bankruptcy Code"), prior to assumption and/or assignment of the Lease by Tenant shall include, but not be limited to all (or any part) of the following: (i) the continued payment by Tenant of the Base Rental, Operating Expense Rental and all other rent due and owing hereunder and the performance of all other covenants and obligations hereunder by Tenant; (ii) the hiring of security guards to protect the Premises if Tenant abandons and/or ceases operations; such obligation of Tenant only to be effective so long as Tenant remains in possession and control of the Premises to the exclusion of Landlord; (iii) the furnishing of an additional/new Security Deposit by Tenant in the amount of three (3) times the then-current monthly Base Rental, Operating Expense Rental and other rent payable hereunder. (b) "Adequate assurance of future performance" by Tenant and/or any assignee of Tenant pursuant to Bankruptcy Code Section 365 will include (but not be limited to) payment of an additional/new Security Deposit in the amount of three (3) times the then-current Base Rental and Operating Expense Rental payable hereunder. (c) Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code, shall be deemed without further act or deed to have assumed all of the obligations of Tenant arising under this Lease on and after the effective date of such assignment. Any such assignee shall, upon demand by Landlord, execute and deliver to Landlord an instrument confirming such assumption of liability. (d) Notwithstanding anything in this Lease to the contrary, all amounts payable by Tenant to or on behalf of the Landlord under this Lease, whether or not expressly denominated as "rent", shall constitute "rent" for the purposes of Section 502(b)(6) of the Bankruptcy Code. (e) If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, any and all monies or other considerations payable or otherwise to be delivered to Landlord (including Base Rental, Operating Expense Rental and other rent hereunder, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the bankruptcy estate of Tenant. Any and all monies or other considerations constituting Landlord's property under the preceding sentence not paid or delivered to Landlord shall be held in trust by Tenant or Tenant's bankruptcy estate for the benefit of Landlord and shall be promptly paid to or turned over to Landlord. (f) It Tenant assumes this Lease and proposes to assign the same pursuant to the provisions of the Bankruptcy Code to any person or entity who shall have made a bona fide offer to accept an assignment of this Lease on terms acceptable to the Tenant, then notice of such proposed offer/assignment, setting forth (i) the name and address of such person or entity; (ii) all of the terms and conditions of such offer, and (iii) the adequate assurance to be provided Landlord to assure such person's or entity's future performance under the Lease, shall be given to Landlord by Tenant no later than twenty (20) days after receipt by Tenant, but in any event no later than ten (10) days prior to the date that Tenant shall make application to a court of competent jurisdiction for authority and approval to enter into such assumption and assignment, and Landlord shall thereupon have the prior right and option, to be exercised by notice to Tenant given at any time prior to the effective date of such proposed assignment, to accept an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bona fide offer made by such persons or entity, less any brokerage commission which may be payable out of the consideration to be paid by such person for the assignment of this Lease. (g) To the extent permitted by law, Landlord and Tenant agree that this Lease is a contract under which applicable law excuses Landlord from accepting performance from (or rendering performance to) any person or entity other than Tenant within the meaning of Sections 365(c) and 365(e)(2) of the Bankruptcy Code. 28. PEACEFUL ENJOYMENT. Tenant shall, and r-nay peacefully have, hold, and enjoy the Premises, subject to the other terms hereof, provided that Tenant pays the rent and other sums herein recited to be paid by Tenant and performs all of Tenant's covenants and agreements herein contained. This covenant and any and all other covenants of Landlord shall be binding upon Landlord and its successors only with respect to breaches occurring during its or their respective periods of ownership of the Landlord's interest hereunder. 29. PARKING. Tenant and its employees and invitees shall have the non-exclusive right to use, in common with others, any parking areas associated with the Premises which Landlord has designated for such use, subject to (a) such reasonable rules and regulations as Landlord may promulgate from time to time and (b) rights of ingress and egress of other tenants and their employees, agents and invitees. Landlord shall not be responsible for enforcing Tenant's parking rights against third parties. If Exhibit "G" "Parking Agreement" is attached hereto, the rights of Tenant and its employees and invitees to use the parking areas within the Project are subject to the provisions of such exhibit. LANDLORD SHALL NOT REDUCE THE TOTAL NUMBER OF PARKING SPACES AVAILABLE TO TENANT DURING THE LEASE TERM. 30. REMOVAL OF PROPERTY AT EXPIRATION OF LEASE; HOLDING OVER. (a) Any and all alterations, additions, improvements, attached furniture, equipment, fixtures, and any unattached or movable equipment, furniture, trade fixtures or other personality which was acquired with funds provided by or on behalf of Landlord installed an or located in or around the Premises shall become the property of Landlord upon termination of this Lease. In addition, all other personal property which shall remain in the Premises for more than five (5) days following either the termination of this Lease or the entry of the Premises by Landlord following Tenant's default hereunder shall, at Landlord's option, become the property of Landlord. Landlord may, nonetheless, require Tenant to remove such fixtures, furniture, trade fixtures, equipment, improvements, alterations, additions and personal property, including but not limited to telephone, data, and/or network cabling, installed on or located in the Premises as are designated by Landlord (the "Required Removables") at Tenant's sole cost, IF LANDLORD NOTIFIES TENANT NO LATER THAN NINETY (90) DAYS PRIOR TO THE END OF THE TERM OR EXTENDED TERM IF THE RENEWAL OPTION IS EXERCISED. In the event that Landlord so elects, and Tenant fails to remove the Required Removables, Landlord may remove the Required Removables at Tenant's cost, and Tenant shall pay Landlord on demand, or Landlord may deduct from Tenant's Security Deposit, all costs incurred in removing, storing and/or disposing of the Required Removables. Landlord, at is sole option, shall inspect any and all alterations and repairs made by or on behalf of the Tenant. All costs associated with the inspection and testing of such alterations or repairs shall be reimbursed to Landlord by Tenant within ten (10) days of such demand. Notwithstanding the terms of this lease to the contrary, the terms of this paragraph shall survive the expiration or earlier termination of this Lease. (b) In the event of holding over by Tenant after expiration or other termination of this Lease or in the event Tenant continues to occupy the Premises after the termination of Tenant's right of possession pursuant to Paragraph 24(b) hereof, Tenant shall become a Tenant at sufferance and, throughout the entire holdover period, Tenant shall pay rent equal to ONE HUNDRED FIFTY PERCENT the sum (or 150%) of the greater of (i) then current market rate or (ii) the sum of the Base Rental and Operating Expense Rental which would otherwise have been applicable had the term of this Lease continued through the period of such holding over by Tenant. No holding over by Tenant or payments of money by Tenant to Landlord after the expiration of the term of this Lease shall be construed to extend the term of this Lease or prevent Landlord from recovery of immediate possession of the Premises by summary proceedings or otherwise unless Landlord has sent written notice to Tenant that Landlord has elected to extend the term of the Lease. Tenant shall be liable to Landlord for all damage, including any consequential damage, which Landlord may suffer by reason of any holding over by Tenant and Tenant shall indemnify Landlord against any and all claims made by any other tenant or prospective tenant against Landlord for delay by Landlord in delivering possession of the Premises to such other tenant or prospective tenant. 31. SUBORDINATION TO MORTGAGE. Tenant accepts this Lease subject and subordinate to any mortgage deed of trust or other lien presently existing or hereafter arising upon the Premises, or upon the Building and/or the Property and to any renewals, modifications, refinancings and extensions thereof, but Tenant agrees that any such mortgagee shall have the right at any time to subordinate such mortgage, deed of trust or other lien to this Lease on such terms and subject to such conditions as such mortgagee may deem appropriate in its discretion. This clause shall be self-operative and no further instrument of subordination shall be required. However, Landlord is hereby irrevocably vested with full power and authority to subordinate this Lease to any mortgage, deed of trust or other lion now existing or hereafter placed upon the Premises, or the Building and/or the Property and Tenant agrees upon demand to execute such further instruments subordinating this Lease or attorning to the holder of any such liens as Landlord may request. The terms of this Lease are subject to approval by the Landlord's existing lender(s) and any lender(s) who, at the time of the execution of this Lease, have committed or are considering committing to Landlord to make a loan secured by all or any portion of the Property, and such approval is a condition precedent to Landlord's obligations hereunder. In the event that Tenant should fail to execute any subordination or other agreement required by this Paragraph promptly as requested, Tenant hereby irrevocably constitutes Landlord as its attorney-in-fact to execute such instrument in Tenant's name, place and stead, it being agreed that such power is one coupled with an interest in Landlord and is accordingly irrevocable. TENANT'S SUBORDINATION TO THE INTERESTS OF ANY FUTURE LENDER IS CONTINGENT UPON THE LENDER ENTERING INTO A NONDISTURBANCE AGREEMENT WITH TENANT, IN A FORM SATISFACTORY TO SUCH LENDER, STATING THAT TENANT'S RIGHT TO THE CONTINUED USE AND POSSESSION OF THE PREMISES SHALL BE UNDER THAT SAME TERMS AND CONDITIONS AS SET FORTH IN THIS LEASE PROVIDED THAT AT SUCH TIME TENANT IS NOT IN DEFAULT OF ITS OBLIGATIONS HEREIN. 32. ESTOPPEL CERTIFICATE. Tenant agrees periodically to furnish within ten (10) days after so requested by Landlord, ground lessor or the holder of any deed of trust, mortgage or security agreement covering the Building, the Land, or any interest of Landlord therein, a certificate signed by a Tenant certifying (a) that this Lease is in full force and effect and unmodified (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications), (b) as to the Commencement Date and the date through which Base Rental and estimated Operating Expense Rental have been paid, (c) that Tenant has accepted possession of the Premises and that any improvements required by the terms of this Lease to be made by Landlord have been completed to the satisfaction of Tenant, (d) that except as stated in the certificate no rent has been paid more than thirty (30) days in advance of its due date, (e) that the address for notices to be sent to Tenant is as set forth in this Lease (or has been changed by notice duly given and is as set forth in the certificate), (f) that except as stated in the certificate, Tenant, as of the date of such certificate, has no charge, lien, or claim of offset against rent due or to become due, (g) that except as stated in the certificate, Landlord is not then in default under this Lease, (h) as to the amount of Rentable Area then occupied by Tenant, (i) that there are no renewal or extension options, purchase options, rights of first refusal or the like in favor of Tenant except as set forth in this Lease, (j) the amount and nature of accounts payable to Landlord under terms of this Lease and (k) as to such other matters as may be requested by Landlord or ground lessor or the holder of any such deed of trust, mortgage or security agreement. Any such certificate may be relied upon by any ground lessor, prospective purchaser, secured party, mortgagee or any beneficiary under any mortgage, deed of trust on the Building or the Land or any part thereof or interest of Landlord therein. 33. ATTORNEY'S FEES. In the event either party defaults in the performance of any of the terms of this Lease and the other party employs an attorney in connection therewith, the defaulting party agrees to pay the prevailing party's reasonable attorneys' fees. 34. NOTICE. Any notice in this Lease provided for must, unless otherwise expressly provided herein, be in writing, and may, unless otherwise in this Lease expressly provided, be given or be served by depositing the same in the United States mail, postage paid and certified with return receipt requested, or by prepaid telegram, when appropriate, addressed to the party to be notified at the address stated in this Lease or such other address notice of which has been given to the other party or by delivering the same in person to such party or an officer or partner of such party. Notice deposited in the mail in the manner hereinabove described shall be effective as of the date it is so deposited. Neither party hereto shall be required to send any notice, request, demand, consent, approval, or other communication required or permitted under this lease to more than two (2) other addresses in addition to the premises. 35. SEVERABILITY. If any term or provision of this Lease, or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and enforced to the fullest extent permitted by law. 36. RECORDATION. Tenant agrees not to record this Lease or any memorandum hereof. 37. GOVERNING LAW. This Lease and the rights and obligations of the parties hereto shall be interpreted, construed, and enforced in accordance with the laws of the State. 38. FORCE MAJEURE. Whenever a period of time is herein prescribed for the taking of any action by Landlord, Landlord shall not be liable or responsible for, and there shall be excluded from the computation of such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations or restrictions, or any other cause whatsoever beyond the control of Landlord. 39. TIME OF PERFORMANCE. Except as expressly otherwise herein provided, with respect to all required acts of Tenant, time is of the essence of this Lease. 40. TRANSFERS BY LANDLORD. Landlord shall have the right to transfer and assign, in whole or in part, all of its rights and obligations hereunder and in the Building and Property referred to herein, and in such event and upon such transfer AND PAYMENT OF THE SECURITY DEPOSIT TO SUCH TRANSFEREE, Landlord shall be released from any further obligations hereunder, and Tenant agrees to look solely to such successor in interest of Landlord for the performance of such obligations. 41. COMMISSIONS. Landlord and Tenant hereby indemnify and hold each other harmless against any loss, claim, expense or liability with respect to any commissions or brokerage fees claimed on account of the execution and/or renewal of this Lease due to any action of the indemnifying party COMMISSIONS PAYABLE UNDER THIS TRANSACTION SHALL BE PAID BY LANDLORD. 42. JOINT AND SEVERAL LIABILITY. If there is more than one Tenant, or if the Tenant as such is comprised of more than one person or entity, the obligations hereunder imposed upon Tenant shall be joint and several obligations of all such parties. 43. AUTHORITY. In the event Tenant is a corporation (including any form of professional association), partnership (general or limited), or other form of organization other than an individual, then each individual executing or attesting this Lease on behalf of Tenant hereby covenants, warrants and represents: (i) that such individual is duly authorized to execute or attest and deliver this Lease on behalf of Tenant in accordance with the organizational documents of Tenant; (ii) that this Lease is binding upon Tenant; (iii) that Tenant is duly organized and legally existing in the state of its organization, and is qualified to do business in the State; (iv) that upon request, Tenant will provide Landlord with true and correct copies of all organizational documents of Tenant, and any amendments thereto; and (v) that the execution and delivery of this Lease by Tenant will not result in any breach of, or constitute a default under any mortgage, deed of trust, lease, loan, credit agreement, partnership agreement or other contract or instrument to which Tenant is a party or by which Tenant may be bound. If Tenant is a corporation, Tenant will, prior to the Commencement Date, deliver to Landlord a copy of a resolution of Tenant's board of directors authorizing or ratifying the execution and delivery of this Lease, which resolution will be duly certified to Landlord's satisfaction by the secretary or assistant secretary of Tenant. 44. FINANCIAL CONDITION OF TENANT. Tenant acknowledges that the financial capability of Tenant to perform its obligations hereunder is material to Landlord and that Landlord would not enter into this Lease but for Its belief, based on its review of Tenant's financial statements, that Tenant is capable of performing such financial obligations. Tenant hereby represents, warrants and certifies to Landlord that its financial statements are true and correct in all material respects. 45. EFFECT OF DELIVERY OF THIS LEASE. Landlord has delivered a copy of this Lease to Tenant for Tenant's review only, and the delivery hereof does not constitute an offer to Tenant or option. This Lease shall not be effective until an original of this Lease executed by both Landlord and Tenant and an original Guaranty, if applicable, in the form attached hereto as EXHIBIT "F" executed by each Guarantor is delivered to and accepted by Landlord, and this Lease has been approved by Landlord's mortgagee. 46. ENTIRE AGREEMENT. This Lease Agreement, including the following Exhibits: EXHIBIT "A" - Property Description EXHIBIT "B" - Outline and Location of Premises EXHIBIT "C" - Operating Expense Rental EXHIBIT "D" - Work Letter EXHIBIT "D-1" - Base Building Shell and Core Condition EXHIBIT "D-2" - Tenant Improvement Allowance EXHIBIT "D-3" - Landlord's Building Standard Material EXHIBIT "E" - Rules and Regulations EXHIBIT "G" - Option to Renew EXHIBIT "H" - Letter of Credit EXHIBIT "H-1" - Form of Demand Letter of Credit EXHIBIT "I" - Parking Agreement constitute the entire agreement between the parties hereto with respect to the subject matter of this Lease. Tenant expressly acknowledges and agrees that Landlord has not made and is not making, and Tenant, in executing and delivering this Lease, is not relying upon, any warranties, representations, promises or statements, except to the extent that the same are expressly set forth in this Lease. All understandings and agreements heretofore had between the parties are merged in this Lease which alone fully and completely expresses the agreement of the parties, neither party relying upon any statement or representation not embodied in this Lease. 47. NO PRESUMPTION AGAINST DRAFTER. Landlord and Tenant understand, agree and acknowledge that this Lease has been freely negotiated by both parties; and (ii) in any controversy, dispute or contest over the meaning, interpretation, validity, or enforceability of this Lease or any of its terms or conditions, there shall be not inference, presumption, or conclusion drawn whatsoever against either party by virtue of that party having drafted this Lease or any portion thereof. 48. WARRANTY WAIVER: EXCEPT AS SPECIFICALLY PROVIDED UNDER THIS LEASE, LANDLORD, ITS OFFICERS, DIRECTORS, AGENTS, EMPLOYEES, ATTORNEYS AND CONTRACTORS, MAKE NO WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE PROJECT, PROPERTY, BUILDING OR THE PREMISES OR ITS CONDITION. NO WARRANTY OF MATERIALS, WORKMANSHIP OR APPLIANCES HAS BEEN MADE OR IS EXPRESSED OR IMPLIED BY THIS LEASE. LANDLORD, ITS OFFICERS, DIRECTORS, AGENTS, EMPLOYEES, ATTORNEYS AND CONTRACTORS EXPRESSLY DISCLAIM AND TENANT EXPRESSLY WAIVES ANY WARRANTY OF HABITABILITY, GOOD AND WORKMANLIKE CONSTRUCTION, SUITABILITY, OF DESIGN OR FITNESS FOR A PARTICULAR PURPOSE AND EXPRESSLY DISCLAIM AND TENANT EXPRESSLY WAIVES ANY WARRANTY AS TO THE ENVIRONMENTAL CONDITION OF THE PROJECT, PROPERTY, BUILDING OR PREMISES AND THE PRESENCE OR CONTAMINATION BY HAZARDOUS MATERIALS. TENANT IS NOT RELYING ON ANY REPRESENTATIONS BY LANDLORD OR LANDLORD'S OFFICERS, DIRECTORS, AGENTS, EMPLOYEES, ATTORNEYS AND CONTRACTORS. TENANT EXPRESSLY WAIVES, TO THE EXTENT ALLOWED BY LAW, ANY CLAIMS UNDER FEDERAL, STATE OR OTHER LAW THAT TENANT MIGHT OTHERWISE HAVE AGAINST LANDLORD, ITS OFFICERS, DIRECTORS, AGENTS, EMPLOYEES, ATTORNEYS AND CONTRACTORS RELATING TO THE CONDITION OF THE PROJECT, PROPERTY, BUILDING OR PREMISES OR THE IMPROVEMENTS OR PERSONAL PROPERTY LOCATED THEREON OR THE PRESENCE IN OR CONTAMINATION OF THE PROJECT OR THE PREMISES BY HAZARDOUS MATERIALS. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease in multiple original counterparts as of the day and year first above written. LANDLORD: -------- MONY/BDP Flex I, L.L.C., a Delaware limited liability corporation By: Transwestern Investment Company, as agent /s/ Scott A. Tausu --------------------------------------- Name (print): Scott A. Tausu Title: SVP ADDRESS: - ------- Transwestern Commercial Services 600 Grant Street Suite 630 Denver, CO 80203 Attn: Arapahoe Service Center 2 TENANT: ------ CAVION TECHNOLOGIES, INC., a Colorado corporation /s/ David J. Selina --------------------------------------- Name (print): David J. Selina Title: President/CEO ADDRESS: - ------------------------- -----END PRIVACY-ENHANCED MESSAGE-----