-----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, HUx+F4aWiGp9QGz8eUpOvw8bIswjhYlGH0AYKasSXc7n1PFTglSspbLL6l4bqpIZ FG365hPEhPKp5f/NfySAyg== 0000912057-99-002849.txt : 19991101 0000912057-99-002849.hdr.sgml : 19991101 ACCESSION NUMBER: 0000912057-99-002849 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19991029 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDICALOGIC INC CENTRAL INDEX KEY: 0000923899 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 930890696 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-87285 FILM NUMBER: 99737803 BUSINESS ADDRESS: STREET 1: 20500 NW EVERGREEN PARKWAY STREET 2: STE 400 CITY: HILLSBORO STATE: OR ZIP: 97124 BUSINESS PHONE: 5036456442 MAIL ADDRESS: STREET 1: 20500 NW EVERGREEN PARKWAY CITY: HILLSBORO STATE: OR ZIP: 97124 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1999 REGISTRATION NO. 333-87285 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ MEDICALOGIC, INC. (Exact name of registrant as specified in its charter) OREGON 7374 93-0890696 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
-------------------------- 20500 NW EVERGREEN PARKWAY HILLSBORO, OREGON 97124 (503) 531-7000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) -------------------------- MARK K. LEAVITT CHIEF EXECUTIVE OFFICER 20500 NW EVERGREEN PARKWAY HILLSBORO, OREGON 97124 (503) 531-7000 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------------- COPIES TO: STEPHEN E. BABSON ROY W. TUCKER TODD A. BAUMAN PERKINS COIE LLP STOEL RIVES LLP 1211 SW FIFTH AVENUE, SUITE 1500 900 SW FIFTH AVENUE, SUITE 2600 PORTLAND, OR 97204 PORTLAND, OREGON 97204 (503) 727-2000 (503) 224-3380
-------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. -------------------------- If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. / / -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED OCTOBER 29, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTUS , 1999 MEDICALOGIC, INC. [MEDICALOGIC LOGO] ______ SHARES OF COMMON STOCK - -------------------------------------------------------------------------------- MARKET AND PROPOSED SYMBOL: THE OFFERING: - - We have applied for listing on the - The underwriters have an option to Nasdaq National Market with the purchase an additional shares symbol MDLI. from us to cover over-allotments. - We anticipate that the initial public offering price will be between $12.00 and $14.00 per share.
- -------------------------------------------------------------------------------- Per Share Total - -------------------------------------------------------------------------------- Public offering price: $ $ Underwriting fees: Proceeds to MedicaLogic:
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8. Neither the SEC nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- DONALDSON, LUFKIN & JENRETTE ROBERTSON STEPHENS U.S. BANCORP PIPER JAFFRAY DLJDIRECT INC. TABLE OF CONTENTS
Page ---- Prospectus Summary.................... 3 Risk Factors.......................... 8 Use Of Proceeds....................... 16 Dividend Policy....................... 16 Capitalization........................ 17 Dilution.............................. 18 Selected Consolidated Financial Data................................ 19 Management's Discussion And Analysis Of Financial Condition And Results Of Operations....................... 20 Business.............................. 30
Page ---- Management............................ 46 Related-Party Transactions............ 54 Principal Shareholders................ 56 Description Of Capital Stock.......... 59 Shares Eligible For Future Sale....... 62 Underwriting.......................... 64 Where You Can Find More Information... 66 Legal Matters......................... 66 Experts............................... 66 Index to Financial Statements......... F-1
2 PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING MEDICALOGIC AND THE COMMON STOCK BEING SOLD IN THIS OFFERING IN OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS AND OUR RISK FACTORS BEGINNING ON PAGE 8. MEDICALOGIC, INC. Our business is connecting physicians and patients through the Internet. For physicians, we offer a line of enterprise and Internet-based electronic medical record products and services for use at the point of care in the exam room, with configurations suitable for practices of all sizes. For patients, we will provide in early 2000 a Web site that will allow them to access healthcare information from their physician-generated medical record, enter personal medical information and effectively communicate with their physician. For both physicians and patients, we will provide focused healthcare content and commerce opportunities, keyed to information in a selectively shared database that unites physicians and patients. Together, these products, services and databases will comprise our Internet Health Services Center. For over a decade, MedicaLogic has developed, marketed and supported electronic medical record software used by physicians at the point of care throughout the United States. We have focused exclusively on the challenge of providing clinical solutions that are used by physicians at the point of care to create and access the electronic medical record. More than 7,000 health professionals, including approximately 3,000 physicians, now maintain electronic medical records with our enterprise electronic medical record software, constituting an estimated base of over 7 million electronic patient records. Our technology will use the Internet to link healthcare consumers to physicians using either our enterprise or Internet-based electronic medical record. Our customers include academic medical centers such as Baylor College of Medicine in Houston, Texas, integrated healthcare delivery systems such as Providence Health System in Portland, Oregon, and other customers such as the NASA space shuttle program. We believe we are a leading provider of electronic medical record software in the healthcare industry. The vast majority of clinical data is still recorded in handwritten or hand-typed notes filed within paper charts that cannot be accessed, aggregated or organized electronically. We believe the Internet has made computerized tools more useful and more affordable than traditional client-server applications to the 600,000 practicing physicians in the United States and will facilitate the widespread adoption of an electronic medical record. We believe the Internet is also an efficient means to distribute medical information to healthcare consumers. Our solution to the market opportunity provided by the Internet is the Internet Health Services Center. The products and services that will comprise our Internet Health Services Center are: - LOGICIAN, our proprietary client-server electronic medical record enterprise software, which has been commercially available since 1996; - LOGICIAN INTERNET, our product for creating and managing electronic medical records over the Internet, which became commercially available in October 1999; - 98POINT6, our Web site for healthcare consumers, which is currently being tested in a pilot program and will be commercially available in early 2000, through which patients will be able to maintain their own personal health portfolio based on their physician-created electronic medical record and access specific healthcare information as well as commerce opportunities; and - MEDICALOGIC.COM, our Web site for physicians and other medical professionals, which has been commercially available since 1996 although further engineering is necessary to provide some 3 features, providing for physician access to patient electronic medical records and, upon further development, a range of healthcare information and commerce opportunities and services. We believe the Internet Health Services Center will provide the following benefits: - Improve the quality of care by increasing the flow of patient medical information among all healthcare participants, which ultimately will result in more accurate diagnoses and more timely and appropriate treatments; - Empower healthcare consumers by giving them quicker, more efficient and more effective access to pertinent medical information through electronic communication with other healthcare participants, such as physicians, payers and suppliers; - Improve the physician-patient relationship by facilitating communication between physicians and patients; and - Reduce healthcare costs by, among other things: - Reducing the inefficiencies of manual and paper-based transactions; - Reducing transcription costs; - Reducing duplicative and unnecessary laboratory tests resulting from inaccurate or misplaced records; - Facilitating compliance with Health Care Financing Administration account coding regulations; and - Reducing hospitalizations related to harmful drug interaction events. Our objective is to be the leading provider of Internet-based electronic medical record information. Our strategy to achieve this objective has the following key elements: - Gain rapid adoption by physicians of our electronic medical record solutions; - Offer the most compelling Internet destination for healthcare consumers; - Become a catalyst of clinical e-commerce transactions; and - Utilize our large, clinically-rich database. To provide the electronic transaction services that will form part of the Internet Health Services Center, we will form relationships with strategic partners who can provide these services. These services will include electronic processing of claims, automatic filling and refilling of prescriptions and electronic transmission of laboratory results. In addition, we will enter into strategic partnerships with vendors who will provide medical content to our customers as well as partnerships that will allow our physician customers to have access to computer hardware on which they may use our products and services. To pursue this strategy, we have recently entered into strategic relationships with CVS.com, a leading online pharmacy, Dell Computer Corporation, Envoy Corporation, a leader in electronic transaction processing in the healthcare industry, and Lernout & Hauspie Speech Products, a provider of speech recognition software. MedicaLogic, Inc. was incorporated in Oregon in May 1985 and commenced operations that year. Our executive offices are located at 20500 NW Evergreen Parkway, Hillsboro, Oregon 97124. Our telephone number is (503) 531-7000. MedicaLogic, Practice With Knowledge, Logician, SIMPL, Quickstep, ScheduLogic, LinkLogic, KnowledgeBank, AboutMyHealth, 98point6 and the MedicaLogic logo are trademarks or service marks of MedicaLogic. Other trademarks or service marks appearing in this prospectus are the property of their holders. 4 THE OFFERING Common stock offered by MedicaLogic.......... shares Common stock to be outstanding after the offering................................... shares Nasdaq National Market Symbol................ MDLI Use of proceeds.............................. - working capital; - general corporate purposes; and - potential acquisitions.
The number of shares of common stock to be outstanding after the offering excludes an aggregate of 7,997,192 shares of common stock reserved for issuance under our stock plans, of which 2,829,826 shares of common stock were subject to outstanding options as of October 15, 1999 at a weighted average exercise price of $6.10 per share. ASSUMPTIONS THAT APPLY TO THIS PROSPECTUS Unless we indicate otherwise, all information in this prospectus reflects the following: - completion of a one-for-two reverse stock split of shares of our common stock; - the conversion of our outstanding preferred stock on a two-for-one basis into common stock; and - no exercise by the underwriters of their over-allotment option to purchase up to additional shares of common stock. 5 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The summary consolidated historical financial information below was derived from the consolidated financial statements beginning on page F-1. This summary should be read together with the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 20. We completed our acquisition of PrimaCis Health Information Technology, Inc. in January 1999. The unaudited pro forma consolidated statements of operations data combine MedicaLogic's and PrimaCis' historical statements of operations for the year ended December 31, 1998 and give effect to the acquisition as if it occurred on January 1, 1998. This information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have actually occurred if the acquisition had been completed as of the dates indicated, nor is it necessarily indicative of our future operating results.
YEARS ENDED DECEMBER 31, -------------------------------------------- NINE MONTHS ENDED PRO SEPTEMBER 30, FORMA ---------------------- 1996 1997 1998 1998 1998 1999 -------- -------- -------- ----------- ----------- -------- (UNAUDITED) (UNAUDITED) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues.............................. $ 9,664 $ 12,807 $16,160 $ 16,408 $10,759 $ 14,992 Operating expenses: Cost of revenues.................... 6,120 7,756 6,754 6,875 4,962 5,724 Marketing and sales................. 6,667 7,681 7,882 9,814 5,647 12,300 Research and development............ 6,583 7,047 8,071 8,525 5,981 8,495 General and administrative.......... 718 1,315 1,151 3,014 735 2,511 -------- -------- ------- -------- ------- -------- Operating loss........................ (10,424) (10,992) (7,698) (11,820) (6,566) (14,038) Net loss attributed to common shareholders........................ $(10,364) $(10,819) $(7,232) $(11,278) $(6,394) $(13,381) ======== ======== ======= ======== ======= ======== Basic and diluted net loss per common share(1)............................ $ (1.58) $ (1.63) $ (1.05) $ (1.48) $ (0.93) $ (1.61) ======== ======== ======= ======== ======= ======== Weighted average shares used in computing basic and diluted net loss per common share(1)................. 6,576 6,635 6,883 7,633 6,882 8,331 Pro forma basic and diluted net loss per common share(1)................. $ (0.41) $ (0.63) ======= ======== Weighted average shares used in computing pro forma basic and diluted net loss per common share(1)............................ 17,479 21,084
6
SEPTEMBER 30, 1999 ------------------------- ACTUAL AS ADJUSTED(2) -------- -------------- (UNAUDITED) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................. $ 7,081 $ Working capital........................................... 43,151 Total assets.............................................. 67,727 Long-term obligations, net of current portion............. 1,659 Convertible redeemable preferred stock.................... 97,825 Total stockholders' equity (deficit)...................... (40,564)
- ------------------------ (1) For a description of the computation of the net loss per share and number of shares used in per share calculations, see note 1 of the notes to the consolidated financial statements. Pro forma basic and diluted net loss per share includes shares of common stock issued on the conversion of our outstanding preferred stock on a two-for-one basis into common stock. (2) As adjusted to reflect the conversion of all outstanding shares of preferred stock into common stock and the sale by us of shares of common stock offered by this prospectus at an initial public offering price of $ per share and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. 7 RISK FACTORS THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS AND RELATED NOTES, BEFORE YOU PURCHASE ANY SHARES OF OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS WOULD LIKELY SUFFER. IF THAT HAPPENS, THE TRADING PRICE OF OUR COMMON STOCK COULD FALL, AND YOU MAY LOSE ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK. RISKS RELATED TO MEDICALOGIC OUR INTERNET-BASED BUSINESS MODEL MAY NOT BE SUCCESSFULLY IMPLEMENTED, AND IT IS DIFFICULT TO EVALUATE BECAUSE IT IS NEW AND UNPROVEN. We have only recently implemented our Internet-based business model, and we do not have an operating history with this model upon which you can evaluate our prospects. In attempting to implement our Internet-based business model, we are significantly changing our business operations, sales and implementation practices, customer service and support operations and management focus. We are also facing new risks and challenges, including a lack of meaningful historical financial data upon which to plan future budgets, the need to develop strategic relationships and other risks described below. For each of the last three fiscal years and the first nine months of 1999, all of our revenue was generated from the sale of licenses on and services related to our enterprise software and no revenue was derived from our LOGICIAN INTERNET system or other Internet-based products and services. Our operating history is not indicative of our future performance under our Internet-based business model, and you should not rely upon our past performance to predict our future performance. We may not be able to implement our business model successfully. WE MAY NOT ACHIEVE BROAD ACCEPTANCE OF OUR PRODUCTS AND SERVICES BY PHYSICIANS, PATIENTS AND OTHER HEALTHCARE STAKEHOLDERS. Our business model depends on our ability both to sell our LOGICIAN and LOGICIAN INTERNET systems to physicians and other healthcare providers and to generate usage by a large number of physicians. Failure to achieve broad acceptance of our products and services by physicians and other healthcare stakeholders would severely limit our ability to implement our Internet-based business model. Achieving market acceptance for our products and services will require substantial marketing efforts and the expenditure of significant financial and other resources to create awareness and demand by physicians and healthcare consumers. Use of our products and services requires physicians to integrate our products and services into their office work flow and to adopt different behavior patterns and new methods of conducting business and exchanging information. Physicians may not choose to use our products and services. WE ARE DEPENDENT ON A SMALL NUMBER OF CUSTOMERS, AND IF WE LOSE ANY OF THEM OUR REVENUES COULD DECLINE SUBSTANTIALLY. We currently derive and expect to continue to derive a significant portion of our revenues from a limited number of customers. If any significant customer spends less money on licenses for LOGICIAN or related services, or terminates its relationship with us, our revenues could decline substantially. In 1998, we derived 21% of our revenue from VHA, Inc., a distribution partner, and in the first nine months of 1999, we derived approximately 41% of our revenue from Baylor College of Medicine and Carilion Health Systems. We expect to continue to derive a significant portion of our future revenues from sales of our LOGICIAN enterprise product to a limited number of large integrated healthcare delivery networks. Failure to make these sales during any quarter could cause our revenues and results of operations to fall short of expectations, which could adversely affect the price of our common stock. 8 WE HAVE A HISTORY OF NET OPERATING LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE. Failure to achieve or maintain profitability could materially and adversely affect the market price of our common stock. We have experienced net losses of approximately $10.3 million in 1996, $10.7 million in 1997, $7.0 million in 1998 and $13.1 million in the first nine months of 1999. At September 30, 1999, we had a retained deficit of $48.9 million. We are investing heavily to develop our Internet-based products and services and expand our sales and marketing capabilities related to our Internet-based business. To date, we have not achieved any revenue from our Internet-based products or services. We expect to continue to experience net losses, and we are not certain when we will become profitable, if at all. Even if we do achieve profitability, we may not sustain or increase profitability on a quarterly or annual basis. OUR RESULTS OF OPERATIONS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY, WHICH MAY HAVE A NEGATIVE IMPACT ON OUR STOCK PRICE. We may experience significant variations in results of operations from quarter to quarter primarily because most of our costs are based on projected revenue levels and our revenues are difficult to predict. These variations in our results may negatively affect our stock price. Sales and results of operations may fluctuate from quarter to quarter depending on: - The amount and timing of operating costs and capital expenditures relating to development and expansion of our business; - Acceptance of our emerging business; - Our introduction of new or enhanced services and products, and similar introductions by our competitors; and - The budgetary cycles of large healthcare providers and other healthcare organizations. In addition, the sales cycle for our products and services varies widely, particularly for sales of our LOGICIAN product to large integrated healthcare delivery networks, and it is difficult for us to predict the timing of particular sales. As a result, we believe that quarter-to-quarter comparisons of our sales and results of operations are not necessarily meaningful and that these comparisons may not be accurate indicators of future performance. OUR FAILURE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS AND SERVICES AND ENHANCE CURRENT PRODUCTS AND SERVICES COULD ADVERSELY AFFECT THE IMPLEMENTATION OF OUR INTERNET-BASED BUSINESS MODEL. Any failure by us to introduce planned products or to introduce these products on schedule could make it difficult for us to implement our Internet-based business model. These include LOGICIAN INTERNET, which we began to offer on a commercial basis in October 1999, and our consumer Web site 98POINT6, which is currently being tested in a pilot program and will be released commercially in early 2000. We may not be able to introduce these products and services or our other products and services under development on schedule, or at all. For example, LOGICIAN INTERNET was introduced one month after its planned release date. In addition, early releases of software often contain errors or defects. Despite our extensive testing, errors could be found in our new product releases and services before or after commercial release, which would result in product redevelopment costs and loss of, or delay in, market acceptance. Past releases of LOGICIAN have contained errors and defects that required us to provide corrections and other upgrades. Our products and services often must be integrated and customized to operate with existing customer legacy computer systems. For example, we are working on enhancements that will allow our LOGICIAN and LOGICIAN INTERNET products to communicate with each other to facilitate connections 9 between physicians in integrated healthcare delivery networks, who primarily use LOGICIAN, and physicians who use LOGICIAN INTERNET. Failure to enhance our product and service offerings to add functionality in areas such as interfacing with the products of our strategic partners could make it more difficult for us to implement our Internet-based business model. Developing, integrating, enhancing and customizing our products and services will be expensive and time consuming. WE RELY ON ESTABLISHING AND MAINTAINING STRATEGIC RELATIONSHIPS THAT MAY NOT PROVIDE ANTICIPATED BENEFITS. We will depend upon our strategic relationships to extend the reach of our products and services to a larger number of participants in the healthcare industry, develop and deploy new products and generate additional revenue. If we lose any of our existing strategic relationships or fail to establish additional relationships, or if our strategic relationships fail to benefit us as expected, we may not be able to execute our business plan. To date, we have established only a limited number of strategic relationships, and these relationships are in the early stages of development. We have limited experience in establishing and maintaining strategic relationships with healthcare and Internet industry participants. Entering into strategic relationships is complicated by several factors, including the following: - Current or future strategic partners may decide to compete with us in some or all of our markets; - Key participants in the healthcare industry may refuse to establish strategic relationships with us if we have entered into relationships with their competitors; and - Potential strategic partners may be reluctant to work with us until our products and services have obtained widespread market acceptance. POTENTIAL INTEGRATED HEALTHCARE DELIVERY NETWORK CUSTOMERS COULD TAKE A LONG TIME TO EVALUATE THE PURCHASE OF OUR PRODUCTS AND SERVICES AND TO COMPLETE THE PURCHASE EVEN AFTER A DECISION HAS BEEN MADE. One element of our strategy is to market our services directly to large healthcare organizations. The sale and implementation of our products and services are often subject to delays due to these organizations' internal budgets and procedures for approving large capital expenditures and deploying new technologies within their networks. As a result, sales of our products and services to new integrated healthcare delivery network customers may grow slowly and unevenly due to those organizations' purchasing cycles. If the time and resources required to sell our products and services to new integrated healthcare delivery network customers materially exceed our expectations, it may adversely affect our share price. The average period from our first contact with an integrated healthcare delivery network customer and its implementation of our products and services is two years and the average period between a sale and implementation is four months. We do not control many of the factors that will influence our customers' buying decisions or affect the timing of implementation. INTENSE COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED SALES OF OUR PRODUCTS AND SERVICES. Our industry is intensely competitive and subject to fragmentation, high growth and rapid technological change. We may face significant competition from traditional healthcare information system vendors and Internet healthcare companies as they expand their product offerings. Many of these companies have significantly greater financial resources, well-established brand names and large installed customer bases. We may be unable to compete successfully against these organizations. We believe that, to be successful, we must gain significant market share with our products and services 10 before our competitors introduce alternative products and services with features similar to ours. Failure to achieve a significant market share may materially reduce our ability to compete successfully, if at all, with other market participants and may lead to reduced sales of our products and services. OUR FAILURE TO KEEP PACE WITH ADVANCES IN TECHNOLOGY COULD HARM OUR BUSINESS. If we cannot adapt to changing technologies, we may not be able to compete effectively in our industry. The Internet and healthcare information markets are characterized by rapid technological change, changes in users' and customers' requirements, frequent new service and product introductions embodying new technologies and the emergence of new industry standards and practices that could make our existing technology obsolete. Our success will depend, in part, on our ability to continue to enhance our products and services, develop new technology that addresses the increasingly sophisticated and varied needs of our prospective customers, license leading technologies and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. We may not be successful in using new technologies effectively or adapting our proprietary technology to evolving customer requirements or emerging industry standards. OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD HAVE A SIGNIFICANT NEGATIVE IMPACT ON OUR BUSINESS OPERATIONS. We will need to expand our operations if we successfully achieve market acceptance for our products and services. Difficulties in managing any future growth could have a significant negative impact on our business operations, increase our costs and make it more difficult for us to achieve profitability. We cannot be certain that our systems, procedures, controls and existing space will be adequate to support expansion of our operations. We may not be able to project the rate or timing of increases in the use of our products and services accurately or to expand and upgrade our systems and infrastructure to accommodate these increases. Our future results of operations will depend on the ability of our officers and key employees to manage changing business conditions and to implement and improve our technical, administrative, financial control and reporting systems. OUR FAILURE TO RETAIN AND ATTRACT KEY PERSONNEL COULD SIGNIFICANTLY HINDER THE EXECUTION OF OUR BUSINESS STRATEGY. Our success depends in large part on the continued service of our management and other key personnel and our ability to continue to attract, motivate and retain highly qualified employees. In particular, the services of Mark K. Leavitt, our president and chief executive officer, David C. Moffenbeier, our chief operating officer, Harvey J. Anderson, our senior vice president, general manager of Internet operations, and Cameron Lewis, our vice president, Internet marketing and e-commerce strategies, are integral to the execution of our business strategy. If one or more of our key employees leaves MedicaLogic and we are unable to find a replacement with the combination of skills and attributes necessary to execute our strategy, we may be unable to execute our strategy successfully. Competition for skilled employees is intense, and the process of finding qualified individuals can be lengthy and expensive. We do not maintain key person life insurance on any of our employees. IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE POSITION MAY BE ADVERSELY AFFECTED. Our ability to compete depends upon our proprietary systems and technology, including LOGICIAN INTERNET and LOGICIAN. The steps we currently take to protect our intellectual property rights may prove to be inadequate, time consuming and expensive. Despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property. Misappropriation of our intellectual property may make us less competitive and require us to engage in expensive litigation to enforce or protect our intellectual property rights or to defend against claims of invalidity. 11 INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS AGAINST US CAN BE COSTLY AND RESULT IN THE LOSS OF SIGNIFICANT RIGHTS. We could be subject to intellectual property infringement claims as the number of our competitors grows and the functionality of our products and services overlaps with competing products. One party has recently filed a patent infringement lawsuit against us and several other companies asserting broad proprietary rights in processes similar to our electronic medical record solutions. Similar infringement claims may be asserted against us and may be successful. We could incur substantial costs and diversion of management resources defending any infringement claims. In addition, a party making a claim against us could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could effectively block our ability to provide products or services. Licenses for intellectual property of third parties that might be required for our products or services may not be available on commercially reasonable terms, or at all. WE ARE VULNERABLE TO INTERRUPTIONS IN OUR OPERATIONS, WHICH COULD HARM OUR ABILITY TO ATTRACT CUSTOMERS TO OUR WEB SITES. Failure of our Internet services to function as desired could harm our ability to attract physicians and consumers to our Web sites. Our operations are vulnerable to interruption from a variety of sources, many of which are not within our control, including: - Power loss and telecommunications failures; - Software and hardware errors, failures or crashes; and - Computer viruses and similar disruptive problems. We have not yet completed comprehensive plans addressing these contingencies. In addition, some of our communications and information services are provided through our service providers. We expect to depend on independent service providers for many of the services we provide through our Internet Health Services Center, including the routing of transaction data to third-party payers. We may have no means of replacing services on a timely basis or at all if they are inadequate or if there is a service interruption or failure. We may face liability for the failure of our system to function for any reason. IF WE ARE HELD LIABLE FOR USE OF DATA WE PROVIDE, WE COULD BE REQUIRED TO PAY MATERIAL DAMAGES TO INJURED THIRD PARTIES. We provide data for use by physicians, consumers and other healthcare stakeholders. This data may be obtained from our physician customers, strategic partners, other third parties or, with patient consent, from the aggregation of patient health records. Claims regarding injuries related to the use of this data may be made in the future, and we may not be able to insure adequately against these claims. A claim brought against us that is uninsured or under-insured could lead to material damages against us. OUR INTERNET INFRASTRUCTURE IS UNPROVEN AND MAY NOT ACCOMMODATE HIGH LEVELS OF USE. To date, we have processed a limited number and variety of Internet-based transactions. In addition, our Internet products and services have only been used by a limited number of physicians and healthcare consumers. Our infrastructure may not accommodate increased use while maintaining acceptable overall performance. To successfully implement our Internet-based business model, we must continue to expand and adapt our network infrastructure to accommodate additional users, increased transaction volumes and changing customer requirements. An unexpectedly large increase in the volume or pace of traffic on our Web site, the number of physicians using LOGICIAN INTERNET or our 12 other Internet-based products and services, or orders placed by customers may require us to expand and further upgrade our technology. This expansion and adaptation would be expensive and will divert our attention from other activities. OUR INABILITY TO PREVENT SECURITY BREACHES COULD DETER PEOPLE FROM USING OUR PRODUCTS AND SERVICES AND COULD EXPOSE US TO CLAIMS FOR DAMAGES. Any well-publicized compromise of Internet security could deter people from using our products and services to conduct transactions that involve transmitting confidential healthcare information over the Internet. A security breach could occur if a third party were able to penetrate our network security and misappropriate our patient and other information. If this happened, we could also be subject to liability and litigation. The difficulty of securely transmitting confidential information over the Internet has been a significant barrier to conducting e-commerce and engaging in sensitive communications. We may have to devote significant financial and other resources to protect against security breaches or to alleviate problems caused by breaches. WE MAY NOT BE ABLE TO IMPLEMENT OUR NEW MANAGEMENT INFORMATION SYSTEMS IN A TIMELY MANNER AND THE NEW SYSTEMS MAY NOT BE ADEQUATE TO SUPPORT OUR OPERATIONS. The growth in the complexity of our business has placed and will continue to place a significant strain on our operational, financial and management information systems. In June, 1999 we purchased a new management information system from Oracle Corporation and the required hardware to support it. This system includes accounting, operations, purchasing and project billing capability. We must integrate this system with our Internet products and services and with our existing customer relationship management system. The successful implementation of this system is expected to be crucial to our operations. We may not be able to implement this new system in an efficient and timely manner and the new system may not be adequate to support our operations. RISKS RELATED TO THE HEALTHCARE INDUSTRY AND THE INTERNET FEDERAL AND STATE LEGISLATION AND REGULATION AFFECTING THE HEALTHCARE INDUSTRY COULD SEVERELY RESTRICT OUR ABILITY TO OPERATE OUR BUSINESS. We are subject to federal and state legislation and regulation affecting the healthcare industry. Existing and new laws and regulations applicable to the healthcare industry could have a material adverse effect on our ability to operate our business. The federal and state governments extensively regulate the confidentiality and release of patient records. Additional legislation governing the distribution of medical records has been proposed at both the state and federal level. It may be expensive to implement security or other measures designed to comply with any new legislation. Moreover, we may be restricted or prevented from delivering patient records electronically. Other legislation currently being considered at the federal level could also negatively affect our business. For example, the Health Insurance Portability and Accountability Act of 1996 mandates the use of standard transactions and identifiers, prescribed security measures and other provisions within two years after the adoption of final regulations by the Department of Health and Human Services. In addition, our success depends on other healthcare participants complying with these regulations. If United States Food and Drug Administration, or FDA, regulations were applicable to any of our products and services, we believe that complying with those regulations would be time consuming, burdensome and expensive and could delay our introduction of new products or services. Some computer applications and software are considered medical devices and are subject to regulation by the FDA. We do not believe that our current products or services are subject to FDA regulation. We may, however, expand our product and service offerings into areas that subject us to FDA regulation. We have no experience in complying with FDA regulations. 13 A federal law commonly known as the Medicare/Medicaid antikickback law, and several similar state laws, prohibit payments that are intended to induce physicians or others to acquire, arrange for or recommend the acquisition of healthcare products or services. Another federal law, commonly known as the Stark law, prohibits physicians from referring Medicare and Medicaid patients for designated health services to entities with which they have a financial relationship, unless that relationship qualifies for an explicit exception to the referral ban. The application and interpretation of these laws are complex and difficult to predict and could constrain our financial and marketing relationships. GOVERNMENT REGULATION OF THE INTERNET COULD SEVERELY RESTRICT OUR ABILITY TO OPERATE OUR BUSINESS. Our business is subject to evolving government regulation of the Internet. Existing as well as new laws and regulations could severely restrict our ability to operate our business. Laws and regulations may be adopted to govern the Internet or other online services covering issues such as: - User privacy; - Pricing; - Content; - Copyrights; - Distribution; and - Characteristics and quality of products and services. The applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Demand for our applications and services may be affected by additional regulation of the Internet. For example, until recently Health Care Financing Administration guidelines prohibited transmission of Medicare eligibility information over the Internet. CONSOLIDATION IN THE HEALTHCARE INDUSTRY COULD RESULT IN MORE INTENSE COMPETITION. Many healthcare industry participants are consolidating to create integrated healthcare delivery systems with greater market power. As the healthcare industry consolidates, competition to provide products and services to industry participants will become more intense. These industry participants may try to use their market power to negotiate price reductions for our products and services. If we were forced to reduce our prices, our revenues and results of operations could suffer. In addition, the acquisition by third parties of any of our customers could have an adverse effect on our relationship with that customer. RISKS RELATED TO THIS OFFERING AND OUR COMMON STOCK THE DEMAND FOR AND PRICE OF OUR COMMON STOCK COULD FLUCTUATE SIGNIFICANTLY. Before this offering, there has been no public market for our common stock. We cannot guarantee that an active trading market will develop or be sustained or that the market price of our common stock will not decline. Even if an active trading market develops, the market price of our common stock is likely to be highly volatile and could fluctuate significantly in response to various factors, including: - Actual or anticipated variations in our quarterly results of operations; - Announcements of technological innovations or new services or products by us or our competitors; - Timeliness of our introductions of new products; and 14 - Changes in financial estimates by securities analysts. In addition, the stock markets, especially the Nasdaq National Market, have experienced extreme price and volume fluctuations that have affected the market prices of equity securities of many technology companies, and Internet-related companies in particular. These fluctuations have often been unrelated or disproportionate to operating performance. The trading prices of many technology companies' stocks are at or near historical highs. These high trading prices may not be sustained. These broad market factors may materially affect the trading price of our common stock. General economic, political and market conditions like recessions and interest rate fluctuations may also have an adverse effect on the market price of our common stock. In the past, following periods of volatility in the market price for a company's securities, shareholders have often initiated securities class action litigation. Any securities class action litigation could result in substantial costs and the diversion of management's attention and resources. SUBSTANTIAL SALES OF OUR COMMON STOCK AFTER THE OFFERING COULD RESULT IN A LOWER MARKET PRICE OF OUR COMMON STOCK. Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales will occur, could adversely affect the market price of our common stock and make it more difficult for us to raise funds through equity offerings in the future. After the offering, based on shares outstanding on September 30, 1999, the holders of approximately 16,327,967 of our shares of common stock will be entitled to registration rights with respect to these shares until the holders may sell the shares under Rule 144 or 144(k) of the Securities Act. On the 181(st) day after the date of this prospectus, approximately 22,752,297 shares of our common stock, including 11,139,545 of the shares subject to registration rights, will be eligible for sale in the public market subject in some cases to volume limitations, based on shares outstanding on September 30, 1999. In addition, a substantial number of outstanding shares of common stock and shares issuable upon exercise of outstanding options will become available for resale in the public market at prescribed times. After the offering, we intend to register 7,997,192 shares of common stock reserved for issuance under our stock incentive plans. OUR RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS WE EXPRESS IN OUR FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS. This prospectus contains forward-looking statements that involve risks and uncertainties, including those discussed above and in other sections of this prospectus. These statements often contain words like believe, expect, anticipate, intend, contemplate, seek, plan, estimate or similar expressions. Forward-looking statements do not guarantee future performance. Because we cannot predict all of the risks and uncertainties that may affect us, or control the ones we do predict, these risks and uncertainties can cause our results to differ materially from the results we express in our forward-looking statements. Recognize these statements for what they are and do not rely on them as facts. We are not obligated to update forward-looking statements. 15 USE OF PROCEEDS We estimate that we will receive net proceeds of approximately $ million, or approximately $ million if the underwriters' overallotment option is exercised in full, from the sale of shares of common stock offered by us. These estimates assume an initial public offering price of $ per share, after deducting the estimated underwriting discounts and commissions and offering expenses payable by us. We expect to use the net proceeds from this offering for working capital and other general corporate purposes. In addition, although we are not currently participating in any active negotiations and have no commitments or agreements with respect to any acquisition, we might use a portion of the remaining proceeds to pay for acquisitions. We intend to invest the net proceeds from this offering in short-term, investment grade, interest-bearing instruments until they are used. DIVIDEND POLICY We have never declared or paid any cash dividends on our capital stock and we do not anticipate paying cash dividends. We currently intend to retain earnings, if any, to fund the development and growth of our business. 16 CAPITALIZATION The table below presents the following information: - our actual capitalization as of September 30, 1999; and - our pro forma capitalization after giving effect to the conversion of all outstanding shares of preferred stock into common stock, the sale by us of the shares of common stock offered by this prospectus at an initial public offering price of $ per share and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us and the filing upon the closing of the offering of amended and restated articles of incorporation to increase the number of authorized shares of common stock to 100 million. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes appearing in this prospectus. The shares issued and outstanding do not include 2,829,826 shares issuable on the exercise of outstanding options as of October 15, 1999.
SEPTEMBER 30, 1999 ---------------------- ACTUAL AS ADJUSTED -------- ----------- (DOLLARS IN THOUSANDS) Cash, cash equivalents and short-term investments........... $ 45,140 $ ======== ======== Capital leases and notes payable, less current portion...... $ 1,659 $ -------- -------- Convertible redeemable preferred stock; 50,000,000 shares authorized, $99,418 aggregate liquidation preference, 46,091,527 shares designated, 31,901,388 issued and outstanding at September 30, 1999, actual; no shares issued or outstanding, as adjusted........................ 97,825 Shareholders' equity (deficit): Common stock, 100,000,000 shares authorized, 8,926,281 issued and outstanding at September 30, 1999, actual; 100,000,000 shares authorized, shares issued and outstanding, as adjusted................................ 15,793 Common stock notes receivable............................. (6,449) Deferred compensation..................................... (988) Accumulated deficit....................................... (48,920) -------- -------- Total shareholders' equity (deficit)........................ (40,564) -------- -------- Total capitalization........................................ $ 57,261 $ ======== ========
17 DILUTION Our pro forma net tangible book value as of September 30, 1999 was approximately $52,491,000 or $2.11 per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the total pro forma number of shares of common stock outstanding after giving effect to the conversion of all outstanding shares of preferred stock into common stock. Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the net tangible book value per share of our common stock immediately afterwards. After giving effect to our sale of shares of common stock offered by this prospectus and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value would have been approximately $ , or approximately $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing shareholders and an immediate dilution in pro forma net tangible book value of $ per share to new investors, as illustrated in the following table: Assumed initial public offering price per share............. $ ----------------------- Pro forma net tangible book value per share as of September 30, 1999.................................................. $ 2.11 Increase attributable to this offering...................... ----------------------- Pro forma net tangible book value per share after this offering.................................................. ----------------------- Dilution to new investors................................... $
The following table summarizes, as of September 30, 1999 on the pro forma basis described above, the total number of shares of common stock purchased from us, the total consideration paid and the average price paid per share by the existing shareholders and by the new investors based upon an initial public offering price of $ per share before deducting the estimated underwriting discounts and commissions and offering expenses payable by us:
SHARES PURCHASED TOTAL CONSIDERATION ------------------------------------ ---------------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ----------------------- -------- ----------------------- ----------------------- (IN THOUSANDS) Existing shareholders....... 24,876,975 % $114,153 % $ 4.58 ----------------------- ----------------------- New investors............... $ ---------- ----------------------- -------- ----------------------- ----------------------- Total....................... 100.0% $ 100.0% ========== ======================= =======================
These tables exclude all options that will remain outstanding upon completion of this offering. See note 7 to notes to the consolidated financial statements. The exercise of outstanding options having an exercise price less than the offering price would increase the dilutive effect to new investors. 18 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the consolidated financial statements and accompanying notes, which are included in this prospectus. The consolidated statements of operations data for the three-year period ended December 31, 1998 and the nine-month period ended September 30, 1999 and the consolidated balance sheet data as of December 31, 1997 and 1998 and September 30, 1999 are derived from, and are qualified by reference to, the audited consolidated financial statements included in this prospectus. The consolidated statements of operations data for the two-year period ended December 31, 1995 and the consolidated balance sheet data as of December 31, 1994, 1995 and 1996 are derived from, and are qualified by reference to, audited consolidated financial statements that are not included in this prospectus. The consolidated statements of operations data for the nine-month period ended September 30, 1998 are derived from unaudited financial statements included in this prospectus and, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the financial position and results of operations for this period. Historical results of operations are not necessarily indicative of future results, and the results for interim periods are not necessarily indicative of the results that may be expected for the entire year.
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------------------------- ---------------------- 1994 1995 1996 1997 1998 1998 1999 -------- -------- -------- -------- -------- ----------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenues: Licenses........................................ $ 2,084 $ 6,765 $ 6,845 $ 7,617 $10,410 $ 6,534 $ 9,620 Service and support............................. 366 772 2,819 5,190 5,750 4,225 5,372 ------- ------- -------- -------- ------- ------- -------- Total revenues.................................... 2,450 7,537 9,664 12,807 16,160 10,759 14,992 Operating expenses: Cost of licenses................................ 263 1,036 2,089 1,702 939 608 813 Cost of service and support..................... 724 2,105 4,031 6,054 5,815 4,354 4,911 Marketing and sales............................. 2,755 5,061 6,667 7,681 7,882 5,647 12,300 Research and development........................ 1,024 2,980 6,583 7,047 8,071 5,981 8,495 General and administrative...................... 376 582 718 1,315 1,151 735 2,511 ------- ------- -------- -------- ------- ------- -------- Total operating expenses.......................... 5,142 11,764 20,088 23,799 23,858 17,325 29,030 ------- ------- -------- -------- ------- ------- -------- Operating loss.................................... (2,692) (4,227) (10,424) (10,992) (7,698) (6,566) (14,038) ------- ------- -------- -------- ------- ------- -------- Other income (expense): Interest expense................................ (88) (176) (251) (240) (187) (145) (180) Interest income................................. 70 172 456 617 707 504 1,113 Other, net...................................... (22) (30) (96) (55) 143 (40) 9 ------- ------- -------- -------- ------- ------- -------- Total other income (expense)...................... (40) (34) 109 322 663 319 942 ------- ------- -------- -------- ------- ------- -------- Loss before income taxes.......................... (2,732) (4,261) (10,315) (10,670) (7,035) (6,247) (13,096) Provision for income taxes........................ -- -- -- -- -- -- Accretion of preferred stock redemption preference.................................... -- -- (49) (149) (197) (147) (285) ------- ------- -------- -------- ------- ------- -------- Net loss attributed to common shareholders...... $(2,732) $(4,261) $(10,364) $(10,819) $(7,232) $(6,394) $(13,381) ======= ======= ======== ======== ======= ======= ======== Net loss per share: Basic and diluted............................... $ (0.58) $ (0.68) $ (1.58) $ (1.63) $ (1.05) $ (0.93) $ (1.61) ======= ======= ======== ======== ======= ======= ======== Weighted average shares--basic and diluted...... 4,687 6,302 6,576 6,635 6,883 6,882 8,331
DECEMBER 31, ---------------------------------------------------- SEPTEMBER 30, 1994 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- -------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents.............................. $3,545 $10,614 $ 18,651 $ 4,924 $ 4,718 $ 7,081 Working capital........................................ 4,159 10,245 19,096 14,870 16,091 43,151 Total assets........................................... 6,242 14,787 26,074 22,072 24,308 67,727 Long-term obligations, net of current portion.......... 406 1,454 977 278 679 1,659 Convertible redeemable preferred stock................. 5,698 15,795 35,867 42,791 49,782 97,825 Total shareholders' deficit............................ (869) (4,995) (15,317) (26,093) (32,439) (40,564)
19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW MedicaLogic was founded in 1985 and released its first DOS-based electronic medical record product in 1989. In 1996, we released LOGICIAN, our Windows-based electronic medical record product. From 1994 through 1998, we concentrated on building our development and implementation capabilities by hiring additional engineering and sales personnel, improving the functionality of LOGICIAN through the release of three major upgrades, and implementing our product at customer sites. During the first nine months of 1999, we released our current version of LOGICIAN, for which we shipped an upgrade in September 1999. Our revenues totaled approximately $16.2 million and $15.0 million for the year ended December 31, 1998 and the nine months ended September 30, 1999, respectively. All of this revenue was derived from the sale and associated support and services of our LOGICIAN software product, both directly and through resellers, to physicians in integrated healthcare delivery systems. We receive software license revenues from licensing our software products both directly to end-users and indirectly through resellers. We receive service revenues from two major sources: customer support contracts and consulting contracts. Customer support revenue, which consists of annual subscription fees for ongoing support of the product, including upgrades, is recognized ratably over the term of the contract, which is typically one year. We derive consulting revenues primarily from the implementation services performed on a time-and-materials basis under separate service arrangements related to the implementation of our software products. We recognize revenues from consulting services as the services are performed. During 1996, four customers accounted for approximately 41% of total revenues. During 1997, two customers accounted for approximately 32% of our total revenues and in 1998, one customer accounted for approximately 21% of our total revenues. During the first nine months of 1999, Baylor College of Medicine accounted for approximately 31% of our total revenues and Carilion Health Systems accounted for approximately 10% of our total revenues. Costs of license revenues consist of licensing fees paid to third-party software vendors, product media, product duplication, and manuals. Costs of service revenues consist of implementation and support personnel and third-party service provider costs related to customer support. Our third-party licensing fees represent charges for use of Oracle databases and industry specific content we include in our software. The majority of these licensing fees are based on the number of licenses we distribute to our customers. Marketing and sales expenses consist primarily of salaries, commissions and bonuses earned by sales and marketing personnel, travel and promotional expenses and facility and communication costs. Research and development expenses consist primarily of salaries and benefits paid to software developers, quality assurance personnel and technical writers, equipment for software developers and payments to outside contractors. General and administrative expenses consist primarily of salaries, benefits and related costs for our finance and administrative personnel and professional services fees. We recognize software license revenues consistent with Statement of Position 97-2, SOFTWARE REVENUE RECOGNITION, as amended by Statement of Position 98-4. These statements provide guidance on applying generally accepted accounting principles in recognizing revenue on software transactions and have been applied to transactions entered into after January 1, 1998. The application of SOP 97-2 has not had a material impact on our results of operations. With the implementation of our Internet business model, we expect that our historical revenue sources, sales of software licenses and services, will gradually be replaced by sources of revenue related to our Internet business model. Our first Internet product, LOGICIAN INTERNET, was not commercially introduced until October 1999. Our consumer Web site, 98POINT6 is being tested in a pilot program and 20 will not be introduced until early 2000. Because our Internet business model is in an emerging stage, revenue and income potential from our Internet products and services is unproven. For this reason, we expect our historical revenue sources will continue to be major contributors to our overall revenues. Despite the continued importance of our historical revenue sources, you should not use our past results as a basis to predict our future performance due to the implementation of our Internet business model. In addition to our historical revenue sources, we expect to generate future revenue from the following sources: - Subscription fees for use of LOGICIAN, rather than the one-time license fees we have historically charged; - Subscription fees for LOGICIAN INTERNET, our hosted application that allows physicians and other healthcare providers to create and manage electronic medical records over the Internet; - Transaction fees for drug prescriptions transmitted through the Internet Health Services Center; - Transaction fees to process payment claims through our Internet Health Services Center; and - Fees charged to advertisers for posting banner and other forms of advertising on our physician-and consumer-oriented Web sites. The subscription revenue associated with LOGICIAN and LOGICIAN INTERNET will be recognized on a monthly basis over the life of the agreement or as services are rendered. Transaction and advertising fee revenues will be recorded as they are received. Since inception, but increasingly during the past year, we have made substantial investments in infrastructure and in staffing and management to accommodate current and anticipated future growth. From January 1, 1999 through September 30, 1999, we hired 78 employees, or approximately 34% of our current workforce, and invested approximately $9.0 million in capital assets. A large portion of these assets is dedicated to the development of our Internet Health Services Center. Our planned growth will require additional staff and infrastructure. We have incurred net losses each year since we began operations. We had a net loss of approximately $7.0 million for the year ended December 31, 1998 and $13.1 million for the nine months ended September 30, 1999 and, as of September 30, 1999, had an accumulated deficit of $48.9 million. We intend to increase further our spending on technology infrastructure development, marketing and promotion, services development and strategic relationships, all of which are related to the establishment of our Internet Health Services Center. As a result, we expect to continue incurring net losses and negative cash flows from operations at least through 2000. Effective January 1999, we acquired PrimaCis Health Information Technology, Inc. in a transaction that was accounted for as a purchase. PrimaCis, which was founded by faculty members of the Baylor College of Medicine, was a developer of electronic medical record software and had developed in-depth Internet-based oncology content for its Internet site. We paid PrimaCis shareholders total consideration of $6.3 million and paid $153,000 in merger-related costs to acquire the outstanding shares of PrimaCis capital stock. These amounts consisted of $2.1 million in cash, the issuance of shares of MedicaLogic common stock valued at $3.3 million and the assumption of $1.1 million in PrimaCis' liabilities. Of this amount, $3.3 million was allocated to a customer list, which will be amortized on a straight line basis over a two-year period. Goodwill in the amount of $3.2 million, reflecting the excess of the purchase price for PrimaCis over the fair value of the net tangible and other intangible assets acquired, will be amortized on a straight-line basis over a four-year period. At about the time of the PrimaCis acquisition, we entered into an agreement with the Baylor College of Medicine. This agreement provides that for each purchase of licenses of LOGICIAN by December 31, 2002 by Baylor College of Medicine or any other institution or health care provider in 21 the Houston, Texas area, we will issue as payment to Baylor College of Medicine shares of our common stock having a then-current fair market value equal to 50% of the license fees received from that sale, up to an aggregate maximum of $12.0 million of our common stock. We account for sales of LOGICIAN in the Houston, Texas area in one of two ways: when we sell additional licenses to Baylor College of Medicine, the amount of revenue we recognize reflects a sales discount equal to 50% of the license fee; and when we sell licenses covered by this agreement to others, we reflect the payment to Baylor College of Medicine in the form of a sales commission. For the nine months ended September 30, 1999, we recorded aggregate deferred compensation of $1.1 million for the grant of stock options and restricted stock at prices less than the estimated fair value on the grant date. We expect to record additional deferred compensation of $538,000 in the fourth quarter of 1999. The deferred compensation is being amortized over the vesting period of the securities, which is generally three years. Of the total deferred compensation, $70,000 was amortized through the nine-month period ended September 30, 1999. RESULTS OF OPERATIONS
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------ ------------------------- 1996 1997 1998 1998 1999 -------- -------- -------- ----------- -------- (UNAUDITED) Revenues: Licenses....................................... 70.8% 59.5% 64.4% 60.7% 64.2% Service and support............................ 29.2 40.5 35.6 39.3 35.8 ------ ----- ----- ----- ----- Total revenues................................. 100.0 100.0 100.0 100.0 100.0 Operating expenses: Cost of licenses............................... 21.6 13.3 5.8 5.7 5.4 Cost of service and support.................... 41.7 47.3 36.0 40.5 32.8 Marketing and sales............................ 69.0 60.0 48.8 52.5 82.0 Research and development....................... 68.1 55.0 49.9 55.6 56.7 General and administrative..................... 7.4 10.3 7.1 6.8 16.7 ------ ----- ----- ----- ----- Total operating expenses..................... 207.8 185.9 147.6 161.1 193.6 Operating loss................................. (107.8) (85.9) (47.6) (61.1) (93.6) Other income (expense): Interest expense............................... (2.6) (1.9) (1.2) (1.3) (1.2) Interest income................................ 4.7 4.8 4.4 4.7 7.4 Other, net..................................... (1.0) (0.4) 0.9 (0.4) 0.1 ------ ----- ----- ----- ----- Total other income (expense):................ 1.1 2.5 4.1 3.0 6.3 Loss before income taxes..................... (106.7) (83.4) (43.5) (58.1) (87.3) Provision for income taxes....................... -- -- -- -- -- ------ ----- ----- ----- ----- Net loss..................................... (106.7)% (83.4)% (43.5)% (58.1)% (87.3)% ====== ===== ===== ===== =====
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 REVENUES Total revenues, which consisted of software licenses and service revenues, increased to $15.0 million for the first nine months of 1999 from $10.8 million for the first nine months of 1998. This increase primarily resulted from an increase of $3.1 million in software revenue, which in turn was 22 primarily attributable to increases in the average selling price of LOGICIAN, partly offset by a decrease in the total licenses sold. The increase in the average selling price resulted primarily from a higher percentage of products sold through direct channels versus products sold through reseller channels. Total service revenue increased to $5.4 million for the first nine months of 1999 from $4.2 million for the first nine months of 1998, due primarily to an increase in our LOGICIAN installed base to 7,468 users on September 30, 1999 from 5,486 users on September 30, 1998. Service revenue represented 36% of our total revenues for the first nine months of 1999 and 39% for the same period in 1998. The decrease as a percentage of total revenue was due primarily to the relatively higher increase in software license revenue compared to service revenue. OPERATING EXPENSES COSTS OF REVENUES Costs of licenses increased 34%, to $813,000 for the first nine months of 1999 from $608,000 for the first nine months of 1998. Costs of licenses as a percentage of related license revenues was 8% for the first nine months of 1999 and 9% for the first nine months of 1998. We anticipate some increased costs for third party licensing fees as we add additional third party content. Costs of service and support increased 13%, to $4.9 million for the first nine months of 1999 from $4.4 million for the first nine months of 1998. The increase in dollar amount resulted primarily from an increase in support and implementation personnel. Costs of service and support as a percentage of related service revenues was 91% for the first nine months of 1999 and 103% for the first nine months of 1998. The decreases in marginal costs of service and support as a percentage of the related service revenues resulted from allocating these costs over a larger revenue base. The cost of providing service to customers as a percentage of associated revenues often varies between periods because the costs of implementation and support personnel are relatively fixed and, at any given time, the staff may not be fully utilized. If we are required to hire additional support staff to service installed licenses on support contracts, we may experience short term increases in costs relative to the revenue produced. MARKETING AND SALES Marketing and sales expenses increased to $12.3 million for the first nine months of 1999 from $5.6 million for the first nine months of 1998. Marketing and sales expenses represented 82% of our total revenues for the nine months ended September 30, 1999 and 53% of our total revenues for the nine months ended September 30, 1998. The increase in dollar amount and percentage of our marketing and sales expenses resulted primarily from costs of $500,000 related to our LOGICIAN INTERNET Beta Program, amortization of costs of $1.2 million related to acquiring PrimaCis' customer list, incremental expenses of $3.6 million related to our new Internet business, including the cost of independent contractors and the hiring of 27 new employees, and an increase of $900,000 in other marketing activities, including trade shows and public relations. We believe that we will need to continue to increase our sales and marketing efforts to expand our market penetration and increase acceptance of our Internet products and services. 23 RESEARCH AND DEVELOPMENT Research and development expenses increased to $8.5 million for the first nine months of 1999 from $6.0 million for the first nine months of 1998. Of the increase, $1.4 million was used to fund an increase in the number of software developers and quality assurance personnel to 81 as of September 30, 1999 from 55 as of September 30, 1998 and $560,000 to fund the use of outside contractors to support our product development and testing activities. Research and development costs represented 57% of total revenue for the nine months ended September 30, 1999 and 56% of total revenues for the nine months ended September 30, 1998. GENERAL AND ADMINISTRATIVE General and administrative expenses increased to $2.5 million for the first nine months of 1999 from $735,000 for the first nine months of 1998. The increase resulted from amortization of $539,000 of goodwill related to the PrimaCis acquisition, $70,000 in compensation expense related to issuing securities below the estimated fair value, and an increase in finance and administrative personnel to 23 as of September 30, 1999 from 9 as of September 30, 1998, to support the growth of our business. These increases were partially offset by a net decrease of $175,000 related to the settlement of litigation related to two customer contracts. General and administrative cost represented 17% of our total revenues for the nine months ended September 30, 1999 and 7% of our total revenues for the nine months ended September 30, 1998. We believe our general and administrative expenses will continue to increase as we expand our administrative staff and incur expenses associated with becoming a public company, including, annual and other public reporting costs, director and officer liability insurance, investor relations programs and professional services fees. OTHER INCOME (EXPENSE) Other income consists of earnings on our cash and cash equivalents and short-term investment balances offset by interest expense associated with debt obligations and other non-operating costs. Other income was $942,000 for the first nine months of 1999 compared to $319,000 for the first nine months of 1998. The increase in other income is primarily the result of an increase of $609,000 in interest earned on cash and cash equivalents and short term investments. PROVISION FOR INCOME TAXES As a result of our net operating losses, no provision for income taxes during the nine-month periods ended September 30, 1999 and 1998 was recorded. As of September 30, 1999 we had net operating loss carryforwards for tax reporting purposes of approximately $48.0 million and research and experimentation credits of approximately $1.6 million which expire through 2019. Approximately $7.1 million of the net operating loss is subject to an annual utilization limitation due to ownership changes in prior years. YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998 REVENUES Total revenues increased from $9.7 million in 1996 to $12.8 million in 1997, and to $16.2 million in 1998. License revenues increased from $6.8 million in 1996 to $7.6 million in 1997, and to $10.4 million in 1998. The increase in license revenues from 1996 to 1997 primarily resulted from an increase in the average selling price from 1996 to 1997 due to more sales through direct rather than reseller channels. The increase in license revenues from 1997 to 1998 continued the trend of realizing higher average selling prices through our direct sales channel. 24 Service revenues increased from $2.8 million in 1996 to $5.2 million in 1997, and to $5.8 million in 1998. The increase in the dollar value of service revenues is the result of support contracts on newly installed licenses that have been added each year. Service revenue represented 29% of total revenues in 1996, 41% in 1997 and 36% in 1998. The fluctuation in service revenues as a percentage of total revenues reflects purchasing and implementation cycles of our customers and a lower level of revenues during the early period of our business. OPERATING EXPENSES COSTS OF REVENUES Costs of licenses decreased from $2.1 million in 1996 to $1.7 million in 1997, and to $939,000 in 1998. Costs of license revenues as a percentage of license revenues was 31% in 1996, 22% in 1997 and 9% in 1998. The decrease in dollar amounts and percentage of revenue amounts from 1997 to 1998 is primarily due to the more favorable license fee terms negotiated with Oracle. Costs of service and support increased from $4.0 million in 1996 to $6.1 million in 1997, and decreased to $5.8 million in 1998. Costs of service revenues as a percentage of service revenues was 143% in 1996, 117% in 1997 and 101% in 1998. The decrease in dollar amount from 1997 to 1998 reflects the reorganization of our consulting practice, which included personnel changes, the relocation of personnel to in-home offices from rented space and the reduction of our use of third-party contractors and the decreasing marginal cost of service on each additional installed license. MARKETING AND SALES Marketing and sales expenses increased from $6.7 million in 1996 to $7.7 million in 1997, and to $7.9 million in 1998. The increases in marketing and sales expenses from 1996 to 1998 resulted primarily from an increase in commissions paid to sales staff based on increased sales and marketing activities, including trade shows and public relations. Marketing and sales expenses represented 69% of our total revenues in 1996, 60% in 1997 and 49% in 1998. The decrease in marketing and sales expenses as a percentage of total revenues reflects the more rapid growth in our revenues compared to the growth of marketing and sales expenses due to our early investment in marketing activities to create product awareness. RESEARCH AND DEVELOPMENT Research and development expenses increased from $6.6 million in 1996 to $7.0 million in 1997, and to $8.1 million in 1998. The increases in research and development expenses from 1996 to 1998 resulted from an increase in the number of software developers and quality assurance personnel and the use of outside contractors to support our product development and testing activities. Research and development costs represented 68% of total revenues for 1996, 55% in 1997 and 50% in 1998. The decrease in research and development expenses as a percentage of total revenues primarily reflects the higher increase in revenues relative to the increase in research and development staff to develop and enhance our LOGICIAN product. GENERAL AND ADMINISTRATIVE General and administrative expenses increased from $718,000 in 1996 to $1.3 million in 1997, and decreased to $1.2 million in 1998. The increase from 1996 to 1998 resulted primarily from the addition of finance and administrative personnel and professional services to support the growth of our business during these periods and, in 1997, reflects an accrual of $450,000 for litigation expenses. General and administrative expenses represented approximately 7% of total revenues in 1996, 10% in 1997 and 7% in 1998. 25 OTHER INCOME (EXPENSE) Other income increased from $109,000 in 1996 to $322,000 in 1997, and to $663,000 in 1998. The increase from 1996 to 1998 in other income is mainly attributable to an increase in interest earned on cash and cash equivalents and short term investments. PROVISION FOR INCOME TAXES As a result of our net operating loss in 1998 and prior years, we made no provision or benefit for federal or state income taxes. QUARTERLY RESULTS OF OPERATIONS The following table presents our unaudited quarterly results of operations for 1998 and the first nine months of 1999. You should read the following table in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. We have prepared this unaudited information on the same basis as the audited consolidated financial statements. This table includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and results of operations for the quarters presented. You should not draw any conclusions about our future results from the results of operations for any quarter.
THREE MONTHS ENDED ------------------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, 1998 1998 1998 1998 1999 1999 1999 ---------- --------- -------------- ------------- ---------- --------- -------------- (DOLLARS IN THOUSANDS) Revenues: License.................. $ 1,417 $ 2,572 $ 2,545 $ 3,876 $ 2,137 $ 3,650 $ 3,833 Service and support...... 1,394 1,276 1,555 1,525 1,490 1,698 2,184 ------- ------- ------- ------- ------- ------- ------- Total revenues......... 2,811 3,848 4,100 5,401 3,627 5,348 6,017 Operating expenses: Cost of revenue--license....... 234 215 158 332 188 279 346 Costs of revenue--service and support............ 1,420 1,414 1,521 1,460 1,414 1,537 1,960 Sales and marketing...... 1,742 1,943 1,962 2,235 2,749 3,510 6,041 Research and development............ 1,886 2,027 2,068 2,090 2,292 2,800 3,403 General and administrative......... 203 248 284 416 136 793 1,582 ------- ------- ------- ------- ------- ------- ------- Total operating expense.............. 5,485 5,847 5,993 6,533 6,779 8,919 13,332 Operating loss............. (2,674) (1,999) (1,893) (1,132) (3,152) (3,571) (7,315) Other income (expense), net...................... 36 139 144 344 211 206 525 ------- ------- ------- ------- ------- ------- ------- Loss before income tax..... (2,638) (1,860) (1,749) (788) (2,941) (3,365) (6,790) Provision for income taxes.................... -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Net income................. $(2,638) $(1,860) $(1,749) $ (788) $(2,941) $(3,365) $(6,790) ======= ======= ======= ======= ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have primarily financed our operations through private placements of equity securities with investors such as Continental Casualty Company; Dell Computer Corporation; Franklin Capital Associates III, L.P.; Furman Selz SBIC, L.P.; Glynn Ventures III, L.P.; New Enterprise Associates VI, Limited Partnership; Sequoia funds; Soros investment funds; and VHA, Inc. As of September 30, 1999, net proceeds from these private placements totaled $97.0 million. 26 As of September 30, we had cash and cash equivalents of $7.1 million and short term investments of $38.1 million. We have a $3.3 million term loan facility with General Electric Capital Business Asset Funding Corporation to finance the purchase of new capital equipment. We have borrowed $2.1 million under this facility, and $1.2 million remains available. Notes issued under this facility are payable in two years if they relate to the purchase of computer equipment and in three years if they relate to other office equipment. Interest accrues annually at rates ranging from 9.4% to 10.4%. Principal and interest are payable monthly in arrears and amortized over the term of the note. In August 1999, we entered into a leasing arrangement for the purpose of leasing computer equipment for the development of our Internet products and services. The cost of the financed equipment totaled $1.8 million with a lease term of two years. We paid $423,000 of this amount as a down payment. The remaining principal and interest is amortized over the life of the lease. Our operating activities resulted in net cash outflows of $4.3 million for the first nine months of 1999 and $5.0 million for the first nine months of 1998. The reduction in cash outflows during the first nine months of 1999 resulted from improved collections on customer contracts and an increase in accounts payable due to the timing of invoice due dates. Cash outflows in 1997, 1998 and 1999 resulted from our continued investment in research and development, consulting services and sales and marketing, which led to operating losses. Investing activities used cash of $42.4 million in the first nine months of 1999. Of that amount, $9.0 million was used to purchase fixed assets, $2.1 million was used for the acquisition of PrimaCis and $43.0 million was invested in short term investment instruments. Financing activities provided cash of $49.1 million in the nine months ended September 30, 1999, $7.8 million in 1998 and $5.6 million in 1997, primarily through the issuance of equity securities and partially offset by payments on capital equipment lease and note obligations. We currently anticipate that we will continue to experience significant growth in our operating expenses as we: - Enter new markets for our products and services; - Increase marketing activities; - Increase research and development spending; - Develop new distribution channels; - Expand our infrastructure; and - Improve our operational and financial systems. These operating expenses will consume a material amount of our cash resources, including a large portion of the proceeds of this offering. We believe the net proceeds of this offering, together with our existing cash and cash equivalents, and available bank borrowings, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Thereafter, we may require additional funds to support our working capital requirements or for other purposes and may seek to raise these additional funds through public or private equity financing or from other sources. We may not be able to obtain adequate or favorable financing at that time. Any financing we obtain may dilute your ownership interest. YEAR 2000 COMPLIANCE Many currently installed computer systems are not capable of distinguishing 21(st) century dates from 20(th) century dates. As a result, beginning on January 1, 2000, computer systems and software used by many companies and organizations in a wide variety of industries including technology, transportation, utilities, finance and telecommunications, will produce erroneous results or fail unless they have been 27 modified or upgraded to process date information correctly. Significant uncertainty exists in the software industry and other industries concerning the scope and magnitude of problems associated with the century change. We recognize the need to ensure our operations will not be adversely affected by Year 2000 software failures. We are assessing the readiness of our software products and our information technology and non-information technology systems and the potential overall impact of the impending century change on our business, financial condition and results of operations. Based on our assessment to date, we believe the current versions of our software products are Year 2000 compliant; that is, they are capable of adequately distinguishing 21(st) century dates from 20(th) century dates. However, our products are generally integrated into enterprise systems involving sophisticated hardware and complex software products that may not be Year 2000 compliant. We periodically review our internal management information technology and other systems to identify any products, services or systems that are not Year 2000 compliant and to take corrective action. Significant information technology systems include our production system, composed of the servers, networks and software that comprise the underlying technical infrastructure that runs our business, and various internal office systems. Our significant non-information technology systems include the telephone systems, air conditioning and security system. To date, we have not encountered any material Year 2000 problems with our computer systems or any other equipment that might be subject to these problems. In addition to assessing the readiness of our systems, we have gathered information from, and have directly communicated through written correspondence, telephone calls and in face-to-face meetings with, our third-party systems and software vendors, as well as other suppliers, to identify and, to the extent possible, resolve issues involving the Year 2000 problem. Based on representations made to us by applicable suppliers, we believe that the third-party software and systems that are material to our business are Year 2000 compliant. However, we have limited or no control over the actions of our third-party suppliers. Thus, while we expect that we will be able to resolve any significant Year 2000 problems with our systems, we cannot guarantee that our third-party suppliers will resolve all Year 2000 problems with their systems before the occurrence of a material disruption to our business. Any failure of material third-party suppliers to resolve Year 2000 problems with their systems in a timely manner would have a negative effect on our ability to conduct business. The majority of our Internet development and marketing groups will be moving into a new facility in the fourth quarter of 1999 at a location currently under construction. Before the relocation, we will complete our evaluation of whether the infrastructure and building systems associated with the facility, such as security and sprinkler systems, and all information technology systems, such as telephone and computer network systems, are Year 2000 compliant. In addition, we cannot be certain that governmental agencies, utility companies, Internet access companies, third-party service providers and others outside of our control will be Year 2000 compliant. The failure by these entities to be Year 2000 compliant could result in a systemic failure beyond our control, such as a prolonged Internet, telecommunications or electrical failure, that could prevent us from delivering our services to our customers, decrease the use of the Internet or prevent users from accessing our Web site, any of which could have a material adverse effect on our business, financial condition and results of operations. We do not expect the total cost of these Year 2000 compliance activities to be material to our business, financial condition and results of operations. To date, we have spent approximately $450,000 on Year 2000 compliance issues and expect to incur approximately $200,000 in additional expenses to evaluate and address these issues. These costs and the timing of when we plan to complete our Year 2000 modifications and testing processes are based on our management's estimates. However, we may not identify and correct all significant Year 2000 problems before January 1, 2000. Year 2000 28 compliance efforts may involve significant time and expense and unremediated problems could materially adversely affect our business, financial condition and results of operations. We may face claims based on Year 2000 problems in other companies' products or issues arising from the integration of multiple products within an overall system. Although we have not been a party to any litigation or arbitration proceeding involving our products or services on Year 2000-related disputes, any liability we have for Year 2000 related damages, including consequential damages, could materially adversely affect our business, financial condition and results of operations. In addition, we believe that the purchasing patterns of customers and potential customers may be affected by Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those we offer. To the extent Year 2000 issues cause a significant delay in, or cancellation of, decisions to purchase our products or services, our business, financial condition and results of operations would be materially adversely affected. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. Because we currently hold no derivative financial instruments and do not currently engage in hedging activities, adoption of SFAS No. 133 is expected to have no material impact on our financial condition or results of operations. In June 1999, the FASB issued Statement No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133. Statement No. 137 defers the effective date of Statement No. 133 for one year. Statement No. 133, as amended, is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. In March 1998, the American Institute of Certified Public Accountants, or AICPA, issued Statement of Position, or SOP, 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1 requires that entities capitalize some costs related to internal use software once specified criteria have been met. We are required to implement SOP 98-1 for the year ending December 31, 1999. Adoption of SOP 98-1 is expected to have no material impact on our financial condition or results of operations. In December 1998, the AICPA issued SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS. SOP 98-9 requires recognition of revenue using the "residual method" in a multiple-element software arrangement when fair value does not exist for one or more of the delivered elements in the arrangement. Under the "residual method," the total fair value of the undelivered elements is deferred and recognized in accordance with SOP 97-2. We are required to implement SOP 98-9 for the year ending December 31, 2000. SOP 98-9 also extends the deferral of the application of SOP 97-2 to other multiple-element software arrangements through our fiscal year ending December 31, 1999. Adoption of SOP 98-9 is expected to have no material impact on our financial condition or results of operations. 29 BUSINESS OVERVIEW Our business is connecting physicians and patients through the Internet. For physicians, we offer a line of enterprise and Internet-based electronic medical record products and services for use at the point of care in the exam room, with configurations suitable for practices of all sizes. For patients, we will provide a Web site that will allow them to access healthcare information from their physician-generated medical record, enter personal medical information and effectively communicate with their physician. For both physicians and patients, we will provide focused healthcare content and commerce opportunities, keyed to information in a selectively shared database that unites physicians and patients. Together, these products, services and databases will comprise our Internet Health Services Center. We believe we can increase the efficiency and quality of healthcare and enhance the physician-patient relationship through our Internet Health Services Center. Founded in 1985, MedicaLogic has been developing, marketing and supporting electronic medical records for over a decade and has products in daily use by physicians across the country. While most healthcare information systems have primarily supported financial and administrative functions, we have focused exclusively on the challenge of providing clinical solutions that are used by physicians at the point of care to create and access the electronic medical record. Our customers include academic medical centers such as Baylor College of Medicine in Houston, Texas, integrated healthcare delivery systems such as Providence Health System in Portland, Oregon, and other customers such as the NASA space shuttle program. More than 7,000 health professionals, including approximately 3,000 physicians, now maintain electronic medical records with our enterprise electronic medical record software, constituting an estimated base of over 7 million electronic patient records. Our technology will use the Internet to link healthcare consumers to physicians using either our enterprise or Internet-based electronic medical record. We believe we are a leading provider of electronic medical record software in the healthcare industry. The Internet, with its open architecture and broadening availability at home, in the workplace and at the point of care, makes it possible for us to create our Internet Health Services Center and make electronic medical records more useful and cost-effective for physicians who practice alone, in small groups or with integrated healthcare delivery networks. As a result, we believe we can substantially accelerate the rate of adoption of electronic medical record technology by physicians. As these electronic medical records are created, our Internet Health Services Center will make available to consumers accurate and timely access to their physician-created medical information. By connecting physicians and consumers around this shared database of Internet health records, we believe we can enhance the physician-patient relationship and make common communications processes, such as prescription refills or appointment requests, much more convenient. Finally, we expect to offer healthcare consumers a combination of health news, education, goods and services that will be precisely tailored to their health status and interests because it will be based on the physician-created clinical information included in their personal health record. INDUSTRY BACKGROUND OVERVIEW OF THE HEALTHCARE INDUSTRY. According to the Health Insurance Association of America, healthcare is the largest single sector of the U.S. economy, consuming approximately $1 trillion annually, or 14% of the country's gross domestic product. The participants include: - PATIENTS: the individual consumers of healthcare services; - PROVIDERS: physicians and organizations such as hospitals, rehabilitation centers and nursing homes; 30 - SUPPLIERS: manufacturers and distributors of goods such as pharmaceuticals, medical devices and healthcare supplies, and providers of ancillary services such as laboratories and others; and - PAYERS: the Medicare and Medicaid programs, indemnity insurers, health plans, employers, individuals, government agencies, insurance companies, managed care organizations and other enterprises that pay the bills for healthcare. In the midst of this complex industry, and despite additional complexity introduced by managed care programs, the physician remains the ultimate decision-maker. Based on data contained in 1999 ENVIRONMENTAL ASSESSMENT, a joint publication of VHA and Deloitte & Touche, 85% of the dollars spent on healthcare, such as admitting patients and ordering lab tests, are initiated by the attending physician. However, the information the physician relies upon to make healthcare decisions is largely contained in a paper record that often is unorganized and cannot be sorted or retrieved easily or effectively. Inefficiencies within the healthcare system consume enormous amounts of time, resources and money. In a recent report to Congress and the General Accounting Office dated November 1998, the Health Care Financing Administration, or HCFA, estimated that over $250 billion, or 25% of every healthcare dollar, is wasted through the delivery of unnecessary care, performance of redundant tests and procedures and excessive administrative costs. As a result, HCFA has instituted a program to monitor physician billing practices, which has forced physicians to spend more time writing and dictating to comply with strict documentation requirements. Because of this regulatory burden and other administrative burdens created by managed care, the length of a typical physician-patient encounter has been reduced. THE PATIENT MEDICAL RECORD. The patient medical record developed and maintained by the physician is of paramount importance in the U.S. healthcare system. This medical record chronicles all patient history, encounters, medication orders, procedures, referrals and vital statistics. All transactions, from the order of laboratory tests, medical procedures and medication prescriptions to invoice generation, payment requests, payer documentation compliance and clinical research data compilation are recorded in the patient's medical record. Physicians require this information about specific patients to diagnose accurately and prescribe appropriate treatments. Despite increasing needs by the healthcare industry for information about its processes and outcomes, the vast majority of clinical data is still recorded today in handwritten or hand-typed notes filed within paper charts which cannot be accessed or aggregated and organized electronically. Recent studies have demonstrated that paper charts are unavailable for patient encounters up to 30% of the time, and that the data within them is frequently inaccurate and incomplete, missing diagnoses, allergies, medication details, and plans for follow-up. Studies show that six out of every 100 hospital admissions are the result of an adverse drug event of which 28% were preventable. Besides the obvious impact on quality, studies have also shown cost consequences, such as laboratory tests being unnecessarily duplicated 11% of the time solely because results have been misfiled. GROWTH OF THE INTERNET AND APPLICABILITY TO HEALTHCARE. The Internet's open architecture, accessibility and growing acceptance make it an increasingly important means of information exchange for both business-to-business and business-to-consumer interaction. Use of the Internet is rapidly expanding from simple information publishing, messaging and data gathering to critical business transactions and confidential communications. We believe the Internet has changed the electronic medical records software environment and made computerized tools more useful and acceptable to physicians. In the past, two principal factors have limited the rate of adoption by physicians of computerized tools for creating and accessing the medical record. First, the cost of acquiring, installing and maintaining the workstations, servers and networks required for a conventional client-server product exceeds the capital budgets of most physician practices. Second, there has been a shortage of personnel skilled in implementing advanced 31 information technology within the physician office sector. Internet-hosted applications have the potential to dramatically lower the capital and resources required of customers, insulating them from the cost and complexity of server configuration and administration. In addition, the availability and falling cost of personal computers, and the simple point-and-click paradigm of the Internet have raised the level of computer usage within the general population and clearly shown the benefit of easily accessible digital information. Physicians have not been left behind in this diffusion of new technology: a 1998 survey published in Modern Physician magazine reported that 84% of doctors surveyed used the Internet for e-mail and 78% used the Internet for educational purposes. Moreover, reports indicate that this trend will continue as a new generation of physicians who are more familiar with Internet technology enter the profession. CONSUMER INTEREST IN HEALTHCARE INFORMATION. Consumer interest in healthcare information is growing rapidly, driven in part by consumers' needs to form their own opinions about treatment options and restrictions imposed by their health plan, as well as a perception that physicians have less time to explain their health conditions and treatments to them. According to a 1997 survey in the Journal of the American Medical Association, 43% of U.S. adults who used the Internet were seeking health information. According to CYBER DIALOGUE, 78% of Internet users with health insurance are interested in managing their health insurance benefits online and 23% of all Internet users are interested in purchasing prescription drugs online. Also according to CYBER DIALOGUE, 90% of all Internet users have health insurance. In addition, the Department of Health and Human Services has recently adopted guidelines stipulating that individuals have a right to access their own or their dependents' medical information. Finally, as healthcare payment models shift more of the financial responsibility for healthcare to the consumer, we expect consumer interest in healthcare information and treatment options to increase. THE MEDICALOGIC SOLUTION Our solution is the Internet Health Services Center, which will integrate the following: - ELECTRONIC MEDICAL RECORDS--for physicians, Internet-hosted applications, which have been commercially available since October 1999, and Internet-enabled client-server applications, which will become commercially available in early 2000, used at the point of care to document physician-patient encounters and manage clinical information. - PERSONAL HEALTH PORTFOLIO--for consumers, a compelling Internet application, which will become commercially available in early 2000, and let consumers maintain a personal health portfolio, combining portions of their physician-created electronic medical record with personally entered information. - CONTEXT-SPECIFIC CONTENT AND E-COMMERCE--for both consumers and physicians, health information content and e-commerce opportunities, which will become commercially available beginning in mid 2000, precisely tailored to the patient's clinical conditions and needs based on data in the Internet Health Record. The content and e-commerce will be provided through strategic relationships with our e-healthcare partners. - INTERNET HEALTH RECORD--a highly secure, clinically rich and deeply structured core database for use by physicians, patients and our strategic partners, which, beginning in early 2000, will combine data from the electronic medical record, the personal health portfolio and our strategic partners. This core database will allow for the sharing of selective data among all the participants in the Internet Health Services Center. 32 The shaded center of the following diagram shows graphically that the Internet Health Record will consist of data in personal health portfolios entered by patients, data in electronic medical records entered by physicians and services and content provided by our strategic eHealthcare partners. THE MEDICALOGIC INTERNET HEALTH SERVICES CENTER eHEALTHCARE PARTNERS [GRAPHIC] HEALTHCARE CONSUMERS PHYSICIANS [graphic containing three overlapping circles. In the top circle is caption "Context-specific Content and e-Commerce," in the left circle is caption "Personal Health Portfolio" and in the right circle is caption "Electronic Medical Record." The overlapping section of the three circles contains the caption "Internet Health Record."] The MedicaLogic solution provides the following key benefits: IMPROVED QUALITY OF CARE. Our solution is designed to increase patient medical information flows among all healthcare participants, which we believe will ultimately result in more accurate diagnoses and more timely and appropriate treatments. Online access to accurate, up-to-date healthcare records will facilitate timely and accurate determinations by physicians regarding a patient's condition and appropriate treatment. In particular, this access could significantly enhance the ability of providers in remote areas to provide quality care. Using our solution, physicians will be able to enter and access patient-specific data online at the point of care, allowing them, for example, to review data regarding potentially harmful drug interactions, without manually searching through the often unorganized and incomplete paper records. We believe these are just a few of the benefits provided by our solution that will result in improved quality of care. EMPOWER HEALTHCARE CONSUMERS WITH INFORMATION REGARDING THEIR HEALTHCARE. Whether they see a physician themselves on a regular or episodic basis, or act as a coordinator of healthcare for a child, elderly parent or other relative, healthcare consumers want more information and more control over their healthcare needs. Through the use of the Internet, our solution is designed to increase information flows among all healthcare participants, including patients, which ultimately gives patients greater control. For healthy adults, our solution will help them gather their medical and family history and set and achieve wellness goals. For those with significant illness together with these persons' healthcare coordinators, our solution will allow them to manage multiple patient records generated by different physicians, provide a physician-patient communication channel for managing disease, deliver educational information and offer a convenient way to purchase healthcare products. With the adoption of legislation and guidelines that will require providers to give patients access to their medical records, we believe the electronic access to healthcare records that will be provided to patients and others 33 through our solution is timely and significant. Likewise, our solution will permit consumers to communicate electronically with other healthcare participants, such as payers and suppliers, giving them quicker, more efficient and more effective access to prescription drugs, payment services and information and other health-related supplies and services. IMPROVED PHYSICIAN-PATIENT RELATIONSHIP. Our Internet solution is designed to facilitate communication between physicians and patients. We believe improved physician access to information at the point of care will result in higher-quality clinical interaction between physicians and patients. Likewise, providing patients with better access to information and electronic communication with physicians will result in a better understanding of physician instructions by patients and, ultimately, a lower risk of treatment error. REDUCED HEALTHCARE COSTS. Our solution is designed to reduce healthcare costs and improve the management of patient records by reducing the inefficiencies of manual and paper-based transactions, eliminating redundant data entry, reducing transcription costs, reducing hospitalizations related to harmful drug interaction events, reducing repetitive and unnecessary laboratory tests resulting from inaccurate or misplaced records, rationalizing entry and availability of Health Care Financing Administration-mandated patient chart and account coding information and decreasing the communication inefficiencies created by isolated proprietary systems. In addition, through greater efficiency and better access to patient medical records, health maintenance should be improved and the costs of treatment reduced. OUR GROWTH STRATEGY Our objective is to be the leading provider of Internet-based electronic health record information. Our strategy to achieve this objective has the following key elements: GAIN RAPID ADOPTION BY PHYSICIANS OF OUR ELECTRONIC MEDICAL RECORD SOLUTIONS. We intend to build on our position as the leading provider of electronic medical record solutions to define the industry standard for this service. Using Internet technology, we are delivering a solution at a dramatically lower cost than was previously possible, which will allow the physician to reduce his operating costs from the first month of use. We believe the value of our solution to physicians will increase and its adoption rate will accelerate as physicians standardize on electronic records and it becomes possible to exchange electronic medical records in the course of referrals and transfers of care. Another key component of creating physician-friendly software is our unique KnowledgeBank, an Internet-based community repository that is available today at our MEDICALOGIC.COM Web site and allows physicians to submit their ideas for the design and layout of clinical encounter forms. The best ideas are implemented and then made available to all physician customers at no additional cost. As a result of KnowledgeBank, the refinement and applicability of our product for specific practices has been continually increasing. As of September 30, 1999, our electronic medical record solutions were being used by more that 7,000 health professionals, including approximately 3,000 physicians, constituting an estimated base of over 7 million electronic patient records. OFFER THE MOST COMPELLING WEB DESTINATION FOR HEALTHCARE CONSUMERS. We believe that our Web-site, 98POINT6, will be highly valued by consumers. This Web site is currently being tested in a pilot program and will be released commercially in early 2000. When released, the Web site will provide consumers with access to portions of their physician-generated medical records, enable consumers to communicate with physicians and contain highly personalized content surrounding a patient's personal health data. We also believe that as word spreads among consumers of this new level of healthcare service, consumers' usage will increase physician interest in adopting the electronic medical records solutions that make the Internet Health Record possible. 34 BECOME A CATALYST OF CLINICAL E-COMMERCE TRANSACTIONS. Because of our unique position at the point of care, where clinical decisions are made that influence the majority of healthcare expenditures, we believe our systems can provide decision support that makes healthcare more consistent and efficient. For example, in LOGICIAN, the physician can quickly select a drug, screen the patient's medical record for harmful drug interactions, check the cost and confirm the acceptability of the chosen drug within the formulary of that patient's health plan, all before the physician has released the prescription to the patient. Without electronic medical records, none of the automatic checks are made, and prescriptions may be rejected when the patient arrives at the pharmacy, creating inefficiencies and frustrations. The desirability of using our systems at the point of care will position us to become a catalyst of clinical e-commerce transactions, which will be completed through strategic partnerships with the appropriate healthcare stakeholders, such as pharmacies, laboratories and electronic claims clearinghouses. We expect these e-commerce services to start becoming available in mid 2000. UTILIZATION OF OUR LARGE, CLINICALLY-RICH DATABASE. As physicians and patients use our systems, we will develop a large and clinically-rich database. With the consent of providers and patients, and in accordance with legal requirements, the aggregated statistical and epidemiological data may be marketed to a range of interested parties in the healthcare industry. These include clinical research organizations, pharmaceutical companies and governmental agencies. We believe that the information in this database has the potential to become one of the most valuable resources in the healthcare industry. We expect to begin providing data to these third parties in late 2000 or early 2001. PRODUCTS AND MARKETS The primary target markets for our solution consist of healthcare providers and healthcare consumers. The healthcare provider market is divided into two segments: physicians in private practice and physicians in integrated healthcare delivery systems. In addition, with appropriate patient consent, and in compliance with applicable law, we intend to aggregate anonymous data contained in the Internet Health Record and market the information to a variety of parties in the healthcare industry. PHYSICIANS IN PRIVATE PRACTICE. There are approximately 450,000 physicians in private practice, constituting approximately 75% of the practicing physician population in the United States. Our product offering for this market is LOGICIAN INTERNET, which we introduced commercially in October 1999. LOGICIAN INTERNET provides the following benefits: - The creation of required documentation at a lower cost and with higher quality than is currently possible with handwriting or dictation/transcription; - The ability to verify automatically compliance with Health Care Financing Administration documentation guidelines for the level of service billed; - The ability to obtain secure and rapid access to key patient clinical information from any Web browser by accessing the MEDICALOGIC.COM Web site; - The ability to be used at the point of care in the exam room, without requiring a continuous Internet connection; - The ability to securely store electronic records at our data center; and - Additional planned benefits in future releases including integration of laboratory results, electronic prescription transmission, claims submission and eligibility checking as well as the ability of physicians to communicate with patients using 98POINT6 by sharing records data and exchanging messages on the patients' personal health portfolios. We expect these features to start becoming available in mid 2000. 35 To minimize the challenges for nontechnical users in installing software and obtaining Internet access, LOGICIAN INTERNET is available as a complete, ready-to-run solution. For a monthly fee, a physician receives a complete package that includes an ultramobile laptop computer from Dell Computer Corporation, pre-installed speech recognition software from Lernout & Hauspie, Internet access service and the LOGICIAN INTERNET hosted application with storage for an unlimited number of charts. For users who already have a suitable computer and Internet access, the hosted application and storage service is made available at a lower monthly fee. PHYSICIANS IN INTEGRATED HEALTHCARE DELIVERY SYSTEMS. Integrated healthcare delivery systems currently employ approximately 150,000 physicians. Our solutions for this market include LOGICIAN, a comprehensive client-server based electronic medical record software solution that has been commercially available for several years, and LOGICIAN INTERNET, depending on the needs of the institution. Clients will be able to migrate between LOGICIAN and LOGICIAN INTERNET in future releases. After delivering first-generation electronic medical record products for the PC-DOS environment from 1990 to 1995, we released LOGICIAN for the Windows client-server environment in 1996 and have delivered three major upgrade releases since then. Our current customers include Allina Health System, Baylor College of Medicine, Carilion Health System, Providence Health System, Riverside Health System and more than 30 others. LOGICIAN provides the following benefits specially designed for this market: - Extensive clinical decision support to improve outcomes, including preventive care reminders, drug interaction and allergy checking and formulary management; - Enhanced ability to measure and manage patient populations using query, reporting and intervention tools; - The creation of required documentation at a lower cost and with higher quality than is currently possible with handwriting or dictation/transcription; - The ability to automatically verify compliance with Health Care Financing Administration documentation guidelines for the level of service billed, which will help capture revenue for which physicians are not being adequately reimbursed today; and - The ability to be used at the point of care, in the exam room. In future releases, we expect that LOGICIAN will also provide the following benefits: - The ability to store electronic records at our data center securely; - The ability of physicians to communicate with patients using 98POINT6 by sharing records data and exchanging messages via their personal health portfolio; and - Additional planned benefits in future releases including integration of laboratory results, electronic prescription transmission and eligibility checking. LOGICIAN interfaces have been developed and implemented with major vendor systems encountered in the integrated healthcare delivery system environment, including laboratory systems, practice management systems and transcription systems. We intend to expand the interfacing capabilities of LOGICIAN to include e-commerce transaction capabilities such as electronic prescription transmission. We will continue to deliver an enterprise-wide electronic medical record solution to this market, evolving from its traditional license-based pricing to monthly subscription pricing. We also expect to enhance the enterprise product's compatibility with the Internet and the interconnectivity between LOGICIAN and LOGICIAN INTERNET. HEALTHCARE CONSUMERS. We estimate that at least 75% of Americans are healthcare consumers, whether they see a physician themselves on a regular or episodic basis, or act as a coordinator of 36 healthcare for a child, elderly parent, or other relative. Healthcare consumers want more information and more control over their healthcare. To provide this, we will offer a Web site 98POINT6, which is currently in a pilot program and which we expect to be commercially available in early 2000. 98POINT6 will provide the following benefits for healthcare consumers: - The ability to securely view summary data from the physician, including medications, diagnoses, allergies, health directives and laboratory results; - The ability to enter information about medical and family history, wellness goals and behaviors into a personal health portfolio; - The ability to integrate these two sources of data into the Internet Health Record, providing useful information that can be shared selectively with other individuals and health professionals; - The ability to conveniently communicate with their personal physician, to request appointments, obtain medication refills, ask questions or clarify their records; - The ability to access health information content that is tailored to their personal needs through data in the Internet Health Record; and - The ability to engage in commerce, which would also be tailored to specific medical needs through data in the Internet Health Record. The personal health portfolio will have the appeal of a personalized Web page while providing specialized tools for health data entry and display, and specific viewing privileges controlled by the individual. For a child, it will provide a visual record of growth and development as well as a timeline of medical incidents. For healthy adults, it will help them gather their medical and family history and set and achieve wellness goals. For those with significant illness together with these persons' healthcare coordinators, it will allow them to manage multiple patient records generated by different physicians, provide a physician-patient communication channel for managing disease, deliver educational information and offer a convenient way to purchase medical products. OTHER HEALTHCARE STAKEHOLDERS. As a result of our position as a provider and custodian of personal and professional health data on the Internet, we have the opportunity to become a catalyst of healthcare e-commerce transactions, such as placing prescription orders with pharmacies, and to become a healthcare infomediary, providing aggregated and anonymous health data to organizations such as clinical research organizations. With the consent of individual patients and physicians, and in compliance with applicable legal requirements, these opportunities include: - Pharmacy--delivery of new and refill prescription orders from physicians and patients to pharmacies and pharmacy benefit managers; - Laboratory--delivery of orders and return of results to physicians and patients; - Payers--direct submission of claims to clearinghouses from physicians using electronic data interchange and electronic bill presentment/payment to clearinghouses by physicians on behalf of patients using their personal health portfolio; - Clinical research organizations--enhanced recruitment of patients for studies through automated screening and notification; - Healthcare organizations, both government and private--aggregated and anonymous data about the health of designated populations for epidemiologic research, planning and management; - Pharmaceutical marketing research--more accessible data on the use and outcomes of drugs; and 37 - Advertising/sponsorship--highly personalized and targeted marketing to consumers and physicians for healthcare-related products or services. We expect to begin providing this data beginning mid 2000 through 2001. CUSTOMER SERVICE AND SUPPORT We believe effective customer service is essential to both attracting and retaining physician usage of our electronic healthcare applications as well as attracting consumers and retaining them as customers of our Internet-based services. We are acutely sensitive to the demands for person-to-person responsiveness of the healthcare community. We provide a wide range of customer support services through a staff of customer service personnel, multiple call centers and an e-mail help desk. We also offer Web-based support services that are available 24 hours a day, seven days a week and are frequently updated to improve existing information and to support new services. Our ongoing telephone support is accessible by a toll-free telephone number and is available from either 5 a.m. to 6 p.m. Pacific Time, Monday through Friday or, for an additional charge 24 hours a day, seven days a week. Our operators screen all requests for telephone support and direct the call to the appropriate customer service personnel. Technical support personnel are responsible for consulting with our strategic partners regarding technical support issues and for resolving technical problems encountered by users, strategic partners or other parties. We also employ technical support personnel who work closely with our direct sales force, distribution partners and customers. We provide our customers with the ability to purchase maintenance for our applications and services, which includes technical support and upgrades. We also provide training programs for our customers. In addition, we provide enterprise planning, site evaluation, work flow preparation, hardware and software installation, interface development and installation and training of physicians and their staff in connection with the implementation of our LOGICIAN application. Enterprise and site evaluation helps us understand how best to implement our LOGICIAN application within the enterprise and physician's office work flow. The objective of the implementation process is to maximize the benefits of electronic medical records to the enterprise and the physician's practice. SIGNIFICANT CUSTOMERS We market our products and services to physicians and large integrated healthcare delivery networks. Because of our historical reliance on large integrated healthcare delivery networks, a large portion of our revenue has been derived from relatively few customers. In 1996, we derived approximately $1.5 million, or 16%, of our revenue from North Memorial Medical Center, $1.0 million, or 11%, of our revenue from Eli Lilly & Company, $990,000, or 11%, of our revenue from Arkansas Blue Cross Blue Shield and $920,000, or 10%, of our revenue from Riverside Physicians Services. In 1997, we derived approximately $2.7 million, or 20%, of our revenue from VHA, Inc., one of our distribution partners, and approximately $1.6 million, or 12%, from Wake Forest Baptist Medical Center. In 1998, we derived approximately $3.4 million, or 21%, of our revenue from VHA. In the first nine months of 1999, we derived approximately $4.5 million, or 31% of our revenue from Baylor College of Medicine and approximately $1.5 million, or 10% from Carilion Health Systems. Our products and services are currently being used by 40 integrated healthcare delivery networks, including: - Allina Health System; - Baylor College of Medicine; - Carilion Health Systems; - Christiana Care Health System; 38 - Eastern Maine Healthcare; - MeritCare Health System; - Promina Health System; - Providence Health System; - Riverside Physician Services; and - Wake Forest University Baptist Medical Center. SALES AND MARKETING Our sales and marketing programs are organized around our main customer segments: integrated healthcare delivery systems, physicians in private practice and healthcare consumers. Our products and services are distributed by a nationwide direct sales force, a complementary inside sales team and a select number of strategic distribution partners, and directly through the Internet. We also partner with national consulting firms and systems integrators to deliver complete information technology solutions for large system customers. PHYSICIANS IN PRIVATE PRACTICE. We promote our products and services to physicians in private practice with programs designed to take advantage of the value of peer-to-peer relationships in the physician community. In contrast to the national image-building campaign required for sales to large health systems, we are building our individual physician sales and marketing campaign around activities that will stimulate physician referrals of LOGICIAN INTERNET. Sales will be offered primarily through online subscription capabilities supported by an inside telephone sales team. Programs for this market segment will include: - A team of physicians who use our products and who are trained and compensated to present at more than 200 national, state and local physician society meetings from the fourth quarter of 1999 through 2000; - Promotion of free trial periods and low cost bundled hardware packages; - A physician incentive program that offers every physician subscribing to LOGICIAN INTERNET a points-based redeemable reward for referring fellow physicians; - An affiliate program for e-commerce partners and professional associations; - A media relations campaign targeted at physician publications and local media; and - Online and offline brand and product advertising aimed at early adopters and high volume specialties. INTEGRATED HEALTHCARE DELIVERY SYSTEMS. We approach the integrated healthcare delivery system market primarily through direct sales and distribution partners. We believe our access to premier reference accounts plays a large part in the success of the sales process. Direct sales are supported by marketing programs that include: - Participation at national health information technology trade conferences; - A speakers program placing current customers and executives before key decision makers of prospective customers; - An editorial and news presence in the healthcare information technology press supported by targeted advertising of our brand; - Publication of industry-reference briefs and texts addressing critical adoption issues; and 39 - Internet access to online product and service information, demonstrations and promotional trials and offline publications. HEALTHCARE CONSUMERS. We believe marketing programs for the healthcare consumer market are likely to be more successful when they are supported by the existing relationship between the physician or local health system and their patients. Based on that premise, we will be launching a Web site 98POINT6, which is currently being tested in a pilot program and which we expect to release commercially in early 2000, that is co-branded with local integrated healthcare delivery networks. In addition, promotion of 98POINT6 will include a national brand building campaign designed to create interest by healthcare consumers through physicians. Consumers will register for membership at no charge at the 98POINT6 site or through a co-branded provider partner site. Marketing programs will include: - Co-branded direct mail and point of service promotional campaigns developed and sponsored by us and executed with provider partners; - Consumer brand building in communities with a high concentration of physician users of electronic medical record products that can be interfaced to 98POINT6; - Online advertising with consumer e-commerce and content partners; and - An aggressive, locally-based media relations campaign targeting people with chronic disease and women, who tend to be the primary health coordinators of their families. Our executive sales and marketing management is located in our Hillsboro, Oregon office with significant Internet marketing and business development resources located in our San Francisco, California facilities, while our account representatives are deployed across the United States. As of September 30, 1999, we employed 60 people in the areas of sales and marketing. STRATEGIC RELATIONSHIPS Because our products and services are used at the point of care, we believe we are well positioned to offer electronic transaction services to both physicians and their patients. To pursue these opportunities, we will form relationships with strategic partners who can provide these electronic transaction services, including electronic processing of claims, automatic filling and refilling of prescriptions and electronic transmission of laboratory results. In addition, we will enter into strategic partnerships with vendors who will provide medical content to our customers as well as partnerships that will allow our physician customers to have access to computer hardware on which they may use our products and services. To date, we have entered into strategic relationships with the following companies: CVS.COM. CVS.com, a subsidiary of CVS Corporation, is a leading online pharmacy and source of health, beauty and wellness products. We have entered into an agreement with CVS.com that provides access to an online licensed pharmacy that will receive and fill orders for prescriptions generated from physicians and patients using our Internet-based products. The one year agreement provides that CVS will pay a transaction fee to us for each prescription filled by its pharmacy pursuant to an order received through our Internet-based products. The agreement may be renewed for subsequent one-year terms. DELL. Dell Marketing L.P. is a subsidiary of Dell Computer Corporation, a leading manufacturer of personal computers and related equipment and a shareholder of MedicaLogic. We have entered into a nonexclusive agreement with Dell Marketing L.P. providing for a mutual marketing relationship to promote each other's products and services, including hyperlinks between each of our Web sites and cooperative marketing efforts which may include trade shows, direct mail campaigns and sales training. 40 The agreement designates Dell as our preferred provider of notebooks, personal computers and other hardware, and we granted Dell a nonexclusive right and license to reproduce and install our software programs and related materials on Dell branded hardware products. We will promote the Dell products with our pre-installed software programs. ENVOY. Envoy Corporation is a leader in electronic transaction processing in the healthcare industry. We have entered into an agreement with Envoy that provides us with a nonexclusive and nontransferable license to Envoy's services for the processing of healthcare transactions, including patient eligibility and referral checks and medical claims submissions. Envoy will also provide technical assistance in developing new functionality to facilitate claims submission. Envoy will charge us transaction fees for use of its services. These fees will be passed on to our LOGICIAN INTERNET customers who elect to subscribe to this premium service, for which we will charge an additional fee. The agreement provides that Envoy will rebate to us a portion of the transaction fees received by Envoy for batch electronic transactions generated through LOGICIAN INTERNET that are submitted by Envoy to its participating payers. We expect this service to become available to our LOGICIAN INTERNET subscribers in early 2000. L&H. L&H Applications USA, Inc. is a subsidiary of Lernout & Hauspie Speech Products N.V., a leading provider of dictation software programs for use in professional services. We have entered into an agreement with L&H that provides us with a nonexclusive and nontransferable license to L&H's medical-specific speech recognition software programs for distribution with LOGICIAN INTERNET. We will make royalty payments to L&H for each copy of the software licensed, including a maintenance and support fee. Royalties will be prepaid quarterly, contingent upon development milestones to be met by L&H. This service is currently available to our LOGICIAN INTERNET subscribers. COMPETITION High growth, intense competition, and technological change characterize the market for electronic healthcare information services and e-commerce. In addition to direct competitors in the electronic medical records market, none of which has a significant share of the market, we face competition from many companies with significantly greater financial resources, well-established brand names and large installed customer bases. We expect significant competition from: TRADITIONAL HEALTHCARE INFORMATION SYSTEM VENDORS. These vendors, including Cerner Corporation, Epic Systems Corporation, IDX Corporation, McKesson/HBOC, Medic, a division of Misys PLC, and Shared Medical Systems Corporation, focus on providing information systems to large healthcare enterprises and physician practice groups. They have large installed bases of customers. Although they have not traditionally focused on providing electronic medical record solutions, they have begun to pursue a variety of Internet strategies, some of which could provide functions competitive with our products and services. INTERNET HEALTHCARE COMPANIES. Internet healthcare companies are focusing on a wide variety of areas, including: - Automating financial, administrative and clinical transactions, such as Healtheon Corporation and CareInsite, Inc.; - Attracting physicians with journalistic content, such as Medscape, Inc. and Physicians Online, Inc.; and - Targeting the health consumer area, including drkoop.com, Inc. and iVillage Inc. for content, as well as online pharmacies, such as drugstore.com, Inc. Each of these companies can be expected to compete with us within segments of the evolving Internet healthcare market, but it is also likely that some of them will serve in the role of our partner 41 or vendor. Major Internet companies, including those not currently specializing in the healthcare industry, may also enter our markets. Many of these companies have longer operating histories, larger customer bases, substantially greater financial, technical, sales and marketing resources and greater name recognition than we do and we may be unable to compete successfully against these companies. The most significant competitive factors include clinical focus, service reliability, breadth of product offerings, price/performance, network security, ease of access and use, content bundling, customer support, brand recognition and operating experience. We believe we will be able to compete favorably with respect to these factors. TECHNOLOGY Our Internet Health Services Center consists of a fault tolerant configuration of Web and database server computers interconnected through redundant, high speed network components. The center is currently located at a secure third-party data center. A new, state-of-the-art data center is being constructed at our San Francisco office. All data centers incorporate advanced technology to provide a high degree of security in the transmission of highly sensitive and confidential patient medical record data over the Internet. This includes strict authentication, sophisticated data encryption techniques, strong network firewalls, stringent personnel policies, tightly controlled physical access to the data centers and independent overall security audits of those sites. All of our services will be linked to advanced storage systems that provide data protection through techniques such as replication. We also will maintain on-site backup power systems in the San Francisco data center and will install similar facilities in our back-up data center. These safeguards are designed to provide a reliable and secure environment for the storage and exchange of confidential patient and customer data. Although we believe our facilities are highly resistant to systems failure and sabotage, we are developing, and are in the process of implementing, a disaster recovery and contingency operations plan. DEVELOPMENT AND ENGINEERING We believe our future success will depend on our ability to continue to maintain and enhance our Internet Health Services Center, LOGICIAN applications and collateral services. We have developed applications and services in house, although future extensions to our products and services may come through acquisitions as well. In any event, we will continue to work closely with other companies in our development efforts. We have several significant projects currently in development. These include the continued enhancement of LOGICIAN, development of new services such as LOGICIAN INTERNET and our physician and consumer oriented Web sites and development of interfaces with our strategic partners' and others' technology. As of September 30, 1999, we employed 101 people in the areas of applications design, research and development, quality assurance and technical support. Rapid technological developments and evolving industry standards characterize the emerging market for Internet-based electronic medical records and associated transaction processing. The emerging nature of this market and its rapid evolution will require that we continually improve the performance, features and reliability of LOGICIAN and the Internet Health Services Center, particularly in response to competing offerings. We must maintain a high standard and desire for the most effective and innovative technologies. The success of new product and service introductions is dependent on several factors, including: - Proper definition of new applications or services; - Appropriate staffing of expertise on the particular assignment; - Timely completion and introduction of new products and services; and 42 - Differentiation of new products and services from those of our competitors. GOVERNMENT REGULATION AND HEALTHCARE REFORM The healthcare industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operation of healthcare organizations. Proposals to reform the U.S. healthcare system have been and will continue to be considered by the U.S. Congress. These programs may contain proposals to increase or decrease government involvement in healthcare or change the operating environment for our potential customers. Healthcare organizations may react to these proposals and the uncertainty surrounding these proposals by curtailing or deferring investments, including those for our products and services. On the other hand, changes in the regulatory environment have in the past increased and may continue to increase the needs of healthcare organizations for cost-effective information management and thereby enhance the marketability of our applications and services. We cannot predict with any certainty what impact, if any, these proposals or healthcare reforms might have on our business, financial condition and results of operations. The Health Insurance Portability and Accountability Act of 1996 mandates the use of standard transactions and identifiers, prescribed security measures and other provisions within two years after the adoption of final regulations by the Department of Health and Human Services. It will be necessary for our products and services to be in compliance with the proposed regulations. Congress is also likely to consider legislation that would establish rules about individuals' rights to access their own or someone else's medical information within legislation known as a Patient Bill of Rights. This legislation, if enacted, would likely define what is to be considered protected health information and outline steps to ensure the confidentiality of this information. The United States Food and Drug Administration is responsible for assuring the safety and effectiveness of medical devices under the Federal Food, Drug and Cosmetic Act. Computer applications and software are considered medical devices and subject to regulation by the FDA when they are indicated, labeled or intended to be used in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease, or are intended to affect the structure or function of the body. We do not believe that any of our current applications or services are subject to FDA jurisdiction or regulation; however, we plan to expand our application and service offerings into areas that may subject us to FDA regulation. We have no experience in complying with FDA regulations. Our compliance with FDA regulations could prove to be time consuming, burdensome and expensive, which could have a material adverse effect on our ability to introduce new applications or services in a timely manner. The confidentiality of patient records and the circumstances under which records may be released for inclusion in our databases are subject to substantial and rapidly evolving regulation governing both the disclosure and the use of confidential patient medical record information. Legislation governing the dissemination of medical record information has been proposed at both the state and federal levels. This legislation may require holders of medical records to implement security measures that may require substantial expenditures by us or materially restrict the ability of healthcare providers to submit information from patient records using our applications. There are currently few laws or regulations that specifically regulate communications or commerce on the Internet. However, laws and regulations may be adopted that address issues such as online content, user privacy, pricing and characteristics and quality of applications and services. For example, although two key provisions of the act were held unconstitutional, the Communications Decency Act of 1996 prohibited the transmission over the Internet of some types of information and content. Internet user privacy has become an issue in the United States. Current United States privacy law consists of a few disparate statutes directed at specific industries that collect personal data, none of which specifically covers the collection of personal information online. The United States or any state 43 may adopt legislation to attempt to protect this privacy. Any legislation addressing these issues could affect the way in which we are allowed to conduct our business, especially those aspects that involve the collection or use of personal information, and could have a material adverse effect on our business, financial condition and results of operations. Moreover, it may take years to determine the extent to which existing laws governing issues such as property ownership, libel, negligence and personal privacy are applicable to the Internet. International regulations with respect to the Internet, privacy and transborder data flows are considerably more developed than regulations in the United States. We intend to develop applications and services to be used on a worldwide basis and, consequently, will be required to comply with international regulations regarding the Internet and electronic commerce, as well as with U.S. regulations. We have not evaluated the effect that these regulations would have on our business. These regulations also may have an adverse effect on our ability to compete internationally. The tax treatment of the Internet and e-commerce is currently unsettled. A number of proposals have been made at the federal, state and local level and by some foreign governments that could impose taxes on the sale of goods and services and some other Internet activities. A recently passed law places a temporary moratorium on specific types of taxation on Internet commerce. We cannot predict the effect of current attempts at taxing or regulating commerce over the Internet. Any legislation that substantially impairs the growth of e-commerce could have a material adverse effect on our business, financial condition and results of operations. INTELLECTUAL PROPERTY RIGHTS We believe patent, trade secret and copyright protection are less significant to our success than our ability to develop new products and services. We rely on a combination of trademark, trade secret and copyright law, and contractual restrictions to protect the proprietary aspects of our technology. We presently have several federal trademark registrations, including MedicaLogic, Practice With Knowledge, Logician, SIMPL and LinkLogic and numerous pending trademark applications, including KnowledgeBank, AboutMyHealth, 98point6, Quickstep and ScheduLogic. We are currently preparing 12 applications for U.S. patents. We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. We presently have nine pending copyright applications for our software, tools and KnowledgeBank forms, reports and templates. We license our software under signed license agreements, which impose restrictions on the licensee's ability to utilize the software. Finally, we seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code. The steps taken by us to protect our proprietary rights may be inadequate and, as a result, third parties may infringe upon or misappropriate our copyrights, trademarks, service marks and similar proprietary rights. In addition, the global nature of the Internet makes it impossible to control the ultimate destination of our services and effective copyright and trademark protection may be unenforceable or limited in foreign countries. Our competitors or others may adopt product or service names similar to ours, thereby impeding our ability to build brand identity and possibly leading to customer confusion. Moreover, because Internet domain names derive value from the individual's ability to remember these names, our domain name may lose its value if, for example, users begin to rely on mechanisms other than domain names to access online resources. Our inability to protect our marks adequately could have a material adverse effect on the acceptance of our brand and on our business, financial condition and results of operations. In the future, litigation may be necessary to enforce and protect our trade secrets, copyrights and other intellectual property rights. Litigation would divert management resources and be expensive and may not effectively protect our intellectual property. 44 EMPLOYEES As of September 30, 1999, we employed 230 persons on a full-time basis, of whom there were 101 in technical development and support, 60 in sales and marketing, 29 in professional services, 17 in operations and networks and 23 in finance and administration. None of our employees is a member of a labor union or is covered by a collective bargaining agreement and we have never experienced a work stoppage. We believe we have good relations with our employees. FACILITIES Our executive offices are located in Hillsboro, Oregon in approximately 103,000 square feet of leased space under a lease that expires in December 2007. We also lease approximately 38,000 square feet of office space in San Francisco, California under a lease that expires in May 2009. We believe our facilities are adequate for our current operations. LEGAL PROCEEDINGS We have been named as a defendant in an action filed by AllCare Health Management Systems, Inc. on June 14, 1999 in the United States District Court for the Northern District of Texas. The complaint alleges that MedicaLogic and eleven other named defendants are infringing a patent relating to an integrated healthcare system. Pursuant to the complaint, the plaintiff is seeking to recover damages in an unspecified amount. We believe the suit against MedicaLogic is without merit and intend to vigorously defend against these claims. This litigation, whether or not determined in our favor or settled by us, may be costly and may divert the efforts and attention of our management from normal business operations. We do not believe, however, that the ultimate disposition of this litigation will have a material adverse effect on our financial condition, liquidity and results of operations. We are not currently subject to any other material legal proceedings. 45 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES The following table sets forth information with respect to our executive officers, directors and key employees as of September 30, 1999.
NAME AGE POSITION - ---- -------- -------- Mark K. Leavitt...................... 49 Chairman of the Board and Chief Executive Officer David C. Moffenbeier................. 48 Chief Operating Officer and Director Harvey J. Anderson................... 35 Senior Vice President, General Manager of Internet Operations Frank J. Spina....................... 45 Senior Vice President and Chief Financial Officer Thomas M. Watson..................... 49 Senior Vice President, Worldwide Sales and Professional Services Eliot H. Bergson..................... 40 Vice President, Internet Content Programming Guy E. Field......................... 44 Vice President, Finance Joseph M. Godsil..................... 34 Vice President, Network Architecture and Data Center Operations D. Cameron Lewis..................... 48 Vice President, Internet Marketing and e-Commerce Strategies Blackford Middleton.................. 41 Vice President, Clinical Informatics C. Sue Reber......................... 53 Vice President, Marketing and Corporate Communications Richard L. Samco..................... 49 Vice President and Chief Technology Officer Charles D. Burwell................... 54 Director Bruce M. Fried....................... 49 Director Ronald H. Kase....................... 41 Director Neal Moszkowski...................... 33 Director Mark A. Stevens...................... 39 Director Ronald R. Taylor..................... 51 Director David W. Wroe........................ 52 Director
MARK K. LEAVITT founded MedicaLogic in 1985 and has served as its chairman of the board and chief executive officer since its inception. From December 1997 to June 1998, Dr. Leavitt served as a director of Physician Partners, Inc., a physician practice management company. From 1992 to 1996, Dr. Leavitt served as a faculty member for St. Vincent Internal Medicine Practice and concurrently served as medical director and regional information systems director for Sisters of Providence Health System from 1992 to 1994. Dr. Leavitt operated a private practice of internal medicine from 1982 to 1992. Dr. Leavitt received a B.S. from the University of Arizona and an M.S. and a Ph.D. in electronic engineering from Stanford University. Dr. Leavitt received an M.D. from the University of Miami and served as a resident in internal medicine at Oregon Health Sciences University from 1979 to 1982. DAVID C. MOFFENBEIER has served as chief operating officer and as a director since 1994. From 1993 to 1994, Mr. Moffenbeier served as chairman of the board of directors of Summit Design Inc., a supplier of software tools for integrated circuits. Previously, Mr. Moffenbeier co-founded Mentor Graphics Corp., a manufacturer of hardware and software for electronic design automation, where he 46 served as a director from 1981 to 1993 and the company's chief financial officer from 1981 to 1984, its vice president of international sales from 1985 to 1988 and its vice president of worldwide sales from 1989 to 1993. He currently serves on the board of directors of Providence Good Health Plan, a health care management organization, and North Pacific Group, Inc., a wholesale distributor of commodities. Mr. Moffenbeier received a B.A. from Wesleyan University and an M.B.A. from Harvard University. Mr. Moffenbeier is a certified public accountant. HARVEY J. ANDERSON has served as senior vice president, general manager of Internet operations since March 1999. From 1996 to 1999, Mr. Anderson served as the assistant general counsel for Netscape Communications Corp., a provider of software, services and Web site resources for the Internet. From 1993 to 1996, Mr. Anderson practiced intellectual property law with McCutchen Doyle Brown & Enersen, LLP, a law firm in San Francisco, California. Mr. Anderson received a B.S. from Marquette University and a J.D. from the University of San Francisco School of Law. FRANK J. SPINA was hired by MedicaLogic to serve as its senior vice president and chief financial officer starting in November 1999. From 1997 to 1999, Mr. Spina served as the chief financial officer for 3D Systems Corporation, a provider of solid imaging systems. From 1994 to 1997, Mr. Spina served as vice president and corporate controller of Qualcomm, Inc., a developer and manufacturer of wireless communication equipment. From 1985 to 1994, Mr. Spina served in a variety of positions with Motorola, Inc., including division controller and group operations controller. Mr. Spina received his B.A. from Baldwin Wallace College and is a certified public accountant. THOMAS M. WATSON has served as senior vice president, worldwide sales and professional services since March 1999. From 1997 to 1999, Mr. Watson served as our vice president, sales. From 1989 to 1997, Mr. Watson served as vice president of sales at Phamis Inc., a leading provider of healthcare information systems solutions. Mr. Watson received a B.A. from Drexel University. ELIOT H. BERGSON has served as vice president, Internet content programming since May 1999. From 1998 to 1999, Mr. Bergson served as acting director of content and production at Network Associates, Inc., a network security and management software company. From 1995 to 1998, he served as editor-in-chief at Netscape Communications Corp. From 1994 to 1995, Mr. Bergson served as editor for both Online Design, a publication for professional designers, photographers and illustrators, and HotWired, an Internet site on Web technology and culture. From 1992 to 1994, Mr. Bergson served as editor for NeXTWORLD, a publication covering the NEXT and NEXTSTEP markets. Mr. Bergson received a B.A. from the University of Vermont. GUY E. FIELD has served as vice president, finance since 1998. From 1994 to 1997, Mr. Field served as the corporate controller of MedicaLogic. From 1983 to 1994, Mr. Field held management positions in treasury, finance, marketing and major account management with Mentor Graphics Corp. He has served on the board of directors of the Software Association of Oregon since 1998. Mr. Field received a B.A. from Loyola University in Los Angeles and is a certified public accountant. JOSEPH M. GODSIL has served as vice president, network architecture and data center operations since May 1999. From 1996 to 1999, Mr. Godsil served as area engineering manager at Netscape Communications Corp. From 1994 to 1996, he served as regional engineer for Sun Microsystems, Inc., a leading provider of hardware, software and services for the Internet. Mr. Godsil received a B.S. from Millikin University in Decatur, Illinois. D. CAMERON LEWIS has served as vice president, Internet marketing and e-commerce strategies since May 1999. From 1998 to 1999, Mr. Lewis served as director of electronic commerce and Internet operations at Network Associates, Inc. From 1995 to 1998, Mr. Lewis served as group manager of the electronic commerce group and acting vice president of customer marketing at Netscape Communications Corp. From 1994 to 1995, Mr. Lewis served as vice president of sales and marketing 47 for Magellan Interactive. Mr. Lewis received a B.A. from the University of Western Ontario and an executive business degree from the University of Toronto. BLACKFORD F. MIDDLETON has served as vice president, clinical informatics since 1994. From 1992 to 1994, Dr. Middleton served as the medical director for information management and technology at Stanford University. Since 1995, Dr. Middleton has served on the Computer-based Patient Record Institute, or CPRI, board of directors and currently serves as its chairman. Dr. Middleton is a general internist who practiced in academic medical centers for over 15 years and received a B.A. from the University of Colorado and an M.D. from Stanford University and additional training in epidemiology and public health at Yale University. C. SUE REBER has served as vice president, strategic marketing and corporate communications since March 1999. From 1993 to 1999, Ms. Reber served as vice president of marketing. Before joining MedicaLogic, Ms. Reber had more than 15 years of experience in healthcare sales and marketing in managed care, medical equipment distribution and hospital management. She received a nursing degree from the Johns Hopkins Hospital School of Nursing and received an M.B.A. from St. Mary's College in Emmitsburg, Maryland. RICHARD L. SAMCO has served as vice president and chief technology officer since March 1999. From 1991 to 1999, Mr. Samco served as our vice president, engineering and vice president, product development. Mr. Samco was a co-founder of Mentor Graphics Corp. in 1981 and served in various engineering and management positions from 1981 to 1991. Before 1981, Mr. Samco held various engineering management positions with Tektronix Inc., a maker of high technology products, and Burroughs Corp., a leading computer corporation now known as Unisys Corporation. Mr. Samco received a B.S. from Stanford University. CHARLES D. BURWELL has been a director since 1997. Since 1993, Mr. Burwell has served as senior vice president of VHA, Inc., a healthcare alliance. As head of information services, he oversees activities associated with VHA's healthcare information technologies and VHA's management information systems team. Mr. Burwell received a B.A. from Northeastern Oklahoma University. BRUCE M. FRIED has been a director since 1998. Mr. Fried is a partner and chair of the healthcare practice group at Shaw Pittman Potts & Trowbridge, a law firm in Washington, D.C. From 1995 to 1998, Mr. Fried served as the Health Care Financing Administration's director of the Center for Health Plans and Providers, where he was responsible for policy development and execution and operations for the Medicare program. From 1994 to 1995, Mr. Fried was vice president of federal affairs at FHP International Corporation, one of the nation's largest managed care organizations. Mr. Fried received a B.A. and a J.D. from the University of Florida. RONALD H. KASE has been a director since July 1994. Mr. Kase joined New Enterprise Associates, a venture capital investment firm in 1990 and has been a general partner since May 1995. Mr. Kase serves on the boards of directors of several privately-held information technology and healthcare companies. Mr. Kase received a B.S. from Purdue University and received an M.B.A. from the University of Chicago. 48 NEAL MOSZKOWSKI has been a director since May 1999. Since 1998, Mr. Moszkowski has served as a partner of Soros Private Equity Partners, LLC, a venture capital investment firm. From 1993 to 1998, Mr. Moszkowski was an executive director in the principal investment area of Goldman, Sachs International and a vice president of Goldman, Sachs & Co. Mr. Moszkowski serves on the board of directors of Integra Life Sciences Holdings Corporation, a developer and marketer of medical products, implants and biomaterials, Crystal Gas Storage, Inc., a natural gas storage company, Bluefly, Inc., an off-price apparel Internet retailer, and several private companies. Mr. Moszkowski earned his B.A. from Amherst College and an M.B.A. from Stanford University. MARK A. STEVENS has been a director since 1994. Mr. Stevens joined Sequoia Capital in 1989 and has been a general partner since 1993. Mr. Stevens serves on the boards of directors of MP3.com, Inc., an online music Internet company, NVidia Corp., a supplier of graphics processors and software and Terayon Communication Systems, Inc., a cable modem system supplier, and several privately held Internet and semiconductor companies. Mr. Stevens received a B.S.E.E., a B.A. and an M.S. in computer engineering from the University of Southern California and an M.B.A. from Harvard University. RONALD R. TAYLOR has been a director since 1995. Since 1998, Mr. Taylor has been a general partner of Enterprise Partners, a venture capital firm. In 1987, Mr. Taylor founded Pyxis Corporation, a medical information systems company, and served as its chairman and chief executive officer until it merged with Cardinal Health, Inc. in 1996. Mr. Taylor serves on the boards of directors of Watson Pharmaceuticals, Inc., a pharmaceutical company, and Cavanaugh's Hospitality Corporation, a leading owner of full service hotels in the Northwest. He received a B.A. from the University of Saskatchewan and an M.A. from the University of California at Irvine. DAVID W. WROE has been a director since 1999. Since 1996, he has served as a senior vice president and chief technology officer for Continental Casualty Company, an insurance company. From 1983 to 1996, Mr. Wroe served as chief executive officer of Agency Management Services, Inc., a CCC majority-owned automation company, and Mr. Wroe continues to serve as the chairman of its board of directors. Mr. Wroe serves on the boards of directors of Rogers & Gray Insurance Company, an insurance company, Home Financial Network, a software company, and Healthware Solutions International, Inc., a software company. Mr. Wroe earned a B.A. from Providence College. Executive officers serve at the discretion of the board of directors and hold office until their successors have been elected and qualified. There are no family relationships among any of the directors, officers or key employees of MedicaLogic. Directors are elected at the annual shareholders meeting and hold office until their successors are elected and qualified. COMMITTEES OF THE BOARD OF DIRECTORS The board of directors has an audit committee and a compensation committee. The audit committee reviews and makes recommendations to the board of directors concerning our internal accounting procedures, reviews and consults with our independent accountants on the accounting principles and auditing practices used for our financial statements and makes recommendations to the board of directors concerning the engagement of independent accountants and the scope of the audit to be undertaken by the accountants. The current members of the audit committee are Bruce M. Fried, Neal Moszkowski and Ronald R. Taylor. The compensation committee reviews and makes recommendations to the board of directors concerning the policies, practices and procedures relating to the compensation and benefits of our officers and managerial employees. The compensation committee exercises all authority under our stock 49 incentive plans and advises and consults with our officers regarding personnel policies. The current members of the compensation committee are Charles D. Burwell, Ronald H. Kase and Mark A. Stevens. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Before establishing the compensation committee, the board of directors as a whole performed the functions delegated to the compensation committee. No member of the board of directors or the compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more directors serving as an executive officer of MedicaLogic. DIRECTOR COMPENSATION Generally, directors do not receive any cash compensation from us for their service as members of the board of directors, but directors are reimbursed for expenses incurred in connection with their attendance at board and committee meetings. Under our stock incentive plan, non-employee directors are granted a one-time option to purchase 30,000 shares of our common stock upon initial election to the board. In addition, we have entered into an arrangement pursuant to which we pay Enterprise Partners, of which Ronald R. Taylor serves as a general partner, $2,000 for each directors meeting attended by Mr. Taylor. Directors' fees totaling $4,000 have been paid to Enterprise Partners for Mr. Taylor's attendance at board meetings. We carry an insurance policy for the protection of our officers and directors against any liability asserted against them in their official capacities. EXECUTIVE COMPENSATION The following table sets forth the total compensation paid or accrued for services rendered to us in all capacities by our Chief Executive Officer and our four other most highly compensated executive officers whose salary and bonus exceeded $100,000 during the year ended December 31, 1998. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------- ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)(2) - --------------------------- -------- -------- -------- ------------------ Mark K. Leavitt, Chairman of the Board and Chief Executive Officer............................... 1998 $210,000 -- -- David C. Moffenbeier, Chief Operating Officer..... 1998 $190,000 -- $50,000 Blackford Middleton, Senior Vice President, Clinical Informatics............................ 1998 $160,000 $20,000 $48,621 Richard L. Samco, Senior Vice President and Chief Technology Officer.............................. 1998 $185,000 -- -- Thomas M. Watson, Senior Vice President, Worldwide Sales and Professional Services................. 1998 $150,000 $75,559(3) --
- ------------------------ (1) Comprised of commission payments. (2) See "Long-Term Incentive Plans--Awards in Last Fiscal Year." (3) Includes $20,000 payment for 1997 performance. We have entered into an employment agreement with Dr. Leavitt. The agreement may be terminated with 60-days notice. 50 LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
PERFORMANCE OR NUMBER OF OTHER PERIOD UNTIL NAME SHARES(#) MATURATION OR PAYOUT(3) - ---- --------- ----------------------- Mark K. Leavitt........................................ 15,000 Before July 1, 2000 David C. Moffenbeier................................... 15,000 Before July 1, 2000 Blackford Middleton.................................... 7,500(1) Before July 1, 2000 Richard L. Samco....................................... 15,000 Before July 1, 2000 Thomas M. Watson....................................... 15,000(2) Before July 1, 2000
- ------------------------ (1) Does not include 12,500 shares of restricted stock issued to Mr. Middleton on July 1, 1998 upon his surrender of 12,500 outstanding options to purchase common stock. Of these 12,500 shares of restricted stock, 5,556 were not subject to a right of repurchase, and 6,945 shares were subject to a right of repurchase by MedicaLogic and have been released from the repurchase option ratably over a period of 20 months beginning July 1, 1998. (2) Does not include 75,000 shares of restricted stock issued to Mr. Watson on July 1, 1998 upon his surrender of 75,000 outstanding options to purchase common stock. Of these 75,000 shares of restricted stock, 33,334 shares were not subject to a right of repurchase, and 41,667 were subject to a right of repurchase by MedicaLogic and have been released from the repurchase option ratably over a period of 20 months beginning July 1, 1998. (3) Unless the repurchase option is terminated earlier upon satisfaction of performance criteria. Except as otherwise provided, shares of restricted stock are subject to MedicaLogic's right of repurchase if specific performance criteria are not met. Our option to repurchase is exercisable for all of the shares if the holder voluntarily terminates his employment within two years of the date the shares were originally granted unless we complete an initial public offering, release an Internet version of LOGICIAN and release a consumer based Internet product before December 31, 1999. If all performance criteria are met on or before December 31, 1999, the shares will be released from the repurchase option. As of December 31, 1998, the named executive officers beneficially owned 234,500 shares of restricted stock with an aggregate value of $779,000. OPTION GRANTS IN LAST FISCAL YEAR No options were granted to, or exercised by, any of the named executive officers during the year ended December 31, 1998. STOCK INCENTIVE PLANS An aggregate of 6,997,192 shares of common stock have been reserved for issuance under our three stock incentive plans described below. The STOCK INCENTIVE PLAN was adopted February 9, 1993 and, as amended, allowed for issuance of 2,247,192 shares. Under the 1996 STOCK INCENTIVE PLAN, adopted December 27, 1996, 500,000 shares were originally reserved for issuance. The 1996 plan was amended in 1998 to reserve an additional 350,000 shares for issuance and in 1999 to reserve an additional 1,900,000 shares for issuance, bringing the total number of shares reserved under the 1993 plan and the 1996 plan to 4,997,192. The stock option plans were approved by the board of directors and the shareholders. The 1996 plan provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, for the granting to employees and consultants of nonstatutory stock options 51 and for the issuance of stock bonuses, restricted stock and stock appreciation rights. Unless terminated earlier, the 1996 stock incentive plan will terminate automatically in December 2006. The 1999 STOCK INCENTIVE PLAN authorizes the issuance of 2,000,000 shares of our common stock. The 1999 plan was approved by the board of directors and the shareholders. The 1999 plan provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, for the granting to employees and consultants of nonstatutory stock options and for the issuance of stock bonuses, restricted stock and stock appreciation rights. Unless terminated earlier, the 1999 plan will terminate automatically in September 2009. As of October 15, 1999, options to purchase 2,829,826 shares of common stock at a weighted average exercise price of $6.10 per share were outstanding and 1,170,000 shares of restricted stock had been issued under the stock incentive plans. The stock incentive plans are administered by the board of directors. The board has the power to determine the terms of the options or rights granted, including the exercise price, the number of shares subject to each option or right, the character of the grant, the exercisability of the grant and the form of consideration payable upon exercise of options. The board of directors may delegate administration of the stock incentive plans to a committee. The exercise price of incentive stock options must not be less than the fair market value of the common stock at the date of the grant or, in the case of incentive stock options issued to holders of more than 10% of the outstanding common stock, 110% of the fair market value. The maximum term of incentive stock options is 10 years, or five years in the case of 10% shareholders. The aggregate fair market value, on the date of the grant, of the common stock for which incentive stock options are exercisable for the first time by an employee during any calendar year may not exceed $100,000. Options granted under the stock incentive plans are generally nontransferable and, unless otherwise determined by the board of directors, must be exercised during the period of the option holder's employment or service with MedicaLogic or within 90 days of termination of employment or service. The stock incentive plans provide that if we merge with or into another corporation, or we sell substantially all of our assets, each outstanding option will be assumed by the successor corporation. EMPLOYEE STOCK PURCHASE PLAN The board of directors has adopted and the shareholders have approved an employee stock purchase plan, or ESPP, for the benefit of MedicaLogic's employees. A total of 1,000,000 shares are reserved for issuance under the ESPP. Except as described below, all full-time employees of MedicaLogic and designated subsidiaries of MedicaLogic are eligible to participate in the ESPP. Any employee who would, after a purchase of shares under an offering, own or be deemed to own five percent or more of the voting power or value of all classes of stock of MedicaLogic, or any parent or subsidiary of MedicaLogic, is ineligible to participate in an offering. Except for the first offering period, offering periods are six months long and commence on January 1 and July 1 of each year and end on the last day of the following June and December. The first offering period will commence on the date of this prospectus and end on June 30, 2000. On the first trading day of each offering period, known as the offering date, each eligible employee is automatically granted an option to purchase shares of MedicaLogic's common stock to be automatically exercised on the last trading day of the six-month purchase period comprising an offering period. The last trading day of a purchase period is known as a purchase date. No option will permit an employee 52 to purchase more than 10,000 shares or permit an employee's right to purchase shares under the ESPP to accrue at a rate that exceeds $25,000 of fair market value, as determined on the offering date, for each calendar year that the option is outstanding. Each eligible employee may elect to participate in the ESPP by filing a subscription and payroll deduction authorization. Shares may be purchased under the ESPP only through payroll deductions of not more than 15 percent of an employee's total compensation. On the purchase date, the amounts withheld will be applied to purchase shares for the employee from MedicaLogic. The purchase price will be the lesser of 85 percent of the closing market price of MedicaLogic's common stock on the offering date or on the purchase date. The ESPP is administered by the board of directors. The board of directors may promulgate rules and regulations for the operation of the ESPP, adopt forms for use in connection with the ESPP, decide any question of interpretation of the ESPP or rights arising under the ESPP and generally supervise the administration of the ESPP. MedicaLogic pays all expenses of the ESPP other than commissions on sales of shares for employees' accounts by the custodian. An independent custodian maintains the records under the ESPP. Shares purchased by employees under the ESPP are delivered to and held by the custodian on behalf of the employees. By appropriate instructions from an employee, all or part of the shares may be sold or transferred into the employee's own name and delivered to the employee. The board of directors may amend the ESPP, except that increases in the number of reserved shares, other than adjustments authorized by the ESPP, or decreases in the purchase price of shares offered under the ESPP require shareholder approval. The board of directors may terminate the ESPP at any time. LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION Our articles of incorporation eliminate, to the fullest extent permitted by Oregon law, liability of a director to MedicaLogic or its shareholders for monetary damages resulting from conduct as a director. Although liability for monetary damages has been eliminated, equitable remedies such as injunctive relief or rescission remain available. In addition, a director is not relieved of his responsibilities under any other law, including the federal securities laws. Our articles of incorporation require us to indemnify our directors to the fullest extent permitted by law. We believe that the limitation of liability provisions in our articles of incorporation enhance our ability to attract and retain qualified individuals to serve as directors. We carry an insurance policy for the protection of our officers and directors against any liability asserted against them in their official capacities. To the extent that indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of MedicaLogic under the above provisions MedicaLogic has been advised that in the opinion of the Securities and Exchange Commission this indemnification is against public policy as expressed in the act and is, therefore, unenforceable. 53 RELATED-PARTY TRANSACTIONS We have accepted promissory notes from the following persons in the amounts listed below as consideration for restricted stock issued to them:
PRINCIPAL NAME AMOUNT OF NOTE DATE OF NOTE - ---- -------------- ---------------- Harvey J. Anderson........................... $ 385,000 March 31, 1999 Harvey J. Anderson........................... 66,000 March 31, 1999 Guy E. Field................................. 30,000 February 2, 1995 Guy E. Field................................. 100,000 July 1, 1998 Guy E. Field................................. 30,000 July 1, 1998 Guy E. Field................................. 33,000 March 31, 1999 Mark K. Leavitt.............................. 60,000 July 1, 1998 Mark K. Leavitt.............................. 66,000 March 31, 1999 Berkeley T. Merchant......................... 125,000 June 29, 1994 Berkeley T. Merchant......................... 120,000 July 1, 1998 Blackford F. Middleton....................... 159,000 August 11, 1995 Blackford F. Middleton....................... 50,000 July 1, 1998 Blackford F. Middleton....................... 30,000 July 1, 1998 Blackford F. Middleton....................... 33,000 March 31, 1999 David C. Moffenbeier......................... 60,000 July 1, 1998 David C. Moffenbeier......................... 66,000 March 31, 1999 Richard L. Samco............................. 60,000 July 1, 1998 Richard L. Samco............................. 66,000 March 1, 1999 Frank J. Spina............................... 1,187,500 October 20, 1999 Thomas M. Watson............................. 300,000 July 1, 1998 Thomas M. Watson............................. 60,000 July 1, 1998 Thomas M. Watson............................. 66,000 March 1, 1999
All of the above non-negotiable promissory notes accrue interest at an annual rate of 6% on the unpaid principal balance from the date of the note until the principal balance is paid in full. Interest is payable quarterly in arrears. The notes are payable in full 10 years from the date of the loan and each note can be prepaid without penalty. We loaned Harvey J. Anderson $103,800 to pay for relocation expenses in the form of an unsecured promissory note. The promissory note accrues interest at an annual rate of 6% on the unpaid principal balance from the date of the note until the principal is paid in full. The note is payable in full on the earlier to occur of the sale of his residence located in Portland, Oregon, the termination of his employment by us, or July 1, 2001. The note is prepayable in full without penalty. In September 1999, we entered into a separate agreement with Mr. Anderson in consideration of Mr. Anderson relocating to San Francisco, California. We agreed to reimburse Mr. Anderson $7,930 for improvements to his Portland, Oregon residence and any shortfall between the sales price on his Portland, Oregon residence and the original purchase price of $520,000 paid by Mr. Anderson and any transaction costs not covered by the sales price of this residence, unless the sales price is greater than the purchase price. We also agreed to forgive the interest accrued on the unsecured promissory note referred to above, which will be repaid from the proceeds of the sale of the Portland, Oregon residence and to pay the mortgage payment on Mr. Anderson's residence in Portland, Oregon until it is sold. In connection with our series C preferred stock financing, we sold an aggregate of 2,505,970 additional shares of series C preferred stock at a price of $2.25 per share in May 1996, including 514,445 shares of series C preferred stock to New Enterprise Associates IV Limited Partnership, a 54 beneficial owner of greater than 5% of our common stock on a converted basis, and an aggregate of 514,445 shares of series C preferred stock to entities associated with Sequoia Funds, a group of affiliated entities beneficially owning greater than 5% of our common stock on a converted basis. In August 1998, we entered into stock purchase agreements with Enterprise Partners IV Associates, L.P. and Enterprise Partners IV, L.P. for the issuance of an aggregate of 175,000 shares of our common stock at a price of $4.00 per share. We also granted an option to purchase 8,000 shares of our common stock at a price of $4.00 per share to Enterprise Partners IV Associates, L.P. and granted an option to purchase 92,000 shares of common stock to Enterprise Partners IV, L.P. The options were exercised on April 14, 1999. Directors Ronald R. Taylor and Ronald H. Kase are affiliated with the Enterprise funds. In connection with our series J preferred stock financing, we sold an aggregate of 1,052,632 shares of series J preferred stock in May 1999 to Sequoia Capital Franchise Fund and Sequoia Capital Franchise Partners, both of which are affiliates of Mark A. Stevens, a director of MedicaLogic. Bruce M. Fried, a member of our board of directors, is a partner in a law firm retained by us to provide legal counsel regarding regulatory and intellectual property issues. 55 PRINCIPAL SHAREHOLDERS The following table presents the beneficial ownership of our common stock as of September 30, 1999 and as adjusted to reflect the common stock offered by this prospectus, by (a) each person known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock on a converted basis; (b) each director and named executive officer; and (c) all directors and officers as a group. Shares that the person or entity has the right to acquire within 60 days after September 30, 1999 are considered to be outstanding in calculating the percentage ownership of the person or entity but are not considered to be outstanding for any other person or entity.
SHARES BENEFICIALLY OWNED ----------------------------------------------------- PERCENTAGE PERCENTAGE NAME NUMBER BEFORE OFFERING AFTER OFFERING - ---- ---------- --------------- -------------- ENTITIES ASSOCIATED WITH SEQUOIA FUNDS ........ 2,803,840(1) 11.3% 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 NEW ENTERPRISE ASSOCIATES ..................... 2,353,595 9.5% 2490 Sand Hill Road Menlo Park, CA 94025 CONTINENTAL CASUALTY COMPANY .................. 2,000,000(2) 8.0% CNA Insurance CNA Plaza Chicago, IL 60685 QUANTUM INDUSTRIAL PARTNERS LDC ............... 1,568,421 6.3% Kaya Flamboyan 9 Willemstad, Curacao Netherlands Antilles SFM DOMESTIC INVESTMENT LLC ................... 1,568,421 6.3% c/o Soros Fund Management LLC 888 Seventh Avenue New York, NY 10016 MARK A. STEVENS ............................... 2,831,340(3) 11.4% 3000 Sand Hill Rd., Bldg. 4, Ste. 280 Menlo Park, CA 94025 RONALD H. KASE ................................ 2,381,095(4) 9.6% 2490 Sand Hill Road Menlo Park, CA 94025 DAVID W. WROE ................................. 2,000,000(2) 8.0% CNA Insurance CNA Plaza Chicago, IL 60685 MARK K. LEAVITT ............................... 1,520,000(5) 6.1% 20500 NW Evergreen Pky. Hillsboro, Oregon 97124
56
SHARES BENEFICIALLY OWNED ----------------------------------------------------- PERCENTAGE PERCENTAGE NAME NUMBER BEFORE OFFERING AFTER OFFERING - ---- ---------- --------------- -------------- RICHARD L. SAMCO .............................. 970,303(6) 3.9% 20500 NW Evergreen Pky. Hillsboro, Oregon 97124 DAVID C. MOFFENBEIER .......................... 658,952(7) 2.6% 20500 NW Evergreen Pky. Hillsboro, Oregon 97124 RONALD R. TAYLOR .............................. 529,167(8) 2.1% Enterprise Partners 7979 Ivanhoe Ave., Ste. 550 La Jolla, CA 92037 BLACKFORD F. MIDDLETON ........................ 108,250(9) Less than 1% 20500 NW Evergreen Pky. Hillsboro, Oregon 97124 THOMAS M. WATSON .............................. 105,000 Less than 1% 20500 NW Evergreen Pky. Hillsboro, Oregon 97124 BRUCE M. FRIED ................................ 11,250(10) Less than 1% 2300 N. Street, NW Washington, DC 20037 CHARLES D. BURWELL ............................ 27,500(11) Less than 1% 220 East Las Colinas Blvd. Irving, TX 75039 NEAL MOSZKOWSKI ............................... 0(12) Less than 1% 888 Seventh Avenue Suite 3300 New York, NY 10106 ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP (15 PERSONS)................................. 11,343,931(13) 45.4%
- ------------------------ (1) Includes 1,775,008 shares of common stock held of record by Sequoia Capital Growth Fund; 358,271 shares of common stock held of record by Sequoia Capital VI; 15,749 shares of common stock held of record by Sequoia 1995; 19,685 shares of common stock held of record by Sequoia Technology Partners VI; 108,812 shares of common stock held of record by Sequoia Technology Partners III; 447,369 shares of common stock held of record by Sequoia Capital Franchise Fund; and 78,948 shares of common stock held of record by Sequoia Capital Franchise Partner. (2) Includes 2,000,000 shares of common stock held of record by Continental Casualty Company. Mr. Wroe is Senior Vice President and Chief Technology Officer of Continental Casualty Company. (3) Includes 2,803,840 shares of common stock held of record by entities associated with Sequoia funds, of which Mr. Stevens disclaims beneficial ownership, except to the extent of his pecuniary interest. See note (1). Mr. Stevens is a general partner of Sequoia Capital VI and Sequoia Technology Partners VI and is a managing member of Sequoia Capital Franchise Fund and Sequoia Capital Franchise Partners. Mr. Stevens participates in the voting control of the shares held of record by Sequoia Capital Growth Fund, Sequoia 1995 and Sequoia Technology 57 Partners III. The share amount also includes 3,334 shares subject to an option held of record by Mr. Stevens that is exerciseable within 60 days of September 30, 1999. (4) Includes 2,353,595 shares of common stock held of record by New Enterprises Associates VI, LP, of which Mr. Kase disclaims beneficial ownership. Includes 27,500 shares subject to an option held of record by Mr. Kase that is exerciseable within 60 days of September 30, 1999. (5) Includes 252,500 shares of common stock held of record by Sandra Leavitt, Dr. Leavitt's former wife, which are voted by Dr. Leavitt as trustee of a voting trust, 5,000 shares of common stock held of record by Amy Elizabeth Leavitt and 85,000 shares of common stock held in trust for Amy Elizabeth Leavitt. (6) Includes 5,000 shares of common stock held of record by Courtaney E. Samco and 5,000 shares of common stock held of record by Mark R. Samco. (7) Includes 250,000 shares of common stock held of record by Elizabeth Moffenbeier. (8) Includes 475,000 shares of common stock held of record by entities associated with Enterprise Partners, for which Mr. Taylor disclaims beneficial ownership, except to the extent of his pecuniary interest. Of those shares for which beneficial ownership is disclaimed, Mr. Taylor has the right to acquire beneficial ownership of 27,778 shares at any time. Also includes 29,167 shares subject to an option held of record by Mr. Taylor that is exerciseable within 60 days of September 30, 1999 and an aggregate of 12,000 shares of common stock of which 4,000 shares each are held of record by his children, Luke Rand Williams, Leah Williams Barbieri and Tiffany Marie Taylor. (9) Includes 2,500 shares of common stock held of record by Allie Middleton. (10) Includes 7,500 shares subject to an option held of record by Mr. Fried that is exerciseable within 60 days of September 30, 1999. (11) Consists of 27,500 shares subject to an option held of record by Mr. Burwell that is exerciseable within 60 days of September 30, 1999. Mr. Burwell disclaims beneficial ownership of the shares underlying these options. Mr. Burwell is a Senior Vice President of VHA, Inc, which holds of record 793,651 shares of common stock. Mr. Burwell disclaims beneficial ownership in shares of common stock held of record by VHA as he does not have voting or dispositive power over these shares. (12) Mr. Moszkowski is an employee of Soros Fund Management LLC, which is the principal investment advisor to Quantum Industrial Partners LDC. Mr. Moszkowski is also a non-managing member of SFM Domestic Investments LLC. Mr. Moszkowski does not have voting or dispositive power over shares held of record by Quantum Industrial Partners LDC or SFM Domestic Investments LLC. (13) Includes 99,514 shares subject to options that are exercisable within 60 days of September 30, 1999. 58 DESCRIPTION OF CAPITAL STOCK GENERAL Upon the completion of this offering, we will be authorized to issue 100,000,000 shares of common stock, and 50,000,000 shares of undesignated preferred stock. The following summary describes all material provisions of our capital stock. However, we encourage you to read the provisions of our articles of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and which, together with applicable Oregon law, contain the legal terms that govern our capital stock. COMMON STOCK As of September 30, 1999, there were 24,876,975 shares of our common stock outstanding, which were held of record by approximately 262 shareholders, after giving effect to the conversion of the outstanding series of preferred stock. The holders of common stock are entitled to one vote per share on all matters to be voted upon by the shareholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably the dividends, if any, as may be declared from time to time by the board of directors out of funds legally available for that purpose. If we liquidate, dissolve or wind up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to the prior distribution rights of preferred stock, if any, then outstanding. The holders of common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to our common stock. The outstanding shares of common stock are, and the shares of common stock offered by this prospectus when issued will be, fully paid and nonassessable. PREFERRED STOCK The board of directors has the authority, without action by the shareholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, which may be greater than the rights of our common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock upon the rights of holders of our common stock until the board of directors determines the specific rights of the holders of preferred stock. However, the effects might include: - Restricting dividends on our common stock; - Diluting the voting power of our common stock; - Impairing the liquidation rights of our common stock; and - Delaying or preventing a change in control of MedicaLogic without further action by the shareholders. Upon the completion of this offering, no shares of preferred stock will be outstanding, and we have no present plans to issue any shares of preferred stock. REGISTRATION RIGHTS After this offering, the holders of 16,327,967 shares of common stock will be entitled to rights with respect to the registration of these shares under the Securities Act. Under the terms of the agreements between us and the holders of these shares, if we propose to register any of our securities under the 59 Securities Act, either for our own account or for the account of other security holders exercising registration rights, these holders are entitled to: - notice of registration; - include their shares of common stock in the registration; and - specified demand registration rights under which they may require us to file a registration statement under the Securities Act at our expense with respect to their shares of our common stock, and we are required to use our best efforts to effect this registration. Further, some of the holders of these demand registration rights may require us to file additional registration statements. All of the registration rights are subject to conditions and limitations, including the right of the underwriters of an offering to limit the number of shares included in the registration and our right not to effect a requested registration within sixty days following the effectiveness of a registration statement registering any of our stock or other securities in connection with the public offering of those securities solely for cash. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is ChaseMellon Shareholder Services, LLC. OREGON CONTROL SHARE AND BUSINESS COMBINATION STATUTES Upon completion of this offering, we will become subject to the Oregon Control Share Act. The Oregon Control Share Act generally provides that a person who acquires voting stock of an Oregon corporation in a transaction, other than a transaction in which voting shares are acquired from the issuing public corporation, that results in the acquiror, broadly defined to include companies or persons acting as a group to acquire the shares, holding more than 20%, 33 1/3% or 50% of the total voting power of the corporation cannot vote the shares it acquires in the acquisition unless voting rights are given to the control shares by: - A majority of each voting group entitled to vote; and - The holders of a majority of the outstanding voting shares, excluding the control shares held by the acquiror and shares held by the company's officers and inside directors. The acquiror may, but is not required to, submit to the target company a statement including specific information about the acquiror and its plans with respect to the company. The statement may also request that the company call a special meeting of shareholders to determine whether voting rights will be accorded to the control shares. If the acquiror does not request a special meeting of shareholders, the issue of voting rights of control shares will be considered at the next annual or special meeting of shareholders. If the acquiror's control shares are accorded voting rights and represent a majority or more of all voting power, shareholders who do not vote in favor of voting rights for the control shares will have the right to receive the appraised fair value of their shares, which may not be less than the highest price paid per share by the acquiror for the control shares. Upon completion of this offering, we will become subject to the provisions of the Oregon Business Corporation Act that govern business combinations between corporations and interested shareholders. The Oregon Business Corporation Act generally provides that if a person or entity acquires 15% or more of the outstanding voting stock of an Oregon corporation, the corporation and the acquiring shareholder, or any affiliated entity of the acquiring shareholder, may not engage in business combination transactions for three years following the date the person acquired the shares. Business combination transactions for this purpose include: 60 - A merger or plan of share exchange; - Any sale, lease, mortgage or other disposition of 10% or more of the assets of the corporation; and - Transactions that result in the issuance or transfer of capital stock of the corporation to the acquiring shareholder. These restrictions do not apply if: - The acquiring shareholder, as a result of the transaction in which the person acquired the shares, owns at least 85% of the outstanding voting stock of the corporation, disregarding shares owned by directors who are also officers and some employee benefits plans; - The board of directors approves the business combination or the transaction that resulted in the shareholder acquiring the shares before the acquiring shareholder acquires 15% or more of the corporation's voting stock; or - The board of directors and the holders of at least two-thirds of the outstanding voting stock of the corporation, disregarding shares owned by the acquiring shareholder, approve the business combination after the acquiring shareholder acquires 15% or more of the corporation's voting stock. STAGGERED BOARD; REMOVAL OF DIRECTORS ONLY FOR CAUSE Our articles and restated bylaws contain provisions that: - Classify the board of directors into three classes as nearly equal in number as possible, each of which will serve for three years with one class being elected each year; and - Provide that directors may be removed by shareholders only for cause and only upon the vote of 75% of the votes then entitled to be cast for the election of directors. The classified board provisions may have the effect of lengthening the time required for a third party to acquire control of MedicaLogic through a proxy contest or the election of a majority of the board of directors and may deter any potential unfriendly offers or other efforts to obtain control of MedicaLogic. These provisions could deprive you of opportunities to realize a premium for your shares and could make removal of incumbent directors more difficult. At the same time, these provisions may have the effect of inducing any third parties seeking control of MedicaLogic to negotiate terms acceptable to the board of directors. In addition, the provisions regarding removal of directors will make the removal of any director more difficult, even if you believe removal is in your best interests. Since these provisions make the removal of directors more difficult, they increase the likelihood that incumbent directors will retain their position and, since the board has the power to retain and discharge management, could perpetuate incumbent management. 61 SHARES ELIGIBLE FOR FUTURE SALE If our shareholders sell substantial amounts of common stock, including shares issued upon the exercise of outstanding options, in the public market following this offering, the market price of our common stock could fall. These sales also might make it more difficult for us to sell equity or equity related securities in the future and at a time and price that we consider appropriate. Upon completion of this offering, we will have outstanding an aggregate of shares of our common stock, assuming no exercise of outstanding options or warrants. As of September 30, 1999, we had approximately 262 holders of common stock, after giving effect to the conversion of the convertible preferred stock. All of the shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act, unless these shares are purchased by our affiliates, or persons who directly or indirectly control, are controlled by or are under common control with us. Shares held by affiliates may generally only be sold in compliance with the limitations of Rule 144 of the Securities Act described below. This leaves 24,876,975 shares eligible for sale in the public market as follows:
NUMBER OF SHARES DATE - ---------------- ---- 22,752,297................. After 180 days from the date of this prospectus, subject, in some cases, to volume limitations. 2,124,679.................. At various times after 181 days from the date of this prospectus, subject, in some cases, to volume limitations.
LOCK-UP AGREEMENTS All of our officers and directors and shareholders holding substantially all of our outstanding shares of common stock have signed lock-up agreements with our underwriters under which they agreed not to transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock, for a period of 180 days after the date of this prospectus. Transfers or dispositions can be made sooner with the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. RULE 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - 1% of the number of shares of our common stock then outstanding, which will equal approximately shares immediately after this offering; or - the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to that sale. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about MedicaLogic, Inc. RULE 144(k) Under Rule 144(k) as currently in effect, a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell those shares without complying with the manner of sale, public 62 information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, Rule 144(k) shares may be sold immediately upon the completion of this offering. RULE 701 In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who purchases shares of our common stock from us in connection with a compensatory stock or option plan or other written agreement is eligible to resell those shares 90 days after the effective date of this prospectus in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period, contained in Rule 144. REGISTRATION RIGHTS After this offering, the holders of 16,327,967 shares of our common stock will be entitled to rights with respect to the registration of those shares under the Securities Act. If these shares are registered, they will become freely tradeable without restriction under the Securities Act. These sales could have a material adverse effect on the trading price of our common stock. STOCK OPTIONS Shortly after this offering, we intend to file a registration statement on Form S-8 covering the shares of common stock reserved for issuance under our stock option plans. Shares of common stock registered under any registration statement will, subject to Rule 144 volume limitations applicable to affiliates, be available for sale in the open market, unless the shares are subject to vesting restrictions or the lock-up agreements described above. 63 UNDERWRITING Subject to the terms and conditions in the underwriting agreement, dated , 1999, the underwriters named below, for whom Donaldson, Lufkin & Jenrette Securities Corporation, BancBoston Robertson Stephens Inc., U.S. Bancorp Piper Jaffray Inc. and DLJDIRECT Inc. are acting as representatives, have each agreed to purchase from MedicaLogic the number of shares of common stock indicated opposite each of their names below.
NUMBER OF UNDERWRITERS SHARES - ------------ --------- Donaldson, Lufkin & Jenrette Securities Corporation......... BancBoston Robertson Stephens Inc........................... U.S. Bancorp Piper Jaffray Inc.............................. DLJDIRECT Inc............................................... --------- Total................................................... =========
The underwriting agreement provides that the obligations of each of the underwriters to purchase and accept delivery of the shares of common stock offered by this prospectus are subject to approval by their counsel of legal matters and to other specified conditions. The underwriters are obligated to purchase and accept delivery of all the shares of common stock offered by this prospectus (other than those shares covered by the over-allotment option described below) if any are purchased. The underwriters initially propose to offer the shares of common stock in part directly to the public at the initial public offering price indicated on the cover page of this prospectus and in part to dealers, including the underwriters, at that price less a concession not in excess of $ per share. The underwriters may allow, and the dealers may re-allow, to other dealers a concession not in excess of $ per share. After the initial offering of the common stock, the public offering price and other selling terms may be changed by the representatives at any time without notice. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. We have granted to the underwriters an option, exercisable within 30 days after the date of this prospectus, to purchase, from time to time, in whole or in part, up to an aggregate of additional shares of common stock at the initial public offering price less underwriting discounts and commissions. The underwriters may exercise this option solely to cover over-allotments, if any, made in connection with this offering. To the extent that the underwriters exercise this option, each underwriter will become obligated, subject to specified conditions, to purchase its pro rata portion of the additional shares based on the underwriter's percentage underwriting commitment as indicated in the preceding table. The following table shows the underwriting fees to be paid to the underwriters by us in this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares of our common stock to cover over-allotments.
NO FULL EXERCISE EXERCISE -------- -------- Per Share.................................................. Total......................................................
We will pay the offering expenses, estimated to be $ . An electronic prospectus is available on the Internet site maintained by DLJDIRECT Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation. Other than the prospectus in electronic format, the information on the Internet site relating to our offering is not a part of this prospectus, has 64 not been approved or endorsed by us or any underwriter and should not be relied on by prospective purchasers. We have agreed to indemnify the underwriters against specified liabilities, including liabilities under the Securities Act, or to contribute to payments that the underwriters may be required to make in connection with these liabilities. Each of MedicaLogic, its executive officers and directors and most of our shareholders has agreed, subject to exceptions, not to (a) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock or (b) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any common stock, regardless of whether any of the transactions described in clause (a) or (b) are to be settled by the delivery of common stock, or other securities, in cash or by any other method, for a period of 180 days after the date of this prospectus without the prior written consent of Donaldson Lufkin & Jenrette Securities Corporation. In addition, during this period, we have also agreed not to file any registration statement for, and each of our executive officers, directors and most of our shareholders has agreed not to make any demand for, or exercise any right for, the registration of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock without the prior written consent of Donaldson Lufkin & Jenrette Securities Corporation. Before this offering, there has been no established trading market for our common stock. The initial public offering price for the shares of common stock offered by this prospectus will be determined by negotiation among us and the representatives. The factors to be considered in determining the initial public offering price include the history of and the prospects for the industry in which we compete, our past and present operations, our historical results of operations, our prospects for future earnings, the recent market prices of securities of generally comparable companies and the general condition of the securities markets at the time of this offering. We have applied for quotation of our common stock on the Nasdaq National Market under the symbol MDLI. Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the shares of common stock offered by this prospectus in any jurisdiction where action for that purpose is required. The shares of common stock offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any of the shares of common stock be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of the jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to this offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any shares of common stock offered by this prospectus in any jurisdiction in which an offer or a solicitation is unlawful. In connection with this offering, the underwriters may engage in transactions that stabilize, maintain or affect the price of our common stock. Specifically, the underwriters may over-allot this offering, meaning syndicate sales may be in excess of the offering size which creates a syndicate short position. The underwriters may bid for and purchase shares of common stock in the open market to cover the syndicate short position or to stabilize the price of our common stock. In addition, the underwriting syndicate may reclaim selling concessions from syndicate members if the syndicate repurchases previously distributed common stock in syndicate covering transactions, in stabilization transactions or in other transactions. Any of these activities may stabilize or maintain the market price 65 of our common stock above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time. The underwriters, at our request, have reserved for sale at the initial public offering price up to 8% of the shares of common stock to be sold in this offering for sale to our employees, directors and other persons we designate. The number of shares available for sale to the general public will be reduced to the extent that any reserved shares are purchased. Any reserved shares not purchased will be offered by the underwriters on the same basis as the other shares offered by this prospectus. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 for the common stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information included in the registration statement or the exhibits and schedules that are part of the registration statement. For further information on us and our common stock, you should review the registration statement and its exhibits and schedules. Any document we file may be read and copied at the Commission's public reference rooms at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commissioner located at Seven World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the Commission at 1-800-SEC-0330 for further information about the public reference rooms. Our filings with the Commission are also available to the public from the Commission's Web site at HTTP://WWW.SEC.GOV. Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities Exchange Act and will file periodic reports, proxy statements and other information with the Commission. These periodic reports, proxy statements and other information will be available for inspection and copying at the Commission's public reference rooms and the Web site of the Commission referred to above. LEGAL MATTERS The validity of the common stock offered by this prospectus will be passed upon for us by Stoel Rives LLP, Portland, Oregon. Stoel Rives LLP holds a warrant to purchase 10,000 shares of MedicaLogic's common stock at an exercise price of $6.50 a share. Legal matters will be passed upon for the underwriters by Perkins Coie LLP, Portland, Oregon. As of the date of this prospectus, partners and employees of Stoel Rives LLP beneficially owned an aggregate of 25,000 shares of our common stock. EXPERTS The financial statements of MedicaLogic, Inc. as of December 31, 1997 and 1998 and September 30, 1999 and for each of the years in the three-year period ended December 31, 1998 and for the nine-month period ended September 30, 1999 have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, appearing herein and upon the authority of such firm as experts in auditing and accounting. The financial statements of PrimaCis Health Information Technology, Inc. as of December 31, 1998 and for the year then ended have been included herein in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein and upon the authority of such firm as experts in auditing and accounting. 66 MEDICALOGIC, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
PAGE MedicaLogic, Inc.--Consolidated Financial Statements: Report of KPMG LLP........................................ F-2 Consolidated Balance Sheets............................... F-3 Consolidated Statements of Operations..................... F-4 Consolidated Statements of Shareholders' Equity (Deficit)............................................... F-5 Consolidated Statements of Cash Flows..................... F-6 Notes to Consolidated Financial Statements................ F-7 PrimaCis Health Information Technology, Inc.--Financial Statements: Report of KPMG LLP........................................ F-27 Balance Sheet............................................. F-28 Statement of Operations................................... F-29 Statement of Shareholders' Deficit........................ F-30 Statement of Cash Flows................................... F-31 Notes to Financial Statements............................. F-32 Pro Forma Financial Information: Summary................................................... F-40 Unaudited Pro Forma Condensed Combined Statement of Operations for the Nine-Month Period Ended September 30, 1998...................................... F-41 Unaudited Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 1998......... F-42 Notes to the Unaudited Pro Forma Condensed Combined Financial Information................................... F-43
F-1 When the reverse stock split referred to in note 13(d) to the consolidated financial statements has been consummated, we will render the following opinion. INDEPENDENT AUDITORS' REPORT The Board of Directors MedicaLogic, Inc.: We have audited the accompanying consolidated balance sheets of MedicaLogic, Inc. and subsidiaries as of December 31, 1997, 1998, and September 30, 1999 and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1998 and the nine-month period ended September 30, 1999. These consolidated financial statements are the responsibility of MedicaLogic's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MedicaLogic, Inc. and subsidiaries as of December 31, 1997, 1998, and September 30, 1999 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 and the nine-month period ended September 30, 1999 in conformity with generally accepted accounting principles. Portland, Oregon October 22, 1999, except as to note 13(d) which is as of November , 1999 F-2 MEDICALOGIC, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ------------------- 1997 1998 SEPTEMBER 30, 1999 -------- -------- ------------------------- (PRO FORMA) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 4,924 $ 4,718 $ 7,081 Short-term investments.................................... 7,116 7,030 38,059 Accounts receivable, net.................................. 7,663 10,084 4,537 Prepaid expenses and other current assets................. 263 545 2,031 -------- -------- -------- Total current assets.................................... 19,966 22,377 51,708 Property and equipment, net................................. 1,969 1,804 10,853 Other assets, net........................................... 137 127 5,166 -------- -------- -------- Total assets............................................ $ 22,072 $ 24,308 $ 67,727 ======== ======== ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.......................................... 667 557 2,993 Accrued and other liabilities............................. 2,187 2,286 1,347 Deferred revenue.......................................... 1,396 2,701 2,554 Current portion of capital leases......................... 846 215 557 Current portion of notes payable.......................... -- 527 1,106 -------- -------- -------- Total current liabilities............................... 5,096 6,286 8,557 Non-current portion of capital leases....................... 278 92 868 Non-current portion of notes payable........................ -- 587 791 Deferred rent............................................... -- -- 250 -------- -------- -------- Total liabilities....................................... 5,374 6,965 10,466 -------- -------- -------- Convertible redeemable preferred stock; 50,000,000 shares authorized; aggregate liquidation preference $99,418 at September 30, 1999; issued and outstanding 19,525,545, 21,524,545, and 31,901,388 at December 31, 1997 and 1998, and September 30, 1999, respectively; pro forma no shares issued and outstanding.................................... 42,791 49,782 97,825 $ -- Commitments and contingencies Shareholders' equity (deficit): Common stock, no par value; authorized 100,000,000 shares; issued and outstanding 6,654,280, 7,127,556 and 8,926,281 shares at December 31, 1997 and 1998 and September 30, 1999, respectively; pro forma 24,876,975 shares issued and outstanding........................... 3,202 5,139 15,793 113,618 Common stock notes receivable............................. (988) (2,039) (6,449) (6,449) Deferred stock compensation............................... -- -- (988) (988) Accumulated deficit....................................... (28,307) (35,539) (48,920) (48,920) -------- -------- -------- -------- Total shareholders' equity (deficit).................... (26,093) (32,439) (40,564) $ 57,261 -------- -------- -------- ======== Total liabilities, redeemable preferred stock and shareholders' equity (deficit)........................ $ 22,072 $ 24,308 $ 67,727 ======== ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-3 MEDICALOGIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE-MONTH PERIOD YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30, --------------------------------------- ------------------------- 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) Revenues: Licenses.................... $ 6,845 $ 7,617 $ 10,410 $ 6,534 $ 9,620 Service and support......... 2,819 5,190 5,750 4,225 5,372 ----------- ----------- ----------- ----------- ----------- Total revenues.......... 9,664 12,807 16,160 10,759 14,992 Operating expenses: Cost of licenses............ 2,089 1,702 939 608 813 Cost of service and support................... 4,031 6,054 5,815 4,354 4,911 Marketing and sales......... 6,667 7,681 7,882 5,647 12,300 Research and development.... 6,583 7,047 8,071 5,981 8,495 General and administrative............ 718 1,315 1,151 735 2,511 ----------- ----------- ----------- ----------- ----------- Total operating expenses.............. 20,088 23,799 23,858 17,325 29,030 ----------- ----------- ----------- ----------- ----------- Operating loss.......... (10,424) (10,992) (7,698) (6,566) (14,038) Other income (expense): Interest expense............ (251) (240) (187) (145) (180) Interest income............. 456 617 707 504 1,113 Other, net.................. (96) (55) 143 (40) 9 ----------- ----------- ----------- ----------- ----------- Total other income...... 109 322 663 319 942 ----------- ----------- ----------- ----------- ----------- Loss before income taxes................. (10,315) (10,670) (7,035) (6,247) (13,096) Provision for income taxes.... -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Net loss................ $ (10,315) $ (10,670) $ (7,035) $ (6,247) $ (13,096) =========== =========== =========== =========== =========== Accretion of preferred stock redemption preference....... (49) (149) (197) (147) (285) ----------- ----------- ----------- ----------- ----------- Net loss attributed to common shareholders... $ (10,364) $ (10,819) $ (7,232) $ (6,394) $ (13,381) =========== =========== =========== =========== =========== Historical net loss per share: Basic and diluted........... $ (1.58) $ (1.63) $ (1.05) $ (0.93) $ (1.61) =========== =========== =========== =========== =========== Weighted average shares-- basic and diluted......... 6,576,278 6,634,541 6,883,036 6,881,578 8,331,102 Pro forma net loss per share: Basic and diluted........... $ (0.41) $ (0.63) =========== =========== Weighted average shares-- basic and diluted......... 17,478,642 21,083,550
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4 MEDICALOGIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS)
COMMON TOTAL COMMON STOCK STOCK SHAREHOLDERS' --------------------- NOTES DEFERRED ACCUMULATED EQUITY SHARES AMOUNT RECEIVABLE COMPENSATION DEFICIT (DEFICIT) ---------- -------- ---------- ------------ ------------ ------------- Balance at December 31, 1995.................. 6,528,112 $ 2,812 $ (683) $ -- $ (7,124) $ (4,995) Issuance of common stock in exchange for a promissory note............................. 52,500 210 (210) -- -- -- Issuance of common stock in exchange for services.................................... 12,500 50 -- -- -- 50 Issuance of common stock for cash............. 2,500 10 -- -- -- 10 Options exercised............................. 18,250 26 -- -- -- 26 Interest accrued on common stock notes receivable.................................. -- -- (44) -- -- (44) Accretion of preferred stock redemption preference.................................. -- -- -- -- (49) (49) Net loss...................................... -- -- -- -- (10,315) (10,315) ---------- ------- ------- ------- -------- -------- Balance at December 31, 1996.................. 6,613,862 3,108 (937) -- (17,488) (15,317) Issuance of common stock in exchange for services.................................... 14,350 51 -- -- -- 51 Options exercised............................. 26,068 43 -- -- -- 43 Interest accrued on common stock notes receivable.................................. -- -- (51) -- -- (51) Accretion of preferred stock redemption preference.................................. -- -- -- -- (149) (149) Net loss...................................... -- -- -- -- (10,670) (10,670) ---------- ------- ------- ------- -------- -------- Balance at December 31, 1997.................. 6,654,280 3,202 (988) -- (28,307) (26,093) Issuance of common stock for acquisition...... 13,750 55 -- -- -- 55 Issuance of common stock for cash............. 175,000 700 -- -- -- 700 Issuance of restricted common stock in exchange for promissory notes............... 250,000 1,000 (1,000) -- -- -- Non-cash stock compensation................... -- 110 -- -- -- 110 Options exercised............................. 34,526 72 -- -- -- 72 Interest accrued on common stock notes receivable.................................. -- -- (51) -- -- (51) Accretion of preferred stock redemption preference.................................. -- -- -- -- (197) (197) Net loss...................................... -- -- -- -- (7,035) (7,035) ---------- ------- ------- ------- -------- -------- Balance at December 31, 1998.................. 7,127,556 5,139 (2,039) -- (35,539) (32,439) Issuance of common stock for acquisition...... 750,000 3,300 -- -- -- 3,300 Issuance of restricted common stock in exchange for promissory notes............... 742,500 4,196 (4,196) -- -- -- Issuance of common stock in exchange for services.................................... 58,750 398 -- -- -- 398 Issuance of common stock for commission....... 14,868 141 -- -- -- 141 Warrants exercised............................ 22,500 13 -- -- -- 13 Options exercised............................. 210,107 758 -- -- -- 758 Stock compensation expense.................... -- 790 -- 70 -- 860 Interest accrued on common stock notes receivable.................................. -- -- (214) -- -- (214) Deferred compensation related to stock options..................................... -- 1,058 -- (1,058) -- -- Accretion of preferred stock redemption preference.................................. -- -- -- -- (285) (285) Net loss...................................... -- -- -- -- (13,096) (13,096) ---------- ------- ------- ------- -------- -------- Balance at September 30, 1999................. 8,926,281 $15,793 $(6,449) $ (988) $(48,920) $(40,564) ========== ======= ======= ======= ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 MEDICALOGIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE-MONTH PERIOD YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30, ------------------------------ ---------------------- 1996 1997 1998 1998 1999 -------- -------- -------- ----------- -------- (UNAUDITED) Cash flows from operating activities: Net loss.................................................. $(10,315) $(10,670) $ (7,035) $ (6,247) $(13,096) Adjustments to reconcile net loss to net cash (used by) provided by operating activities: Depreciation and amortization......................... 912 1,464 1,537 1,152 3,085 Non-cash expenses..................................... 50 51 110 110 1,001 Provisions for doubtful accounts...................... 304 829 756 50 405 Loss (gain) on disposition of assets.................. -- 14 (2) (2) (11) Other non-cash expenses............................... (44) (51) (51) (38) 249 Changes in assets and liabilities: Accounts receivable................................. (3,027) (3,630) (3,177) 194 5,142 Prepaid expenses and other current assets........... (25) (133) (239) (235) (1,486) Other assets........................................ 300 (35) -- (48) (177) Accounts payable.................................... 1,131 (906) (110) (130) 1,383 Accrued and other liabilities....................... 80 1,314 99 (259) (939) Deferred rent....................................... -- -- -- -- 250 Deferred revenue.................................... (250) 113 1,305 481 (147) -------- -------- -------- -------- -------- Net cash (used by) provided by operating activities...................................... (10,884) (11,640) (6,807) (4,972) (4,341) -------- -------- -------- -------- -------- Cash flows from investing activities: Purchase of fixed assets.................................. (263) (525) (1,280) (990) (9,027) Purchase of business...................................... -- -- (12) (12) (2,117) Proceeds from sale of fixed assets........................ -- -- 6 6 18 Purchase of short-term investments........................ -- (15,261) (28,248) (23,868) (42,990) Purchase from maturities of short-term investments........ -- 8,145 28,334 18,911 11,961 Issuance of long-term note receivable..................... -- -- -- -- (200) -------- -------- -------- -------- -------- Net cash used by investing activities............. (263) (7,641) (1,200) (5,953) (42,355) -------- -------- -------- -------- -------- Cash flows from financing activities: Net proceeds from issuance of preferred stock............. 20,023 6,775 6,794 6,794 47,758 Net proceeds from issuance of common stock................ 36 43 772 745 771 Proceeds from issuance of notes payable................... -- -- 1,264 967 1,311 Principal payments under capital lease.................... (875) (1,264) (879) (697) (253) Principal payments under note obligations................. -- -- (150) (33) (528) -------- -------- -------- -------- -------- Net cash provided by financing activities......... 19,184 5,554 7,801 7,776 49,059 -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents..................................... 8,037 (13,727) (206) (3,149) 2,363 Cash and cash equivalents at beginning of period............ 10,614 18,651 4,924 4,924 4,718 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period.................. $ 18,651 $ 4,924 $ 4,718 $ 1,775 $ 7,081 ======== ======== ======== ======== ======== Summary of non-cash investing and financing activities: Issuance of common stock in exchange for note receivable.............................................. $ 210 $ -- $ 1,000 $ 1,000 $ 4,196 Issuance of common stock for purchase of a business....... -- -- 55 55 3,300 Assets acquired or exchanged under capital leases......... 1,451 593 62 62 1,371 Accretion of preferred stock redemption preference........ 49 149 197 147 285
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) COMPANY MedicaLogic, Inc. (MedicaLogic) develops, markets and supports electronic medical record software used by physicians at the point of care, throughout the U.S. The accompanying consolidated financial statements include the accounts of MedicaLogic and subsidiaries. All significant intercompany balances have been eliminated in consolidation. (b) UNAUDITED QUARTERLY INFORMATION The financial information included herein for the nine-month period ended September 30, 1998 is unaudited. However, such information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim period. The unaudited interim consolidated financial statements should be read together with the consolidated financial statements and the notes included in the consolidated financial statements. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year. (c) CASH EQUIVALENTS For purposes of these statements, MedicaLogic considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. (d) SHORT-TERM INVESTMENTS Short-term investments include various corporate debt instruments and have been classified as available-for-sale securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES at December 31, 1997 and 1998. Short-term investments are carried at amortized cost, which approximates market. At September 30, 1999, contractual maturities of short-term investments ranged from ninety to two hundred ninety-six days. (e) ACCOUNTS RECEIVABLE Accounts receivable are shown net of allowance for doubtful accounts of $852, $1,360 and $1,235 at December 31, 1997 and 1998 and September 30, 1999, respectively. The following table presents a rollforward of the allowance for doubtful accounts for the respective periods:
DECEMBER 31, ------------------------------ SEPTEMBER 30, 1996 1997 1998 1999 -------- -------- -------- -------------- Balance--beginning of period..... $ 30 $ 165 $ 852 $1,360 Provision........................ 304 829 756 405 Charge offs...................... (169) (142) (248) (530) ----- ----- ------ ------ Balance--end of period........... $ 165 $ 852 $1,360 $1,235 ===== ===== ====== ======
F-7 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (f) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Property and equipment under capital leases are stated at the lower of the present value of minimum lease payments at the beginning of the lease term or fair value of the leased assets at the inception of the lease. The cost of repairs and maintenance is expensed as incurred. Depreciation on furniture, equipment and leasehold improvements is calculated on a straight-line basis over the estimated useful lives of the assets, five years for furniture and two to three years for equipment. Property and equipment held under capital leases are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. Amortization of leasehold improvements is recognized over the shorter of the life of the improvement or the remaining life of the lease using the straight-line method. In accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, management reviews long-lived assets and the related intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate, to the carrying amount including associated intangible assets of such operation. If the operation is determined to be unable to recover the carrying amount of its assets, then intangible assets are written down first, followed by the other long-lived assets of the operation, to fair value. Fair value is determined based on discounted cash flows or appraised values, depending upon the nature of the assets. (g) GOODWILL Goodwill represents the excess of the aggregate purchase price over the fair value of the tangible and intangible assets acquired in various acquisitions. Goodwill costs are being amortized on a straight-line basis, over periods ranging from two to four years. Amortization expense for the years ended December 31, 1996, 1997 and 1998 and for the nine-month period ended September 30, 1999 was $-0-, $-0-, $34 and $566, respectively. Accumulated amortization at December 31, 1997 and 1998 and at September 30, 1999 was $-0-, $34 and $600, respectively. Recoverability of goodwill is periodically reviewed for impairment. (h) SOFTWARE DEVELOPMENT COSTS Software development costs have been accounted for in accordance with Statement of Financial Accounting Standards No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. Under the standard, capitalization of software development costs begins upon the establishment of technological feasibility, subject to net realizable value considerations. To date, the period between achieving technological feasibility and the general availability of such software has been short; therefore, software development costs qualifying for capitalization have been immaterial. Accordingly, MedicaLogic has not capitalized any software development costs and charged all costs to research and development expense. F-8 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (i) REVENUE RECOGNITION In October 1997, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 97-2, SOFTWARE REVENUE RECOGNITION. Subsequently, in March 1998, the Financial Accounting Standards Board ("FASB") approved SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE OF A PROVISION OF 97-2, SOFTWARE REVENUE RECOGNITION. SOP 98-4 defers for one year, the application of several paragraphs and examples in SOP 97-2 that limit the definition of vendor specific objective evidence (VSOE) of the fair value of various elements in a multiple element arrangement. The provisions of SOP's 97-2 and 98-4 have been applied to transactions entered into by MedicaLogic beginning January 1, 1998. Prior to 1997, MedicaLogic's revenue policy was in accordance with the preceding authoritative guidance provided by SOP No. 91-1, SOFTWARE REVENUE RECOGNITION. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on VSOE of the relative fair values of each element in the arrangement. MedicaLogic establishes VSOE based on the average selling prices of our product and support during the respective period. MedicaLogic recognizes revenue from license fees generally when a signed agreement has been obtained, the delivery of the product has occurred, there are no uncertainties surrounding product acceptance, the fee is fixed and determinable and collectibility of the license fee is probable. Term based licenses from internet products will be recognized on a subscription basis. Support revenue consists of annual subscriptions for maintenance and post-customer support services. Subscriptions, conveying the right to obtain upgrades, when and if available, are generally paid in advance and revenue is recognized ratably over the term of subscription. Services revenue generally consists of consulting, training and integration fees. Such services are typically billed separately from the license fees and are recognized as the related services are performed. In December 1998, the AICPA issued SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS. This SOP amends SOP 97-2 to require recognition of revenue using the "residual method" in circumstances outlined in the SOP. Under the residual method, revenue is recognized as follows: (1) the total fair value of undelivered elements, as indicated by VSOE, is deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2 and (2) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. SOP 98-9 is effective for fiscal years beginning after March 15, 1999. Also, the provisions of SOP 97-2 that were deferred by SOP 98-4 will continue to be deferred until the date SOP 98-9 becomes effective. (j) INCOME TAXES MedicaLogic accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred income taxes reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end. F-9 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that include the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. (k) STOCK-BASED EMPLOYEE COMPENSATION MedicaLogic has adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which defines a fair value based method of accounting for employee stock options and similar equity instruments. As is permitted under SFAS No. 123, MedicaLogic has elected to continue to account for its stock- based compensation plans under APB Opinion No. 25 and provide the pro forma disclosures as prescribed by SFAS No. 123. (l) ADVERTISING MedicaLogic expenses costs of advertising when the costs are incurred. Advertising expense was approximately $700, $836, $896 and $1,471 for the years ended December 31, 1996, 1997 and 1998 and for the nine-month period ended September 30, 1999, respectively. (m) NET LOSS PER SHARE MedicaLogic has adopted SFAS No. 128, EARNINGS PER SHARE, which provides that "basic net income (loss) per share" and "diluted net income (loss) per share" for all periods presented are to be computed using the weighted average number of common shares outstanding during each period, with diluted net income per share including the effect of potentially dilutive common shares. The reconciliation of shares used to calculate basic and diluted income per share consists of the following:
DECEMBER 31, SEPTEMBER 30, ------------------------------------------------ -------------------------------------- 1996 1997 1998 1998 1998 1999 1999 --------- --------- --------- ------------ ----------- --------- ------------ (PRO FORMA) (UNAUDITED) (PRO FORMA) (UNAUDITED) (UNAUDITED) Basic weighted average shares of common stock............... 6,576,278 6,634,541 6,883,036 17,478,642 6,881,578 8,331,102 21,083,550 Effect of dilutive securities: Stock options and warrants.......... -- -- -- -- -- -- -- --------- --------- --------- ---------- --------- --------- ---------- Diluted weighted average shares of common stock........ 6,576,278 6,634,541 6,883,036 17,478,642 6,881,578 8,331,102 21,083,550 ========= ========= ========= ========== ========= ========= ==========
Common stock equivalents related to stock options and warrants of 419,927, 915,284, 1,129,724, 1,088,518 (unaudited) and 2,161,773 are anti-dilutive in a net loss year and, therefore, are not F-10 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) included during the years ended December 1996, 1997 and 1998, and the nine-month periods ended September 30, 1998 and 1999 for calculation of net loss per share. The pro forma net loss per share information assumes the conversion, on a weighted average basis, of 10,595,606 and 12,752,488 shares of preferred stock into common stock for the year ended December 31, 1998 and the nine-month period ended September 30, 1999. (n) COMPREHENSIVE LOSS MedicaLogic has no material components of other comprehensive loss and accordingly the comprehensive loss is the same as net loss for all periods presented. (o) USE OF ESTIMATES Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amount of assets, liabilities and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. (p) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximate fair value due to the short-term nature of these instruments. The carrying amounts of capital leases and notes payable approximate fair value as the stated interest rates reflect current market rates. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument when available. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (q) COSTS OF SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE Internal use software development costs are accounted for in accordance with SOP 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. Costs incurred in the preliminary project stage are expensed as incurred and costs incurred in the application and development stage, which meet the capitalization criteria, are capitalized and amortized on a straight-line basis over five years, the estimated useful life of the asset. (r) CONTINGENCIES AND FACTORS THAT COULD AFFECT FUTURE RESULTS A substantial portion of MedicaLogic's revenues each year are generated from the development and release to market of computer software products. In the extremely competitive industry environment in which MedicaLogic operates, such product generating, development and marketing processes are uncertain and complex, requiring accurate prediction of market trends and demand as well as successful management of various development risks inherent in such products. In light of these dependencies, it is possible that failure to successfully manage a significant product F-11 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) introduction could have a severe near term impact on MedicaLogic's growth and results of operations. (s) PRO FORMA SHAREHOLDERS EQUITY (UNAUDITED) Pro forma net loss per share has been computed as described above and also gives effect to common equivalent shares from preferred stock that will automatically convert upon the closing of MedicaLogic's initial public offering (using the as-if-converted method). If MedicaLogic's initial public offering is consummated, all of the convertible preferred stock outstanding as of the closing date will automatically be converted into an aggregate of 15,950,964 shares of common stock based on the shares of convertible preferred stock outstanding at September 30, 1999. Unaudited pro forma shareholders' equity at September 30, 1999, as adjusted for the conversion of the convertible preferred stock, is disclosed on the balance sheet. (2) ACQUISITIONS On January 5, 1998, MedicaLogic paid $12 in cash and issued 13,750 shares of common stock valued at $4.00 per share to acquire certain intangible assets of Health Outcome Technologies, Inc. (HOT). This acquisition was accounted for as a purchase and results of operations for the acquired company are included only from the date of acquisition forward. In connection with this acquisition, MedicaLogic recorded goodwill of $67, which is being amortized over two years, the estimated economic life of the goodwill. The separate results of operations of HOT were not material compared to MedicaLogic's overall results of operations and as such, pro forma financial information has been omitted. In January 1999, MedicaLogic acquired PrimaCis Health Information Technology, Inc. (PrimaCis), a Delaware corporation. The total purchase price, including acquisition costs, was $6,453 and consisted of $2,100 in cash, the assumption of $1,053 in liabilities and the issuance of 750,000 shares of common stock at an estimated fair value of $4.40 per share. The purchase accounting allocations resulted in goodwill of approximately $3,200 and other intangible assets of approximately $3,300, which consists primarily of a customer list. Goodwill is amortized on a straight-line basis over a four year period. Other intangible assets are amortized on a straight-line basis over a two year period. The pro forma results shown below assume the PrimaCis acquisition occurred as of the beginning of 1998. Revenues.................................................... $ 16,408 Net loss.................................................... (11,278) Diluted net loss per share.................................. (1.48)
The pro forma results are not necessarily indicative of what actually would have occurred had the acquisition been in effect for the 1998 period. The pro forma statement of operations data for the nine-months ended September 30, 1999 have not been presented as the results of operations presented for MedicaLogic during this period include PrimaCis' operating results. In addition, they are not intended to be a projection of the future results that may be achieved from the combined operations. F-12 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (2) ACQUISITIONS (CONTINUED) In connection with the acquisition of PrimaCis, MedicaLogic entered into a separate agreement with a customer of PrimaCis under which MedicaLogic received a purchase order for 1,500 licenses. MedicaLogic delivered 500 licenses to this customer on March 31, 1999 and delivered 1,000 licenses to this customer on June 17, 1999 under a standard license agreement. In addition, Medicalogic is performing training and implementation services on a time and materials basis. (3) BALANCE SHEET COMPONENTS (a) PROPERTY AND EQUIPMENT Property and equipment, including equipment under capital leases, consist of the following:
DECEMBER 31, ------------------- SEPTEMBER 30, 1997 1998 1999 -------- -------- ------------- Furniture and equipment............... $ 3,850 $ 4,565 $12,086 Leasehold improvements................ 876 1,267 3,551 ------- ------- ------- 4,726 5,832 15,637 Less accumulated depreciation and amortization........................ (2,757) (4,028) (4,784) ------- ------- ------- $ 1,969 $ 1,804 $10,853 ======= ======= =======
(b) ACCRUED AND OTHER LIABILITIES Accrued liabilities consist of the following:
DECEMBER 31, ------------------- SEPTEMBER 30, 1997 1998 1999 -------- -------- ------------- Royalties............................... $ 947 $ 843 $ 599 Payroll and related liabilities......... 674 627 412 Litigation accruals..................... 301 488 175 Other................................... 265 328 161 ------ ------ ------ $2,187 $2,286 $1,347 ====== ====== ======
(4) LEASES MedicaLogic leases certain office furniture and equipment under long-term capital leases, which expire over the next two years. At December 31, 1997 and 1998 and September 30, 1999, the net book value of leased furniture and equipment included in property and equipment was $1,122, $307 and $1,425 respectively. MedicaLogic also leases its office facilities under non-cancelable operating lease agreements. F-13 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (4) LEASES (CONTINUED) Future minimum lease payments under non-cancelable operating leases and the capital leases are as follows:
CAPITAL OPERATING LEASES LEASES -------- --------- Year ending December 31: 1999 (for the three months ended December 31)........... $ 199 $ 590 2000.................................................... 730 2,838 2001.................................................... 838 2,884 2002.................................................... -- 2,884 2003.................................................... -- 3,003 Thereafter.............................................. -- 16,353 ------ ------- Total minimum lease payments........................ 1,767 $28,552 ======= Less amount representing interest......................... (342) ------ Present value of net minimum capital lease payments.......................................... 1,425 Less current portion of capital leases.................... (557) ------ Non-current portion of capital leases............... $ 868 ======
Rent expense for the years ended December 31, 1996, 1997 and 1998 and for the nine-month period ended September 30, 1999 totaled approximately $600, $611, $1,073 and $981, respectively. On May 12, 1999 MedicaLogic entered into a ten year operating lease agreement for office space. The lease requires a letter of credit in lieu of a cash security deposit in the amount of $1,750. Also in connection with this lease, MedicaLogic granted options to the lessor to purchase up to 25,000 shares of common stock, at a price of $6.50 per share. The lessor is required to exercise the option at any time within three years of MedicaLogic's initial public offering. In addition, at the time of MedicaLogic's initial public offering the lessor will have the right to purchase the greater of 50,000 shares of common stock or 1% of the number of shares offered at the initial offering price. The fair value of the options to issued to the lessor was determined by applying the Black-Scholes methodology using the commitment date of the lease for performance of the lessor as the measurement date. The per share weighted average fair market value was $1.30 on the date of grant, with the following weighted average assumptions: Risk-free interest rate of 5.75%, expected dividend yield -0-%, a three year term, an expected volatility of 100%. The fair value of $65 will be amortized over the lease period. F-14 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (5) NOTES PAYABLE Notes payable consists of the following:
DECEMBER 31, SEPTEMBER 30, ------------------- -------------- 1997 1998 1999 -------- -------- -------------- Note payable, monthly principal and interest payments of $1; interest at 11% per annum; final payment due December 31, 2008; unsecured...................................... $ -- $ 70 $ 67 Note payable, monthly principal and interest payments of $3; interest at 11% per annum; final payment due November 30, 1999; unsecured...................................... -- 37 7 Notes payable, under term facility, monthly principal and interest payments of $47; interest at two-year treasury constant maturities plus 5% per annum (10.4% as of December 31, 1998 and 9.53% at September 30, 1999); maturing between September 2000 and September 2001; secured by equipment purchased thereunder..................................... -- 1,007 650 Notes payable under term facility, monthly principal and interest payments of $25; interest at a two-year treasury constant maturities plus 5% per annum (9.45% at September 30, 1999); maturing between March 2001 and September 2001; secured by equipment purchased thereunder........................... -- -- 834 Note payable under term facility, quarterly principal and interest payments of $38; interest at 7.96% per annum; final payment due April 2001; secured by equipment purchased thereunder..................................... -- -- 339 ----- ------ ------ -- 1,114 1,897 Less current portion of notes payable............ -- 527 1,106 ----- ------ ------ $ -- $ 587 $ 791 ===== ====== ======
MedicaLogic has a $3,300 term loan facility to finance the purchase of new capital equipment. $1,823 is outstanding, as described above, under this facility at September 30, 1999. Future maturities are as follows: Year ending December 31: 1999 (for the three months ended December 31)............. $ 274 2000...................................................... 1,049 2001...................................................... 483 2002...................................................... 44 2003...................................................... 8 Thereafter................................................ 39 ------ Total................................................... $1,897 ======
F-15 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (6) CONVERTIBLE REDEEMABLE PREFERRED STOCK MedicaLogic has authorized several series of convertible redeemable preferred stock. The title, carrying amount, and number of shares issued and outstanding are as follows:
DECEMBER 31, SEPTEMBER 30, ------------------- -------------- 1997 1998 1999 -------- -------- -------------- Series A, $1.00 liquidation preference; issued and outstanding 5,750,001 at December 31, 1997 and 1998 and September 30, 1999........ 5,734 5,745 5,750 Series A-1, $10.00 liquidation preference; no shares issued and outstanding at September 30, 1999.......................... -- -- -- Series C, $2.25 liquidation preference; issued and outstanding 7,012,637 shares at December 31, 1997 and 1998 and September 30, 1999.......................... 15,744 15,767 15,779 Series C-1, $22.50 liquidation preference; no shares issued and outstanding at September 30, 1999.......................... -- -- -- Series E, $3.15 liquidation preference; 4,761,907 shares issued and outstanding at December 31, 1997 and 1998 and September 30, 1999.......................... 14,538 14,694 14,811 Series E-1, $31.50 liquidation preference; no shares issued and outstanding at September 30, 1999.......................... -- -- -- Series F, $3.40 liquidation preference; 2,000,000, 4,000,000 and 4,000,000 shares issued and outstanding at December 31, 1997 and 1998 and September 30, 1999............. 6,775 13,576 13,582 Series F-1, $34.00 liquidation preference; no shares issued and outstanding at September 30, 1999.......................... -- -- -- Series I, $3.80 liquidation preference; no shares issued and outstanding at September 30, 1999.......................... -- -- -- Series I-1, $38.00 liquidation preference; no shares issued and outstanding at September 30, 1999.......................... -- -- -- Series J, $4.75 liquidation preference; 10,376,843 shares issued and outstanding at September 30, 1999.......................... -- -- 47,930 Series J-1, $47.50 liquidation preference; no shares issued and outstanding at September 30, 1999.......................... -- -- -- ------- ------- ------- Total convertible redeemable preferred stock................................... 42,791 49,782 97,825 ======= ======= =======
The terms for each series of preferred stock are similar and are summarized below: DIVIDENDS Preferred shareholders are entitled to receive dividends when and if declared by the Board of Directors at an annual rate of $.10 and $1 per share for Series A and A-1, $.225 and $2.25 per share for Series C and C-1, $.315, $3.15 for Series E and E-1, $.340 and $3.40 for Series F and F-1, and $.380 and $3.80 for Series I and I-1, and $0.475 and $4.75 for Series J and J-1, respectively. The right to receive F-16 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (6) CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED) dividends on preferred stock is not cumulative and no right to receive dividends accrues to holders of the preferred stock in the event the Board of Directors does not declare dividends. No dividends may be declared or paid on common stock until all declared dividends on preferred stock have been paid. As of September 30, 1999, no dividends had been declared or paid. LIQUIDATION PREFERENCES Upon dissolution, liquidation or winding up of the affairs of MedicaLogic, either voluntarily or involuntarily, the preferred shareholders receive preference in liquidation over the common shareholders of MedicaLogic. The liquidation value for each outstanding share is $1 and $10 for Series A and A-1, $2.25 and $22.50 for Series C and C-1. $3.15 and $31.50 for Series E and E-1, $3.40 and $34.00 for Series F and F-1. $3.80 and $38.00 for Series I and I-1, and $4.75 and $47.50 for Series J and J-1, respectively, adjusted for any stock dividends. The holders of Series E and E-1, Series F and F-1, Series I and I-1 and Series J and J-1, on a parity basis among these Series, are entitled to receive their liquidation value prior to and in preference to any distribution to the holders of Series A and A-1 and Series C and C-1 preferred stock. The holders of Series C and C-1 preferred stock are entitled to receive their liquidation value prior to and in preference to any distribution to the holders of Series A and A-1. REDEMPTION The preferred stock is subject to certain mandatory redemption features following the affirmative vote of a majority of the outstanding shares of the preferred stock, effective no earlier than December 31, 2001. Upon the majority vote of the outstanding shares, MedicaLogic is required to redeem all of the then outstanding preferred stock or an amount determined by MedicaLogic for which funds are available for redemption. The per share redemption price for each series of preferred stock is equal to its per share liquidation value for each respective series discussed above. In the event of a redemption of only a portion of the total outstanding preferred stock, MedicaLogic is required to redeem Series E and E-1, Series F and F-1, Series I and I-1 and Series J and J-1 prior to and in preference to the holders of Series A and A-1 and Series C and C-1 preferred stock. In addition, the holders of Series C and C-1 will have preference over the holders of Series A and A-1 preferred stock. VOTING The holder of each share of each series of preferred stock is entitled to the number of votes such holder would be entitled to if the shares of preferred stock were converted to common stock. CONVERSION Two shares of preferred stock is voluntarily convertible into one share of common stock at any time after the date of issuance at a rate that equals the original issue price divided by the conversion price at the time in effect, subject to certain adjustments as set forth in the purchase agreements. Automatic conversion to common stock at the then effective conversion rate will occur for Series A, A-1, C, C-1, F-17 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (6) CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED) E and E-1, following the effectiveness of a registration statement under the Securities Act of 1933 in which the aggregate price to the public equals or exceeds $7,500,000 and in which the public offering price of common stock equals or exceeds $10 per share. The public offering price of MedicaLogic's common stock that will trigger automatic conversion of the Series F and F-1, the Series I and I-1 and Series J and J-1 preferred stock is $10.80, $11.58 and $10.80 per share, respectively. (7) SHAREHOLDERS' EQUITY (a) SHAREHOLDERS' AGREEMENT MedicaLogic and certain of its shareholders have an agreement that includes restrictions on the purchase and sale of MedicaLogic's stock. Except as expressly provided, no shareholder is allowed to transfer ownership of stock without the prior written consent of the other shareholders that are party to the agreement. These restrictions lapse upon the effectiveness of a registration of common stock under the Securities Act of 1933, as amended, and the consummation of the sale of common stock pursuant to that registration statement. The agreement entitles MedicaLogic to purchase a shareholder's stock under certain conditions. The acquisition price is equal to the fair value of the shares to be purchased. (b) STOCK INCENTIVE PLAN On February 9, 1993, MedicaLogic adopted a Stock Incentive Plan which allowed for the issuance of 2,249,692 shares of common stock. Under the 1996 Stock Incentive Plan, adopted December 31, 1996, together with the 1993 Stock Incentive Plan (the Plans), 500,000 shares of common stock were reserved for issuance. The 1996 Plan was amended in 1998 to reserve an additional 350,000 shares of common stock for issuance, bringing the total under the Plans to 3,097,192. Pursuant to the terms of the Plans, the Board of Directors is authorized to grant incentive stock options, non-statutory stock options and to sell restricted stock to employees or others providing services or benefits to MedicaLogic. The Plans also allow granting of stock bonuses, stock appreciation rights, and other forms of stock based incentives, although none have been granted to date. Option prices for incentive stock options are set at not less than the fair market value of the common stock at the date of grant. Options vest over periods determined by the Board of Directors. Options to employees are contingent upon continued employment with MedicaLogic and, unless otherwise specified, expire ten years from the date of grant. In March 1998, MedicaLogic extended the term of all outstanding options from five years to ten years, which constituted a new measurement date. The fair value of the stock as determined by the Board of Directors on the date the change was effective was $4.00 per share. 121,025 of these options had exercise prices of less than $4.00 per share and were fully vested. MedicaLogic recorded a compensation charge of $110 in connection with this change in option terms. The compensation expense was calculated by taking the difference between the original grant price and the fair value on the new measurement date. F-18 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (7) SHAREHOLDERS' EQUITY (CONTINUED) On April 30, 1999, MedicaLogic's 1996 Plan was amended to reserve an additional 1,900,000 shares of common stock. In September 1999 MedicaLogic adopted the 1999 Stock Incentive Plan, which authorizes the issuance of 2,000,000 shares, bringing the total to 6,997,192. The per share weighted average fair market value, as determined by applying the Black-Scholes option pricing model to stock options granted under the Plans during 1996, 1997, 1998 and the nine-month period ended September 30, 1999 was $2.88, $2.90, $3.44 and $5.02, respectively, on the date of grant, with the following weighted average assumptions:
YEARS ENDED NINE-MONTH DECEMBER 31, PERIOD ENDED ------------------------------ SEPTEMBER 30, 1996 1997 1998 1999 -------- -------- -------- ------------- Risk-free interest rate................ 6.3% 6.5% 6.0% 5.75% Expected dividend yield................ 0% 0% 0% 0% Expected life (in years)............... 4 4 7 7 Expected volatility.................... 100% 100% 100% 100%
MedicaLogic continues to apply APB Opinion No. 25 in accounting for the Plans and, accordingly, compensation cost is generally not recognized for its stock options in the financial statements. The effect on MedicaLogic's net loss, had MedicaLogic determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123 is as follows:
NINE-MONTH YEARS ENDED DECEMBER 31, PERIOD ENDED ------------------------------ SEPTEMBER 30, 1996 1997 1998 1999 -------- -------- -------- ------------- Net loss................... $(10,364) $(10,819) $(7,232) $(13,381) Pro forma net loss......... (10,908) (11,921) (8,342) (16,289) Net loss per share......... (1.58) (1.63) (1.05) (1.61) Pro forma net loss per share.................... (1.65) (1.77) (1.20) (1.92)
F-19 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (7) SHAREHOLDERS' EQUITY (CONTINUED) Transactions involving the Plans are summarized as follows:
NUMBER WEIGHTED AVERAGE OF SHARES EXERCISE PRICE --------- ---------------- Options outstanding, December 31, 1995..... 295,520 $2.40 Granted.................................... 248,150 4.00 Exercised.................................. (18,250) 1.50 Forfeited.................................. (21,350) 2.50 --------- ----- Options outstanding, December 31, 1996..... 504,070 3.08 Granted.................................... 536,475 4.00 Exercised.................................. (26,068) 1.64 Forfeited.................................. (40,462) 3.90 --------- ----- Options outstanding, December 31, 1997..... 974,015 3.68 Granted.................................... 480,493 4.10 Exercised.................................. (34,526) 2.10 Forfeited.................................. (206,576) 3.98 --------- ----- Options outstanding, December 31, 1998..... 1,213,406 3.80 Granted.................................... 1,193,750 5.92 Exercised.................................. (210,107) 3.60 Forfeited.................................. (35,276) 5.04 --------- ----- Options outstanding, September 30, 1999.... 2,161,773 $4.98 ========= =====
F-20 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (7) SHAREHOLDERS' EQUITY (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------------------- ------------------------- WEIGHTED NUMBER OF AVERAGE WEIGHED NUMBER WEIGHTED OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE RANGE OF SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30, EXERCISE EXERCISE PRICE 1999 LIFE PRICE 1999 PRICE --------------------- -------------- ----------- -------- -------------- -------- 1.60--2.00 73,225 3.62 1.78 73,225 1.78 4.00--4.40 1,243,798 8.30 4.12 728,712 4.04 6.50 844,750 9.54 6.50 36,842 6.50 ----------- --------- ---- ---- ------- ---- 1.60--6.50 2,161,773 8.5 4.98 838,779 3.95
At September 30, 1999, 2,036,784 shares were available for grant. MedicaLogic has recorded deferred stock compensation expense of $1,058 at September 30, 1999. This deferred stock compensation expense is based on the difference between the deemed fair market value of common stock and the exercise price of the option or stock on the grant date. Deferred compensation is being amortized over the vesting period of the options, which is generally three years. MedicaLogic recognized expense of $70 in the nine-month period ended September 30, 1999 related to these grants. (c) STOCK WARRANTS In 1994, MedicaLogic entered into a Stock Purchase Warrant Agreement (the Agreement) with Indius, Inc. (II). Pursuant to the Agreement, MedicaLogic issued II warrants to purchase up to 22,500 shares of common stock at $.62 per share, conditioned on II meeting certain software development and licensing requirements. These warrants were exercised in March 1999. (d) RESTRICTED STOCK PURCHASE AGREEMENTS As of September 30, 1999, MedicaLogic had sold 1,045,000 shares of common stock at prices ranging from $4.00 to $6.50 to senior management of MedicaLogic. These shares were sold under agreements which allow MedicaLogic, at its option, to repurchase these shares at the original sale price. In accordance with the repurchase agreements associated with 827,500 of these shares, the shares subject to repurchase are reduced in equal increments over 36 months from the original vesting dates which range from February 28, 1996 to August 20, 2000. At December 31, 1997 and 1998 and September 30, 1999 there were 22,951, 141,530 and 809,376 shares outstanding that were eligible for repurchase. 217,500 of these shares of common stock are released from MedicaLogic's repurchase rights if certain key business performance criteria are met. In connection with these stock issuances, MedicaLogic recorded compensation expense of $790 for nine months ended September 30, 1999. 82,500 and 217,500 of these shares were eligible for repurchase at December 31, 1998 and September 30, 1999, respectively. (e) SHARES ISSUED FOR SERVICES During 1996, MedicaLogic issued 12,500 shares of common stock valued at $50 in exchange for consulting services performed by an independent third party. F-21 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (7) SHAREHOLDERS' EQUITY (CONTINUED) During 1997, MedicaLogic issued 14,350 shares of common stock valued at $57, in exchange for contracted engineering services by an independent third-party. During 1999, MedicaLogic issued 58,750 shares of common stock valued at $398 for public relations consulting, headhunter services, and contracted engineering services by independent third-parties. 208,422 shares of preferred stock were issued to the three principals of an investment group as a commission in conjunction with the Series J preferred stock issuance. The preferred shares were valued at $990. A warrant for 10,000 shares of common shares at a price of $6.50 and a two year term was issued for legal services. The value of the warrant was $35. (f) EMPLOYEE STOCK PURCHASE PLAN In September 1999, MedicaLogic adopted the MedicaLogic Employee Stock Purchase Plan. 1,000,000 shares were authorized for issuance under this Plan. (8) INCOME TAXES MedicaLogic incurred a loss for both financial reporting and tax return purposes for the years ended December 31, 1996, 1997 and 1998 and the nine-month period ended September 30, 1999. As such, there was no current or deferred tax provision for these periods. The actual income tax expense differs from the expected tax expense (computed by applying the U.S. federal corporate income tax rate of 34% to net loss before income taxes) as follows:
YEARS ENDED DECEMBER 31, NINE-MONTH ------------------------------------ PERIOD ENDED 1996 1997 1998 1999 -------- -------- -------- ------------ Computed expected income tax (benefit) expense............................... (34.0)% (34.0)% (34.0)% (34.0)% Increase (reduction) in income tax expense (benefit) resulting from: State income tax (benefit) expense........................... (4.3) (4.3) (4.3) (4.3) Increase in valuation allowance..... 39.0 43.8 44.7 38.7 Research and development credits.... (0.7) (3.1) (8.3) (2.0) Other............................... -- (2.4) 1.9 1.6 ----- ----- ----- ----- Income tax expense................ --% --% --% --% ===== ===== ===== =====
F-22 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (8) INCOME TAXES (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
NINE-MONTH DECEMBER 31, PERIOD ENDED ------------------- SEPTEMBER 30, 1997 1998 1999 -------- -------- ------------- Deferred tax assets: Furniture and equipment due to differences in depreciation......................... $ 165 $ 229 $ 107 Net operating loss and research and experimentation credit carryforwards.... 11,221 14,169 19,220 Allowance for doubtful accounts........... 326 234 474 Other accruals............................ 173 215 425 -------- -------- -------- Gross deferred tax assets............... 11,885 14,847 20,226 Less valuation allowance.................. (11,406) (14,559) (20,046) -------- -------- -------- Net deferred tax assets................. 479 288 180 -------- -------- -------- Deferred tax liabilities: Change in method of accounting............ (467) (280) (175) Other..................................... (12) (8) (5) -------- -------- -------- Net deferred tax liabilities............ (479) (288) (180) -------- -------- -------- Net deferred tax assets and liabilities........................... $ -- $ -- $ -- ======== ======== ========
The valuation allowance for deferred tax assets as of September 30, 1999 was approximately $20,046. The net change in the total valuation allowance for the years ending December 31, 1996, 1997 and 1998 and the nine-month period ended September 30, 1999 was an increase of approximately $4,067, $4,668, $3,153 and $5,487 respectively. At September 30, 1999, MedicaLogic has available federal and state net operating loss carryforwards for tax purposes of approximately $47,963 and research and experimentation credits of approximately $1,597, which expire through 2019. Approximately $7,100 of the net operating losses are subject to annual utilization limitation due to ownership changes in prior years. (9) COMMITMENTS AND CONTINGENCIES In September 1999, MedicaLogic entered into a license agreement with L&H Applications USA, Inc. (L&H). L&H has granted to MedicaLogic a non-exclusive, non-transferable license to incorporate L&H's product into MedicaLogic's Logician family of products. MedicaLogic has committed to a non-refundable pre-payment of royalty fees of $1,100 due on December 20, 1999. MedicaLogic is required to make additional minimum payments of $230 and $795 for the years ended December 31, 2000 and 2001, respectively. MedicaLogic has agreed to issue common stock to a customer at fair market value up to $12,000, contingent upon sales of additional licenses to third parties in the customer's geographic area. F-23 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (9) COMMITMENTS AND CONTINGENCIES (CONTINUED) MedicaLogic has issued 14,868 shares of common stock with an estimated fair value of $9.50 per share, to this customer as of September 30, 1999. The stock agreement expires December 31, 2002. MedicaLogic is involved in various claims and legal actions in the normal course of business. The most significant of these are described below. MedicaLogic was the defendant in a suit at December 31, 1998 arising out of an alleged breach of contract with a channel partner. This suit was settled in April 1999. MedicaLogic was also the defendant at December 31, 1998 in a suit filed by a customer. This suit was a counter-claim to a breach of contract MedicaLogic had filed. The suit sought a refund of amounts paid to MedicaLogic for the product. This suit was settled in July 1999. MedicaLogic accrued for its estimated exposure related to these suits based on a review of the current facts and circumstances at both December 31, 1997 and 1998. MedicaLogic is currently a defendant in an action relating to a patent infringement claim. The plaintiff is seeking unspecified damages. MedicaLogic believes this suit is without merit and intends to vigorously defend against the claims. In the opinion of management, the ultimate disposition of outstanding claims and legal actions will not have a material effect on MedicaLogic's consolidated financial position, results of operations or liquidity. (10) SEGMENT INFORMATION MedicaLogic derives its revenue from a single operating segment, electronic medical records, and the service and support related to these products. GEOGRAPHIC INFORMATION MedicaLogic operates solely within the United States and to date has derived all of its revenue from within the United States. MAJOR CUSTOMERS In 1996, MedicaLogic derived greater than 10% of its revenue from the following customers: North Memorial Medical Center ($1,500), Eli Lilly & Company ($1,000), Arkansas Blue Cross Blue Shield ($990). In 1997, MedicaLogic derived greater than 10% of its revenue from VHA, Inc., one of our distribution partners ($2,700), and from Wake Forest Baptist Medical Center ($1,600). MedicaLogic had accounts receivable from these customers representing approximately 36% of trade accounts receivable at December 31, 1997. In 1998, MedicaLogic derived greater than 10% of its revenue from VHA, Inc., ($3,400). MedicaLogic had accounts receivable from this customer representing approximately 20% of trade accounts receivable at December 31, 1998. F-24 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (10) SEGMENT INFORMATION (CONTINUED) During the nine-month period ended September 30, 1999, MedicaLogic derived 10% or greater of its revenue from Baylor College of Medicine ($4,500) and Carilion Health Systems ($1,500). (11) 401(K) PLAN MedicaLogic sponsors a 401(k) deferred savings plan for all employees. Employees become eligible to participate in the plan upon employment. Employees may contribute up to 15% of their pay to the plan, subject to the limitation of $10 by the Internal Revenue Code. All employee contributions vest immediately. MedicaLogic has not made any matching contributions but does pay administrative costs for the Plan. These costs were not significant for any period presented. (12) RELATED PARTY TRANSACTIONS MedicaLogic has accepted promissory notes aggregating $1,965 of principal amount at September 30, 1999 from Company officers in consideration for restricted stock issued. These notes accrue interest at 6% per annum and are payable in full 10 years from the date of the loan. MedicaLogic also has loaned an officer approximately $104 to help pay for relocation expenses, pursuant to an unsecured promissory note, which bears interest at 6% per annum. The note is payable in full on the earlier to occur of the sale of his residence located in Portland, Oregon, the termination of his employment by the Company, or July 1, 2001. The note is prepayable in full without penalty. In September 1999, MedicaLogic entered into an agreement with a Company officer in consideration of relocating to San Francisco, California. MedicaLogic agreed to reimburse this officer $8 for improvements to his Portland, Oregon residence and any shortfall between the sales price on his Portland, Oregon residence and the original purchase price of $520 paid by this officer and any transaction costs not covered by the sales price of this residence, unless the sales price is greater than the purchase price. MedicaLogic also agreed to forgive the interest accrued on the unsecured promissory note referred to above, which will be repaid from the proceeds of the sale of the Portland, Oregon residence and to pay the mortgage payment on the officer's residence in Portland, Oregon until it is sold. In May 1996, MedicaLogic sold a total of 514,445 shares of Series C preferred stock for $1,158 to beneficial owners of greater than 5% of MedicaLogic's common stock on a converted basis. In August 1998, MedicaLogic entered into stock purchase agreements with two entities that are affiliated with two directors of MedicaLogic. These agreements were for the issuance of 175,000 shares of common stock at a price of $4.00 per share. Options for 100,000 shares of common stock were also granted to these entities with a fair value using the Black-Scholes of $113. These stock options were exercised by these entities for an additional 100,000 shares of common stock in April 1999. In May 1999, MedicaLogic sold an aggregate of 526,316 shares of Series J preferred stock to two entities that are affiliated with a director of MedicaLogic. A member of MedicaLogic's Board of Directors is a partner in a law firm retained by MedicaLogic to provide legal counsel. F-25 MEDICALOGIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (13) SUBSEQUENT EVENTS (a) STOCK INCENTIVE PLAN In October 1999, MedicaLogic granted 719,250 options under the 1999 stock incentive plan. The options were granted at $9.50, the fair market value at the grant date. The fair value was determined by MedicaLogic's Board of Directors. (b) SHARES ISSUED In October 1999, MedicaLogic issued 157,895 shares to Baylor College of Medicine associated with sales to a third party. The estimated fair market value of the common stock on the date of issuance was $9.50 per share resulting in commission expense of $1,501. (c) BORROWINGS In October 1999, MedicaLogic used $581 of its term loan referenced in note 5 to acquire additional capital equipment. These borrowings are secured by the equipment purchased and bear interest at the rate of 10% per annum. (d) STOCK SPLIT On November , 1999, the Board of Directors approved a one-for-two reverse stock split of outstanding common shares. Common share data for all periods presented in the accompanying financial statements have been adjusted to give effect to the stock split. F-26 INDEPENDENT AUDITORS' REPORT The Board of Directors PrimaCis Health Information Technology, Inc.: We have audited the accompanying balance sheet of PrimaCis Health Information Technology, Inc. as of December 31, 1998, and the related statements of operations, stockholders' deficit, and cash flows for the year ended December 31, 1998. These financial statements are the responsibility of PrimaCis' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PrimaCis Health Information Technology, Inc. as of December 31, 1998, and the results of its operations and its cash flows for the year ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ KPMG LLP Portland, Oregon July 23, 1999 F-27 PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. BALANCE SHEET (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, 1998 ------------ ASSETS Current assets: Cash and cash equivalents................................. $ 50 Accounts receivable....................................... 51 Other receivables......................................... 10 ------- Total current assets.................................. 111 Property and equipment, net................................. 58 Other assets................................................ 11 ------- Total assets.......................................... $ 180 ======= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable.......................................... 19 Accrued liabilities....................................... 72 Deferred revenue.......................................... 225 Current portion of capital leases......................... 10 Notes payable to related party............................ 381 ------- Total current liabilities............................. 707 Non-current portion of capital leases....................... 10 ------- Total liabilities..................................... 717 ------- Stockholders' deficit: Common stock, par value $0.001 per share; authorized 15,000,000 shares; issued and outstanding 11,361,425 shares at December 31, 1998.................................................... 11 Additional paid in capital................................ 3,005 Notes from shareholders................................... (39) Warrants.................................................. 109 Accumulated deficit....................................... (3,623) ------- Total stockholders' deficit........................... (537) ------- Total liabilities and stockholders' deficit........... $ 180 =======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. F-28 PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1998 ------------ Revenues: Licenses.................................................. $ 70 Service and support....................................... 178 ----------- Total revenues........................................ 248 Operating expenses: Cost of licenses.......................................... 16 Cost of service and support............................... 105 Marketing and sales....................................... 282 Research and development.................................. 454 General and administrative................................ 1,063 ----------- Operating loss........................................ (1,672) Other income (expense): Interest expense.......................................... (116) Interest income........................................... 2 Other..................................................... (7) ----------- Loss before income taxes.............................. (1,793) Provision for income taxes.................................. -- ----------- Net loss.............................................. $ (1,793) =========== Net loss per share--basic and diluted....................... $ (0.16) =========== Shares used in computing net loss per share--basic and diluted................................................... 11,481,704
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. F-29 PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. STATEMENT OF STOCKHOLDERS' DEFICIT YEAR ENDED DECEMBER 31, 1998 (DOLLARS IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL --------------------- PAID IN NOTES FROM ACCUMULATED SHAREHOLDERS' SHARES AMOUNT CAPITAL SHAREHOLDERS WARRANTS DEFICIT DEFICIT ---------- -------- ---------- ------------ --------- ------------ ------------- Balances at December 31, 1997...... 9,458,093 $ 9 $1,687 $ -- $ -- $(1,830) $ (134) Issuance of common stock........... 3,203,332 3 1,329 (39) -- -- 1,293 Cancellation of common stock....... (1,300,000) (1) (11) -- -- -- (12) Issuance of stock warrants......... -- -- -- -- 109 -- 109 Net loss........................... -- -- -- -- -- (1,793) (1,793) ---------- --- ------ ---- ---- ------- ------- Balances at December 31, 1998...... 11,361,425 $11 $3,005 $(39) $109 $(3,623) $ (537) ========== === ====== ==== ==== ======= =======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. F-30 PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1998 ------------ Cash flows from operating activities: Net loss.................................................. $(1,793) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization........................... 37 Other non-cash expense.................................. 91 Changes in assets and liabilities: Accounts receivable................................... (22) Prepaid expenses and other current assets............. 5 Accounts payable...................................... 16 Accrued and other liabilities......................... (128) Deferred revenue...................................... 200 ------- Net cash used by operating activities............... (1,594) ------- Cash flows from investing activities: Purchase of fixed assets.................................. (37) ------- Net cash used by investing activities............... (37) ------- Cash flows from financing activities: Net proceeds from issuance of common stock................ 1,293 Proceeds from issuance of notes payable................... 381 Principal payments under capital lease.................... (7) ------- Net cash provided by financing activities........... 1,667 ------- Net increase in cash and cash equivalents........... 36 Cash and cash equivalents at beginning of year.............. 14 ------- Cash and cash equivalents at end of year.................... $ 50 ======= Summary of non-cash investing and financing activities: Issuance of common stock in exchange for note receivable.............................................. $ 39 Assets acquired or exchanged under capital leases......... 23 =======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. F-31 PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) COMPANY PrimaCis Health Information Technology, Inc. (PrimaCis), located in Houston, Texas, was formed in April 1996. PrimaCis develops, supports and markets its electronic medical record software and its Internet-based oncology content for its Internet site. (b) CASH EQUIVALENTS For purposes of the statement of cash flows, PrimaCis considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. (c) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Property and equipment under capital leases are stated at the lower of the present value of minimum lease payments at the beginning of the lease term or fair value of the leased assets at the inception of the lease. The cost of repairs and maintenance is expensed as incurred. Depreciation on property and equipment is calculated on a double-declining basis over the estimated useful lives of the assets, generally five to seven years. Property and equipment held under capital leases is amortized on the straight-line method over the shorter of the lease term or estimated useful life of the asset. Amortization of leasehold improvements is recognized over the shorter of the life of the improvement or the remaining life of the lease using the straight-line method. (d) SOFTWARE DEVELOPMENT COSTS Software development costs have been accounted for in accordance with Statement of Financial Accounting Standards No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED. Under the standard, capitalization of software development costs begins upon the establishment of technological feasibility, subject to net realizable value considerations. To date, the period between achieving technological feasibility and the general availability of such software has been short; therefore, software development costs qualifying for capitalization have been immaterial. Accordingly, PrimaCis has not capitalized any software development costs and charged all such costs to research and development expense. (e) REVENUE RECOGNITION In October 1997, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 97-2, SOFTWARE REVENUE RECOGNITION. Subsequently, in March 1998, the Financial Accounting Standards Board ("FASB") approved SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE OF A PROVISION OF 97-2, SOFTWARE REVENUE RECOGNITION. SOP 98-4 defers for one year, the application of several paragraphs and examples in SOP 97-2 that limit the definition of vendor specific objective evidence (VSOE) of the fair value of various elements in a multiple element F-32 PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) arrangement. The provisions of SOP's 97-2 and 98-4 have been applied to transactions entered into beginning January 1, 1998. Prior to 1997, PrimaCis' revenue policy was in accordance with the preceding authoritative guidance provided by SOP No. 91-1, SOFTWARE REVENUE RECOGNITION. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on VSOE of the relative fair values of each element in the arrangement. PrimaCis establishes VSOE based on the average selling price of our products, support and services during the period. PrimaCis recognizes revenue from license fees generally when a signed agreement has been obtained, the delivery of the product has occurred, there are no uncertainties surrounding product acceptance, the fee is fixed and determinable and collectibility of the license fee is probable. Support revenue consists of annual subscriptions for maintenance and post-customer support services. Subscriptions, containing the right to obtain upgrades, when and if available, are generally paid in advance and revenue is recognized ratably over the term of the subscription. Services revenue generally consists of consulting, training and integration fees. Such services are typically billed separately from the license fees and are recognized as the related services are performed. In December 1998, the AICPA issued SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS. This SOP amends SOP 97-2 to require recognition of revenue using the "residual method" in circumstances outlined in the SOP. Under the residual method, revenue is recognized as follows: (1) the total fair value of undelivered elements, as indicated by VSOE, is deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2 and (2) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. SOP 98-9 is effective for fiscal years beginning after March 15, 1999. Also, the provisions of SOP 97-2 that were deferred by SOP 98-4 will continue to be deferred until the date SOP 98-9 becomes effective. (f) INCOME TAXES PrimaCis accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred income taxes reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that include the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. F-33 PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (g) STOCK-BASED EMPLOYEE COMPENSATION PrimaCis has adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which defines a fair value based method of accounting for employee stock options and similar equity instruments. As is permitted under SFAS No. 123, PrimaCis has elected to continue to account for its stock- based compensation plans under APB Opinion No. 25 and provide the pro forma disclosures as prescribed by SFAS No. 123. (h) NET LOSS PER SHARE PrimaCis has adopted SFAS No. 128, EARNINGS PER SHARE, which provides that "basic net income (loss) per share" and "diluted net income (loss) per share" for all prior periods presented are to be computed using the weighted average number of common shares outstanding during each period, with diluted net income per share including the effect of potentially dilutive common shares. The reconciliation of shares used to calculate basic and diluted income per share consists of the following as of December 31, 1998: Basic weighted average shares of common stock........... 11,481,704 Effect of dilutive securities: Stock options and warrants............................ 400,000 ---------- Diluted weighted average share of common stock.......... 11,881,704 ==========
Common stock equivalents related to stock options and warrants are anti-dilutive in a net loss year and, therefore, are not included in the 1998 net loss per share. (i) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to the short-term nature of these instruments. The carrying amounts of capital leases and notes payable approximate fair value as the stated interest rates reflect current market rates. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument when available. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (j) USE OF ESTIMATES Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amount of assets, liabilities and contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. F-34 PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (k) OTHER ASSETS Other assets consist primarily of legal costs related to the organization of the Company. The organizational costs are being amortized on a straight-line basis over a period of five years. Amortization expense for the year ended December 31, 1998 was $5. Accumulated amortization at December 31, 1998 was $14. (l) CONTINGENCIES AND FACTORS THAT COULD AFFECT FUTURE RESULTS A substantial portion of PrimaCis' revenues each year are generated from the development and release to market of computer software products. In the extremely competitive industry environment in which PrimaCis operates, such product generating, development and marketing processes are uncertain and complex, requiring accurate prediction of market trends and demand as well as successful management of various development risks inherent in such products. In light of these dependencies, it is possible that failure to successfully manage a significant product introduction could have a sever near term impact on the Company's growth and results of operations. (2) PROPERTY AND EQUIPMENT Property and equipment, including equipment under capital leases, consist of the following at December 31, 1998: Furniture................................................... $ 74 Equipment................................................... 27 ---- 101 Less accumulated depreciation and amortization.............. 43 ---- $ 58 ====
(3) LEASES The Company leases certain office furniture and equipment under a long-term capital lease, which expires on December 2, 2000. At December 31, 1998, the net book value of leased furniture and equipment included in property and equipment was $20. The Company also leases its office facilities under non-cancelable operating lease agreements. F-35 PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (3) LEASES (CONTINUED) Future minimum lease payments under non-cancelable operating leases and the capital leases as of December 31, 1998 are as follows:
CAPITAL OPERATING LEASES LEASES -------- --------- Year ending December 31: 1999..................................................... $12 $42 2000..................................................... 12 12 2001..................................................... -- -- 2002..................................................... -- -- 2003..................................................... -- -- Thereafter............................................... -- -- --- --- Total minimum lease payments........................... 24 $54 === Less amount representing interest.......................... 4 --- Present value of net minimum capital lease payments.... 20 Less current portion of capital leases..................... 10 --- Non-current portion of capital leases.................. $10 ===
Rent expense for the year ended December 31, 1998, totaled approximately $35. (4) NOTES PAYABLE During 1998, PrimaCis received an unsecured loan of $381 from an officer and shareholder of PrimaCis. The loan was evidenced by a promissory note payable and other supporting documentation, and was paid in full during 1999. In conjunction with this loan, PrimaCis granted the shareholder the option to purchase 300,000 shares of common stock of PrimaCis at an exercise price of $0.06 per share. The Company recorded the option at fair value, as determined by the Black-Scholes method, as additional interest expense over the life of the loan. (5) STOCKHOLDERS' EQUITY (a) STOCKHOLDERS' AGREEMENT The Company and its stockholders have an agreement that includes restrictions on the purchase and sale of PrimaCis' stock. Except as expressly provided, no stockholder is allowed to transfer ownership of stock without the prior written consent of all stockholders. F-36 PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (5) STOCKHOLDERS' EQUITY (CONTINUED) (b) STOCK INCENTIVE PLAN In 1997, PrimaCis adopted an Incentive Stock Option Plan (the Plan). Pursuant to the terms of the Plan, the Board of Directors is authorized to grant incentive stock options, non-statutory stock options and restricted stock to employees or non-employees. Option prices for incentive stock options are generally set at not less than the fair market value of the common stock at the date of grant. Options vest over periods determined by the Board of Directors. Options are contingent upon continued employment with PrimaCis and, unless otherwise specified, expire ten years from the date of grant. PrimaCis has reserved 500,000 shares of its common stock for issuance under the Plan. The per share weighted average fair market value, as determined by applying the Black-Scholes method to stock options granted under the Plan during 1998, was $0.37 on the date of grant with the following weighted average assumptions:
YEAR ENDED DECEMBER 31, 1998 - ---------------------------- Risk free interest rate..................................... 6.0% Expected dividend yield..................................... 0% Expected life (in years).................................... 10.0 Expected volatility......................................... 100%
PrimaCis continues to apply APB Opinion No. 25 in accounting for its Plan and, accordingly, compensation cost is generally not recognized for its stock options in the financial statements. For the year ended December 31, 1998, PrimaCis recognized $282 in compensation costs with respect to stock based compensation awards as valued under APB No. 25. The effect on PrimaCis' net loss, had PrimaCis determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, for the year ended December 31, 1998 is as follows: Net loss.................................................... $(1,793) Pro forma net loss.......................................... (1,801) Net loss per share.......................................... $ (0.16) Pro forma net loss per share................................ (0.16)
F-37 PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (5) STOCKHOLDERS' EQUITY (CONTINUED) Transactions involving the Plan are summarized as follows:
WEIGHTED AVERAGE NUMBER EXERCISE OF SHARES PRICE --------- -------- Options outstanding, December 31, 1997................... -- $ -- Granted.................................................. 270,000 0.48 Exercised................................................ -- -- Forfeited................................................ (205,000) 0.59 -------- ----- Options outstanding, December 31, 1998................... 65,000 $0.14 ======== =====
At December 31, 1998, the range of exercise prices and weighted average remaining contractual life of outstanding options were $.06 to $.60 and ten years, respectively. At December 31, 1998, 65,000 options were exercisable with a weighted average exercise price of $0.14. At December 31, 1998, 435,000 shares were available for grant. (c) WARRANTS During fiscal 1998, PrimaCis issued warrants to investors. At December 31, 1998 warrants to purchase 300,000 and 35,000 shares of common stock at exercise prices of $0.06 and $0.40, respectively, were outstanding. (6) INCOME TAXES PrimaCis incurred a loss for both financial reporting and tax return purposes and, as such, there was no current or deferred tax provision for the year ended December 31, 1998. The actual income tax expense differs from the expected tax expense (computed by applying the U.S. federal corporate income tax rate of 34% to net income (loss) before income taxes) as follows (in thousands):
1998 -------- Computed expected income tax (benefit) expense.............. (34.0)% Increase (reduction) in income tax expense (benefit) resulting from: State income tax (benefit) expense........................ -- Increase in valuation allowance........................... 34.0 Research and development credits.......................... -- ----- Income tax expense...................................... --% =====
F-38 PRIMACIS HEALTH INFORMATION TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (6) INCOME TAXES (CONTINUED) The tax effects of temporary differences and net operating loss carryforwards which give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 1998 are as follows: Deferred tax assets: Net operating loss and research and experimentation credit carryforwards........................................... $ 1,362 ------- Gross deferred tax assets............................... 1,362 Less valuation allowance.................................. (1,362) ------- Net deferred tax assets................................. $ -- =======
The net change in the total valuation allowance for the year ended December 31, 1998 was an increase of $687. PrimaCis has available federal and state net operating loss carryforwards for tax purposes of approximately $3,537 which expire through 2018. Approximately $3,537 of the net operating losses are subject to annual utilization limitation due to the change in ownership in 1999. (7) SIGNIFICANT CUSTOMERS PrimaCis had two customers that accounted for approximately 98% of the total revenue for the year ended December 31, 1998. (8) SUBSEQUENT EVENTS On January 29, 1999, PrimaCis entered into a reorganization and merger agreement with MedicaLogic, Inc. The purchase price consisted of $2,100 in cash, the assumption of $1,053 in liabilities and 750,000 shares of MedicaLogic common stock issued at $4.40 per share. F-39 PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma condensed combined statement of operations have been prepared to give effect to the acquisition of PrimaCis Health Information Technology, Inc. (PrimaCis). The historical financial information has been derived from the respective historical financial statements of MedicaLogic, Inc. and PrimaCis, and should be read in conjunction with such financial statements and the related notes included herein. The unaudited pro forma condensed combined statements of operations combine MedicaLogic's and PrimaCis' historical statements of operations and give effect to the acquisition, including the amortization of goodwill and other tangible assets resulting from the acquisition, as if it occurred on January 1, 1998 for the nine month period ended September 30, 1998 and the year ended December 31, 1998. The unaudited pro forma condensed combined statement of operations for the period from December 31, 1998 through September 30, 1999 have not been presented as the results of operations presented for MedicaLogic during this period include PrimaCis' operating results. The unaudited pro forma condensed combined information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have actually occurred if the acquisition had been consummated as of the dates indicated, nor is it necessarily indicative of the future operating results of the combined companies. The pro forma adjustments are based upon available information and certain assumptions that MedicaLogic believes are reasonable under the circumstances. F-40 MEDICALOGIC, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 -------------------------------------------------------- PRO FORMA PRO FORMA MEDICALOGIC PRIMACIS ADJUSTMENTS COMBINED ----------- ----------- ----------- ----------- Revenues: Licenses................................ $ 6,534 $ 36 $ 6,570 Service and support..................... 4,225 133 4,358 ----------- ----------- ----------- Total revenues...................... 10,759 169 10,928 ----------- ----------- ----------- Operating expenses: Cost of licenses........................ 608 8 616 Cost of service and support............. 4,354 86 4,440 Marketing and sales..................... 5,647 109 $1,238 6,994 Research and development................ 5,981 211 6,192 General and administrative.............. 735 905 600 2,240 ----------- ----------- ----------- Total operating expenses............ 17,325 1,319 20,482 ----------- ----------- ----------- Operating loss...................... (6,566) (1,150) (9,554) Other income (expense): Interest expense........................ (145) (72) (217) Interest income......................... 504 1 505 Other, net.............................. (40) (5) (45) ----------- ----------- ----------- Loss before income taxes............ (6,247) (1,226) (9,311) Provision for income taxes................ -- -- -- ----------- ----------- ----------- Net loss............................ $ (6,247) $ (1,226) $ (9,311) =========== =========== =========== Net loss per share: Basic and diluted....................... $ (0.90) $ (0.11) $ (1.22) =========== =========== =========== Shares used in computing net loss per share: Basic and diluted....................... 6,881,578 11,111,426 7,631,578 =========== =========== ===========
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION. F-41 MEDICALOGIC, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------ PRO FORMA PRO FORMA MEDICALOGIC PRIMACIS ADJUSTMENTS COMBINED ----------- ----------- ------ ----------- Revenues: Licenses................................ $ 10,410 $ 70 $ 10,480 Service and support..................... 5,750 178 5,928 ----------- ----------- ----------- Total revenues...................... 16,160 248 16,408 ----------- ----------- ----------- Operating expenses: Cost of licenses........................ 939 16 955 Cost of service and support............. 5,815 105 5,920 Marketing and sales..................... 7,882 282 $1,650 9,814 Research and development................ 8,071 454 8,525 General and administrative.............. 1,151 1,063 800 3,014 ----------- ----------- ----------- Total operating expenses............ 23,858 1,920 28,228 ----------- ----------- ----------- Operating loss...................... (7,698) (1,672) (11,820) Other income (expense): Interest expense........................ (187) (116) (303) Interest income......................... 707 2 709 Other, net.............................. 143 (7) 136 ----------- ----------- ----------- Loss before income taxes............ (7,035) (1,793) (11,278) Provision for income taxes................ -- -- -- ----------- ----------- ----------- Net loss............................ $ (7,035) $ (1,793) $ (11,278) =========== =========== =========== Net loss per share: Basic and diluted....................... $ (1.02) $ (0.16) $ (1.48) =========== =========== =========== Shares used in computing net loss per share: Basic and diluted....................... 6,883,036 11,481,704 7,633,036 =========== =========== ===========
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION. F-42 MEDICALOGIC, INC. NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The unaudited pro forma condensed financial information reflects the acquisition by MedicaLogic, Inc. of PrimaCis Health Information Technology, Inc. (PrimaCis) and gives effect to certain reclassifications to the historical financial statements to conform the presentation of the historical operations of the merged companies. The adjustments to the unaudited pro forma condensed combined statement of operations have been calculated as if the acquisition occurred on January 1, 1998. Pursuant to the merger agreement, a total of $3,000 in cash and 750,000 shares of MedicaLogic common stock, valued at $4.40 per share, was issued in connection with the acquisition of PrimaCis in exchange for all outstanding common shares and vested options of PrimaCis. In addition, MedicaLogic paid $153 in merger related costs which is included in the total purchase price. The pro forma adjustments to the unaudited pro forma condensed combined statements of operations are to record the amortization of goodwill of approximately $3,200 and other intangible assets of approximately $3,300 recorded as a result of the acquisition over four and two years, respectively, and to reduce depreciation expense to reflect new asset fair values. F-43 - --------------------------------------------------------- - --------------------------------------------------------- 1999 [MEDICALOGIC LOGO] ________ SHARES ---------------------- PROSPECTUS ---------------------- DONALDSON, LUFKIN & JENRETTE ROBERTSON STEPHENS U.S. BANCORP PIPER JAFFRAY --------------- DLJDIRECT INC. - --------------------------------------------------------- We have not authorized any dealer, salesperson or other person to give you written information other than this prospectus or to make representations about matters not stated in this prospectus. You must not rely on unauthorized information. This prospectus is not an offer to sell these securities or our solicitation of your offer to buy the securities in any jurisdiction where that would not be permitted or legal. The information contained in this prospectus is accurate only on the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. - -------------------------------------------------------------------------------- Until , 1999 (25 days after the date of this prospectus), all dealers that effect transactions in these shares of common stock may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions. - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts, payable by the Registrant in connection with the offer and sale of the Common Stock being registered. All amounts are estimates except the registration fee, the NASD filing fee and the Nasdaq National Market entry fee. Registration fee............................................ $ 16,680 NASD filing fee............................................. 6,500 Blue Sky fees and expenses (including legal fees)........... 5,000(1) Nasdaq National Market entry fee............................ 95,000(1) Accounting fees and expenses................................ 250,000(1) Other legal fees and expenses............................... 200,000(1) Transfer agent and registrar fee............................ 5,000(1) Printing and engraving...................................... 90,000(1) Miscellaneous............................................... 31,820(1) -------- Total................................................... $700,000(1) ========
- ------------------------ (1) Estimated expense. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article IV of the Registrant's 1994 Restated Articles of Incorporation requires indemnification of current or former directors of the Company to the fullest extent not prohibited by the Oregon Business Corporation Act. The Oregon Business Corporation Act permits or requires indemnification of directors and officers in certain circumstances. The effects of the indemnification provisions are as follows: (a) The Indemnification Provisions grant a right of indemnification in respect of any proceeding (other than an action by or in the right of the Company), if the person concerned acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the Company, was not adjudged liable on the basis of receipt of an improper personal benefit and, with respect to any criminal action or proceeding, had no reasonable cause to believe the conduct was unlawful. The termination of a proceeding by judgment, order, settlement, conviction or plea of nolo contendere, or its equivalent, is not, of itself, determinative that the person did not meet the required standards of conduct. (b) The Indemnification Provisions grant a right of indemnification in respect of any proceeding by or in the right of the Company against the expenses (including attorney fees) actually and reasonably incurred if the person concerned acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the Company, except that no right of indemnification will be granted if the person is adjudged to be liable to the Company. (c) Every person who has been wholly successful, on the merits or otherwise, in the defense of any proceeding to which the person was a party because of the person's status as a director or officer is entitled to indemnification as a matter of right. (d) Because the limits of permissible indemnification under Oregon law are not clearly defined, the Indemnification Provisions may provide indemnification broader than that described in (a) and (b). II-1 (e) The Registrant may advance to a director or officer the expenses incurred in defending any proceeding in advance of its final disposition if the director or officer affirms in writing in good faith that he or she has met the standard of conduct to be entitled to indemnification as described in (a) or (b) above and undertakes to repay any amount advanced if it is determined that the person did not meet the required standard of conduct. The Registrant has obtained insurance for the protection of its directors and officers against any liability asserted against them in their official capacities. The rights of indemnification described above are not exclusive of any other rights of indemnification to which the persons indemnified may be entitled under any bylaw, agreement, vote of shareholders or directors or otherwise. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Within the last three years, the Registrant has issued and sold the following unregistered securities on the dates and for the consideration indicated: In December 1996, the Registrant issued an aggregate of 4,761,907 shares of Series E Preferred Stock to 24 investors for total consideration $15,000,007.05. The Series E Preferred Stock was offered and sold by the Registrant in reliance upon the exemptions from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. In November 1997, the Registrant issued 2,000,000 shares of Series F Preferred Stock to one investor for total consideration of $6,800,000. The shares of Series F Preferred Stock were offered and sold by the Registrant in reliance upon the exemptions from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. In connection with the same transaction, the Registrant granted to the investor an option to purchase an additional 2,000,000 shares of Series F Preferred for $3.40 a share and an option to purchase 4,129,665 shares of Series G Preferred Stock for $3.65 a share. The Registrant also issued to the investor an option to purchase one share of Series H Preferred Stock, which option was exercisable upon the failure of the Registrant to reach specific revenue targets. On March 31, 1998, the investor exercised its option to purchase 2,000,000 shares of Series F Preferred Stock for a total purchase price of $6,800,000. The investor and the Registrant agreed to extend the exercise period for the Series G option agreement to June 1, 1998. The Series G option has expired and will not be exercised. The Series H option has also expired and will not be exercised. The Series F Preferred Stock was offered and sold, and the Series F option, the Series G option and the Series H option were issued and, in the case of the Series G option, extended by the Registrant, in reliance upon the exemptions from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. In January 1998, the Company issued an aggregate of 27,500 shares of Common Stock at a deemed value of $2.00 a share to Health Outcome Technologies, Inc. ("HOT") in consideration for the acquisition of certain intangible assets of HOT. These shares of Common Stock were offered and sold by the Registrant in reliance upon the exemptions from registration pursuant to Section 4(2) of the Securities Act and Rule 504 of Regulation D promulgated under the Securities Act. In March 1998, the Registrant issued 45,000 shares of Common Stock to an investor for a total purchase price of $13,950, pursuant to the exercise of a warrant issued in 1994. The Common Stock issued pursuant to the warrant was offered and sold by the Registrant in reliance upon the exemptions from registration pursuant to Section 4(2) of the Securities Act. In August 1998, the Registrant issued an aggregate of 350,000 shares of Common Stock to Enterprise Partners IV Associates, L.P. and Enterprise Partners IV, L.P., for a total purchase price of $700,000. In addition, the Registrant granted an option to purchase 16,000 shares of Common Stock at a price of $2.00 a share to Enterprise Partners IV Associates, L.P. and granted an option to purchase 184,000 shares of Common Stock at a price of $2.00 a share to Enterprise Partners IV, L.P. The options II-2 were exercised on April 14, 1999. The shares of Common Stock and the options were offered and sold and issued in reliance upon the exemptions from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. In February 1999, the Registrant issued 1,500,000 shares of Common Stock to the shareholders of PrimaCis Information Technology, Inc., at a deemed value of $2.20 a share, as partial consideration for the acquisition of PrimaCis. The shares of Common Stock were offered and sold by the Registrant in reliance upon the exemptions from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. In May 1999, the Registrant issued shares of its Series J Preferred Stock to four investors. The Registrant offered and sold an aggregate of 7,326,316 shares of Series J Preferred Stock to the investors at a price of $4.75 a share, for a total purchase price of $34,800,000. The shares of Series J Preferred Stock were offered and sold by the Registrant in reliance upon the exemptions from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. In August 1999, the Registrant issued an additional 3,050,527 shares of its Series J Preferred Stock to 11 investors. The Registrant offered and sold the shares of Series J Preferred Stock to the investors at a price of $4.75 a share, for $13,499,998.75 in cash, and services from three of the investors valued at $990,004.50. The shares of Series J Preferred Stock were offered and sold by the Registrant in reliance upon the exemptions from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. In September and October 1999, the Registrant issued 345,525 shares of Common Stock to Baylor College of Medicine pursuant to an agreement described in the prospectus that provides for the issuance of shares of Common Stock to Baylor upon certain purchases of LOGICIAN licenses from the Company. The shares were issued to Baylor as a result of purchases of LOGICIAN licenses by institutions in Houston, Texas for approximately $1,641,244, and the deemed value of the shares at the time of issuance was $4.75 a share. The shares of Common Stock were offered and sold by the Registrant in reliance upon the exemptions from registration pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. OPTIONS, RESTRICTED STOCK AND GRANTS UNDER STOCK INCENTIVE PLAN As set forth in the chart below, between September 1996 and September 1999 the Registrant granted to employees, consultants and directors stock options under the Registrant's Stock Incentive Plans in reliance on the exemption from registration provided by either (i) Section 4(2) of the Securities Act, or (ii) Rule 701 promulgated under the Securities Act.
NUMBER OF SHARES EXERCISE SUBJECT TO OPTIONS PRICE ------------------ -------- September 1, 1996 to October 28, 1998............... 1,901,636 $2.00 October 29, 1998 to May 25, 1999.................... 743,000 $2.20 May 26, 1999 to September 17, 1999.................. 1,719,500 $3.25 September 18, 1999 and thereafter................... 1,300,000 $4.75
Of the options granted during the period from September 1, 1996 to October 28, 1998 to purchase 1,901,636 shares of Common Stock, 1,752,189 were outstanding as of September 10, 1999. Of the options granted during the period from October 29, 1998 to May 25, 1999 to purchase 743,000 shares of Common Stock, 742,631 remain outstanding. Of the options granted from May 26, 1999 to September 17, 1999 to purchase 1,719,500 shares of Common Stock, all were outstanding as of October 15, 1999. Of the options granted after September 17, 1999 to purchase 1,300,000 shares of Common Stock, all were outstanding as of October 15, 1999. II-3 In the past three years, the Registrant from time to time offered and sold the following shares of Common Stock as incentive compensation to senior management of the Registrant, subject to repurchase or performance requirements, pursuant to Registrant's Stock Incentive Plans. Such restricted Common Stock was issued in reliance on the exemption from registration provided by either (i) Section 4(2) of the Securities Act, or (ii) Rule 701 promulgated under the Securities Act.
NUMBER OF SHARES OF SALE RESTRICTED COMMON PRICE ------------------- -------- September 1, 1996 to October 28, 1998............... 500,000 $2.00 October 29, 1998 to May 25, 1999.................... 600,000 $2.20 May 26, 1999 to September 17, 1999.................. 885,000 $3.25 September 18, 1999 and thereafter................... 250,000 $4.75
In the past three years, the Registrant from time to time has granted shares of its Common Stock to employees or consultants in exchange for services rendered to the Registrant, pursuant to the Registrant's Stock Incentive Plans, as set forth in the table below in reliance upon the exemption from registration provided by either (i) Section 4(2) of the Securities Act, or (ii) Rule 701 promulgated under the Securities Act.
DEEMED PER SHARE NUMBER OF SHARES VALUE AT DATE OF COMMON DATE OF GRANT - ---- ---------------- ---------------- September 1, 1996 to October 28, 1998........ 58,700 $2.00 October 29, 1998 to May 25, 1999............. 47,500 $2.20 May 26, 1999 to September 17, 1999........... 70,000 $3.25 September 18, 1999 and thereafter............ 10,000 $4.75
The foregoing share amounts do not give effect to a one-for-two reverse stock split to be effected by the Company prior to the offering. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits 1.1 Form of Underwriting Agreement 3.1(3) 1994 Restated Articles of Incorporation, as amended 3.2(3) Restated Bylaws 4.1(3) See Article II of Exhibit 3.1 and Article V of Exhibit 3.2 4.2 Specimen Stock Certificate 5.1(2) Opinion of Stoel Rives LLP 10.1(3) 1999 Amended and Restated Investor Rights Agreement 10.2(3) 1993 Stock Incentive Plan 10.3(3) 1996 Stock Incentive Plan, as amended 10.4(3) 1999 Stock Incentive Plan 10.5(3) Form of Incentive Stock Option Agreement 10.6 Form of Restricted Stock Purchase Agreement (Performance) 10.7 Form of Restricted Stock Purchase Agreement 10.8 Equipment Financing Agreement between MedicaLogic and GE Capital Financing dated June 5, 1998 10.8.1 Industrial Business Park Lease between MedicaLogic and Evergreen Corporate Center LLC dated January 15, 1997, as amended July 15, 1999 10.8.2(3) Office Lease between 945 Battery LLC, and MedicaLogic, dated May 9, 1999
II-4 10.9(3) Agreement to Issue Shares of Common Stock between MedicaLogic and Baylor College of Medicine dated as of February 16, 1999 10.10 Software Deposit Agreement with Fidex Americas Corporation dated April 15, 1996 10.11(1)(3) Oracle Alliance Agreement between MedicaLogic and Oracle Corporation dated April 1, 1998, as amended 10.12(3) Employment Agreement between MedicaLogic and Mark Leavitt, dated August 1, 1985 10.13(2) Employee Stock Purchase Plan 21.1(3) Subsidiaries of the Registrant 23.1 Consent of KPMG LLP 23.2 Consent of KPMG LLP 23.2(2) Consent of Stoel Rives LLP (included in Exhibit 5.1) 24.1(3) Power of Attorney 24.2 Power of Attorney of Neal Moszkowski 27.1 Financial Data Schedule
- ------------------------ (1) Certain portions of this Exhibit have been omitted based on a request for confidential treatment; such portions have been filed separately with the Commission. (2) To be filed by amendment. (3) Previously filed. (b) Financial Statement Schedules Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 14, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. II-5 (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment No. 1 to Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hillsboro, State of Oregon, on October 27, 1999. MEDICALOGIC, INC. By /s/ MARK K. LEAVITT, M.D. ------------------------------------------ Mark K. Leavitt, M.D. CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to Registration Statement on Form S-1 has been signed below on October 27, 1999 by the following persons in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ MARK K. LEAVITT, M.D. -------------------------------------- Chairman of the Board and Chief Executive Officer Mark K. Leavitt, M.D. PRINCIPAL EXECUTIVE OFFICER /s/ DAVID C. MOFFENBEIER* -------------------------------------- Chief Operating Officer and Director David C. Moffenbeier PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER /s/ CHARLES D. BURWELL* -------------------------------------- Director Charles D. Burwell /s/ BRUCE M. FRIED* -------------------------------------- Director Bruce M. Fried /s/ RONALD H. KASE* -------------------------------------- Director Ronald H. Kase /s/ NEAL MOSZKOWSKI* -------------------------------------- Director Neal Moszkowski /s/ MARK A. STEVENS* -------------------------------------- Director Mark A. Stevens /s/ RONALD R. TAYLOR* -------------------------------------- Director Ronald R. Taylor
II-7
SIGNATURE TITLE --------- ----- /s/ DAVID W. WROE* -------------------------------------- Director David W. Wroe
/s/ MARK K. LEAVITT, M.D. ----------------------------------------- Mark K. Leavitt, M.D. *By ATTORNEY-IN-FACT
II-8 EXHIBIT INDEX 1.1 Form of Underwriting Agreement 3.1(3) 1994 Restated Articles of Incorporation, as amended 3.2(3) Restated Bylaws 4.1(3) See Article II of Exhibit 3.1 and Article V of Exhibit 3.2 4.2 Specimen Stock Certificate 5.1(2) Opinion of Stoel Rives LLP 10.1(3) 1999 Amended and Restated Investor Rights Agreement 10.2(3) 1993 Stock Incentive Plan 10.3(3) 1996 Stock Incentive Plan, as amended 10.4(3) 1999 Stock Incentive Plan 10.5(3) Form of Incentive Stock Option Agreement 10.6 Form of Restricted Stock Purchase Agreement (Performance) 10.7 Form of Restricted Stock Purchase Agreement 10.8 Equipment Financing Agreement between MedicaLogic and GE Capital Financing dated June 5, 1998 10.8.1 Industrial Business Park Lease between MedicaLogic and Evergreen Corporate Center LLC dated January 15, 1997, as amended July 15, 1999 10.8.2(3) Office Lease between 945 Battery LLC, and MedicaLogic, dated May 9, 1999 10.9(3) Agreement to Issue Shares of Common Stock between MedicaLogic and Baylor College of Medicine dated as of February 16, 1999 10.10 Software Deposit Agreement with Fidex Americas Corporation dated April 15, 1996 10.11(1)(3) Oracle Alliance Agreement between MedicaLogic and Oracle Corporation dated April 1, 1998, as amended 10.12(3) Employment Agreement between MedicaLogic and Mark Leavitt, dated August 1, 1985 10.13(2) Employee Stock Purchase Plan 21.1(3) Subsidiaries of the Registrant 23.1 Consent of KPMG LLP 23.2 Consent of KPMG LLP 23.3(2) Consent of Stoel Rives LLP (included in Exhibit 5.1) 24.1(3) Power of Attorney 24.2 Power of Attorney of Neal Moszkowski 27.1 Financial Data Schedule
- ------------------------ (1) Certain portions of this Exhibit have been omitted based on a request for confidential treatment; such portions have been filed separately with the Commission. (2) To be filed by amendment. (3) Previously filed. EX-1.1 2 EXHIBIT 1.1 __________ Shares MedicaLogic, Inc. Common Stock UNDERWRITING AGREEMENT __________, 1999 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BANCBOSTON ROBERTSON STEPHENS INC. U.S. BANCORP PIPER JAFFRAY INC. DLJDIRECT INC. As representatives of the several Underwriters named in Schedule I hereto c/o Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Ladies and Gentlemen: MedicaLogic, Inc., an Oregon corporation (the "Company"), proposes to issue and sell ____________ shares of its common stock (the "Firm Shares"), to the several underwriters named in Schedule I hereto (the "Underwriters"). The Company also proposes to issue and sell to the several Underwriters not more than an additional _______ shares of its common stock (the "Additional Shares"), if requested by the Underwriters as provided in Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter referred to collectively as the "Shares." The shares of common 1 stock of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "Common Stock." SECTION 1. Registration Statement and Prospectus. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder (collectively, the "Act"), a registration statement on Form S-1, including a prospectus, relating to the Shares. The registration statement, as amended at the time it became effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Act, is hereinafter referred to as the "Registration Statement;" and the prospectus in the form first used to confirm sales of Shares is hereinafter referred to as the "Prospectus." If the Company has filed or is required pursuant to the terms hereof to file a registration statement pursuant to Rule 462(b) under the Act registering additional shares of Common Stock (a "Rule 462(b) Registration Statement"), then, unless otherwise specified, any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462(b) Registration Statement. SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to issue and sell, and each Underwriter agrees, severally and not jointly, to purchase from the Company at a price per share of $______ (the "Purchase Price") the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to issue and sell the Additional Shares and the Underwriters shall have the right to purchase, severally and not jointly, up to _______ Additional Shares from the Company at the Purchase Price. Additional Shares may be purchased solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. The Underwriters may exercise their right to purchase Additional Shares in whole or in part from time to time by giving written notice thereof to the Company within 30 days after the date of this Agreement. You shall give any such notice on behalf of the Underwriters and such notice shall specify the aggregate number of Additional Shares to be purchased pursuant to such exercise and the date for payment and delivery thereof, which date shall be a business day (i) no earlier than two business days after such notice has been given (and, in any event, no earlier than the Closing Date (as hereinafter defined)) and (ii) no later than ten business days after such notice has been given. If any Additional Shares are to be purchased, each Underwriter, severally and not jointly, agrees to purchase from the 2 Company the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) which bears the same proportion to the total number of Additional Shares to be purchased from the Company as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I bears to the total number of Firm Shares. The Company hereby agrees not to (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any Common Stock (regardless of whether any of the transactions described in clause (i) or (ii) is to be settled by the delivery of Common Stock, or other securities, in cash or otherwise), except to the Underwriters pursuant to this Agreement and except to Baylor College of Medicine pursuant to the Agreement to Issues Shares of Common Stock between the Company and Baylor College of Medicine dated as of February 16, 1999, for a period of 180 days after the date of the Prospectus, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding the foregoing, during such period, (i) the Company may grant stock options pursuant to the Company's existing stock option plan and (ii) the Company may issue shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof. The Company also agrees not to file any registration statement with respect to any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock for a period of 180 days after the date of the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation, except for any registration statement on Form S-8 (or any successor form). The Company shall have delivered, prior to or concurrently with the execution of this Agreement, an agreement executed by (i) each of the directors and officers of the Company and (ii) each shareholder listed on Annex I hereto to the effect that such person will not, during the period commencing on the date such person signs such agreement and ending 180 days after the date of the Prospectus, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation, (A) engage in any of the transactions described in the first sentence of this paragraph or (B) make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock. SECTION 3. Terms of Public Offering. The Company is advised by you that the Underwriters propose (i) to make a public offering of their respective portions of the Shares as soon after the execution and delivery of this Agreement as in your judgment is advisable and (ii) initially to offer the Shares upon the terms set forth in the Prospectus. 3 Of the Shares to be offered by the Underwriters, ____________ Shares have been reserved (the "Reserved Shares") for sale to certain individuals and entities, including employees, officers and directors of the Company and other parties associated with the Company and members of their families. The number of shares available to the general public will be reduced to the extent those persons or entities purchase, or confirm the purchase (either orally or in writing) of, Reserved Shares. Any Reserved Shares not so purchased or confirmed for purchase will be offered in the Offering. SECTION 4. Delivery and Payment. The Shares shall be represented by definitive certificates and shall be issued in such authorized denominations and registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation shall request no later than two business days prior to the Closing Date or the applicable Option Closing Date (as defined below), as the case may be. The Company shall deliver the Shares, with any transfer taxes thereon duly paid by the Company, to Donaldson, Lufkin & Jenrette Securities Corporation through the facilities of The Depository Trust Company ("DTC"), for the respective accounts of the several Underwriters, against payment to the Company of the Purchase Price therefore by wire transfer of Federal or other funds immediately available in New York City. The certificates representing the Shares shall be made available for inspection not later than 9:30 A.M., New York City time, on the business day prior to the Closing Date or the applicable Option Closing Date, as the case may be, at the office of DTC or its designated custodian (the "Designated Office"). The time and date of delivery and payment for the Firm Shares shall be 9:00 A.M., New York City time, on ________, 1999 or such other time on the same or such other date as Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree in writing (the "Closing Date"). The time and date of delivery and payment for any Additional Shares to be purchased by the Underwriters shall be 9:00 A.M., New York City time, on the date specified in the applicable exercise notice given by you pursuant to Section 2 or such other time on the same or such other date as Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree in writing (an "Option Closing Date"). The documents to be delivered on the Closing Date or any Option Closing Date on behalf of the parties hereto pursuant to Section 8 of this Agreement shall be delivered at the offices of Perkins Coie LLP, 1211 S.W. Fifth Avenue, Portland, Oregon and the Shares shall be delivered at the Designated Office, all on the Closing Date or such Option Closing Date, as the case may be. SECTION 5. Agreements of the Company. The Company hereby agrees as follows: (a) To advise you promptly and, if requested by you, to confirm such advice in writing, (i) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information, 4 (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for such purposes, (iii) when any amendment to the Registration Statement becomes effective, (iv) if the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, when the Rule 462(b) Registration Statement has become effective and (v) of the happening of any event during the period referred to in Section 5(d) below which makes any statement of a material fact made in the Registration Statement or the Prospectus untrue or which requires any additions to or changes in the Registration Statement or the Prospectus in order to make the statements therein not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (b) To furnish to you four signed copies of the Registration Statement as first filed with the Commission and of each amendment to it, including all exhibits, and to furnish to you and each Underwriter designated by you such number of conformed copies of the Registration Statement as so filed and of each amendment to it, without exhibits, as you may reasonably request. (c) To prepare the Prospectus, the form and substance of which shall be satisfactory to you, and to file the Prospectus in such form with the Commission within the applicable period specified in Rule 424(b) under the Act; during the period specified in Section 5(d) below, not to file any further amendment to the Registration Statement and not to make any amendment or supplement to the Prospectus of which you shall not previously have been advised or to which you shall reasonably object after being so advised; and, during such period, to prepare and file with the Commission, promptly upon your reasonable request, any amendment to the Registration Statement or amendment or supplement to the Prospectus that may be necessary or advisable in connection with the distribution of the Shares by you, and to use its best efforts to cause any such amendment to the Registration Statement to become promptly effective. (d) Prior to 10:00 A.M., New York City time, on the first business day after the date of this Agreement and from time to time thereafter for such period as in the opinion of counsel for the Underwriters a prospectus is required by law to be delivered in connection with sales by an Underwriter or a dealer, to furnish in New York City to each Underwriter and any dealer as many copies of the Prospectus (and of any amendment or supplement to the Prospectus) as such Underwriter or dealer may reasonably request. (e) If during the period specified in Section 5(d), any event shall occur or condition shall exist as a result of which, in the opinion of counsel for the Underwriters, it 5 becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare and file with the Commission an appropriate amendment or supplement to the Prospectus so that the statements in the Prospectus, as so amended or supplemented, will not in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with applicable law, and to furnish to each Underwriter and to any dealer as many copies thereof as such Underwriter or dealer may reasonably request. (f) Prior to any public offering of the Shares, to cooperate with you and counsel for the Underwriters in connection with the registration or qualification of the Shares for offer and sale by the several Underwriters and by dealers under the state securities or Blue Sky laws of such jurisdictions as you may request, to continue such registration or qualification in effect so long as required for distribution of the Shares and to file such consents to service of process or other documents as may be necessary in order to effect such registration or qualification; provided, however, that the Company shall not be required in connection therewith to qualify as a foreign corporation in any jurisdiction in which it is not now so qualified or to take any action that would subject it to general consent to service of process or taxation other than as to matters and transactions relating to the Prospectus, the Registration Statement, any preliminary prospectus or the offering or sale of the Shares, in any jurisdiction in which it is not now so subject. (g) To mail and make generally available to its shareholders as soon as practicable an earnings statement covering the twelve-month period ending December 31, 2000 that shall satisfy the provisions of Section 11(a) of the Act, and to advise you in writing when such statement has been so made available. (h) During the period of three years after the date of this Agreement, to furnish to you as soon as available copies of all reports or other communications furnished to the record holders of Common Stock or furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed and such other publicly available information concerning the Company and its subsidiaries as you may reasonably request. (i) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of its obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company's counsel and the Company's accountants in connection with the registration and delivery of the Shares under the Act 6 and all other fees and expenses in connection with the preparation, printing, filing and distribution of the Registration Statement (including financial statements and exhibits), any preliminary prospectus, the Prospectus and all amendments and supplements to any of the foregoing, including the mailing and delivering of copies thereof to the Underwriters and dealers in the quantities specified herein, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) all costs of printing or producing this Agreement and any other agreements or documents in connection with the offering, purchase, sale or delivery of the Shares, (iv) all expenses in connection with the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states and all costs of printing or producing any Preliminary and Supplemental Blue Sky Memoranda in connection therewith (including the filing fees and fees and disbursements of counsel for the Underwriters in connection with such registration or qualification and memoranda relating thereto), (v) the filing fees and disbursements of counsel for the Underwriters in connection with the review and clearance of the offering of the Shares by the National Association of Securities Dealers, Inc., (vi) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the Common Stock and all costs and expenses incident to the listing of the Shares on the Nasdaq National Market, (vii) the cost of printing certificates representing the Shares, (viii) the costs and charges of any transfer agent, registrar and/or depository and (ix) all other costs and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section. (j) To use its best efforts to list for quotation the Shares on the Nasdaq National Market and to maintain the listing of the Shares on the Nasdaq National Market for a period of three years after the date of this Agreement. (k) To use its best efforts to do and perform all things required or necessary to be done and performed under this Agreement by the Company prior to the Closing Date or any Option Closing Date, as the case may be, and to satisfy all conditions precedent to the delivery of the Shares. (l) If the Registration Statement, at the time of the effectiveness of this Agreement, does not cover all of the Shares, to file a Rule 462(b) Registration Statement with the Commission registering the Shares not so covered in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of this Agreement and to pay to the Commission the filing fee for such Rule 462(b) Registration Statement at the time of the filing thereof or to give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act. 7 SECTION 6. Representations and Warranties of the Company. The Company represents and warrants to each Underwriter that: (a) The Registration Statement has become effective (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement); any Rule 462(b) Registration Statement filed after the effectiveness of this Agreement will become effective no later than 10:00 P.M., New York City time, on the date of this Agreement; and no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission. (b) (i) The Registration Statement (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement), when it became effective, did not contain and, as amended, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement) and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Act, (iii) if the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, such Rule 462(b) Registration Statement and any amendments thereto, when they become effective (A) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (B) will comply in all material respects with the Act, and (iv) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (c) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the Act, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in any 8 preliminary prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (d) Each of the Company and its subsidiaries has been duly incorporated and is validly existing as a corporation under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as described in the Prospectus and to own, lease and operate its properties, and each is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (e) There are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or liens granted or issued by the Company or any of its subsidiaries relating to or entitling any person to purchase or otherwise to acquire any shares of the capital stock of the Company or any of its subsidiaries, except as otherwise disclosed in the Registration Statement. (f) All the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights; and the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. (g) All of the outstanding shares of capital stock of each of the Company's subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable, and are owned by the Company, directly or indirectly through one or more subsidiaries, free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature. (h) As of the Closing Date, the authorized capital stock of the Company will conform as to legal matters to the description thereof contained in the Prospectus. (i) Neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws or in default in the performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound. 9 (j) The execution, delivery and performance of this Agreement by the Company, the compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby will not (i) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the securities or Blue Sky laws of the various states), (ii) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any of its subsidiaries or any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound, (iii) violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over the Company, any of its subsidiaries or their respective property or (iv) result in the suspension, termination or revocation of any Authorization (as defined below) of the Company or any of its subsidiaries or any other impairment of the rights of the holder of any such Authorization. (k) There are no legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is or could be a party or to which any of their respective property is or could be subject that are required to be described in the Registration Statement or the Prospectus and are not so described; nor are there any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed as required. (l) Neither the Company nor any of its subsidiaries has violated any foreign, federal, state or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), any provisions of the Employee Retirement Income Security Act of 1974, as amended, or any provisions of the Foreign Corrupt Practices Act, or the rules and regulations promulgated thereunder, except for such violations which, singly or in the aggregate, would not have a material adverse effect on the business, prospects, financial condition or results of operation of the Company and its subsidiaries, taken as a whole. (m) Each of the Company and its subsidiaries has such permits, licenses, consents, exemptions, franchises, authorizations and other approvals (each, an "Authorization") of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, including, without limitation, under any applicable Environmental Laws, as are necessary 10 to own, lease, license and operate its respective properties and to conduct its business as currently conducted and as proposed to be conducted, except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. Each such Authorization is valid and in full force and effect and each of the Company and its subsidiaries is in compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; and no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Authorization; and, except as described in the Registration Statement, such Authorizations contain no restrictions that are burdensome to the Company or any of its subsidiaries; except where such failure to be valid and in full force and effect or to be in compliance, the occurrence of any such event or the presence of any such restriction would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (n) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any Authorization, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (o) This Agreement has been duly authorized, executed and delivered by the Company. (p) KPMG Peat Marwick LLP are independent public accountants with respect to the Company and its subsidiaries as required by the Act. (q) The consolidated financial statements included in the Registration Statement and the Prospectus (and any amendment or supplement thereto), together with related schedules and notes, present fairly the consolidated financial position, results of operations and changes in financial position of the Company and its subsidiaries on the basis stated therein at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods 11 involved, except as disclosed therein; the supporting schedules, if any, included in the Registration Statement present fairly in accordance with generally accepted accounting principles the information required to be stated therein; and the other financial and statistical information and data set forth in the Registration Statement and the Prospectus (and any amendment or supplement thereto) are, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. (r) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (s) Except as set forth in Schedule 6(s), there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement. (t) The Company and its subsidiaries own or possess, or can acquire on reasonable terms, all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names ("Intellectual Property") currently employed by them in connection with the business now operated or proposed to be operated by them except where the failure to own or possess or otherwise be able to acquire such Intellectual Property would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole; and, except as set forth in the Registration Statement, neither the Company nor any of its subsidiaries has received any notice of infringement of, or conflict with, asserted rights of others with respect to any of such Intellectual Property which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole. (u) No relationship, direct or indirect, exists between or among the Company or any of its subsidiaries on the one hand, and the directors, officers, shareholders, customers or suppliers of the Company or any of its subsidiaries on the other hand, which is required by the Act to be described in the Registration Statement or the Prospectus which is not so described. 12 (v) The pro forma financial statements of the Company and its subsidiaries and the related notes thereto set forth in the Registration Statement and the Prospectus (and any supplement or amendment thereto) have been prepared on a basis consistent with the historical financial statements of the Company and its subsidiaries, give effect to the assumptions and adjustments used in the preparation thereof on a reasonable basis and in good faith. Such pro forma financial statements have been prepared in accordance with the applicable requirements of Rule 11-02 of Regulation S-X promulgated by the Commission. The other pro forma financial and statistical information and data set forth in the Registration Statement and the Prospectus (and any supplement or amendment thereto) are, in all material respects, accurately presented and prepared on a basis consistent with the pro forma financial statements. (w) Since the respective dates as of which information is given in the Prospectus other than as set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there has not occurred any material adverse change or any development involving a prospective material adverse change in the condition, financial or otherwise, or the earnings, business, management or operations of the Company and its subsidiaries, taken as a whole, (ii) there has not been any material adverse change or any development involving a prospective material adverse change in the capital stock or in the long-term debt of the Company or any of its subsidiaries and (iii) neither the Company nor any of its subsidiaries has incurred any material liability or obligation, direct or contingent. (x) Each certificate signed by any officer of the Company and delivered to the Underwriters or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to the Underwriters as to the matters covered thereby. SECTION 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter, its directors, its officers and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and against any and all losses, claims, damages, liabilities and judgments (including, without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action, that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to 13 any Underwriter furnished in writing to the Company by such Underwriter through you expressly for use therein; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter who failed to deliver a Prospectus, as then amended or supplemented, (so long as the Prospectus and any amendments or supplements thereto was provided by the Company to the several Underwriters in the requisite quantity and on a timely basis to permit proper delivery on or prior to the Closing Date) to the person asserting any losses, claims, damages, liabilities or judgments caused by any untrue statement or alleged untrue statement of a material fact contained in such preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such material misstatement or omission or alleged material misstatement or omission was cured in the Prospectus, as so amended or supplemented, and such Prospectus was required by law to be delivered at or prior to the written confirmation of sale to such person. In addition to the foregoing, in connection with the offer and sale of Reserved Shares, the Company agrees, promptly upon a request in writing, to indemnify and hold harmless the Underwriters from and against any and all losses, liabilities, claims, damages and expenses incurred by them as a result of the failure of purchasers of the Reserved Shares (including eligible directors, officers, employees and parties having business relationships with the Company) to pay for and accept delivery of the Reserved Shares that, by the end of the first business day following the date of this Agreement, were subject to a properly confirmed application to purchase. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent as the foregoing indemnity from the Company to such Underwriter but only with reference to information relating to such Underwriter furnished in writing to the Company by such Underwriter through you expressly for use in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus. (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 7(a) or 7(b) (the "indemnified party"), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 7(a) and 7(b), the Underwriter shall not be required to assume the defense of such action pursuant to this Section 7(c), but 14 may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of such Underwriter). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party, and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all indemnified parties and all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by Donaldson, Lufkin & Jenrette Securities Corporation, in the case of parties indemnified pursuant to Section 7(a), and by the Company, in the case of parties indemnified pursuant to Section 7(b). The indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with its written consent or (ii) effected without its written consent if the settlement is entered into more than twenty business days after the indemnifying party shall have received a request from the indemnified party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the indemnifying party) and, prior to the date of such settlement, the indemnifying party shall have failed to comply with such reimbursement request. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. (d) To the extent the indemnification provided for in this Section 7 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages, liabilities 15 or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 7(d)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 7(d)(i) above but also the relative fault of the Company on the one hand and the Underwriters on the other hand in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand shall be deemed to be in the same proportion as the total net proceeds from the offering (after deducting underwriting discounts and commissions, but before deducting expenses) received by the Company, and the total underwriting discounts and commissions received by the Underwriters, bear to the total price to the public of the Shares, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such indemnified party in connection with investigating or defending any matter, including any action, that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 7(d) are several in 16 proportion to the respective number of Shares purchased by each of the Underwriters hereunder and not joint. (e) The remedies provided for in this Section 7 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. SECTION 8. Conditions of Underwriters' Obligations. The several obligations of the Underwriters to purchase the Firm Shares under this Agreement are subject to the satisfaction of each of the following conditions: (a) All the representations and warranties of the Company contained in this Agreement shall be true and correct on the Closing Date with the same force and effect as if made on and as of the Closing Date. (b) If the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, such Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., New York City time, on the date of this Agreement; and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before or contemplated by the Commission. (c) You shall have received on the Closing Date a certificate dated the Closing Date, signed by Mark K. Leavitt, in his capacity as Chairman of the Board and Chief Executive Officer, and David C. Moffenbeier, in his capacity as Chief Operating Officer of the Company, confirming the matters set forth in Sections 6(w), 8(a) and 8(b) and that the Company has complied with all of the agreements and satisfied all of the conditions herein contained and required to be complied with or satisfied by the Company on or prior to the Closing Date. (d) Since the respective dates as of which information is given in the Prospectus other than as set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there shall not have occurred any change or any development involving a prospective change in the condition, financial or otherwise, or the earnings, business, management or operations of the Company and its subsidiaries, taken as a whole, (ii) there shall not have been any change or any development involving a prospective change in the capital stock or in the long-term debt of the Company or any of its subsidiaries and (iii) neither the Company nor any of its subsidiaries shall have incurred any liability or obligation, direct or contingent, the effect of which, in any such case described in clause 8(d)(i), 8(d)(ii) or 8(d)(iii), in your judgment, is material and adverse and, in your 17 judgment, makes it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. (e) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date, of Stoel Rives LLP counsel for the Company, to the effect that: (i) each of the Company and its subsidiaries has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as described in the Prospectus and to own, lease and operate its properties; (ii) each of the Company and its subsidiaries is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole; (iii) all the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights; (iv) the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights; (v) all of the outstanding shares of capital stock of each of the Company's subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable, and are owned by the Company, directly or indirectly through one or more subsidiaries, free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature; (vi) this Agreement has been duly authorized, executed and delivered by the Company; (vii) the authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus; 18 (viii) the Registration Statement has become effective under the Act and, to such counsel's knowledge, after due inquiry, no stop order suspending its effectiveness has been issued and no proceedings for that purpose are pending before or contemplated by the Commission; (ix) the statements under the captions "Shares Eligible for Future Sale," "Certain Transactions," "Business-Government Regulation and Healthcare Reform" and "Description of Capital Stock" in the Prospectus and Items 14 and 15 of Part II of the Registration Statement, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings; (x) to the best of such counsel's knowledge, after due inquiry, neither the Company nor any of its subsidiaries is in violation of its respective articles of incorporation, as amended, or by-laws, as amended, and neither the Company nor any of its subsidiaries is in default in the performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound; (xi) the execution, delivery and performance of this Agreement by the Company, the compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby will not (A) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the securities or Blue Sky laws of the various states), (B) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the articles of incorporation or by-laws of the Company or any of its subsidiaries or any indenture, loan agreement, mortgage, lease or other agreement or instrument known to such counsel that is material to the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound, (C) violate or conflict with any applicable law, rule or regulation or, to such counsel's knowledge, judgment, order or decree of any court or any governmental body or agency having jurisdiction over the Company, any of its subsidiaries or their respective property or (D) result in the suspension, termination or revocation of any Authorization of the Company or any of its subsidiaries or any other 19 impairment of the rights of the holder of any such Authorization, except where the suspension, termination or revocation of any such Authorization or other impairment of the rights of the holder of such Authorization would not, individually or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries taken as a whole; (xii) after due inquiry, such counsel does not know of any legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is a party or to which any of their respective property is subject that are required to be described in the Registration Statement or the Prospectus and are not so described, or of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed as required; (xiii) to the best of such counsel's knowledge, each of the Company and its subsidiaries has such Authorizations of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, including, without limitation, under any applicable Environmental Laws, as are necessary to own, lease, license and operate its respective properties and to conduct its business, except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole; each such Authorization is valid and in full force and effect and, to the best of such counsel's knowledge, each of the Company and its subsidiaries is in compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; and, to the best of such counsel's knowledge, no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Authorization; and, to the best of such counsel's knowledge, except as described in the Registration Statement, such Authorizations contain no restrictions that are burdensome to the Company or any of its subsidiaries; except where such failure to be valid and in full force and effect or to be in compliance, the occurrence of any such event or the presence of any such restriction would not, singly or in the aggregate, have a material adverse 20 effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole; (xiv) the Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; (xv) to the best of such counsel's knowledge after due inquiry, except as set forth in the Registration Statement, the Company has not received any notice of infringement of or conflict with asserted rights of others with respect to any of the Intellectual Property which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect; (xvi) other than as disclosed on Schedule 8(e)(xvi) attached hereto, to the best of such counsel's knowledge after due inquiry, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement; and (xvii) (A) the Registration Statement and the Prospectus and any supplement or amendment thereto (except for the financial statements and other financial data included therein as to which no opinion need be expressed) comply as to form with the Act, (B) nothing has come to the attention of such counsel that has caused it to believe that at the time the Registration Statement became effective or on the date of this Agreement, the Registration Statement and the prospectus included therein (except for the financial statements and other financial data as to which such counsel need not express any belief) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (C) nothing has come to the attention of such counsel that has caused it to believe that the Prospectus, as amended or supplemented, if applicable (except for the financial statements and other financial data, as aforesaid) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinions, such counsel may rely as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and its subsidiaries and certificates or other written statements of public officials. 21 The opinion of Stoel Rives LLP described in Section 8(e) above shall be rendered to you at the request of the Company and shall so state therein. (f) You shall have received on the Closing Date an opinion, dated the Closing Date, of Perkins Coie LLP, counsel for the Underwriters, as to the matters referred to in Sections 8(e)(iv), 8(e)(vi), 8(e)(ix) (but only with respect to the statements under the caption "Description of Capital Stock" and "Underwriting") and 8(e)(xvii). In giving such opinions with respect to the matters covered by Section 8(e)(xvii) Stoel Rives LLP and Perkins Coie LLP may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. (g) You shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to you, from KPMG Peat Marwick LLP, independent public accountants, containing the information and statements of the type ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. (h) The Company shall have delivered to you the agreements specified in Section 2 hereof which agreements shall be in full force and effect on the Closing Date. (i) The Shares shall have been duly listed for quotation on the Nasdaq National Market. (j) The Company shall not have failed on or prior to the Closing Date to perform or comply with any of the agreements herein contained and required to be performed or complied with by the Company on or prior to the Closing Date. The several obligations of the Underwriters to purchase any Additional Shares hereunder are subject to the delivery to you on the applicable Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization and issuance of such Additional Shares and other matters related to the issuance of such Additional Shares. SECTION 9. Effectiveness of Agreement and Termination. This Agreement shall become effective upon the execution and delivery of this Agreement by the parties hereto. 22 This Agreement may be terminated at any time on or prior to the Closing Date by you by written notice to the Company if any of the following has occurred: (i) any outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic conditions or in the financial markets of the United States or elsewhere that, in your judgment, is material and adverse and, in your judgment, makes it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus, (ii) the suspension or material limitation of trading in securities or other instruments on the New York Stock Exchange, the American Stock Exchange, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade or the Nasdaq National Market or limitation on prices for securities or other instruments on any such exchange or the Nasdaq National Market, (iii) the suspension of trading of any securities of the Company on any exchange or in the over-the-counter market, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority, which in your opinion materially and adversely affects, or will materially and adversely affect, the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your opinion has a material adverse effect on the financial markets in the United States. If on the Closing Date or on an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase the Firm Shares or Additional Shares, as the case may be, which it has or they have agreed to purchase hereunder on such date and the aggregate number of Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the total number of Firm Shares or Additional Shares, as the case may be, to be purchased on such date by all Underwriters, each non-defaulting Underwriter shall be obligated severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I bears to the total number of Firm Shares which all the non-defaulting Underwriters have agreed to purchase, or in such other proportion as you may specify, to purchase the Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the number of Firm Shares or Additional Shares, as the case may be, which any Underwriter has agreed to purchase pursuant to Section 2 hereof be increased pursuant to this Section 9 by an amount in excess of one-ninth of such number of Firm Shares or Additional Shares, as the case may be, without the written consent of such Underwriter. If on the Closing Date any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than 23 one-tenth of the aggregate number of Firm Shares to be purchased by all Underwriters and arrangements satisfactory to you and the Company for purchase of such Firm Shares are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter and the Company. In any such case which does not result in termination of this Agreement, either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. If, on an Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased on such date, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase such Additional Shares or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase on such date in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of any such Underwriter under this Agreement. SECTION 10. Miscellaneous. Notices given pursuant to any provision of this Agreement shall be addressed as follows: (i) if to the Company, to MedicaLogic, Inc., 20500 N.W. Evergreen Parkway, Hillsboro, Oregon 97124 and (ii) if to any Underwriter or to you, to you c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, or in any case to such other address as the person to be notified may have requested in writing. The respective indemnities, contribution agreements, representations, warranties and other statements of the Company and the several Underwriters set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Shares, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, the officers or directors of any Underwriter, any person controlling any Underwriter, the Company, the officers or directors of the Company or any person controlling the Company, (ii) acceptance of the Shares and payment for them hereunder and (iii) termination of this Agreement. If for any reason the Shares are not delivered by or on behalf of the Company as provided herein (other than as a result of any termination of this Agreement pursuant to Section 9), the Company agrees to reimburse the several Underwriters for all out-of-pocket expenses (including the fees and disbursements of counsel) incurred by them. Notwithstanding any termination of this Agreement, the Company shall be liable for all expenses that it has agreed to pay pursuant to Section 5(i) hereof. The Company 24 also agrees to reimburse the several Underwriters, their directors and officers and any persons controlling any of the Underwriters for any and all fees and expenses (including, without limitation, the fees and disbursements of counsel) incurred by them in connection with enforcing their rights hereunder (including, without limitation, pursuant to Section 7 hereof). Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Underwriters, the Underwriters' directors and officers, any controlling persons referred to herein, the Company's directors and the Company's officers who sign the Registration Statement and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Shares from any of the several Underwriters merely because of such purchase. This Agreement shall be governed and construed in accordance with the laws of the State of New York. This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. 25 Please confirm that the foregoing correctly sets forth the agreement between the Company and the several Underwriters. Very truly yours, MedicaLogic, Inc. By: -------------------------------------------- Name: Title: ----------------------------------------- DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION BANCBOSTON ROBERTSON STEPHENS, INC. U.S. BANCORP PIPER JAFFRAY INC. DLJDIRECT INC. Acting severally on behalf of themselves and the several Underwriters named in Schedule I hereto By DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By -------------------------- 26 SCHEDULE I Number of Firm Shares Underwriters to be Purchased - ------------ --------------- Donaldson, Lufkin & Jenrette Securities Corporation BancBoston Robertson Stephens Inc. U.S. Bancorp Piper Jaffray Inc. DLJdirect Inc. [Names of other Underwriters] --------------- Total Annex I [Insert names of shareholders of the Company who will be required to sign lock ups] Schedules 6(s) and 8(e)(xvi) Registration Rights [To come] EX-4.2 3 EXHIBIT 4.2
COMMON STOCK COMMON STOCK MedicaLogic Number Shares MDL _____ ______ THIS CERTIFICATE SEE REVERSE FOR IS TRANSFERABLE INCORPORATED UNDER THE LAWS CERTAIN DEFINITIONS IN NEW YORK, NY OF THE STATE OF OREGON AND A STATEMENT AS OR RIDGEFIELD TO THE RIGHTS, PARK, NJ PREFERENCES, PRIVILEGES AND RESTRICTIONS ON SHARES CUSIP 584642 10 2
THIS CERTIFIES THAT IS THE OWNER OF FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, NO PAR VALUE, OF MedicaLogic, Inc. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: MEDICALOGIC, INC. CORPORATE ------ SEAL 1985 * Oregon * DAVID C. MOFFENBEIER MARK K. LEAVITT CHIEF OPERATING OFFICER CHAIRMAN AND CHIEF AND SECRETARY EXECUTIVE OFFICER COUNTERSIGNED AND REGISTERED: CHASEMELLON SHAREHOLDER SERVICES, L.L.C. TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE MedicaLogic, Inc. A statement of the designations, relative rights, preferences and limitations applicable to each class of stock or series thereof as established, from time to time, by the Articles of Incorporation of the Corporation and by any certificate of designation, the number of shares constituting each class and series, and the designations thereof, may be obtained by the holder hereof on request in writing and without charge from the Secretary of the Corporation at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common (Oregon Custodians use the following) TEN ENT - as tenants by the (Name) CUST UL OREG (Name) MIN--__________________, as Custodian under entireties the laws of Oregon, for _________________ JT TEN - as joint tenants with a minor right of survivorship (Name) CUST (Name) (State) UNIF GIFT MIN ACT--_________Custodian_________ and not as tenants in (Cust) (Minor) common Under _______ Uniform Gifts to Minors Act (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, _______________________________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------- - -------------------------------------- - ------------------------------------------------------------------------------------------------------------------ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ Shares - ------------------------------------------------------------------------------------------------------------ of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney - ---------------------------------------------------------------------------------------------------------- to transfer the said stock on the books of the within named Corporation will full power of substitution in the premises. Dated _________________________________ X __________________________________________________________ X __________________________________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed By _____________________________________________________ THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
EX-10.6 4 EXHIBIT 10.6 MEDICALOGIC, INC. STOCK INCENTIVE PLAN RESTRICTED STOCK PURCHASE AGREEMENT This Restricted Stock Purchase Agreement ("Agreement") is entered into as of _________, 1999 between MedicaLogic, Inc., an Oregon corporation (the "Company"), and ________________ ("Purchaser") and is made pursuant to the Company's Stock Incentive Plan. In consideration of the mutual agreements contained in this Agreement, the parties agree as follows: 1. Purchase. 1.1 Purchase Agreement. The Company hereby agrees to sell to Purchaser, and Purchaser hereby agrees to purchase from the Company, ________ _____________________ (_____) shares of the Company's common stock (the "Shares") at a purchase price of $_____ per share, all on the terms and subject to the conditions of this Agreement. 1.2 Payment of Purchase Price. Purchaser shall pay for the Shares by delivering to the Company a duly executed note (the "Purchase Note"), substantially in the form of Exhibit A hereto. 1.3 Delivery of Stock. The Company will issue in Purchaser's name, as promptly after receipt of the Purchase Note as practicable, one or more certificates representing the Shares. To secure its rights under the Repurchase Option described in Section 2, the Company will retain the certificate or certificates representing the Shares. Purchaser will deliver to the Company executed blank stock powers covering the Shares subject to the Repurchase Option, substantially in the form of Exhibit B hereto. 2. Repurchase Option. 2.1 Option to Repurchase Upon Occurrence of Certain Events. The Company shall have the option to repurchase all or a portion of the Shares ("Repurchase Option"), in consideration for the forgiveness of all or a commensurate portion of the principal balance of and accrued interest on the Purchase Note, in the event Purchaser voluntarily terminates his/her employment within two years of the date the Shares were originally granted. The Repurchase Option shall terminate as of December 31, 1999 in the event all of the following events have occurred: a. The Company completes an initial public offering of the Company's Common Stock; b. An Internet version of Logician (Logician.net) is released; and c. A consumer patient web property (AboutMyHealth, or other web site name) is released. 2.2 Exercise of Option. The Repurchase Option shall be exercised by the Company by delivering to Purchaser (or to Purchaser's executors or administrators, if applicable) a written notice of exercise. Upon exercise of a Repurchase Option, the Company shall reduce the amount of principal and accrued interest then due, if any, on the Purchase Note and the Company shall promptly pay to Purchaser the balance of the repurchase price, if any. Upon delivery of such notice and reduction of the amounts due under the Purchase Note, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interest therein or related thereto, and the Company shall have the right to transfer to its own name the number of Shares being repurchased without further action by Purchaser. 2.3 Exercise Price. The price to be paid by the Company for the Shares upon exercise of the Repurchase Option shall be $_____ per Share. 2.4 Assignability. The right of the Company under a Repurchase Option to purchase any part of the Shares may be assigned in whole or in part to any person or persons designated by the Board of Directors of the Company. 3. Withholding. Upon notification of the amount due, if any, and prior to or concurrently with delivery of the certificates representing the Shares, Purchaser shall pay to the Company amounts necessary to satisfy any applicable federal, state, and local withholding tax requirements. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, Purchaser shall pay such amount to the Company on demand. If Purchaser fails to pay any amount demanded, the Company shall have the right to withhold such amount from other amounts payable by the Company to Purchaser, including salary, subject to applicable law. 4. Limitations on Transfer. 4.1 While Subject to Repurchase Option. Without the written consent of the Company, Purchaser shall not sell, assign, encumber, dispose of or transfer (including transfer by operation of law) any interest in any Shares that have not been released from the Repurchase Option. 4.2 Stock Transfer Agreement. Upon release from the Repurchase Option, the Shares shall be subject to the terms of any shareholders agreement then in effect, including any amendments or supplements thereto, among the Company and any of its shareholders (a "Shareholders Agreement"), including the transfer restrictions contained therein, and Purchaser agrees that the transfer restrictions and purchase options of any such Shareholders Agreement shall apply to the Shares and agrees to be bound from the date of this Agreement onward by all of the terms and conditions of any such Shareholders Agreement. 2 5. Investment Intent; Restricted Securities. Purchaser represents, warrants and covenants to the Company that the Shares are being acquired by Purchaser for investment for Purchaser's own account only and not with a view to, or resale in connection with, any distribution thereof within the meaning of the Securities Act of 1993, as amended (the "Act"). Purchaser understands and acknowledges that the sale of the Shares has not been registered under the Act or applicable state securities laws, that the Shares must be held indefinitely unless subsequently registered under the Act and applicable state securities laws or unless an exemption from such registration requirement is available, that the Company is under no obligation to register the Shares, and that the certificate or certificates representing the Shares will be stamped with legends substantially in the form specified in Section 7 of this Agreement. Purchaser agrees to comply with the transfer restrictions specified in the legends set forth in Section 7 and on the Share Certificates. 6. Acknowledgment of Access to Information. Purchaser acknowledges that he, through his position with the Company, has had access to sufficient information regarding the Company's business and financial condition to enable him to make an investment decision regarding the purchase of the Shares. Purchaser acknowledges that he has been provided an opportunity to ask questions of, and receive answers from, the Company concerning the terms and conditions of this offering and to obtain additional information concerning the Company and this offering. 7. Legend. All certificates representing the Shares shall be endorsed with legends substantially in the following form, in addition to any other legends required by law: "THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN A RESTRICTED STOCK PURCHASE AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION." "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED." "TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS RESTRICTED BY A SHAREHOLDERS AGREEMENT AMONG THE CORPORATION AND ITS SHAREHOLDERS, WHICH AGREEMENT BY THIS REFERENCE, IS INCORPORATED HEREBY AND MADE A PART HEREOF AS IF FULLY SET FORTH, AND WHICH AGREEMENT, BY ACCEPTANCE OF DELIVERY OF THIS CERTIFICATE, IS ACCEDED TO BY THE HOLDER HEREOF. A COPY OF THE 3 SHAREHOLDERS AGREEMENT IS ON FILE WITH THE SECRETARY OF THE CORPORATION." 8. Specific Performance. Purchaser acknowledges and agrees that the Company will suffer irreparable harm if Purchaser fails to comply with the terms of this Agreement, and that monetary damages will be inadequate to compensate the Company for such failure. Accordingly, Purchaser agrees that this Agreement may be enforced by specific performance or other injunctive relief, in addition to any other remedies available at law or in equity. 9. Notices. Any required or permitted notice shall be given in writing and shall be deemed given upon personal delivery or upon deposit in the United States mail by registered or certified mail, postage prepaid. Any notice to Purchaser shall be addressed to Purchaser at Purchaser's address shown on the corporate records of the Company, and any notice to the Company shall be addressed to the Company at its registered office. 10. No Right to Employment. Nothing in the Company's Stock Incentive Plan or in this Agreement shall confer upon Purchaser any right to be continued in the employment of the Company or to interfere in any way with the right of the Company to terminate Purchaser's employment at any time for any reason. 11. Entire Agreement; Amendment. This Agreement constitutes the entire agreement of the parties with regard to the subject matter hereof and may be amended only by written agreement between the Company and Purchaser. 12. Successors of Company. This Agreement shall be binding upon and shall inure to the benefit of any successor or successors of the Company and, subject to the restrictions on transfer of this Agreement, shall be binding upon and shall inure to the benefit of Purchaser's heirs, executors, administrators, successors and assigns. 13. Governing Law, Severability. This Agreement shall be governed by and construed in accordance with the laws of Oregon, without regard to the choice of law rules applied in the courts of such state. If any provisions or provision of this Agreement are found to be unenforceable, the remaining provisions shall nevertheless be enforceable and shall be construed as if the unenforceable provisions were deleted. 14. Further Action. The parties agree to execute such further instruments and to take such actions as may reasonably be necessary to carry out the intent of this Agreement. 4 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date written above. THE COMPANY: MEDICALOGIC, INC. By: _____________________________________ Title: __________________________________ Address: 20500 NW Evergreen Parkway Hillsboro, OR 97124 PURCHASER: _________________________________________ Address: ________________________________ _________________________________________ 5 Exhibit A $__________ NON-NEGOTIABLE PROMISSORY NOTE FOR VALUE RECEIVED, the undersigned ________________ ("Maker") hereby promises to pay to MedicaLogic, Inc., an Oregon corporation ("Payee"), at Payee's offices at 20500 NW Evergreen Parkway, Hillsboro, OR 97124, or at such other place Payee may designate in writing from time to time, the principal sum of __________________________________________________________ Dollars ($_________), plus accrued and unpaid interest thereon, in lawful money of the United States of America, on or before the date five years after the date hereof. 1. Interest. Interest shall accrue on the unpaid principal balance outstanding hereunder at the rate of six percent (6%) per annum from the date of this Note until such principal balance is paid in full. Interest shall be calculated on the basis of a 360-day year consisting of twelve 30-day months. Interest shall be payable quarterly in arrears. 2. Prepayment. Maker may prepay all or any portion of this Note at any time without penalty. Any such prepayment shall be applied first to pay interest accrued to the date of prepayment and second to reduce the principal balance hereof. 3. Costs of Collection. Maker agrees to pay any and all costs, including without limitation attorneys' fees, costs and expenses (in addition to any statutory costs) at trial, or on any appellate review, incurred by Payee or any holder of this Note in enforcing this Note and collecting sums due under this Note. 4. Waiver of Suretyship Defenses. The undersigned and all persons liable or to become liable on this Note waive presentment, protest and demand and notice of protest, demand, dishonor or nonpayment of this Note. 5. Waiver Only in Writing. Payee shall not be deemed, by any act or failure to act, to have waived any of its rights or remedies hereunder unless such waiver is in writing and signed by Payee, and then only to the extent specifically set forth in writing. 6. Usury. It is the specific intent of the Maker and Payee that this Note bear a lawful rate of interest, and if any court of competent jurisdiction should determine that the rate herein provided for exceeds that which is statutorily permitted for the type of transaction evidenced hereby, the interest rate shall be reduced to the highest rate permitted by applicable law, with any excess interest theretofore collected being applied against principal or, if such principal has been fully repaid, returned to Maker on demand. 7. Governing Law. This Note shall be construed in accordance with Oregon law, regardless of choice of law rules. MAKER: ----------------------------------------- Exhibit B IRREVOCABLE STOCK POWER KNOW ALL MEN BY THESE PRESENTS, that I, ________________, for value received, have bargained, sold, assigned, and transferred, and by these presents do hereby bargain, sell, assign, and transfer unto __________________________, _________________________ (_____) shares of the Common Stock of MedicaLogic, Inc., an Oregon corporation, standing in my name on the books of said corporation, represented by Certificate No. ___, and that I do hereby irrevocably constitute and appoint ____________________________ my true and lawful attorney to sell, assign, transfer, and set over all or any part of the said stock, and for that purpose to make and execute all necessary acts of assignment and transfer thereof, and to substitute one or more persons with like full power, hereby ratifying and confirming all that said attorney or substitute or substitutes shall lawfully do by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand as of this ____ day of _________, 1999. ----------------------------------------- Variable - Performance (3 criteria) Restricted Stock Middleton, Blackford Field, Guy Samco, Rick Leavitt, Mark K. Moffenbeier, David Watson, Thomas M. Anderson, Harvey J. EX-10.7 5 EXHIBIT 10.7 MEDICALOGIC, INC. STOCK INCENTIVE PLAN RESTRICTED STOCK PURCHASE AGREEMENT This Restricted Stock Purchase Agreement ("Agreement") is entered into as of _____, 1999 between MedicaLogic, Inc., an Oregon corporation (the "Company"), and _______ ("Purchaser") and is made pursuant to the Company's Stock Incentive Plan. In consideration of the mutual agreements contained in this Agreement, the parties agree as follows: 1. Purchase. 1.1 Purchase Agreement. The Company hereby agrees to sell to Purchaser, and Purchaser hereby agrees to purchase from the Company, ______ (______) shares of the Company's common stock (the "Shares") at a purchase price of $____ per share, all on the terms and subject to the conditions of this Agreement. 1.2 Payment of Purchase Price. Purchaser shall pay for the Shares by delivering to the Company a duly executed note (the "Purchase Note"), substantially in the form of Exhibit A hereto. 1.3 Delivery of Stock. The Company will issue in Purchaser's name, as promptly after receipt of the Purchase Note as practicable, one or more certificates representing the Shares. To secure its rights under the Repurchase Option described in Section 2, the Company will retain the certificate or certificates representing the Shares. Purchaser will deliver to the Company executed blank stock powers covering the Shares subject to the Repurchase Option, substantially in the form of Exhibit B hereto. 2. Repurchase Option. 2.1 Option on Termination of Employment. If Purchaser ceases to be employed by the Company for any reason, other than a termination by the Company without cause (as defined herein) (a "Termination"), the Company shall have an irrevocable, exclusive option (the "Repurchase Option") for a period of 60 days from the date of Termination to purchase all or any portion of the Shares held by Purchaser on the date of the Termination that have not been released from the Repurchase Option as provided in Section 2.3. The right of the Company under the Repurchase Option to purchase any part of the Shares may be assigned in whole or in part to any person or persons designated by the Board of Directors of the Company. 2.2 Exercise of Option. The Repurchase Option shall be exercised by the Company by delivering to Purchaser (or to Purchaser's executors or administrators, if applicable) a written notice of exercise and a check in the amount of the exercise price set forth in Section 2.4. Notwithstanding the foregoing, the Company may, at its option, elect to reduce 1 the amount payable to Purchaser (or Purchaser's estate, if applicable) upon exercise of a Repurchase Option by an amount not in excess of sum of the unpaid principal, if any, and the accrued but unpaid interest, if any, then due on the Purchase Note. Upon delivery of such notice and payment of the exercise price, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interest therein or related thereto, and the Company shall have the right to transfer to its own name the number of Shares being repurchased without further action by Purchaser. 2.3 Release from Repurchase Option. The Shares shall be released from the Repurchase Option ratably over a period of 36 months beginning on the date six months from _____________ (the "Vesting Reference Date"), so that on sixth (1/6) of the Shares will be released from the Repurchase Option on the sixth month anniversary of the Vesting Reference Date and the remaining five sixths (5/6) of the Shares shall be released from the Repurchase Option ratably over a period of 30 months beginning on the seventh month anniversary of the Vesting Reference Date so that 1/36 of the Shares under the Option shall vest on each monthly anniversary of the Vesting Reference Date beginning on the date seventh month after the Vesting Reference Date; provided, however, that all Shares shall be released immediately from the Repurchase Option in the event (a) Optionee's employment with the Company is terminated by the Company without cause including, without limitation, termination resulting from a reduction in the workforce of the Company, or (b) a Change of Control (as defined below) occurs. For purposes of the preceding paragraph, the circumstances in which the Company will have cause to terminate Optionee shall include, without limitation, (i) any misappropriation by Optionee of funds or property of the Company; (ii) the conviction of or plea of guilty or nolo contendere by Optionee of a felony or any crime involving moral turpitude; (iii) Optionee's engagement in illegal, immoral or similar conduct tending to place Optionee or the Company, by association with Optionee, in disrepute; and (iv) Optionee's nonperformance or gross dereliction of duty which continues after notice from the Company and a reasonable opportunity to cure. For purposes of the preceding paragraph, "Change of Control" means the occurrence of any of the following: (i) the sale, conveyance, or other disposition of all or substantially all of the property or business of the Company, (ii) the merger or consolidation of the Company with any other entity (other than a wholly-owned subsidiary corporation), or the completion of any other transaction or series of related transactions not involving a public offering, in which more than fifty percent (50%) of the voting power of the Company is disposed of, or (iii) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors. For purposes of this provision, "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company who (a) was a member of such Board of Directors on the date of this agreement or (b) was nominated for election or elected or appointed to such Board of Directors by the Board of Directors at a time when a majority of the Board consisted of Continuing Directors. 2 As Shares are released from the Repurchase Option, the Company shall deliver to Purchaser a certificate representing the Shares released; provided, however, that the parties agree that for administrative convenience the Company shall deliver certificates representing the Shares in increments of __________ Shares; and provided, further, that in the event that (i) one or more Shares but fewer than ___________ Shares have been released from the Repurchase Option and (ii) it is expected that no more Shares will be released from the Repurchase Option, then the Company shall deliver to Purchaser one or more certificates representing all Shares then released from the Repurchase Option but for which certificates have not been delivered. If, during the time the Company is holding certificates to secure its rights under the Repurchase Option, the outstanding shares of common stock of the Company are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, by reason of any reorganization, merger, consolidation, plan of exchange, recapitalization, reclassification, stock split, combination of shares, or dividend payable in shares, appropriate adjustment shall be made by the Board of Directors of the Company in the number and kind of shares the Company shall deliver to Purchaser as Shares are released from the Repurchase Option. 2.4 Exercise Price. The price to be paid by the Company for the Shares upon exercise of the Repurchase Option shall be $_______ per Share. 3. Withholding. Upon notification of the amount due, if any, and prior to or concurrently with delivery of the certificates representing the Shares, Purchaser shall pay to the Company amounts necessary to satisfy any applicable federal, state, and local withholding tax requirements. If additional withholding becomes required beyond any amount deposited before delivery of the certificates, Purchaser shall pay such amount to the Company on demand. If Purchaser fails to pay any amount demanded, the Company shall have the right to withhold such amount from other amounts payable by the Company to Purchaser, including salary, subject to applicable law. 4. Limitations on Transfer. 4.1 While Subject to Repurchase Option. Without the written consent of the Company, Purchaser shall not sell, assign, encumber, dispose of or transfer (including transfer by operation of law) any interest in any Shares that have not been released from the Repurchase Option. 4.2 Stock Transfer Agreement. Upon release from the Repurchase Option, the Shares shall be subject to the terms of any shareholders agreement then in effect, including any amendments or supplements thereto, among the Company and any of its shareholders (a "Shareholders Agreement"), including the transfer restrictions contained therein, and Purchaser agrees that the transfer restrictions and purchase options of any such Shareholders Agreement shall apply to the Shares and agrees to be bound from the date of this Agreement onward by all of the terms and conditions of any such Shareholders Agreement. 3 5. Investment Intent; Restricted Securities. Purchaser represents, warrants and covenants to the Company that the Shares are being acquired by Purchaser for investment for Purchaser's own account only and not with a view to, or resale in connection with, any distribution thereof within the meaning of the Securities Act of 1993, as amended (the "Act"). Purchaser understands and acknowledges that the sale of the Shares has not been registered under the Act or applicable state securities laws, that the Shares must be held indefinitely unless subsequently registered under the Act and applicable state securities laws or unless an exemption from such registration requirement is available, that the Company is under no obligation to register the Shares, and that the certificate or certificates representing the Shares will be stamped with legends substantially in the form specified in Section 7 of this Agreement. Purchaser agrees to comply with the transfer restrictions specified in the legends set forth in Section 7 and on the Share Certificates. 6. Acknowledgment of Access to Information. Purchaser acknowledges that he, through his position with the Company, has had access to sufficient information regarding the Company's business and financial condition to enable him to make an investment decision regarding the purchase of the Shares. Purchaser acknowledges that he has been provided an opportunity to ask questions of, and receive answers from, the Company concerning the terms and conditions of this offering and to obtain additional information concerning the Company and this offering. 7. Legend. All certificates representing the Shares shall be endorsed with legends substantially in the following form, in addition to any other legends required by law: "THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN A RESTRICTED STOCK PURCHASE AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION. " "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED." "TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS RESTRICTED BY A SHAREHOLDERS AGREEMENT AMONG THE CORPORATION AND ITS SHAREHOLDERS, WHICH AGREEMENT BY THIS REFERENCE, IS INCORPORATED HEREBY AND MADE A PART 4 HEREOF AS IF FULLY SET FORTH, AND WHICH AGREEMENT, BY ACCEPTANCE OF DELIVERY OF THIS CERTIFICATE, IS ACCEDED TO BY THE HOLDER HEREOF. A COPY OF THE SHAREHOLDERS AGREEMENT IS ON FILE WITH THE SECRETARY OF THE CORPORATION." 8. Specific Performance. Purchaser acknowledges and agrees that the Company will suffer irreparable harm if Purchaser fails to comply with the terms of this Agreement, and that monetary damages will be inadequate to compensate the Company for such failure. Accordingly, Purchaser agrees that this Agreement may be enforced by specific performance or other injunctive relief, in addition to any other remedies available at law or in equity. 9. Notices. Any required or permitted notice shall be given in writing and shall be deemed given upon personal delivery or upon deposit in the United States mail by registered or certified mail, postage prepaid. Any notice to Purchaser shall be addressed to Purchaser at Purchaser's address shown on the corporate records of the Company, and any notice to the Company shall be addressed to the Company at its registered office. 10. No Right to Employment. Nothing in the Company's Stock Incentive Plan or in this Agreement shall confer upon Purchaser any right to be continued in the employment of the Company or to interfere in any way with the right of the Company to terminate Purchaser's employment at any time for any reason. 11. Entire Agreement; Amendment; Counterparts. This Agreement constitutes the entire agreement of the parties with regard to the subject matter hereof and may be amended only by written agreement between the Company and Purchaser. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute but one and the same instrument. 12. Successors of Company. This Agreement shall be binding upon and shall inure to the benefit of any successor or successors of the Company and, subject to the restrictions on transfer of this Agreement, shall be binding upon and shall inure to the benefit of Purchaser's heirs, executors, administrators, successors and assigns. 13. Governing Law, Severability. This Agreement shall be governed by and construed in accordance with the laws of Oregon, without regard to the choice of law rules applied in the courts of such state. If any provisions or provision of this Agreement are found to be unenforceable, the remaining provisions shall nevertheless be enforceable and shall be construed as if the unenforceable provisions were deleted. 14. Further Action. The parties agree to execute such further instruments and to take such actions as may reasonably be necessary to carry out the intent of this Agreement. 5 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date written above. THE COMPANY: MEDICALOGIC, INC. By: ------------------------------------- Title: ---------------------------------- Address: 20500 NW Evergreen Parkway Hillsboro, OR 97124 PURCHASER: ----------------------------------------- Address: -------------------------------- -------------------------------- 6 Exhibit A $__________ NON-NEGOTIABLE PROMISSORY NOTE FOR VALUE RECEIVED, the undersigned ________________ ("Maker") hereby promises to pay to MedicaLogic, Inc., an Oregon corporation ("Payee"), at Payee's offices at 20500 NW Evergreen Parkway, Hillsboro, OR 97124, or at such other place Payee may designate in writing from time to time, the principal sum of __________________________________________________________ Dollars ($_________), plus accrued and unpaid interest thereon, in lawful money of the United States of America, on or before the date five years after the date hereof. 1. Interest. Interest shall accrue on the unpaid principal balance outstanding hereunder at the rate of six percent (6%) per annum from the date of this Note until such principal balance is paid in full. Interest shall be calculated on the basis of a 360-day year consisting of twelve 30-day months. Interest shall be payable quarterly in arrears. 2. Prepayment. Maker may prepay all or any portion of this Note at any time without penalty. Any such prepayment shall be applied first to pay interest accrued to the date of prepayment and second to reduce the principal balance hereof. 3. Costs of Collection. Maker agrees to pay any and all costs, including without limitation attorneys' fees, costs and expenses (in addition to any statutory costs) at trial, or on any appellate review, incurred by Payee or any holder of this Note in enforcing this Note and collecting sums due under this Note. 4. Waiver of Suretyship Defenses. The undersigned and all persons liable or to become liable on this Note waive presentment, protest and demand and notice of protest, demand, dishonor or nonpayment of this Note. 5. Waiver Only in Writing. Payee shall not be deemed, by any act or failure to act, to have waived any of its rights or remedies hereunder unless such waiver is in writing and signed by Payee, and then only to the extent specifically set forth in writing. 6. Usury. It is the specific intent of the Maker and Payee that this Note bear a lawful rate of interest, and if any court of competent jurisdiction should determine that the rate herein provided for exceeds that which is statutorily permitted for the type of transaction evidenced hereby, the interest rate shall be reduced to the highest rate permitted by applicable law, with any excess interest theretofore collected being applied against principal or, if such principal has been fully repaid, returned to Maker on demand. 7. Governing Law. This Note shall be construed in accordance with Oregon law, regardless of choice of law rules. MAKER: ----------------------------------------- Exhibit B IRREVOCABLE STOCK POWER KNOW ALL MEN BY THESE PRESENTS, that I, ________________, for value received, have bargained, sold, assigned, and transferred, and by these presents do hereby bargain, sell, assign, and transfer unto __________________________, _________________________ (_____) shares of the Common Stock of MedicaLogic, Inc., an Oregon corporation, standing in my name on the books of said corporation, represented by Certificate No. ___, and that I do hereby irrevocably constitute and appoint ____________________________ my true and lawful attorney to sell, assign, transfer, and set over all or any part of the said stock, and for that purpose to make and execute all necessary acts of assignment and transfer thereof, and to substitute one or more persons with like full power, hereby ratifying and confirming all that said attorney or substitute or substitutes shall lawfully do by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand as of this ____ day of _________, 1999. ----------------------------------------- MedicaLogic, Inc. Page: 1 STOCK OPTIONS GRANTED File: Granted FROM 1/1/93 TO 10/26/99 Date: 10/26/99 Option Type is equal to RSP Time: 1:34:46 PM STATUS - Fixed Vesting Restricted Stock Field, Guy Middleton, Blackford Watson, Thomas M. Anderson, Harvey J. Spina, Frank J. EX-10.8 6 EXHIBIT 10.8 MetLife Capital Loan and Security Agreement THIS LOAN AND SECURITY AGREEMENT entered into as of the 5th day of June, 1998, by and between MetLife Capital Corporation, a Delaware corporation, whose address is 10900 NE 4th Street, Suite 500, Bellevue, WA 98004 ("Lender") and MedicaLogic, Inc., an Oregon Corporation, whose address is 20500 NW Evergreen Parkway, Hillsboro, OR 97124 ("Borrower"). WHEREAS, Lender has agreed to make a commercial loan or loans to Borrower; and WHEREAS, as a condition to making the loans, and in order to secure the repayment thereof, Lender has required Borrower to execute and deliver to Lender this Loan and Security Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Borrower and Lender agree as follows: 1. Creation of Security Interest. As security for the due and punctual payment of any and all of the present and future obligations of the Borrower to Lender, whether direct or contingent or joint or several, Borrower hereby conveys, assigns and grants to Lender a continuing security interest in all of Borrower's rights, title and interests in and to the equipment described in the Supplemental Security Agreement(s) entered into pursuant to this Loan and Security Agreement from time to time ("Equipment") including all present and future additions, attachments and accessories thereto, all substitutions therefor and replacement thereof and all proceeds thereof, including all proceeds of insurance (such Equipment and property hereinafter called "Collateral"). 2. The Loans. (a) Subject to the terms and conditions of this Loan and Security Agreement, Lender agrees to make a loan or loans to Borrower. The maximum principal amount of any loan or loans to be made by Lender to Borrower shall be within Lender's discretion, subject to the exercise of Lender's reasonable business judgment, and shall be as stated in the loan commitment letter issued by Lender to Borrower, or in the event a commitment letter is not issued by Lender, in Lender's internal credit approval (each such loan or loans shall be referred to as the "Loan Amount"). (b) The Loan Amount shall be repaid by Borrower as a term loan or term loans ("Term Loan"). The Term Loan shall be evidenced by a promissory note or notes in the form attached hereto as Exhibit "A" ("Term Note"). The payment provisions of each Term Note shall be stated therein. (c) If requested by Borrower, and in accordance with the terms and conditions of Section 3 hereof, Lender shall make interim fundings to Borrower of a Term Loan as partial advances of the Loan Amount ("Interim Loans"). The Interim Loans shall either be for the payment of the acquisition cost of any items of Equipment delivered and accepted by Borrower prior to the expiration date of Lender's loan commitment to Borrower ("Commitment Expiration Date") or to fund progress payments to the vendor or manufacturer of the Equipment, if the making of progress payments was agreed to by Lender in its commitment or approval to make the loan or loans to Borrower. The Interim Loans shall be evidenced by promissory notes in the form attached hereto as Exhibit "B" ("Interim Note"). Interest on all Interim Loans shall be payable as provided therein. The principal amount due under the Interim Loans shall be due as provided in the Interim Notes, at which time, provided no Event of Default hereunder has occurred and is continuing or event which with the passing of time or giving of notice or both would become an Event of Default hereunder has occurred and is continuing, Lender shall consolidate all Interim Loans and convert them to a Term Loan evidenced by a Term Note or Notes. Whether or not a Term Loan is evidenced by one or more Term Notes shall be as agreed between Lender and Borrower, or in the absence of such an agreement, as decided by Lender, in the exercise of its reasonable business judgment. (d) In the event that the amount loaned pursuant to the Interim Loans is less than the Loan Amount, subject to Borrower's compliance with the terms and conditions of this Loan and Security Agreement (including the satisfaction of the conditions of borrowing set forth in Section 7 of this Loan and Security Agreement, including but not limited to providing Lender with a description of the items of Equipment), Lender shall disburse to Borrower the balance of the Loan Amount on the same date that the Interim Loans are converted into a term loan. 3. Method For Borrowing On Interim Loan. Borrower shall give Lender at least five (5) business days written notice of a request for the disbursement of an Interim Loan ("Request"), specifying the date on which the Interim Loan is to be disbursed. Such Request shall be in the form attached hereto as Exhibit "C". Such Request shall be accompanied by an original copy of the invoice or invoices to be paid from the Interim Loan. Such Request shall constitute a representation and warranty by the Borrower that (i) as of the date of the Request no Event of Default or event which with the passing of time or the giving of notice or both would constitute an Event of Default hereunder has occurred and is continuing and (ii) in the event items of Equipment have been delivered to the Borrower, Borrower has unconditionally accepted the Equipment from the vendor thereof. Subject to the conditions of this Loan and Security Agreement, Lender shall disburse the Interim Loan to the invoicing party, or if Borrower shall have paid the amount of such invoice, Lender shall reimburse Borrower, upon receipt of proof of payment from Borrower. 4. Cross Collateral/Cross Default. All Collateral shall secure the payment and performance of all of Borrower's liabilities and obligations to Lender hereunder and under any of the loan documents relating hereto including, but not limited to, all Interim Notes and all Term Notes (the Loan and Security Agreement, the Interim Notes, the Term Notes, the Supplemental Security Agreement(s) and all other loan documents may be referred to herein collectively as the "Loan Documents"). Lender's security interest in the Collateral shall not be terminated until and unless all of Borrower's obligations to Lender under any of the Loan Documents are fully paid and performed. The occurrence of an event of default under any other of the Loan Documents shall be deemed to be an Event of Default hereunder and an Event of Default hereunder shall be deemed to be an event of default under any other of the Loan Documents. 5. Representations And Warranties. Borrower hereby represents and warrants as follows: (a) Power and Authorization. Borrower has the full power and (corporate) authority to execute, deliver and perform Borrower's obligations under the Loan Documents. The execution and delivery of the Loan Documents have been authorized by all requisite corporate (or partnership) action on the part of Borrower. The execution, delivery and performance of the Loan Documents have not constituted and will not constitute a breach, default, or violation of or under Borrower's articles of incorporation, bylaws (partnership agreement), or any other agreement, indenture, contract, lease, law, order, decree, judgment, or injunction to which Borrower is a party or may be bound and have not resulted and will not result in the creation of any lien upon the Equipment pursuant to any agreement, indenture, lease, contract or other instrument to which Borrower is a party, except the lien created by this Loan and Security Agreement. (b) Existence. If Borrower is a corporation, Borrower (i) is duly incorporated, validly existing and in good standing under the laws of its state of incorporation, (ii) has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, and (iii) is duly qualified to transact business as a foreign corporation in each jurisdiction where the Equipment will be located and in the jurisdiction where its principal place of business is located. If Borrower is a partnership, Borrower (i) has been duly formed as a (limited or general) partnership under the laws of the state of its organization, (ii) is comprised of the general partner(s) listed on the Schedule of Partners attached to this Loan and Security Agreement, and (iii) is in good standing under the laws of the state of its formation. (c) Binding Effect. This Loan and Security Agreement constitutes the valid and binding agreement of the Borrower; the Interim Notes and the Term Note, when executed and delivered, will constitute the valid and binding obligations of the Borrower; and the Loan Documents are enforceable in accordance with their terms except as (i) the enforceability thereof may be limited by the bankruptcy laws, and (ii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. (d) Litigation. There is no action, suit or proceeding pending against, or to the knowledge of the Borrower, threatened against or affecting the Borrower, before any court or arbitrator or any governmental body, agency or official which has not been previously disclosed to the Lender in writing and in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, financial condition or results of operations of the Borrower or which would in any manner draw into question the validity of any of the Loan Documents. (e) Filing of Tax Returns. The Borrower has filed all tax returns required to have been filed and has paid all taxes shown to be due and payable on such returns, including interest and penalties, and all other taxes which are payable by it, to the extent the same have become due and payable. The Borrower knows of no proposed tax assessment against it and all tax liabilities of the Borrower are adequately provided for. (f) Title. The Borrower has or shall have at the time it executes the Term Note good and indefeasible title to the Collateral free and clear of all liens other than the Lender's lien. (g) Compliance with Law. The business and operations of the Borrower have been and are being conducted in accordance with all applicable laws, rules and regulations, other than violations which could not (either individually or collectively) have a material adverse effect on the financial condition or operations of the Borrower. (h) Full Disclosure. All documents, records, instruments, certificates, statements (including, but not by way of limitation, financial statements of Borrower) and information provided to Lender by Borrower in connection with this Loan and Security Agreement are true and accurate in all material respects and do not contain any untrue statement, or fail to contain any statement of a material fact necessary to make the statements contained herein or therein not misleading. There is no fact known to the Borrower that Borrower has not disclosed in writing which could materially and adversely affect the financial condition or operations of Borrower. (i) Security Interest. The security interest granted to Lender hereunder is a valid, first priority security interest in the Collateral and has been or promptly after the execution of the Supplemental Security Agreement describing the Collateral will be, perfected in accordance with the requirements of all states in which any item of the Collateral is located. (j) Personal Property. Under the laws of the state(s) in which the Collateral is to be located, the Collateral is deemed to consist solely of personal property. (k) Pollution and Environmental Control. Borrower has obtained all permits, licenses and other authorizations which are required under, and is in material compliance with, all federal, state, and local laws and regulations relating to pollution, reclamation, or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, or hazardous or toxic materials or wastes into air, water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants or hazardous or toxic materials or wastes. Borrower shall maintain all such permits, licenses, and authorizations current. 6. Covenants. Borrower hereby agrees and covenants as follows: (a) Payment. Borrower shall pay the indebtedness secured hereby as provided herein and in the Interim Notes and Term Notes. (b) Location of Collateral. Borrower will keep the Collateral located at the location or locations stated on the Supplemental Security Agreements, provided, however, that Borrower may change the location of the collateral with Lender's prior written consent. (c) No Liens. Except for the security interest granted hereby or under any other agreement under which Lender is the secured party, whether as mortgagee, beneficiary or otherwise, Borrower shall keep the Collateral free and clear of any security interest, lien or encumbrance of any kind and Borrower shall not sell, assign (by operation of law or otherwise) exchange or otherwise dispose of any of the Collateral. (d) Insurance. Borrower shall procure and continuously maintain and pay for (a) all risk physical damage and property insurance covering loss or damage to the equipment for not less than the full replacement value thereof naming Lender as loss payee and (b) bodily injury and property damage combined single limit liability insurance, all in such amounts and against such risks and hazards as are reasonably required by Lender, with insurance companies and pursuant to contracts or policies and with deductibles satisfactory to Lender. All contracts and policies shall include provisions for the protection of Lender notwithstanding any act or neglect of or breach or default by Borrower, shall provide for payment of insurance proceeds to Lender, shall provide that they may not be modified, terminated or cancelled unless Lender is given at least thirty (30) days' advance written notice thereof, and shall provide that the coverage is "primary coverage" for the protection of Borrower or Lender notwithstanding any other coverage carried by Lender protecting against similar risks. Borrower shall promptly notify any appropriate insurer and Lender of each and every occurrence, which may become the basis of a claim or cause of action against the insured and provide Lender with all data pertinent to such occurrence. Borrower shall furnish Lender with certificates of such insurance or copies of policies upon request and shall furnish Lender with renewal certificates not less than thirty (30) days prior to the renewal date. Proceeds of all insurance are payable first to Lender to the extent of its interest. (e) Financing Statements. At the request of Lender, Borrower will join Lender in executing one or more financing statements pursuant to the Uniform Commercial Code and other documents deemed necessary by Lender under applicable law to record or perfect its security interest in the Collateral, including continuation statements, in form satisfactory to Lender and will pay the cost of filing the same in all public offices wherever filing is deemed by Lender to be necessary or desirable. Borrower hereby authorizes Lender, in such jurisdictions where such action is authorized by law, to effect any such recordation or filing of financing statements or other documents without Borrower's signature thereto. (f) Change of Name or Address. Borrower will immediately notify Lender in writing of any change in its place of business or the adoption or change of any tradename or fictitious business name, and will upon request of Lender, execute any additional financing statements or other similar documents necessary to perfect or maintain its security interest. (g) Use of Equipment, Maintenance. Borrower will cause the Equipment to be used in a careful and proper manner, will comply with and conform to all governmental laws, rules and regulations relating thereto, and will cause the Equipment to be operated in accordance with the manufacturer's or supplier's instructions or manuals and only by competent and duly qualified personnel. Borrower will cause the Equipment to be kept and maintained in good repair, condition and working order and will furnish all parts, replacements, mechanisms, devices and servicing required therefor so that the value, condition and operating efficiency thereof will at all times be maintained and preserved, normal wear and tear excepted. All such repairs, parts, mechanisms, devices and replacements shall immediately, without further act, become part of the Equipment and subject to the security interest created by this Loan and Security Agreement. Borrower will not make any improvement, change, addition or alteration to the Equipment if such improvement, change, addition or alteration will impair the originally intended function or use of the Equipment or impair the value of the Equipment as it existed immediately prior to such improvement, change, addition or alteration. Any part added to the Equipment in connection with any improvement, change, addition or alteration shall immediately, without further act, become part of the Equipment and subject to the security interest created by this Loan and Security Agreement. (h) Inspection. Lender may at any reasonable time or times inspect the Equipment and may at any reasonable time or times inspect the books and records of Borrower. (i) Taxes. Borrower shall promptly pay, when due, all charges, fees, assessments and taxes (excluding all taxes measured by Lender's income) which may now or hereafter be imposed upon the ownership, leasing, possession, sale or use of the Collateral. (j) Performance by Lender. If Borrower fails to perform any agreement or obligation contained herein, Lender may itself perform, or cause the performance of such agreement or obligation. Borrower will pay, or reimburse Lender, on demand, for any and all fees, including attorneys' fees, costs and expenses of whatever kind or nature incurred by Lender in connection with (i) the creation, preservation and protection of Lender's security interest in the Collateral, including, without limitation, all fees and taxes in connection with the recording or filing of instruments and documents in public offices, (ii) payments or discharge of any taxes or liens upon or in respect of the Collateral, (iii) premiums for insurance with respect to the Equipment and (iv) this Loan and Security Agreement and with protecting, maintaining or preserving the Collateral and Lender's interests therein, whether through judicial proceedings or otherwise, or in connection with defending or prosecuting any actions, suits or proceedings arising out of or related to the Loan and Security Agreement and the Loan Documents or in connection with any debt restructuring, loan workout negotiations or bankruptcy or insolvency case or proceedings. All such amounts shall constitute obligations of Borrower secured by the Collateral. In the event that Borrower fails to perform any of its agreements contained herein, Borrower will, on demand, reimburse Lender for all such expenditures, together with interest thereon from the date of such expenditure until fully reimbursed at the rate of two percent (2%) per month on the outstanding balance of such expenditures or the highest rate permitted by law, whichever is less. (k) Power of Attorney. Borrower hereby irrevocably appoints Lender Borrower's attorney-in-fact, with full authority in the place and stead of Borrower and in the name of Borrower or otherwise, from time to time in the Lender's discretion, to take any action and to execute any instrument which Lender may deem necessary or advisable to accomplish the purposes of this Loan and Security Agreement, including, without limitation: (i) to obtain compromise and adjust insurance required to be paid to Lender; (ii) to ask, demand, collect, sue for, recover, receive, and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (iii) to receive, endorse, and collect any drafts or other instruments, documents, and chattel paper in connection with clause (i) or (ii) above; and (iv) to file any claims or take any action or institute any proceedings which Lender may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Lender with respect to any of the Collateral. (l) No Duties. The powers conferred on Lender hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Lender shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. (m) Financial Data. Borrower will furnish to Lender and will cause any guarantor of Borrower's obligations to furnish to Lender on request (i) annual balance sheet and profit and loss statements prepared in accordance with generally accepted accounting principles and practices consistently applied and, if Lender so requires, accompanied by the annual audit report of an independent certified public accountant reasonably acceptable to Lender, and (ii) all other financial information and reports that Lender may from time to time reasonably request, including, if Lender so requires, income tax returns of Borrower and any guarantor of Borrower's obligations hereunder. 7. Conditions of Borrowing. Lender shall not be obligated to make any loan hereunder unless: (a) The Interim Notes or Term Notes evidencing such loan shall have been duly executed and delivered to Lender; (b) Borrower shall have executed and delivered to Lender the Supplemental Security Agreement describing the Collateral and stating, except with respect to progress payment fundings, the location thereof; (c) Except with respect to progress payment fundings, Lender shall have received evidence (as described in Section 6d hereof) that insurance has been obtained in accordance with the provisions of this Loan and Security Agreement; (d) Lender shall have received any and all third party consents, waivers or releases deemed necessary or desirable by it in connection with the loan and the Collateral being financed, including, without limitation, Uniform Commercial Code lien releases and the consent and waiver, in form and substance satisfactory to Lender, of each and every realty owner, landlord and mortgagee holding an interest in or encumbrance on the real property where any of the Collateral is to be located; (e) All filings, recordings and other actions deemed necessary or desirable by Lender in order to establish, protect, preserve and perfect its security interest in the Collateral being financed by such loan as a valid perfected first priority security interest shall have been duly effected, including, without limitation, the filing of financing statements and the recordation of landlord (owners) and/or mortgagee waivers or disclaimers, all in form and substance satisfactory to Lender, and all fees, taxes and other charges relating to such filings and recordings shall have been paid by Borrower. (f) The representations and warranties contained in this Loan and Security Agreement shall be true and correct in all respects on and as of the date of the making of any loan hereunder with the same effect as the date of the making of any loan hereunder with the same effect as if made on and as of such date; (g) In the sole judgment of Lender, there shall have been no material adverse change in the financial condition, business or operations of Borrower from the earliest date of any financial statement, credit report, business report or similar document submitted to Lender for its review; (h) All Loan Documents shall be satisfactory to Lender's attorneys; and (i) Lender shall have received, in form and substance satisfactory to Lender, such other documents as Lender shall require including, but not limited to a Request, proof of payment, vendor invoices and certificates of authority and incumbency. 8. Default. The occurrence of any of the following events, following the giving of any required notice and/or the expiration of any applicable period of grace, shall constitute an event of default ("Event of Default") hereunder: (a) Borrower's default in payment of any installment of the principal of or interest on any Interim Note or Term Note when and after the same shall become due and payable, whether at the due date thereof or by acceleration or otherwise, which default shall continue unremedied for ten (10) days; or (b) The failure by Borrower to make payment of any other amount payable hereunder or under any Interim Note or Term Note, and the continuance of such failure for more than ten (10) days after written notice thereof by Lender to Borrower; or (c) The failure by Borrower to perform or observe any covenant, condition, obligation or agreement to be performed or observed by it hereunder, which failure shall continue unremedied for thirty (30) days after written notice thereof by Lender to Borrower; or (d) The occurrence of a default described in Section 4 hereof; or (e) Any warranty, representation or statement made or furnished with respect to the Borrower or the Collateral to Lender by or on behalf of Borrower, in connection with this Loan and Security Agreement, or the indebtedness secured hereby, shall prove to have been false in any adverse, material respect when made or furnished; or (f) Borrower shall become insolvent or bankrupt or make an assignment for the benefit of creditors or consent to the appointment of a trustee or receiver; or a trustee or a receiver shall be appointed for Borrower or for a substantial part of its property without its consent and shall not be dismissed for a period of sixty (60) days; or bankruptcy, reorganization, liquidation, insolvency or dissolution proceedings shall be instituted by or against Borrower and, if instituted against Borrower, shall be consented to or be pending and not dismissed for a period of sixty (60) days; or any execution or writ of process shall be issued under any action or proceeding against Borrower in such capacity whereby any of the Collateral may be taken or restrained; Borrower shall cease doing business as a going concern; or, without the prior written consent of Lender, Borrower shall sell, transfer or dispose of all or substantially all of its assets or property; or (g) The liquidation, merger, consolidation, reorganization, conversion to an "S" status or dissolution, if Borrower is a corporation or partnership, of Borrower, if in Lender's reasonable opinion, such act shall materially and adversely affect Borrower's ability to perform under any of the Loan Documents; or (h) Any item of Collateral is seized or levied on under legal or governmental process or for any reason Lender deems itself insecure. Lender shall be entitled to deem itself insecure when some event occurs, fails to occur or is threatened or some objective condition exists or is threatened which significantly impairs the prospects that any of Borrower's obligations to Lender will be paid when due, which significantly impairs the value of the Collateral to Lender or which significantly affects the financial or business condition of Borrower. The occurrence of an Event of Default shall terminate any commitment or obligation by Lender to make any of the loans contemplated by this Loan and Security Agreement. 9. Remedies Upon Default. Upon the occurrence of an Event of Default hereunder, Lender may, at its option, do any one or more of the following: (a) Declare all obligations of Borrower to Lender to be immediately due and payable, whereupon all unpaid principal of and interest on said indebtedness and other amounts declared due and payable shall be and become immediately due and payable; (b) Take possession of all or any of the Collateral and exclude therefrom Borrower and all others claiming under Borrower, and thereafter hold, store, use, operate, manage, maintain and control, make repairs, replacements, alterations, additions and improvements to and exercise all rights and powers of Borrower in respect to the Collateral or any part thereof. In the event Lender demands, or attempts to take possession of the Collateral in the exercise of any rights under this Loan and Security Agreement, Borrower promises and agrees to promptly turn over and deliver complete possession thereof to Lender; (c) Require Borrower to assemble the Collateral, or any portion thereof, at a place designated by Lender and reasonably convenient to both parties, and promptly to deliver such Collateral to Lender, or an agent or representative designated by it; (d) Sell, lease or otherwise dispose of the Collateral at public or private sale, without having the Collateral at the place of sale, and upon terms and in such manner as Lender may determine (and Lender may be a purchaser at any sale); and (e) Exercise any remedies of a secured party under the Uniform Commercial Code as adopted in the state where the Collateral is located or any other applicable law. Except as to portions of the Collateral which are perishable or threaten to decline speedily in value or are of a type customarily sold on a recognized market, Lender shall give Borrower at least ten (10) days' prior written notice of the time and place of any public or private sale of the Collateral or other intended disposition thereof to be made. Such notice may be mailed to Borrower at the address set forth in the first paragraph of this Loan and Security Agreement. Borrower hereby specifically agrees (to the extent that applicable law and public policy allows it to effectively do so) that any public or private sale held in accordance with the terms of this Loan and Security Agreement shall, for the purpose of the Uniform Commercial Code as adopted in the state where the Collateral is located and for all other purposes, be deemed to have been conducted in a commercially reasonable manner and in good faith. The proceeds of any sale under Section 9(d) shall be applied as follows: (i) To the repayment of the costs and expenses of retaking, holding and preparing for the sale and the selling of the Collateral (including legal expenses and attorneys' fees) and the discharge of all assessments, encumbrances, charges or liens, if any, on the Collateral prior to the lien hereof (except any taxes, assessments, encumbrances, charges or liens subject to which such sale shall have been made); (ii) To the payment of the whole amount then due and unpaid of the indebtedness of Borrower to Lender; (iii) To the payment of other amounts then secured hereunder; and (iv) The surplus, if any, shall be paid to the Borrower or to whomsoever may be lawfully entitled to receive the same. Lender shall have the right to enforce one or more remedies hereunder, successively or concurrently, and such action shall not operate to estop or prevent Lender from pursuing any further remedy which it may have, and any repossession or retaking or sale of the Collateral pursuant to the terms hereof shall not operate to release Borrower until full payment of any deficiency has been made in cash. 10. Limitation on Interest: It is the intent of the parties to this Loan and Security Agreement to contract in strict compliance with applicable usury laws from time to time in effect. In furtherance thereof, the parties stipulate and agree that none of the terms and provisions contained in the Loan Documents shall ever be construed to create a contract to pay for the use, forbearance or detention of money at a rate in excess of the maximum interest rate permitted to be charged by applicable law from time to time in effect. 11. Personal Property/Tags. No item of Equipment will be attached or affixed to realty or any building without Lender's prior knowledge and written consent and waiver of the landlord and the mortgagee, if any, of the real property. If so requested by Lender, Borrower will affix tags supplied by Lender, reflecting Lender's security interest in the Equipment. 12. Loss and Damage. Borrower shall bear the risk of damage, loss, theft, or destruction, partial or complete of the Equipment, whether or not such loss or damage is covered by insurance, except that while Borrower is not in default, Lender agrees to apply toward payment of obligations of Borrower insurance proceeds payable to Lender by reason of such damage, loss, theft, or destruction. In the event of any damage, loss, theft, or destruction, partial or complete, of any item of Equipment, Borrower shall promptly notify Lender in writing and at the option of Lender (a) repair or restore the Equipment to good condition and working order, or (b) replace the Equipment with similar equipment in good repair, condition and working order, or (c) pay Lender, in cash, an amount equal to the unamortized equipment cost for the item or if the Equipment was not purchased with the loan proceeds, the pro rata portion of the outstanding principal balance due under the Interim Note or Term Note, as the case may be, and all other amounts relating to that item of Equipment then due and owing hereunder, and upon payment of that amount, Lender's lien shall be terminated with respect to that item of Equipment only, and Lender will release its interest in that item of Equipment. 13. Assignment. Borrower may not assign or transfer any rights under this Loan and Security Agreement or to the Collateral without Lender's prior written consent. 14. Indemnification. Borrower shall indemnify and hold harmless Lender from and against any and all claims, losses, liabilities, causes of action, costs and expenses (including the fees of Lender's attorneys) ("Claims") in any way relating to or arising out of this Loan and Security Agreement, the other Loan Documents or the Collateral, except for any Claims resulting solely and directly from Lender's gross negligence or willful misconduct. 15. Notices. Whenever Borrower or Lender shall desire to give or serve any notice, demand, request or other communication with respect to this Loan and Security Agreement, each such notice, demand, request or communication shall be in writing and shall be effective only if the same is physically delivered or is by certified mail, postage prepaid, return receipt requested, or by overnight courier, postage prepaid, mailed to the parties at the addresses set forth in the first paragraph of this Loan and Security Agreement, with a copy to Lender's Vice President of Credit. Any party hereto may change its address for such notices by delivering or mailing to the other parties hereto, as aforesaid, a notice of such change. 16. No Waiver by Lender. By exercising or failing to exercise any of its rights, options or elections hereunder, Lender shall not be deemed to have waived any breach or default on the part of Borrower or to have released Borrower from any of the obligations secured hereby, unless such waiver or release is in writing and is signed by Lender. In addition, the waiver by Lender of any breach hereof for default in payment of an indebtedness secured hereby shall not be deemed to constitute a waiver of any succeeding breach or default. 17. Further Agreements. From time to time, Borrower will execute such further instruments as Lender may reasonably require, in order to protect, preserve, and maintain the security interest granted hereby. 18. Binding upon Successors. All agreements, covenants, conditions and provisions of this Loan and Security Agreement shall apply to and bind the successors and assigns of all parties hereto. 19. Governing Laws. This Loan and Security Agreement shall be governed by the laws of the State of Washington. 20. Amendment. This Loan and Security Agreement can be modified or rescinded only by a writing expressly referring to this Loan and Security Agreement, signed by both of the parties hereto. 21. Invalidity of Provisions. Every provision of this Loan and Security Agreement is intended to be severable. In the event that any term or provision hereof is declared by a court to be illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the balance of the terms and provisions hereof, which terms and provisions shall remain binding and enforceable, then to the extent possible all of the other provisions shall nonetheless remain in full force and effect. IN WITNESS WHEREOF, Borrower and Lender have duly executed this Loan and Security Agreement the day and year first above written. Lender: MetLife Capital Corporation Borrower: MedicaLogic, Inc. ---------------------------- ---------------------------- By: MITCHELL J. STEVENS By: GUY E. FIELDS -------------------------------- ---------------------------------- (Print Name): Mitchell J. Stevens (Print Name): Guy E. Fields ---------------------- ------------------------ Title: Vice President Title: Vice President of Finance ----------------------------- ------------------------------- Social Security Number: _______________ (If Borrower is an individual) Federal Tax Identification Number: 930890696 ----------------------------- EXHIBIT "A" No. ______________________ TERM PROMISSORY NOTE $ ______________________ ___________________, 19 _____ FOR VALUE RECEIVED, the undersigned, _____________________ ("Maker"), promises to pay to the order of MetLife Capital Corporation ("Payee"), at its office at 10900 N.E. 4th St., Suite 500, Box C - 97550, Bellevue, Washington 98009, the principal sum of ($_____________) Dollars together with interest on unpaid principal from the date of disbursement of such principal amount until payment in full at a rate of _________________ percent (_______%) per annum ("Rate") computed on the basis of a 360 day year of twelve consecutive thirty day months. Interest hereunder shall be paid on the unpaid principal, together with principal, in ____________ (___) installments of _______________________________ ($________) Dollars commencing on _______________ and monthly thereafter until __________________________ on which date the entire balance of principal and interest unpaid shall be due and payable. It is agreed that each installment, when paid, shall be applied by the holder hereof, first so much as shall be required to the payment of interest accrued as specified hereto, and the balance thereof to the repayment of the principal sum. Except as may be otherwise expressly provided herein, this Note may not be prepaid in whole or in part, except with the prior written consent of Payee. Maker shall have the privilege of prepaying all (but not part) of the then outstanding balance under this Note on ______________ or on any installment due date thereafter, subject to giving thirty (30) days prior written notice to Payee specifying the date of prepayment and further subject to payment of a prepayment premium equal to the amount, if any, required to offset the adverse impact to Payee of any decline in interest rates. The prepayment premium is determined by (i) calculating the decrease, expressed in basis points (but not less than zero) in the current weekly average yield for ___________ (____) year U.S. Treasury Constant Maturities as published in Federal Reserve Statistical Release H.15(519) (the "Index") from the weekly average yield of ____________ as of _________________________ to the Friday (or, if Friday is not a business day, the last business day) of the week immediately preceding the prepayment date (ii) dividing the difference by 100, (iii) multiplying the result by the applicable "Premium Factor" set forth below, and (iv) multiplying the product by the principal to be prepaid. Any prepayment shall be applied first to the prepayment premium, if any, next to accrued interest and late charges (if any), and thereafter to the principal then outstanding. The Premium Factor shall be the amount shown on the following chart for the month in which prepayment occurs. Number of Months Remaining (Years) Premium Factor 18 - 13 (2) 12 - 1 (1) In the event the Federal Reserve Board ceases to publish Statistical Release H.15(519), then the decrease in _____________ (____) - Year U.S. Treasury Constant Maturities will be determined from another source designated by Payee. If Maker shall have given to Payee notice of Maker's intention to so prepay, Maker shall not then be entitled to withdraw such notice, and the indebtedness proposed to be prepaid in such notice together with the aforesaid prepayment fee, if applicable, shall be due and payable upon the date specified for such prepayment in such notice. Upon the occurrence of an Event of Default and acceleration of payment of indebtedness evidenced hereby during a period open to prepayment, Maker shall pay to Payee, in addition to any and all other sums due and payable hereunder, as liquidated damages for the loss of Payee's investment and not as a penalty, an amount equal to the prepayment fee which would have been payable hereunder on such date of acceleration in the event of a voluntary prepayment. Maker and Payee agree that the foregoing amounts do not constitute penalties but rather constitute reasonable calculations of the investment loss that would be sustained by Payee in the event of such prepayment. It is specifically understood and agreed by Maker that, in the event of a default under this Note or under any instrument securing the Note, a tender of payment of the unpaid principal and accrued interest then outstanding shall be deemed a prepayment, and, accordingly, said tender must include the premium herein above required, or if said tender is made prior to the time this privilege is operative, then said tender must include a premium equal to six (6) months' interest at the Rate computed on the principal amount so tendered. It is further understood and agreed by Maker that Payee shall not be obligated to accept said tender, and said tender shall for all purposes be deemed ineffectual and deficient, unless said tender shall include the premium herein above required. In the event that Payee does not receive any payment on the date due, Maker will pay Payee a late charge of five percent (5%) of the payment outstanding together with the payment and, provided said sum is received within ten (10) days of the date due, Payee agrees not to demand immediate payment of the whole sum of principal and interest as otherwise permitted herein. If, from any circumstances whatsoever, payment of any obligation due under this Note at the time such performance shall be due shall involve exceeding the maximum amount currently prescribed by any applicable usury statute or any other applicable law, then such obligation shall be reduced to such maximum amount, so that in no event shall any payment be possible under this Note, or under any other instrument evidencing or securing the indebtedness evidenced hereby, that is in excess of such maximum amount. In the event that an Event of Default shall occur under the Loan and Security Agreement (as hereinafter defined) or any other instrument now or hereafter securing repayment hereof, following any required notice and/or the expiration of any applicable period of grace, then, and in such event, the principal indebtedness evidenced hereby, and any other sums advanced hereunder, together with all unpaid interest accrued thereon, shall, at the option of Payee, at once become due and payable and may be collected forthwith, regardless of the stipulated date of maturity. TIME IS OF THE ESSENCE WITH RESPECT TO THIS NOTE. Interest shall accrue on the outstanding principal for so long as such default continues, regardless of whether or not there has been an acceleration of the indebtedness evidenced hereby as set forth herein, at the rate equal to the lesser of fifteen percent (15%) per annum or the maximum rate allowable under law. All such interest shall be paid at the time of and as a condition precedent to the curing of any such default should Payee, at its sole option, allow such default to be cured. In the event this Note, or any part thereof, is collected by or through an attorney-at-law, Maker agrees to pay all costs of collection including, but not limited to, reasonable attorneys' fees, whether or not suit is filed. This Note is one of the notes referred to in and is secured by the Loan and Security Agreement dated June 5, 1998 between Maker and Payee. The terms of the Loan and Security Agreement are incorporated herein by reference. Maker waives any right of exemption and waives presentment, protest and demand and notice of protest, demand and of dishonor and nonpayment of this Note, and consents that any holder hereof shall have the right, without notice, to grant any extension or extensions of time for payment of this Note or any part thereof or any other indulgences or forbearances whatsoever, or may release any of the security for this Note without in any way affecting the liability of any other party for the payment of this Note. The due payment and performance of Maker's obligations hereunder shall be without regard to any counterclaim, right of offset, or any other counterclaim whatsoever which Maker may have against Payee and without regard to any other obligations of any nature whatsoever which Payee may have to Maker, and no such counterclaim or offset shall be asserted by Maker in any action, suit or proceeding instituted by Payee for payment of Maker's obligations hereunder. This Note and the Loan and Security Agreement shall be governed by and construed in accordance with the laws of the State of Washington. Maker acknowledges that there is no presumption that the value of the property securing this Note is equal to the face amount of the Note, and that a deficiency judgment may be necessary in proceedings taken for enforcement hereof. No amendment to this Note shall be binding upon Payee unless it is in writing and duly signed by Payee. IN WITNESS WHEREOF, the Maker has caused these presents to be duly signed the date first above written. Borrower: ___________________________ By: ___________________________ Witness: ___________________________ (Print Name) ___________________________ Title: ___________________________ 2 EXHIBIT "B" No. ______________________ INTERIM PROMISSORY NOTE NO. ONE $ ______________________ ___________________, 19 _____ FOR VALUE RECEIVED, the undersigned, _____________________ ("Maker"), promises to pay to the order of MetLife Capital Corporation ("Payee"), at its office at 10900 N.E. 4th St., Suite 500, ___________, Bellevue, Washington 98004, the principal sum of ____________________________________ ($_____________) together with interest on unpaid principal from the date of disbursement of such principal amount until payment in full at a rate per annum equal to ________ percent (_______%) (the "Reference Rate"). The Reference Rate shall be adjusted as of the date of any announced change thereto. Interest shall be computed on the basis of a 360 day year and actual days elapsed. Interest shall accrue on the unpaid principal, commencing on the date that funds are advanced to Maker by Payee hereunder and shall be payable on the fifteenth (15) day of each month until _______________ on which date the entire balance of principal and interest unpaid shall be due and payable. In the event that Payee does not receive any monthly payment on the date due, Maker will pay Payee a late charge of five percent (5%) of the monthly payment outstanding together with the monthly payment and, provided said sum is received within ten (10) days of the date due. Payee agrees not to demand immediate payment of the whole sum of principal and interest as otherwise permitted herein. If, from any circumstances whatsoever, payment of any obligation due under this Note at the time such performance shall be due shall involve exceeding the maximum amount currently prescribed by any applicable usury statute or any other applicable law, then such obligation shall be reduced to such maximum amount, so that in no event shall any payment be possible under this Note, or under any other instrument evidencing or securing the indebtedness evidenced hereby, that is in excess of such maximum amount. In the event that an Event of Default shall occur under the Loan and Security Agreement (as hereinafter defined) or any other instrument now or hereafter securing repayment hereof, following any required notice and/or the expiration of any applicable period of grace, then, and in such event, the principal indebtedness evidenced hereby, and any other sums advanced hereunder, together with all unpaid interest accrued thereon, shall, at the option of Payee, at once become due and payable and may be collected forthwith, regardless of the stipulated date of maturity. TIME IS OF THE ESSENCE WITH RESPECT TO THIS NOTE. Interest shall accrue on the outstanding principal for so long as such default continues, regardless of whether or not there has been an acceleration of the indebtedness evidenced hereby as set forth herein, at the rate equal to the lesser of fifteen percent (15%) per annum or the maximum rate allowable under law. All such interest shall be paid at the time of and as a condition precedent to the curing of any such default should Payee, at its sole option, allow such default to be cured. In the event this Note, or any part thereof, is collected by or through an attorney-at-law, Maker agrees to pay all costs of collection including, but not limited to, reasonable attorneys' fees, whether or not suit is filed. This Interim Note is one of the notes referred to in and is secured by the Loan and Security Agreement dated ___________________ between Maker and Payee. The terms of the Loan and Security Agreement are incorporated herein by reference. Maker waives any right of exemption and waives presentment, protest and demand and notice of protest, demand and of dishonor and nonpayment of this Interim Note, and consents that any holder hereof shall have the right, without notice, to grant any extension or extensions of time for payment of this Interim Note or any part thereof or any other indulgences or forbearances whatsoever, or may release any of the security for this Interim Note without in any way affecting the liability of any other party for the payment of this Interim Note. The due payment and performance of Maker's obligations hereunder shall be without regard to any counterclaim, right of offset, or any other counterclaim whatsoever which Maker may have against Payee and without regard to any other obligations of any nature whatsoever which Payee may have to Maker, and no such counterclaim or offset shall be asserted by Maker in any action, suit or proceeding instituted by Payee for payment of Maker's obligations hereunder. This Interim Note and the Loan and Security Agreement shall be governed by and construed in accordance with the laws of the State of Washington. Maker acknowledges that there is no presumption that the value of the property securing this Interim Note is equal to the face amount of the Interim Note, and that a deficiency judgment may be necessary in proceedings taken for enforcement hereof. No amendment to this Interim Note shall be binding upon Payee unless it is in writing and duly signed by Payee. IN WITNESS WHEREOF, the Maker has caused these presents to be duly signed the date first above written. Maker: ___________________________ By: ___________________________ (Print Name) ___________________________ Title: ___________________________ Address: ___________________________ ___________________________ EXHIBIT "C" LOAN # REQUEST FOR ADVANCE OF NO. LOAN PROCEEDS In accordance with the Loan and Security Agreement dated ______________, the undersigned, as Borrower, hereby requests Lender to make a disbursement of the Loan Amount in the amount of $___________. To the extent that any item of Equipment has been delivered to Borrower, Borrower represents and warrants that it has inspected and accepted such item of Equipment and that such item has been duly assembled and is in good working order. [ ] The undersigned further authorizes and directs Lender to disburse the proceeds of this Loan in payment of the following invoices, copies of which are attached herein. or [ ] The undersigned has previously paid the following invoices and requests MetLife Capital Corporation to disburse the proceeds of this Loan to the undersigned. Copies of the invoices and proof of such payment are attached hereto: VENDOR INVOICE NO. AMOUNT - -------------------------------------------------------------------------------- ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ TOTAL ___________________________ DATE: _____________________________ (Borrower): _____________________________ By: _____________________________ (Print Name): _____________________________ Title: _____________________________ EX-10.8-1 7 EXHIBIT 10.8-1 Standard Form of INDUSTRIAL/BUSINESS PARK LEASE Developed by PORTLAND METROPOLITAN ASSOCIATION OF BUILDING OWNERS AND MANAGERS INDUSTRIAL/BUSINESS PARK LEASE (NNN) 1.1 BASIC LEASE TERMS. a. REFERENCE DATE: January 15, 1997 b. TENANT: MedicaLogic, Inc., an Oregon corporation 20500 NW Evergreen Parkway Address (Leased Premises): Hillsboro, OR 97124 Address (For Notices): MedicaLogic, Inc. 15400 NW Greenbrier Parkway, Suite 400 Beaverton, OR 97006 c. LANDLORD: Evergreen Corporate Center LLC, an Oregon limited liability company Address (For Notices): 111 SW Columbia Street, Suite 1380 Portland, OR 97201 d. TENANT'S USE OF PREMISES: General Office Purposes e. PREMISES AREA: Approximately 75,010 Square Feet in Evergreen Corporate Center RIDER NO. 1 f. RIDER NO. 2 g. h. TERM OF LEASE: Anticipated Commencement Date: December 15, 1997 Expiration: December 14, 2007 RIDER NO. 3 Number of Months: 120 i. BASE MONTHLY RENT: j. Time Period Base Monthly Rent ----------- ----------------- Commencement Date through 12th month $60,000 13th month through 24th month $67,500 25th month through 60th month $78,750 61st month through 120th month $87,000 k. ANNUAL EXPENSES: Note: See Section 4.3 below for the method of computing Expenses. The number set forth above for Annual Expenses is only an estimate. The actual Annual Expenses shall be determined pursuant to Section 4.3c below. l. PREPAID RENT: $60,000 m. TOTAL SECURITY DEPOSIT: $87,000 n. BROKER(S): Melvin Mark Brokerage Company, representing Landlord, and Norris, Beggs & Simpson, representing Tenant 2.1 PREMISES. Landlord leases to Tenant the premises described in Section 1.1 and in Exhibit A (the "Premises"), located in the project described on Exhibit B (the "Project"). Landlord shall modify Tenant's percentage of the Project as set forth in Section 1.1 if the Project size is increased or decreased, as the case may be, through the development of additional property or the deletion of a portion of the Project. RIDER NO. 2 Landlord shall give Tenant notice when the Premises are ready for occupancy. RIDER NO. 4 Within five (5) days after Tenant receives Landlord's notice that the Premises are ready for occupancy, Landlord and Tenant shall inspect the Premises and prepare a "punchlist" of items to be completed. The existence of "punchlist" items shall not postpone the commencement date of this Lease Agreement. By taking occupancy of the Premises, Tenant acknowledges that it has examined the Premises and accepts the Premise in their then present condition, subject only to any work which Landlord has agreed to perform as set forth on the "punchlist." RIDER NO. 5 (1) Landlord shall deliver the Premises to Tenant clean and free of debris on the commencement date and Landlord warrants to Tenant that the Premises shall be in good operating condition on the commencement date. In the event that it is determined that this warranty has been violated, then it shall be the obligation of Landlord, after receipt of written notice from Tenant setting Page 1 Please Initial 3/95 MM KN MKL GEF -------- -------- Landlord Tenant forth with specificity the nature of the violation, to promptly, at Landlord's sole cost, rectify such violation. Tenant's failure to give such written notice to Landlord with sixty (60) days after the commencement date shall be deemed that Landlord has complied with all of Landlord's obligations hereunder. (2) Landlord warrants to Tenant that the Premises, in the state existing on the date that the term commences, but without regard to the use for which Tenant will occupy the Premises, does not violate any covenants or restrictions of record, or any applicable Laws (as hereinafter defined) in effect on RIDER NO. 6. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Landlord, after written notice from Tenant, to promptly, at Landlord's sole cost and expense, rectify any such violation. In the event Tenant does not give to Landlord written notice of the violation of this warranty within 180 days from the date the term commences, the correction of same shall be the obligation of the Tenant at Tenant's sole cost. RIDER NO. 7 3.1 TERM The term of this Lease is for the period set forth in Section 1.1, commencing on the date in Section 1.1. If Landlord, for any reason, cannot deliver possession of the Premises to Tenant upon the scheduled commencement date set forth in Section 1.1, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting from such delay. In that event, however, Landlord shall deliver possession of the Premises as soon as practicable and the commencement date shall be the date of such delivery with the term of the Lease remaining unchanged, and all other terms and conditions of this Lease remaining in full force and effect. However, if Landlord is delayed in delivering possession to Tenant for any reason attributable to Tenant, this Lease (including the obligation to pay all rents) shall commence RIDER NO. 8 4.1 RENT Base Monthly Rent. Tenant shall pay to Landlord base monthly rent in the initial amount in Section 1.1 which shall be payable monthly in advance on the first day of each and every calendar month ("Base Monthly Rent"); provided, however, the Base Monthly Rent for the first month of the term shall be paid upon the Commencement Date. All charges and sums due from Tenant to Landlord hereunder shall be deemed rent. 4.2 RENT ADJUSTMENT If Section 1.1j is applicable, Base Monthly Rent shall be increased periodically to the amounts and at the times set forth in Section 1.1j. 4.3 EXPENSES The purpose of this Section is to ensure that Tenant bears a share of all Expenses reasonably related to the use, maintenance, ownership, repair or replacement, and insurance of the Project. Accordingly, beginning on the commencement date, Tenant shall commence the payment of Expenses. (1) Expenses Defined The term "Expenses" shall mean all costs and expenses reasonably incurred by Landlord with respect to the ownership, operation, maintenance, repair or replacement, and insurance of the Project, including without limitation, the following costs: a. All supplies, materials, labor, equipment, and utilities used in or related to the operation and maintenance of the Project; b. All management, janitorial, legal, accounting, insurance, and service agreement costs related to the Project; RIDER NO. 9 c. All maintenance, replacement and repair costs relating to the areas within or around the Project, including, without limitation, air conditioning systems, sidewalks, landscaping, service areas, driveways, parking areas (including resurfacing and restriping parking areas) walkways, building exteriors (including painting), signs and directories, repairs and replacing roofs, walls and other structural elements of the Premises, the Building and the Project. RIDER NO. 10 d. Amortization (along with reasonable financing charges) of capital improvements over the useful life of such capital improvements made to the Project which may be required by any government authority or which will improve the operating efficiency of the Project e. All Real Property Taxes, which shall mean and include all taxes, assessments (general and special) and other impositions or charges which may be taxed, charged, levied, assessed or imposed upon all or any portion of or in relation to the Project or any portion thereof, any leasehold estate in the Premises or measured by rent from the Premises, including any increase caused by the transfer, sale or encumbrance of the Project or any portion thereof. "Real Property Taxes" shall also include any form of assessment, levy, penalty, charge or tax (other than estate, inheritance, net income or franchise taxes) imposed by any authority having a direct or indirect power to tax or charge, including, without limitation, any city, county, state, federal or any improvement or other district, whether such tax is (1) determined by the area of the Project or the rent or other sums payable under this lease; (2) upon or with respect to any legal or equitable interest of Landlord in the Project or any part thereof; (3) upon this transaction or any document to which Tenant is a party creating a transfer in any interest in the Project; (4) in lieu of or as a direct substitute in whole or in part of or in addition to any real property taxes on the Project; (5) based on any parking spaces or parking facilities provided in the Project; (6) in consideration for services, such as police protection, fire protection, street, sidewalk and roadway maintenance, refuse removal or other services that may be provided by any governmental or quasi-governmental agency from time to time which were formerly provided without charge or with less charge to property owners or occupants. "Real Property Taxes" shall also include all assessments under recorded covenants or master plans and/or by owner's associations. RIDER NO. 11 RIDER NO. 12 (2) Annual Estimate of Expenses On the commencement date or as soon thereafter as practical, Landlord shall estimate Tenant's portion of Expenses for the remainder of the calendar year based on the Tenant's portion of the Project Area set forth in Section 1.1. At the commencement of each calendar year thereafter or as soon thereafter as practical, Landlord shall estimate Tenant's portion of Expenses for the coming year based on the Tenant's portion of the Project Area set forth in Section 1.1. Page 2 Please Initial 3/95 MM KN MKL GEF -------- -------- Landlord Tenant (3) Monthly Payment of Expenses RIDER NO. 13 As soon as practical following each calendar year, Landlord shall prepare an accounting of actual Expenses incurred during the prior calendar year and such accounting (the "Notice") shall reflect Tenant's share of Expenses. If the additional rent paid by Tenant under this Section during the preceding calendar year was less than the actual amount of Tenant's share of Expenses, Landlord shall so notify Tenant and Tenant shall pay such amount to Landlord within 30 days of receipt of such Notice. Such amount shall be deemed to have accrued during the prior calendar year and shall be due and payable from Tenant even though the term of this Lease has expired or this Lease has been terminated prior to Tenant's receipt of this Notice. Tenant shall have RIDER NO. 13a contest the amount due; failure to so notify Landlord shall represent final determination of Tenant's share of expenses. If Tenant's payments were greater than the actual amount, then such overpayment shall be credited by Landlord to all present rent due under this Section or if this Lease has terminated, said amount shall be paid directly to Tenant. RIDER NO. 14 (4) Rent Without Offset and Late Charge All rent shall be paid by Tenant to Landlord monthly in advance on the first day of every calendar month, at the address shown in Section 1.1, or such other place as Landlord may designate in writing from time to time. All rent shall be paid without prior demand or notice and without any deduction or offset whatsoever. All rent shall be paid in lawful currency of the United States of America. All rent due for any partial month shall be prorated at the rate of 1/30th of the total monthly rent per day. Tenant acknowledges that late payment by Tenant to Landlord of any rent or other sums due under this Lease will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impracticable to ascertain. Such costs include, without limitation, processing and accounting charges and late charges that may be imposed on Landlord by the terms of any encumbrance or note secured by the Premises. Therefore, if any rent or other sum due from Tenant is not received RIDER NO. 15 due, Tenant shall pay to Landlord an additional sum equal to 5% of such overdue payment. Landlord and Tenant hereby agree that such late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of any such late payment and that the late charge is in addition to any and all remedies available to the Landlord and that the assessment and/or collection of the late charge shall not be deemed a waiver of any default. Additionally, all such delinquent rent or other sums, plus this late charge, shall bear interest at the prime rate of Key Bank of Oregon or its successor, plus 2%, on a fully floating basis (herein the "Default Rate"), from the date first due until the date paid in full. Any payments of any kind returned for insufficient funds will be subject to an additional handling charge of $25.00, and thereafter, Landlord may require Tenant to pay all future payments of rent or other sums due by money order or cashier's check. 5.1 PREPAID RENT On the Commencement Date, Tenant shall pay to Landlord the prepaid rent set forth in Section 1.1, and if Tenant is not in default of any provisions of this Lease, such prepaid rent shall be applied toward the Base Monthly Rent due for the first month of the term (or the first month following any Base Monthly Rent abatement period, if applicable). Upon a default by Tenant prior to such application, Landlord shall have the right, without waiver of the default or prejudice to other remedies, to use the prepaid rent or any of it to cure the default or to compensate Landlord for all or any damages resulting from the default. Landlord's obligations with respect to the prepaid rent are those of a debtor and not of a trustee, and landlord can commingle the prepaid rent with Landlord's general funds. Landlord shall not be required to pay Tenant interest on the prepaid rent. Landlord shall be entitled to immediately endorse and cash Tenant's prepaid rent; however, such endorsement and cashing shall not constitute Landlord's acceptance of this Lease. In the event Landlord does not accept this Lease, Landlord shall return said prepaid rent. 6.1 DEPOSIT Upon execution of this Lease, Tenant shall deposit the security deposit set forth in Section 1.1 with Landlord as security for the performance by Tenant of the provisions of this Lease. Upon a default by Tenant, Landlord shall have the right, without waiver of the default or prejudice to other remedies, to use the security deposit or any portion of it to cure the default or to compensate Landlord for any damages resulting from Tenant's default. Upon demand, Tenant shall immediately pay to Landlord a sum equal to the portion of the security deposit expended or applied by Landlord to maintain the security deposit in the amount initially deposited with Landlord. In no event will Tenant have the right to apply any part of the security deposit to any rent or other sums due under this Lease. If Tenant is not in default at the expiration or termination of this Lease, Landlord shall return the entire security deposit to Tenant, except for the portion designated in Section 1.1, if any, which Landlord shall retain as a non-refundable cleaning fee. Landlord's obligations with respect to the deposit are those of a debtor and not of a trustee, and Landlord can commingle the security deposit with Landlord's general funds. Landlord shall not be required to pay Tenant interest on the deposit. Landlord shall be entitled to immediately endorse and cash Tenant's security deposit; however, such endorsement and cashing shall not constitute Landlord's acceptance of this Lease. In the event Landlord does not accept this Lease, Landlord shall return said security deposit. If Landlord sells its interest in the Premises during the term hereof and deposits with or credits to the purchaser the unapplied portion of the security deposit, thereupon Landlord shall be discharged from any further liability or responsibility with respect to the security deposit. 7.1 USE OF PREMISES AND PROJECT FACILITIES Tenant shall use the Premises solely for the purposes set forth in Section 1.1 and for no other purpose without obtaining the prior written consent of Landlord. Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises or with respect to the suitability of the Premises or the Project for the conduct of Tenant's business, nor has Landlord agreed to undertake any modification, alteration or improvement to the Premises or the Project, except as provided in writing in this Lease. RIDER NO. 16 Tenant acknowledges that Landlord may from time to time, at its sole discretion, make such modifications, alterations, deletions or improvements to the Project as Landlord may deem necessary or desirable, without compensation or notice to Tenant. RIDER NO. 17 Tenant shall promptly and at all times comply with all federal, state and local statutes, laws, ordinances, orders and regulations affecting the Premises and the Project (herein "Laws"), as well as all master plans, restrictive covenants, and also any rules and regulations that Landlord may adopt from time to time. RIDER NO. 18 Tenant shall not do or permit anything to be done in or about the Premises or bring or keep anything in the Premises that will in any way increase the premiums paid by Landlord on its insurance related to the Project or which will in any way increase the premiums for fire or casualty insurance carried by other tenants in the Project. Tenant will not perform any act or carry on any practices that may injure the Premises or the Project; that may be a nuisance or menace to other tenants in the Project; or that shall in any way interfere with the quiet enjoyment of such other tenants. Tenant shall not use the Premises for sleeping, washing Page 3 Please Initial 3/95 MM KN MKL GEF -------- -------- Landlord Tenant clothes, cooking or the preparation, manufacture or mixing of anything that might emit any objectionable odor, noises, vibrations or lights onto such other tenants. If sound insulation is required to muffle noise produced by Tenant on the Premises, Tenant at its own cost shall provide all necessary insulation. Tenant shall not do anything on the Premises which will overload any existing parking or service to the Premises. Pets and/or animals of any type shall not be kept on the Premises. 8.1 SIGNAGE All signage shall comply with rules and regulations set forth by Landlord as may be modified from time to time. Current rules and regulations relating to signs are described on Exhibit F. Tenant shall place no window covering (e.g., shades, blinds, curtains, drapes, screens or tinting materials), stickers, signs, lettering, banners or advertising or display material on or near exterior windows or doors if such materials are visible from the exterior of the Premises, without Landlord's prior written consent. Similarly, Tenant may not install any alarm boxes, foil protection tape or other security equipment on the Premises without Landlord's prior written consent. Any material violating this provision may be destroyed by Landlord without compensation to Tenant. 9.1 PERSONAL PROPERTY TAXES Tenant shall pay before delinquency all taxes, assessments, license fees and public charges levied, assessed or imposed upon its business operations as well as upon all trade fixtures, leasehold improvements, merchandise and other personal property in or about the Premises. 10.1 PARKING Landlord grants to Tenant and Tenant's customers, suppliers, employees and invitees, a nonexclusive license to use the designated parking areas in the Project for the use of motor vehicles during the term of this Lease. RIDER NO. 19 Landlord reserves the right at any time to grant similar nonexclusive use to other tenants, to make rules and regulations relating to the use of such parking areas, including reasonable restrictions on parking by tenants and employees, to designate specific spaces for the use of any tenant and to make changes in the parking layout from time to time. RIDER NO. 20 11.1 UTILITIES Tenant shall pay for all water, gas, heat, light, power, sewer, electricity, telephone, garbage or other service metered, chargeable or provided to the Premises. RIDER NO. 21 12.1 MAINTENANCE RIDER NO. 22 electrical, plumbing and sewerage systems lying outside the Premises ; provided, however, the cost of all such maintenance shall be considered "Expenses" for purposes of Section 4.3. Except as provided above, Tenant shall maintain the Premises in good condition, including, without limitation, maintaining and repairing all walls, floors, ceilings, interior doors, exterior and interior windows and fixtures as well as damage caused by Tenant, its agents, employees or invitees. RIDER NO. 23 Upon expiration or termination of this Lease, Tenant shall surrender the Premises to Landlord in the same condition as existed at the commencement of the term, except for reasonable wear and tear or damage caused by fire or other casualty . Nothing herein shall excuse Tenant from financial responsibility for property damage caused by Tenant or Tenant's agents. RIDER NO. 24 13.1 ALTERATIONS (1) Tenant shall not make any alterations to the Premises without Landlord's prior written consent in each instance. If Landlord gives its consent to such alterations, Landlord may post notices in accordance with the laws of the state in which the Premises are located. Any alterations made shall remain on and be surrendered with the Premises upon expiration or termination of this Lease, except that Landlord may, within 30 days before or 30 days after the expiration or termination of this Lease or the termination of Tenant's right of possession, elect to require Tenant to remove any alterations which Tenant may have made to the Premises. RIDER NO. 25 If Landlord so elects, at its own cost Tenant shall restore the Premises to the condition designated by Landlord in its election, before the last day of the term or within 30 days after notice of its election is given, whichever is later. (2) Any request for Landlord's consent to alterations shall be made at least thirty (30) days before any work may be commenced and shall be accompanied by (i) detailed and costed plans and specifications for all alterations, and (ii) Tenant's written agreement to provide, upon completion of work, a complete set of as-built plans and specifications. Landlord may withhold consent, in its reasonable discretion and may issue such consent subject to conditions. All alterations shall be constructed only after obtaining Landlord's prior written consent and only in conformity with all Laws. The issuance of Landlord's consent shall not be a waiver of Tenant's obligation to comply with all Laws, nor Landlord's opinion that such alterations are in compliance with all Laws. (3) Should Landlord consent in writing to Tenant's alteration of the Premises, Tenant shall contract with a contractor approved by Landlord for the construction of such alterations, shall secure all appropriate governmental approvals and permits, and shall complete such alterations with due diligence in compliance with the plans and specifications approved by Landlord. All such construction shall be performed in a manner which will not interfere with the quiet enjoyment of other tenants of the Project. (4) Tenant shall pay all costs for construction of alterations and shall keep the Premises and the Project free and clear of all liens which may result from work by third parties authorized by Tenant. If any such lien is filed, the same shall be an event of default hereunder if Tenant fails to remove such lien within ten (10) days of the filing thereof. 14.1 RELEASE AND INDEMNITY As material consideration to Landlord, Tenant agrees that Landlord and Landlord's partners, shareholders, officers, directors, employees and agents (collectively, the "Protected Parties") shall not be liable to Tenant for any damage to Tenant or Tenant's property from any Page 4 Please Initial 3/95 MM KN MKL GEF -------- -------- Landlord Tenant cause, RIDER NO. 26 and Tenant waives all claims against Landlord for damage to persons or property arising for any reason, except for damage resulting directly from Landlord's breach of its express obligations under this Lease which Landlord has not cured within a reasonable time after receipt of written notice of such breach from Tenant. Tenant shall defend, indemnify and hold Landlord and all other Protected Parties harmless from all claims, losses, causes of action, costs and expenses, and damages arising out of (a) any damage to any person or property occurring in, on or about the Premises, (b) use by Tenant or its agents of the Premises and/or the Project or other properties of Landlord, and/or (c) Tenant's breach or violation of any term of this Lease. RIDER NO. 27 15.1 INSURANCE Tenant, at its cost, shall maintain public liability and property damage insurance and products liability insurance with a single combined liability limit of $1,000,000, insuring against all liability of Tenant and its authorized representatives arising out of or in connection with Tenant's use or occupancy of the Premises. Public liability insurance, products liability insurance and property damage insurance shall insure performance by Tenant of the indemnity provisions of Section 14.1. Landlord shall be named as an additional insured and the policy shall contain cross-liability endorsements. On all its personal property, at its cost, Tenant shall maintain a policy of standard fire and extended coverage insurance with vandalism and malicious mischief endorsements and "all risk" coverage on all Tenant's improvements and alterations in or about the Premises, to the extent of at least 100% of their full replacement value. The proceeds from any such policy shall be used by Tenant for the replacement of personal property and the restoration of Tenant's improvements or alterations. All insurance required to be provided by Tenant under this Lease shall release Landlord and the other Protected Parties from any claims for damage to any person or the Premises and the Project, and to Tenant's fixtures, personal property, improvements and alterations in or on the Premises or the Project, caused by or resulting from risks insured against under any insurance policy carried by Tenant and in force at the time of such damage. All insurance required to be provided by Tenant under this Lease: (a) shall be issued by insurance companies authorized to do business in the state in which the Premises are located; (b) be reasonably acceptable to Landlord; (c) shall be issued as a primary policy; and (d) shall contain an endorsement requiring at least 30 days prior written notice of cancellation to Landlord and Landlord's lender, before cancellation or change in coverage, scope or amount of any policy. Tenant shall deliver a certificate or copy of such policy together with evidence of payment of all current premiums to Landlord within 10 days of execution of this Lease. Tenant's failure to provide evidence of such coverage to Landlord may, in Landlord's sole discretion, constitute a default under this Lease. RIDER NO. 28 16.1 DESTRUCTION If during the term, the Premises or Project is more than 25% destroyed (based upon replacement cost) from any cause, or rendered inaccessible or unusable from any cause, Landlord may, in its sole discretion, terminate this Lease by delivery of notice to Tenant within 30 days of such event without compensation to Tenant. If Landlord does not elect to terminate this Lease, and if, in Landlord's estimation, the Premises cannot be restored within 270 days following such destruction, RIDER NO. 29 then Landlord shall commence to restore the Premises in compliance with then existing laws and shall complete such restoration with due diligence. In such event, this Lease shall remain in full force and effect, but there shall be an abatement of Base Monthly Rent between the date of destruction and the date of completion of restoration, based on the extent to which destruction interferes with Tenant's use of the Premises; provided, there shall be no abatement if such damage is the result of Tenant's negligence or wrongdoing. Tenant shall not be entitled to any damages or compensation for loss of use or any inconvenience occasioned by damage or any repair or restoration. 17.1 CONDEMNATION (1) Definitions. The following definitions shall apply: (1) "Condemnation" means (a) the exercise of any governmental power of eminent domain, whether by legal proceedings or otherwise by condemnor and (b) the voluntary sale or transfer by landlord to any condemnor either under threat of condemnation or while legal proceedings for condemnation are proceeding; (2) "Date of Taking" means the date the condemnor has the right to possession of the property being condemned; (3) "Award" means all compensation, sums or anything of value awarded, paid or received on a total or partial condemnation; and (4) "Condemnor" means any public or quasi-public authority, or private corporation or individual, having a power of condemnation. (2) Obligations to Be Governed by Lease. If during the term of the Lease there is any taking of all or any part of the Premises or the Project, the rights and obligations of the parties shall be determined pursuant to this Lease. (3) Total or Partial Taking. If the Premises are totally taken by condemnation, this Lease shall terminate on the Date of Taking. If any portion of the Premises is taken by Condemnation, this Lease shall terminate as to the part so taken as of the Date of Taking, but shall in all other respects remain in effect, except that Tenant can elect to terminate this Lease if the remaining portion of the Premises is rendered unsuitable for Tenant's continued use of the Premises. If Tenant elects to terminate this Lease, Tenant must exercise its right to terminate by giving notice to Landlord within 30 days after the nature and extent of the Condemnation have been finally determined. If Tenant elects to terminate this Lease, Tenant shall also notify Landlord of the date of termination, which date shall not be earlier than 30 days nor later than 90 days after Tenant has notified Landlord of its election to terminate; except that this Lease shall terminate on the Date of Taking if the Date of Taking falls on a date before the date of termination as designated by Tenant. If any portion of the Premises is taken by condemnation and this Lease remains in full force and effect, on the Date of Taking the Base Monthly Rent shall be reduced by an amount in the same ratio as the total number of square feet in the Premises taken bears to the total number of square feet in the Premises immediately before the Date of Taking. (4) Landlord's Election. Notwithstanding anything herein to the contrary, if the Project or any portion thereof is taken by Condemnation and the portion taken does not, in Landlord's sole judgment, feasiblely permit the continuation of the operation of the Project by Landlord, then landlord shall have the right to terminate this Lease by written notice given within thirty (30) days following the Date of Taking. RIDER NO. 30 (5) Award. Tenant shall have no right or claim to all or any portion of the Award; provided this shall not limit Tenant's right to seek and to receive compensation for relocation expenses or the value of its personal property taken, so long as receipt of such compensation does not decrease the Award otherwise payable to Landlord. Page 5 Please Initial 3/95 MM KN MKL GEF -------- -------- Landlord Tenant 18.1 ASSIGNMENT OR SUBLEASE Tenant shall not assign or encumber its interest in this Lease or the Premises or sublease all or any part of the Premises or allow any other person or entity (except Tenant's authorized representatives, employees, invitees, or guests) to occupy or use all or any part of the Premises without first obtaining Landlord's consent. RIDER NO. 31 Any assignment, encumbrance or sublease without Landlord's written consent shall be voidable and at Landlord's election, shall constitute a default. If Tenant is a partnership, a withdrawal or change, voluntary, involuntary or by operation of law of any partner, or the dissolution of the partnership, shall be deemed a voluntary assignment. If Tenant consists of more than one person, a purported assignment, voluntary or involuntary or by operation of law from one person to the other or to a third party shall be deemed a voluntary assignment. If Tenant is a corporation, any dissolution, merger, consolidation or other reorganization of Tenant, or sale or other transfer of a controlling percentage of the capital stock of Tenant, or the sale of at least 25% of the value of the assets of Tenant shall be deemed a voluntary assignment. The phrase "controlling percentage" means ownership of and right to vote stock possessing at least 50% of the total combined voting power of all classes of Tenant's capital stock issued, outstanding and entitled to vote for election of directors. RIDER NO. 32 The preceding two sentences shall not apply to corporations the stock of which is traded through an exchange or over the counter. RIDER NO. 33 All rent received by Tenant from its subtenants in excess of the rent payable by Tenant to Landlord under this Lease (allocated on a square footage basis in cases of partial subleasing) shall be paid to Landlord, and any sums to be paid by an assignee to Tenant in consideration of the assignment of this Lease shall be paid to Landlord. If Tenant requests Landlord to consent to a proposed assignment or subletting, Tenant shall pay to Landlord, whether or not consent is ultimately given, $100 or Landlord's reasonable attorneys' fees incurred in connection with such request, whichever is greater. No interest of Tenant in this Lease shall be assignable by involuntary assignment through operation of law (including without limitation the transfer of this Lease by testacy or intestacy). Each of the following acts shall be considered an involuntary assignment: (a) if Tenant is or becomes bankrupt or insolvent, makes an assignment for the benefit of creditors, or institutes proceedings under the Bankruptcy Act in which Tenant is the bankrupt; or if Tenant is a partnership or consists of more than one person or entity, if any partner of the partnership or other person or entity is or becomes bankrupt or insolvent, or makes an assignment for the benefit of creditors; or (b) if a writ of attachment or execution is levied on this Lease; or (c) if in any proceeding or action to which Tenant is a party, a receiver is appointed with authority to take possession of the Premises. An involuntary assignment shall constitute a default by Tenant and landlord shall have the right to elect to terminate this Lease, in which case this Lease shall not be treated as an asset of Tenant. 19.1 DEFAULT The occurrence of any of the following shall constitute a default by Tenant: (a) A failure to pay rent or other charge RIDER NO. 34 20.1 LANDLORD'S REMEDIES (1) Landlord shall have the following remedies if Tenant is in default. These remedies are not exclusive; they are cumulative and in addition to any remedies now or later allowed by law. Landlord may terminate this Lease and/or Tenant's right to possession of the Premises at any time. No act by Landlord other than giving notice to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the Premises, or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this lease shall not constitute a termination of this Lease. Upon termination of this Lease or of Tenant's right to possession, Landlord has the right to recover from Tenant: (1) The worth of the unpaid rent that had been earned at the time of such termination; (2) The worth of the amount of the unpaid rent that would have been earned after the date of such termination; and (3) Any other amount, including court, attorney and collection costs, necessary to compensate Landlord for all detriment proximately caused by Tenant's default. "The Worth," as used for Item 20.1(1) in this Paragraph is to be computed by allowing interest at the Default Rate. "The Worth" as used for Item 20.1(2) in this Paragraph is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of termination of Tenant's right of possession. RIDER NO. 35 (2) All covenants and assignments to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement of rent. If Tenant shall fail to pay any sum of money owed to any party other than Landlord, for which it is liable hereunder, or if Tenant shall fail to perform any other act on its part to be performed hereunder, and such failure shall continue for RIDER NO. 36 Landlord may, without waiving such default or any other right or remedy, but shall not be obligated to, make any such payment or perform any such other act to be made or performed by Tenant. All sums so paid by Landlord and all necessary incidental costs, together with interest thereon at the Default Rate from the date of expenditure by Landlord, shall be payable to Landlord on demand. 21.1 ENTRY ON PREMISES Landlord and its authorized representatives shall have the right to enter the Premises at all reasonable times RIDER NO. 37 for any of the following purposes: (a) To determine whether the Premises are in good condition and whether Tenant is complying with its obligations under this Lease; (b) To do any necessary maintenance and to make any restoration to the Premises or the Project that Landlord has the right or obligation to perform; (c) To post "for sale" signs at any time during the term, to post "for rent" or "for lease" signs during the last 90 days of the term, or during any period while Tenant is in default; (d) To show the Premises to prospective brokers, agents, buyers, tenants or persons interested in leasing or purchasing the Premises, at any time during the term; or (e) To repair, maintain or improve the Project and to erect scaffolding and protective barricades around and about the Premises but not so as to prevent entry to the Premises and to do any other act or thing necessary for the safety or preservation of the Premises or the Project. Landlord shall not be liable in any manner for any inconvenience, disturbance, loss of business, nuisance or other damage arising out of Landlord's entry onto the Premises as provided in this Section. Landlord shall conduct its activities on the Premises as provided herein in a manner that will cause the least inconvenience, annoyance or disturbance to Tenant. For each of these purposes, Landlord shall at all times have and retain a key with which to unlock all the doors in, upon and about the Premises, excluding Tenant's vaults and safes. Tenant shall not alter any lock or install a new or additional lock or bolt on any door of the Premises without prior written consent of Landlord. If Landlord gives its consent, Tenant shall furnish Landlord with a key for any such lock. Page 6 Please Initial 3/95 MM KN MKL GEF -------- -------- Landlord Tenant 22.1 SUBORDINATION Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, and at the election of Landlord or any mortgagee or any beneficiary of a Deed of Trust with a lien on the Project or any ground lessor with respect to the Project, this Lease shall be subject and subordinate at all time to (a) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Project, and (b) the lien of any mortgage or deed of trust which may now exist or hereafter be executed in any amount for which the Project, ground leases or underlying leases, or Landlord's interest or estate in any of said items is specified as security. In the event that any ground lease or underlying lease terminates for any reason or any mortgage or Deed of Trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination, attorn to and become the Tenant of the successor in interest to Landlord, at the option of such successor in interest. Tenant covenants and agrees to execute and deliver, upon demand by Landlord and in the form requested by Landlord any additional documents evidencing the priority or subordination of this Lease with respect to any such ground lease or underlying leases or the lien of any such mortgage or Deed of Trust. Tenant hereby irrevocably appoints Landlord as attorney-in-fact of Tenant to execute, deliver and record any such document in the name and on behalf of Tenant. RIDER NO. 38 Tenant, within ten days from notice from Landlord, shall execute and deliver to Landlord, in recordable form, certificates stating that this Lease is not in default, is unmodified and in full force and effect, or in full force and effect as modified, and stating the modifications. This certificate should also state the amount of current monthly rent, the dates to which rent has been paid in advance, the amount of any security deposit and prepaid rent, and such other matters as Landlord may request. In addition, in connection with any sale or financing involving the Premises, Tenant shall deliver to Landlord, within twenty (20) days of request by Landlord, a current audited financial statement of Tenant and of each guarantor. RIDER NO. 39 23.1 NOTICE Any notice, demand, request, consent, approval or communication desired by either party or required to be given, shall be in writing and either served personally or sent by prepaid certified first class mail, addressed as set forth in Section 1.1. RIDER NO. 40 Either party may change its address by notification to the other party. Notice shall be deemed to be communicated 48 hours from the time of such mailing, or upon the time of service as provided in this Section. 24.1 WAIVER No delay or omission in the exercise of any right or remedy by Landlord shall impair such right or remedy or be construed as a waiver. No act or conduct of Landlord, including without limitation, acceptance of the keys to the Premises, shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the term. Only written notice from Landlord to Tenant shall constitute acceptance of the surrender of the Premises and accomplish termination of the Lease. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. Any waiver by Landlord of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of the Lease. 25.1 SURRENDER OF PREMISES; HOLDING OVER Upon expiration of the term or the termination of this Lease or of Tenant's right of possession, Tenant shall surrender to Landlord the Premises and all tenant improvements and alterations (except alterations which Tenant has the right or obligation to remove) in good condition, except for ordinary wear and tear. RIDER NO. 41 Tenant shall remove all personal property including, without imitation, all wallpaper, paneling and other decorative improvements or fixtures and shall perform all restoration made necessary by the removal of any alterations or Tenant's personal property before the expiration of the term, including for example, restoring all wall surfaces to their condition prior to the commencement of this Lease. RIDER NO. 42 Landlord can elect to retain or dispose of in any manner Tenant's personal property not removed from the Premises by Tenant prior to the expiration of the term. Tenant waives all claims against Landlord for any damage to Tenant resulting from Landlord's retention or disposition of Tenant's personal property. Tenant shall be liable to Landlord for Landlord's costs for storage, removal or disposal of Tenant's personal property. If Tenant fails to surrender the Premises upon the expiration of the term, or upon the termination of this Lease or of Tenant's right of possession, Tenant shall defend, indemnify and hold Landlord harmless from all resulting loss or liability, including without limitation, any claim made by any succeeding tenant founded on or resulting from such failure. If Tenant, with Landlord's consent, remains in possession of the Premises after expiration of this Lease, such possession by Tenant shall be deemed to be a month-to-month tenancy terminable on written 30-day notice at any time, by either party. All provisions of this Lease, except those pertaining to term and rent, shall apply to the month-to-month tenancy. Tenant shall pay Base Monthly Rent in an amount equal to 150% of the Base Monthly Rent for the last full calendar month during the regular term plus 100% of said last month's estimate of Tenant's share of Expenses pursuant to Section 4.3(3). 26.1 LIMITATION OF LIABILITY In consideration of the benefits accruing hereunder, Tenant agrees that, regarding any claim against Landlord and/or any other Protected Party, including in the event of any actual or alleged failure, breach or default by Landlord: a. The sole and exclusive remedy of Tenant shall be against the interest of Landlord in the Project, and neither Landlord nor any other Protected Party shall have any other liability whatsoever. b. If Landlord is a partnership, the following provisions of this item b. shall also apply: (i) No partner of Landlord shall be sued or named as a party in any suit or action; (ii) No service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction of the partnership); (iii) No partner of Landlord shall be required to answer or otherwise plead to any service or process; (iv) No judgement may be taken against any partner of Landlord; (v) Any judgment taken against any partner of Landlord may be vacated and set aside at any time without hearing; and (vi) No writ of execution will ever be levied against the assets of any partner of Landlord. c. These covenants and agreements contained in this Section are enforceable both by Landlord and also by any other Protected Party. Page 7 Please Initial 3/95 MM KN MKL GEF -------- -------- Landlord Tenant d. Tenant agrees that each of the foregoing provisions shall be applicable to any and all liabilities, claims and causes of action whatsoever, including those based on any provision of this Lease, any implied covenant, and/or any statute or common law principle. 27.1 MISCELLANEOUS PROVISIONS (1) Time of Essence. Time is of the essence of each provision of this Lease. (2) Successor. This Lease shall be binding on and inure to the benefit of the parties and their successors, except as provided in Section 18.1 herein. (3) Landlord's Consent. Any consent required by Landlord under this Lease must be granted in writing. No such consent shall be unreasonably withheld, but any consent may be issued subject to reasonable conditions. As a condition to any consent, Landlord may require that any other party or parties with a right of consent issue such consent on terms acceptable to Landlord. (4) Commissions. Each party represents that it has not had dealings with any real estate broker, finder or other person with respect to this Lease in any manner, except for the broker identified in Section 1.1, who shall be compensated by Landlord. (5) Other Charges. If Landlord becomes a party to any litigation concerning this lease, the premises or the project, by reason of any act or omission of Tenant or any agent, guest or invitee of Tenant, Tenant shall be liable to Landlord for all attorneys fees and costs incurred by Landlord in connection with such litigation, including any appeal or review. In the event of litigation RIDER NO. 43 between Tenant and Landlord and/or any other Protected Party, the prevailing party shall be entitled to recover from the losing party all costs and attorneys fees incurred both at and in preparation for trial and any appeal or review. If Landlord employs a collection agency to recover delinquent charges, Tenant agrees to pay all collection agency and attorneys' fees charged to Landlord in addition to rent, late charges, interest and other sums payable under this Lease. Tenant shall pay a charge of $75 to Landlord for preparation of a demand for delinquent rent. (6) Landlord's Successors. In the event of a sale or conveyance by Landlord of the Project or a portion thereof including the Premises, or of Landlord's interest in the foregoing, the same shall operate to release Landlord from any liability under this Lease, and in such event Landlord's success in interest shall be solely responsible for all obligations of Landlord under this Lease. (7) Interpretation. This Lease shall be construed and interpreted in accordance with the laws of the state in which the Premises are located. This Lease constitutes the entire agreement between the parties with respect to the Premises and the Project, except for such guarantees or modifications as may be executed in writing by the parties from time to time. When required by the content of this Lease, the singular shall include the plural, and the masculine shall include the feminine and/or neuter. "Party" shall mean Landlord or Tenant. If more than one person or entity constitutes Tenant, the obligations imposed on Tenant shall be joint and several. The enforceability, invalidity or illegality of any provision shall not render the other provisions unenforceable, invalid or illegal. (8) Third Parties. The Protected Parties shall have the right to enforce the provisions of this Lease which reference them. Except for the foregoing, there are no third parties benefitted hereby, this Lease being intended solely for the benefit of Landlord and Tenant. Notwithstanding the foregoing, the beneficiary under a trust deed, or a mortgagee, holding a security interest in the Project shall be a third party beneficiary of the Tenant's obligations set forth in Sections 30.1 and 31.1 hereof and shall have the right to enforce such provisions. (9) Survival. The release and indemnity covenants of Tenant, the right of Landlord to enforce its remedies hereunder, the attorneys fees provisions hereof, the provisions of Section 26.1 hereof, as well as all provisions of this Lease which contemplate performance after the expiration or termination hereof or the termination of Tenant's right to possession hereunder, shall survive any such expiration or termination. 28.1 EMISSIONS Tenant shall not: a. Discharge, emit or permit to be discharged or emitted, any liquid, solid or gaseous matter, or any combination thereof, into the atmosphere, the ground or any body of water, which matter, as reasonably determined by Lessor or any governmental entity does, or may, pollute or contaminate the same, or is, or may become, radioactive or does, or may, adversely affect the (1) health or safety of persons, wherever located, whether on the Premises or anywhere else, (2) condition, use or enjoyment of the Premises or any other real or personal property, whether on the Premises or anywhere else, or (3) Premises or any of the improvements thereto, or thereon including buildings, foundations, pipes, utility lines, landscaping or parking areas; b. Produce, or permit to be produced, any intense glare, light or heat except within an enclosed or screened area and then only in such manner that the glare, light or heat shall not be discernible from outside the Premises; c. Create, or permit to be created, any sound pressure level which will interfere with the quiet enjoyment of any real property outside the Premises; or which will create a nuisance or violate any Law, rule, regulation or requirement; d. Create, or permit to be created, any ground vibration that is discernible outside the Premises; e. Transmit, receive or permit to be transmitted or received, any electromagnetic, microwave or other radiation which is harmful or hazardous to any person or property in, on or about the Premises, or anywhere else. Page 8 Please Initial 3/95 MM KN MKL GEF -------- -------- Landlord Tenant 28.2 STORAGE AND USE (1) Storage. Subject to the uses permitted and prohibited to Tenant under this lease, Tenant shall store in appropriate leak proof containers all solid, liquid, or gaseous matter, or any combination thereof, which matter, if discharged or emitted into the atmosphere, the ground or any body of water, does or may (1) pollute or contaminate the same, or (2) adversely affect the (i) health or safety of persons, whether on the Premises or anywhere else, (ii) condition, use or enjoyment of the Premises or any real or personal property, whether on the Premises or anywhere else, or (iii) Premises or any of the improvements thereto or thereon. (2) Use. In addition, without Landlord's prior written consent, Tenant shall not use, store or permit to remain on the Premises any solid, liquid or gaseous matter which is, or may become, radioactive. If Landlord does give its consent, Tenant shall store the materials in such a manner that no radioactivity will be detectable outside a designated storage area and Tenant shall use the materials in such a manner that (1) no real or personal property outside the designated storage area shall become contaminated thereby or (2) there are and shall be no adverse effects on the (i) health or safety of persons, whether on the Premises or anywhere else, (ii) condition, use or enjoyment of the Premises or any real or personal property thereon or therein, or (iii) Premises or any of the improvements thereto or thereon. 28.3 DISPOSAL OF WASTE (1) Refuse Disposal. Tenant shall not keep an trash, garbage, waste or other refuse on the Premises except in sanitary containers and shall regularly and frequently remove same from the Premises. Tenant shall keep all incinerators, containers or other equipment used for the storage or disposal of such materials in a clean and sanitary condition. (2) Sewage Disposal. Tenant shall properly dispose of all sanitary sewage and shall not use the sewage system (1) for the disposal of anything except sanitary sewage or (2) in excess of the lesser of the amount (a) reasonably contemplated by the uses permitted under this Lease or (b) permitted by any governmental entity. Tenant shall keep the sewage disposal system free of all obstructions and in good operating condition. (3) Disposal of Other Waste. Tenant shall properly dispose of all other waste or other matter delivered to, stored upon, located upon or within, used on, or removed from, the premises in such a manner that it does not, and will not, adversely affect the (1) health or safety of persons, wherever located, whether on the Premises or elsewhere, (2) condition, use or enjoyment of the Premises or any other real or personal property, wherever located, whether on the Premises or anywhere else, or (3) Premises or any of the improvements thereto or thereon including buildings, foundations, pipes, utility lines, landscaping or parking areas. 29.1 COMPLIANCE WITH LAW Notwithstanding any other provision in the Lease to the contrary, Tenant shall comply with all Laws in complying with its obligations under this Lease, and in particular, Laws relating to the storage, use and disposal of hazardous or toxic matter. 30.1 INDEMNIFICATION Tenant shall defend, indemnify and hold Landlord, the other Protected Parties, the Project and the beneficiary under a trust deed, or mortgagee, holding a security interest in the Project harmless from any loss, claim, liability or expense, including, without limitation, attorneys fees and costs, at trial and/or on appeal and review, arising out of or in connection with its failure to observe or comply with the provisions of this Section. This indemnity shall survive the expiration or earlier termination of the term of the Lease or the termination of Tenant's right to possession and be fully enforceable thereafter. 31.1 ADDITIONAL PROVISIONS The following covenants and agreements shall in no way diminish or limit the foregoing provisions of this Section. No use may be made of, on or from the Premises relating to the handling, storage, disposal, transportation or discharge of Hazardous Substances (as defined below). All of such use which does occur shall be in strict conformance with all Laws. Tenant shall give prior written notice to Landlord of any use, whether incidental or otherwise, of Hazardous Substances on the Premises, or of any notice of any violation of any Law with respect to such use. Landlord and any ground lessor or master lessor of the Premises and/or the Project shall have the right to request and to receive information with respect to use of Hazardous Substances on the Premises in writing. In addition to the indemnity obligations contained elsewhere herein, Tenant shall indemnify, defend and hold harmless Landlord, the other Protected Parties, the Premises, the Project, and the beneficiary under a trust deed, or a mortgagee, holding a security interest in the Project, from and against all claims, losses, damages, costs, response costs and expenses, liabilities, and other expenses caused by, arising out of, or in connection with, the generation, release, handling, storage, discharge, transportation, deposit or disposal in, on, under or about he Premises by Tenant or any of Tenant's Agents of the following (collectively referred to as "Hazardous Substances"): hazardous materials, hazardous substances, toxic wastes, toxic substances, pollutants, petroleum products, underground tanks, oils, pollution, asbestos, PCB's, materials, or contaminants, as those terms are commonly used or as defined by federal, state and/or local law or regulation related to protection of health or the environment, including but not limited to, the Resource Conservation and Recovery Act (RCRA) (42 U.S.C. ss. 6901 et seq.); the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) (42 U.S.C.ss. 9601, et seq.); the Toxic Substances Control Act (15 U.S.C. ss. 2601, et seq.); the Clean Water Act (33 U.S.C. ss. 1251, et seq.); the Clean Air Act (42 U.S.C. ss. 7401, et seq.); and ORS Chapters 453, 465 and 466 as any of the same may be amended from time to time, and/or by any rules and regulations promulgated thereunder. Such damages, costs, liabilities, and expenses shall include such as are claimed by any regulating and/or administering ground lessor or master lessor of the Project, the holder of any Mortgage or Deed of Trust on the Project, and/or any successor of the Landlord named herein. This indemnity shall include (a) claims of third parties, including governmental agencies, for damages, fines, penalties, response costs, monitoring costs, injunctive or other relief; (b) the costs, expenses or losses resulting from any injunctive relief, including preliminary or temporary injunctive relief; (c) the expenses, including fees of attorneys and experts, of reporting the existence of Hazardous Substances to an agency of the State of Oregon or of the United States as required by applicable laws and regulations; (d) any and all expenses or obligations, including attorney's and paralegal fees, incurred Page 9 Please Initial 3/95 MM KN MKL GEF -------- -------- Landlord Tenant at, before and after any trial or appeal therefrom or review thereof, or an administrative proceeding or appeal therefrom or review thereof, whether or not taxable as costs, including, without limitation, attorney's fees, paralegal fees, witness fees (expert and otherwise), deposition costs, photocopying and telephone charges and other expenses related to the foregoing, all of which shall be paid by Tenant to Landlord when such expenses are accrued. This indemnity shall survive the expiration or earlier termination of the term of the Lease or the termination of Tenant's right to possession and be fully enforceable thereafter. RIDER NO. 44 32.1 INFORMATION Tenant shall provide Landlord with any and all information regarding Hazardous Substances in the Premises, including contemporaneous copies of all filings and reports to governmental entities, and any other information requested by Landlord. In the event of any accident, spill or other incident involving Hazardous Substances, Tenant shall immediately report the same to Landlord and supply Landlord with all information and reports with respect to the same. All information described herein shall be provided to Landlord regardless of any claim by Tenant that it is confidential or privileged. 33.1 RIDER NO. 45 Tenant: MEDICALOGIC, INC., an Oregon corporation MARK LEAVITT GUY E. FIELD -------------------------------------------------- By: Mark K. Leavitt Guy E. Field By: President Controller Landlord: EVERGREEN CORPORATE CENTER LLC, an Oregon limited liability company By: Marzer Venture, an Oregon general partnership By: MELVIN MARK --------------------------------------------------- Its: Partner -------------------------------------------------- By: Schnitzer Investment Corp., an Oregon corporation By: KEN NOVACK --------------------------------------------------- Its: -------------------------------------------------- Exhibits - -------- A - Premises A-1 Measurement Standards for each floor B - Project C - Landlord's Work Plans D - Work Agreement E - Rules and Regulations F - Sign Regulations Page 10 Please Initial 3/95 MM KN MKL GEF -------- -------- Landlord Tenant [MAP SHOWING LOCATIONS OF BUILDINGS 1, 2, 3, 4 and 5, STREETS AND TREES OMITTED] The location, size, and number of improvements except for Building 1 EXHIBIT A and Building 2 are conceptual at this time and are subject to change. Premises are cross-hatched Site Plan Evergreen Corporate Center at Tanasbourne Commerce Center Melvin Mark Development Company June 19, 1996 Zimmer Gunsul Frasca EXHIBIT A-1 MEASUREMENT STANDARDS FOR EACH FLOOR AREA STANDARD NATIONAL ASSOCIATION OF INDUSTRIAL AND OFFICE PARKS (NAIOP) INTRODUCTION The purpose of the NAIOP area standard is to permit communication and computation on a clear and understandable basis. Another important purpose is to allow comparison of values on the basis of a generally agreed upon unit of measurement. The result is a unit of measurement that is most typically used by building owners, managers, tenants, appraisers, architects, lending institutions, and others to compute the floor area of a building. It should be noted that this standard can be used to measure space in old, as well as new, buildings. It is applicable to any architectural design or type of construction. Generally, this type of area computation has been used for single or multiple tenant industrial/commercial facilities. If the areas are leased, the leases are typically provided in a "triple net" format. AREA The area is defined as the amount of space allocated to a particular occupant or tenant. This space can be provided in two forms: 1. the basic space allocated/occupied, and 2. common spaces allocated/occupied or provided for use by two or more occupants or tenants of a building. Basic Space Basic space area is computed by measuring from the outside surface of exterior walls or permanent extensions/projections to the middle of interior walls which may separate one space from another. See Figures 1-4. Common Space Common space area is calculated in the same manner as basic space. This area is then prorated and added to the basic space area of those spaces or tenants which the common space serves. See Figures 5 and 6. [GRAPHIC FLOOR PLAN OMITTED] FLOOR PLAN FIGURE 3 [GRAPHIC FLOOR PLAN OMITTED] SECTION B-B FIGURE 4 [GRAPHIC FLOOR PLAN OMITTED] FLOOR PLAN FIGURE 5 BASIC AREA FOR ELECTRICAL ROOM TENANT A 2000 SQ. FT. 2000/4800 = 41.67% TENANT B 2800 SQ. FT. 2800/4800 = 58.33% ------------ ------ SUBTOTAL 4800 SQ. FT. 100.00% COMMON AREA (ELECTRICAL ROOM = 200 SQ. FT.) TENANT A 200 (.4167) = 83.34 SQ. FT. TENANT B 200 (.5833) = 116.66 SQ. FT. -------------- SUBTOTAL 200.00 SQ. FT. LEASED AREA TENANT A BASIC 2000.00 TENANT B BASIC 2800.00 COMMON 83.34 COMMON 116.66 ------- ------- TOTAL 2083.34 TOTAL 2916.66 GRAND TOTAL 5,000.00 SQ. FT. [GRAPHIC FLOOR PLAN OMITTED] FLOOR PLAN FIGURE 6 BASIC AREA FOR ELECTRICAL ROOM FOR DOCK TENANT A 4750 48.72% 4750 65.52% TENANT B 2500 25.64% 2500 34.48% TENANT C 2500 25.64% 0.00% ------------------------ ----------- SUBTOTAL 9750 100.00% 7250 100.00% COMMON AREA (ELECTRICAL ROOM 250 SQ. FT.; DOCK 553 SQ. FT.) FOR ELECTRICAL ROOM FOR DOCK SUBTOTAL TENANT A [250(.4872) = 121.8] + [553(.6552) = 362.33] = 484.13 SQ. FT. TENANT B [250(.2564) = 64.1] + [553(.3448) = 190.67] = 254.77 SQ. FT. TENANT C [250(.2564) = 64.1] + 0 = 64.10 SQ. FT. ----- ------ ------ 250.0 553.00 = 803.00 SQ. FT.
LEASED AREA TENANT A: BASIC 4750.00 TENANT B: BASIC 2500.00 TENANT C: BASIC 2500.00 COMMON 484.13 COMMON 254.77 COMMON 64.10 ------- ------- ------- TOTAL 5234.13 TOTAL 2754.77 TOTAL 2564.10 GRAND TOTAL 10,553 SQ. FT.
[GRAPHIC FLOOR PLAN OMITTED] FLOOR PLAN FIGURE 1 BUILDING SECTION A-A FIGURE 2 [MAP SHOWING LOCATIONS OF BUILDINGS 1, 2, 3, 4 and 5, STREETS AND TREES OMITTED] The location, size, and number of improvements except for Building 1 EXHIBIT B and Building 2 are conceptual at THE PROJECT this time and are subject to change. Site Plan Evergreen Corporate Center at Tanasbourne Commerce Center Melvin Mark Development Company June 19, 1996 Zimmer Gunsul Frasca EXHIBIT C LANDLORD'S WORK PLANS SCOPE NARRATIVE Medicalogic Building Design and Material Building Exterior The building exterior will be a combination of brick and glass. The brick is a special ECC blend which has a rich and complex range of colors from dark red to Orange. The glass used will be an insulated glass with a light green tint, matching the other exterior glass used in the park (PacifiCare). allowing for excellent energy characteristics with maximum outward visibility. Energy Systems The building is designed for large, efficient, easily maintained HVAC systems. Roof top AHUs with VAV and DDC electronic controls. Elevator The building includes one hydraulic passenger elevator with a 2500 lb capacity and speed of 100 feet per minute. The elevator will contain a sheet metal hood which will allow for an 8 foot height in approximately one half of the cab when removed. Materials Brick is the predominant exterior material providing a modern high-quality, long-term, low maintenance exterior surface. It will be hand laid with a rich, textured pattern. 1 Medicalogic Building Technical Systems Description 1. Site Work 1.1 Work in Public Right-of-Way The project will comply with all requirements of government agencies. 1.2 Walks, Ramps, and Stairs - (Work within 5' of building face). (a) Constructed of concrete, brick or similar material. (b) Finish to minimize slipping. (c) Slope or crown for drainage. (d) Concrete minimum thickness 4 inches. (e) Provide handrails where required by code and safety requirements. (f) Curbs adjacent to sidewalks shall be cast monolithically with sidewalks. 1.3 Landscaping - (Work within approximately 5' of building face.) (a) All landscape areas to have time clock operated irrigation system. (b) Planting areas to be graded to avoid ponding. (c) Six inch minimum topsoil throughout with additional topsoil or planting mix at trees or shrubs. Topsoil to be free from weeds, boulders, roots, etc. (d) Planting materials will be selected with respect to: i. Appropriateness to area and exposure. ii. Size to provide visual impact within one year period. iii. Ease of maintenance. 1 iv. Minimizing root damage to adjacent areas. 1.4 Site Lighting - (Work within 5' of building face.) (a) Lighting will be provided at all stairs and walkways. (b) Specialty lighting will be provided at exterior building main entrances and building identification 1.5 Signs (a) Exterior signing for building address or designation and directional will be included. (b) All other exterior and interior tenant signage is at tenant's expense and must meet landlord's standards. 1.6 Paving shall comply with the standards of Project Release No. 1 (Phase 1 Site Work) together with such design revisions as may be required to accommodate the Tenant of Building 2. 1.7 Trash enclosure to be located and sized to accommodate use by the Tenant of Building 2. 2. Structural Design Guidelines 2.1 Codes and Standards (a) American Concrete Institute, "Building Code Requirements for Reinforced Concrete," ACI 318-83. (b) American Institute of Steel Construction, "Specification for the Design, Fabrication and Erection of Structural Steel for Buildings," Eighth Edition of Manual of Steel Construction. (c) Uniform Building Code as in effect in Oregon ("UBC"). 2.2 Design Load Criteria (a) Floor Live Load: 50 psf plus 20 psf partition load (b) Floor Dead Load: 55 psf (c) Roof live load: 25 psf (d) Roof dead load: 20 psf 2 (e) Wind load: 80 mph, exposure C (f) Seismic Zone: UBC zone 3 (g) Mechanical equipment pads sufficient to support equipment required by mechanical design 2.3 Materials (a) Concrete 4000 psi minimum at 28 days for structural concrete. 2500 psi minimum at 28 days for sidewalk and backfill concrete (b) Reinforcing Steel i. Bars ASTM A615, deformed, Grade 60 ii. Welded Wire ASTM A185 (c) Structural Steel ASTM A36; ASTM A572; Grade 42 or Grade 50; or ASTM A588; Grade 50 2.4 Structural System Analysis Approach (a) Floor System: Structural steel columns supporting an open web joist and girder system. Metal decking with a 5.5" composite concrete slab. (b) Lateral Force Resisting System: shear walls. (c) Foundation System Design will be based on the recommendation of the geotechnical consultant. Recommendations will include design criteria for foundation system(s) best suited to project; design criteria and pressures for the design of slabs. To be conventional spread footings bearing on native soils. 3 (d) Slab on grade to be 4" unreinforced concrete 2.5 Exterior Wall System Design will be in accordance with applicable building codes and standards. 2.6 Testing and Inspection (a) Testing and inspection of building structural elements will be provided in accordance with building department requirements. (b) Testing and inspections to be undertaken by independent agency. 3. Exterior Enclosure 3.1 Building Facade (a) General i. Comply with state energy code. ii. Designed for wind and seismic loading and lateral movement. iii. Provide one year guarantee against water leakage. Provide a consultant to inspect design and construction of facade and roof. 3.2 Cladding System (a) ECC brick blend. (b) Glazing System i. Insulated glass required. To have butt glazed exterior glass similar in color to PacifiCare. ii. Butt glazing system to comply with Oregon Energy Codes. (c) Miscellaneous i. Provide Sealants, flashings, vapor barriers, insulation as required for a complete installation. ii. Glass to be cleaned prior to the time of occupancy. 4 3.3 Environmental Protection (a) Roofing i. Fifteen year bondable. ii. Closed cell rigid insulation to meet energy code. iii. Roofing system to be a built-up roofing with cap sheet. iv. Provide roof access, roof hatch and ladder. (b) Membrane Waterproofing i. Fluid type with insulation and protection board. 3.4 Exterior Entrances (a) Main Entries i. Entries will be in compliance with the ADA. (b) Service Entries, Exits, Etc. Painted hollow metal galvanized. (c) Loading Dock and Parking Access Manually operated insulated vertical rolling door. 4. Interior Materials & Finishes 4.1 Tenant Office Space (a) Ceilings i. Exposed T bar grid at approximately 9' above finished floor. ii. 2x4 ceiling tile to be tegular "second-look" style, scored to look like 2x2 (b) Walls i. Core walls to extend and seal to structure. ii. Gypsum wallboard taped, sanded, primed and painted with finish coat, ready for occupancy. 5 iii. Window sill to be finished sheet rock. iv. Reinforce ceiling above window for window covering. (c) Floors i. Concrete with sealer prepared to receive carpet. ii. Carpet, furnish and install: allowance of $20/square yard. (d) Window Coverings i. Exterior window blinds similar to PacifiCare (e) Doors and hardware i. Full Height doors (up to 9') ii. Schlage Schedule "D" lever-action passage and lock sets 4.2 Typical Floor Elevator Lobby (a) Ceiling and walls. Painted gypsum board. (b) Floor: Carpet at furnish and install allowance of $20/square yard. 4.3 Toilet Rooms (a) Ceiling i. Painted gypsum wallboard ii. Fluorescent lighting. (b) Walls Ceramic tile selected by Landlord on wet walls to 4'6" (c) Floor Ceramic tile selected by Landlord (d) Miscellaneous i. Lavatories to be mounted in counter with mirror above. 6 ii. Recessed paper towel and waste receptacles. iii. Ceiling hung toilet partitions with coat hooks. Purse shelves in women's toilet room. iv. Toilet seat cover dispenser and rolled toilet paper holder at each water closet. v. Sanitary napkin waste disposal at each women's water closet. vi. Two coat hooks in each toilet room. vii. Refrigerated drinking fountain adjacent to toilet rooms. viii. Wall-mounted soap dispenser by each lavatory. ix. Shower stalls will be prefabricated fiberglass. 4.4 Janitor's Closets (a) Walls Painted gypsum wallboard. (b) Floor Vinyl tile selected by Landlord with rubber base. (c) Miscellaneous i. Janitor sink. ii. Plastic laminate wainscoting at janitor sink. iii. Shelf and hooks for supplies. 4.5 Building Lobby and Main Floor Elevator Lobby (a) Ceiling i. Building standard ceiling per building standard specification 4.1. ii. Building standard lighting per building standard specifications 7.2(a)(ii), 7.2(b). 7 (b) Walls i. Painted gypsum board per building standard 4.1(b). (c) Floor i. Carpet at furnish and install allowance of $20/square yard. 4.6 Exit Stairwells (a) Ceilings Painted exposed construction. (b) Walls Painted. (c) Floors i. Concrete sealed. 4.7 Electrical/Telephone Rooms, Elevator Machine Rooms, etc. (a) Ceilings Exposed construction, unpainted or gypsum wallboard taped and primed. (b) Walls Exposed construction or gypsum wallboard taped and primed. (c) Floors i. Sealed. 4.8 Furnishings and casework. (a) The Work does not include any furniture, appliances, partitions, computer equipment, telephones, cabling, or any other furniture, furnishings, or equipment, even if shown on any plan or drawing. (b) The Work shall include the following casework as an allowance item. The stated allowance will be applied against both design and construction of the following items. The allowance will be calculated on an actual per-lineal foot basis, with a fixed per-unit 8 cost, except for the reception area counter, which portion of the allowance shall be fixed at $7500. In the event the cost of design and construction of the following exceeds the total allowance, the excess cost shall be added to the Cost of the Work (it being the understanding that such extra cost shall be paid for by Tenant).
Casework Estimated Quantity Unit Unit Cost Cost Plastic Laminate Counters at Toilet Rooms 84 If $ 75.00 $ 6,300 Coffee Bar (Upper & Lowers) 48 If $ 250.00 $12,000 Catering Kitchen Casework (Upper & Lowers) 30 If $ 250.00 $ 7,500 Lounge Casework (Upper & Lowers) 21 If $ 250.00 $ 5,250 Counter at Reception Area (Allowance) Is $7,500.00 $ 7,500 Credenzas at Main Conference & Training 32 If $ 350.00 $11,200 Est. Total $49,750
4.9 Miscellaneous Requirements (a) A general interior building signing system for the following will be provided: Code/ADA required signage. 5. Vertical Transportation 5.1 Elevator (a) Hydraulic passenger elevator with 1500 lb capacity and speed of 100 fpm. 6. HVAC/Mechanical 6.1 Quality Assurance (a) Equipment Areas Coordinate mechanical equipment spaces and other space requirements with architectural arrangement. (b) Pressure Ratings Provide components subject to system pressure with pressure ratings that exceed maximum system pressure at location of components. Such components include piping, fittings, valves, 9 piping specialties, tanks, coils, equipment and air handling and distribution devices. (c) Noise With each system in normal operation simultaneously, mechanical systems will meet the following criteria: i. Noise Criteria Standard (NG) Maximum noise criteria levels: Offices 35 Meeting Rooms 35 Cafeteria 40 Lobbies 40 Corridors 40 Toilets 40 Storage 50 (d) Vibration Mechanical systems not to result in vibration in excess of industry standards for Class-A office space. 6.2 Heating, Ventilating and Air Conditioning - Design Criteria (a) Will Comply with Oregon Energy Code. (b) Other: see ASHRAE Handbooks, latest applicable volumes. (c) Electrical Loads. Base final design on data provided by Landlord's Design Electrical Engineer and assumptions made under these plans and specifications. (d) Minimum Outside Ventilation Air. Typically 20 CFM per occupant (assumes one occupant per cubicle or office per space plan) or 0.2 CFM per square foot, whichever is greater. (e) Minimum Total Air Circulation Rates: i. Office Spaces: Typically 0.80 CFM per SF interior, 1.0 CFM per SF perimeter. 10 ii. Toilets: Typically 2 CFM per SF iii. Other: As required by good design practice. (f) Air Drafts Air motion not to exceed 50 FPM in any portion of occupied spaces from floor up to 6'6" above floor. (g) Air Handling Equipment includes for the three major zones of the building totaling 195 tons: i. East Wing 65 nominal ton VAV units (1) 2nd floor fan powered boxes (5) 2nd floor cooling only VAV boxes (5) 1st floor fan powered boxes (4) 1st floor cooling only VAV boxes (7) Electric room exhaust fans (2) Perimeter slot diffusers (15) T-bar supply diffusers (70) T-bar return grilles with sound boots (10) T-bar return air grilles without boots (32) Exhaust grilles (2) Fire/smoke dampers (9) ii. Central Wing 65 nominal ton VAV units (1) 2nd floor fan powered boxes (7) 2nd floor cooling only VAV boxes (8) 1st floor fan powered boxes (7) 1st floor cooling only VAV boxes (8) Electric room exhaust fans (2) Toilet/kitchen exhaust fan (1) Perimeter slot diffusers (28) T-bar supply diffusers (82) T-bar return air grilles with sound boots (14) T-bar return air grilles without boots (36) Exhaust grilles (9) Fire/smoke dampers (11) 11 iii. West Wing 65 nominal ton VAV units (1) 2nd floor fan powered boxes (5) 2nd floor cooling only VAV boxes (5) 1st floor fan powered boxes (5) 1st floor cooling only VAV boxes (5) Electric room exhaust fans (2) Toilet/kitchen exhaust fan (1) Perimeter slot diffusers (10) T-bar supply diffusers (66) T-bar return air grilles with sound boots (8) T-bar return air grilles without boots (32) Exhaust grilles (10) Fire/smoke dampers (4) (h) Room Thermostats i. Provide and connect each temperature control zone. ii. Install per code: (1) Where rooms and walls are constructed in their final forms, install thermostats on wall. (2) Where areas are subject to addition of walls, locate thermostat at ceiling with five feet of wire control tubing. 6.3 Controls (a) Complete system of direct digital (DDC) temperature controls and computerized energy management. i. Air side economizer cycle. ii. Warm-up cycle. iii. Night set-back. iv. Automatic stop and start. (b) VAV box will be integrated with the DDC system. (c) Freeze Protection for Mechanical Systems. 12 6.4 Heating, Ventilating and Air Conditioning Systems Description. (a) Mechanical system to be rooftop packaged multiple-zoned VAV units complete with DDC controls. VAV boxes to be straight VAV or fan powered VAV combination with electric heat at perimeter and cooling only at interior. Ductwork to be medium pressure spiral round duct. Returns to be via ceiling plenum. (b) No fiberglass to be used in the air stream other than at the following locations: (i) the first 20 feet of supply and return mains downstream of the rooftop equipment and (ii) return air grilles in private offices shall have acoustically lined sound boots. 6.5 Plumbing - Design Criteria (a) Utilities: i. Connections: Connect to utility mains for water, gas, storm, and sanitary sewers at 5' outside of building face. ii. Regulations: Comply with requirements of utility companies and agencies. (b) Domestic Water i. Pressure Range at Fixtures (1) Minimum: 25 PSIG (2) Maximum: 70 PSIG ii. Lavatories (1) Office Spaces: 105 degrees F, single faucet. (2) Kitchen Areas: 140 degrees F hot water and cold water. (3) Shower: 105 degrees F. iii. Water coolers per plan. 13 (c) Natural Gas For gas fired equipment. (d) Sanitary Waste and Vents i. Fixtures Per architectural drawings. ii. Mechanical Systems As required by design. (e) Storm Drains For roofs, planters, and exterior areas. 6.6 Plumbing - System Description (a) Fixtures and Drains Wall hung, flush valve water closets and urinals. (b) Tenant Sink Provisions as shown the plans. (c) Domestic Water. i. Water heaters as designed by Landlord. ii. Piping distribution systems for cold and hot water to fixtures and equipment. iii. Valves, piping specialties, vibration isolation and insulation. (d) Sanitary Waste and Vent i. Piping collection system from fixtures, drains and equipment. (e) Storm Drains i. Piping collection system from drains for roofs. Include roof overflow drains with discharge nozzles. 14 (f) Landlord will pay sewer equalization charges and any other permit or connection fees for number of sewer units needed for fixtures shown on plans. 6.7 Fire Protection - Design Criteria (a) Site Utilities i. Connections Connect to utility mains at 5' from building face. ii. Regulations Comply with requirements of utility company or agency. iii. Coordination (1) With utility company or agency. (2) For locations, rooms, vaults, boxes, meters valves, and visible items. (b) Fire Sprinklers i. Provide for entire building. ii. Per NFPA 13. 6.8 Fire Protection - Systems Descriptions (a) Piping Distribution Combined system for sprinkler and standpipes. (b) Fire Department Pumper Connections At locations per code enforcing agency. (c) Sprinkler Heads -- per code. (d) Fire Extinguishers In cabinets where indicated on architectural drawings and per code. (e) Other Components Per code. 15 7. Electrical/Communication 7.1 Quality Assurance (a) Equipment Areas i. Coordinate electrical equipment rooms and other space requirements with Architect. (b) Noise and Vibration With each system in normal operation simultaneously, electrical systems shall meet following criteria: i. Noise Maximum Noise Criteria (NC) levels: Offices 35 Meeting Rooms 35 Cafeteria 40 Lobbies 40 Corridors 40 Toilets 40 Storage 50 ii. Vibration System not to exceed the following: (1) Less than 16 Hz: 0.004 inch per second vibration velocity. (2) 16 Hz or Greater: 0.001 g rms acceleration as analyzed by 1/3 octave bands or for single frequency components. 7.2 Design Criteria (a) Lighting Levels; Minimum Average Maintained Foot-Candles i. Offices: 60 in open landscaped offices ii. Lobbies: 25 iii. Corridors: 20 16 iv. Other Areas: Consistent with task, but not to exceed 60. (b) Lighting Fixture Type: 2'x4' Two-lamp parabolic with a T-8 ballast by Columbia or Lithonia. (c) Lighting Circuiting - to be determined by Landlord. (d) Lighting Switching Open areas/no more than 1,000 sq. ft. will be controlled by one light switch (e) Power Distribution In switchboards, distribution panelboards, branch circuit panelboards and feeders and busways allow for: i. HVAC, plumbing, fire protection, elevator and lighting loads. ii. Minimum 25% spare capacity (over the fully built out building), in feeders, including breaker spaces in panelboards. iii. In electrical riser room on each floor provide sleeves in floor for future systems; include routing space from switchboard room to lowest typical floor electrical room. (f) Office Area Receptacle and Communications Outlets i. average of one per 285 square feet of premises area, and three electrical circuits for each workstation cluster (8 units). ii. Ten percent of the total circuit count for outlets is to be dedicated. iii. Distribution shall be by means other than power poles. (g) Other Power Outlet Requirements i. Maintenance Outlets in Corridors 20A, 120V, duplex outlets, maximum 90 feet apart. 17 ii. Electrical Closets Minimum one 20A, 120V, duplex outlet. iii. Toilets One duplex receptacle 20A, 120V, at lavatory counter as directed. iv. At Telephone Backboard Mounting height 7 feet on separate circuit in each closet. v. Drinking Fountains Single receptacles of proper voltage and ampere ratings for water chiller equipment at locations as required by plans. vi. Elevator Pit 20A, 120V 7.3 Systems Description (a) Power Supply - Building Services 277/480 volt, 3-phase (b) Transformer Pad (c) Main Switchboard (d) Normal Power Distribution i. Utility Metering ii. Building Power Distribution (e) Telephone System Conduit i. Empty conduits to, and riser conduit sleeves in, telephone riser closets with plywood backboards located on each floor. (f) Fire Detection and Alarm Systems As Required By Code 18 LISTS OF PLANS Electrical Plans dated December 27, 1996, prepared by Christenson Electric, pp. E-1 and E-2, for Evergreen Corporate Center--MedicaLogic. Partition Plans dated December 3, 1996, prepared by ZGF Partnership, 2 pp, for Evergreen Corporate Center--MedicaLogic. Preliminary Facade Design dated November 7, 1996, prepared by ZGF Partnership, for Evergreen Corporate Center - MedicaLogic. 1 NOTES ON SCOPE OF WORK 1. Site Work. The Landlord's Work includes completion of the following around the Building: curbs, sidewalks, irrigation and landscaping, all building utilities (sufficient to complete connections to the building shell when built), transformer and pad, and landscaping to screen the transformer from view, recycling and garbage storage area for building, asphalt, landscape, and utility repairs and additions as needed ("collectively, Building Site Work"). 2. Miscellaneous. 2.1 The scope of the Work also includes the following: (a) Insulated glass at locations designed by Landlord's Architect on the exterior perimeter of the building. Building facade will include brick and glass on all sides generally consistent with the preliminary facade design dated November 7, 1996. (b) Roof will be high enough to allow Tenant to build a 9 foot clear interior ceiling above the slab with sufficient space above the proposed interior ceiling grid to allow for HVAC ductwork and miscellaneous mechanical and electrical systems. The top of exterior perimeter glazing will be approximately 9 feet above the finished floor. (c) Provision of roof screening for installed mechanical equipment screening all of Tenant's mechanical equipment. (d) Infrastructure for sprinkler distribution system. (Drops and finish items and the installation thereof are part of the Tenant's responsibility and are not included in the Work.) (e) Fifteen-year standard roof warranty, in the form provided by the manufacturer. (f) One-year "water tight" guarantee, in the form provided by the manufacturer. (g) One-year standard HVAC warranty in the form provided by the manufacturer. (h) One-year standard elevator warranty in the form provided by the manufacturer. (i) One-year standard glazing system warranty in the form provided by the manufacturer. 2 (j) Roof and foundation drainage. (k) Two four-inch conduits from the street to the telephone equipment room in the Premises. (l) The items in the quantities listed on the attached Schedule C-1; provided, however, the Schedule's sole purpose is to provide detailed information on quantities and items to be provided by Landlord. If any item listed on such Schedule is also included in this Exhibit C, the quantities shown on such Schedule shall be illustrative only of what is described in this Exhibit C and not added to what is described in this Exhibit C. 3. Design Costs. Landlord shall be responsible for the cost of design and engineering of the Landlord's Work, to the extent necessary to prepare Landlord's Work Plans sufficient for permitting. Tenant shall be responsible for design and engineering costs resulting from (i) any Tenant details or Tenant's program requirements, other than details necessary to prepare plans sufficient to obtain permits for the Scope of Work described herein; (ii) any Tenant-requested changes or further clarifications to any plans; (iii) any Additional Work; and (iv) any work outside the scope of Landlord's Work, including without limitation plans for design of Tenant's furnishings, equipment, electrical, communications, and computer systems, and integration and connection of the same to Landlord's Work. Tenant shall engage and pay for its own architect, pursuant to Section 2.1 of Exhibit D, for any plans described in clauses (iii) or (iv). 3 SCHEDULE C-1
- -------------------------------------------------------------------------------- BAUGH CONSTRUCTION OREGON, INC. Project: Medicalogic Tenant Improvement Architect: ZGF Location: Hillsboro, Oregon Estimator: B. Jensen - -------------------------------------------------------------------------------- Description Quantity* Unit Loading Dock Excavation 1 ls Wall Footings 95 lf Dock Ramp Walls 475 sf Dock Leveler Pit 1 ls Dock Ramp Slab 600 sf Guardrails 80 lf Overhead Door - 12' x 9' 1 ea Hollow Metal Doors 1 pr Dock Leveler/Bumpers/Seal 1 ls Area Drain 1 ea Storm Drain Lateral 100 lf Casework (See Allowance per lease) Doors & Relites Prefinished 8'-6" Oak Drs/Timely Frms/HW 79 ea Prefinished 8'-6" Oak Drs/Timely Frms/HW/Pr 3 ea Relites 2' x 8'-6" 25 ea Larger Relites 160 sf Accordian Door and Support 79 lf Walls Gypboard at Exterior Walls 8,766 sf Pluming Chase 952 sf Toilet Room Walls w/ Sound Insulation 6,636 sf Full Height Walls 10,262 sf Office Walls 17,154 sf Column Wraps 73 ea Fascia at Lobby Opening 54 lf Architectural Railing System 85 lf Ceilings Gypboard Ceilings at Toilets/Showers/Kitchen 2,556 sf Ceiling Coves at Toilet Rooms 200 lf Acoustical Ceilings - 2 x 4 Second Look 66,039 sf Sound Insulation on Ceiling @ Office Walls 15,248 sf Painting & Wallcovering Paint Walls - Enamel 64,931 sf Paint Walls & Ceilings - Epoxy 2,556 sf Floorcovering Ceramic Tile Floors at Toilets/Showers 2,332 sf Ceramic Tile Base 444 lf Ceramic Tile Wet Wall 1,776 sf Page 1 of 2 - -------------------------------------------------------------------------------- BAUGH CONSTRUCTION OREGON, INC. Project: Medicalogic Tenant Improvement Architect: ZGF Location: Hillsboro, Oregon Estimator: B. Jensen - -------------------------------------------------------------------------------- Description Quantity* Unit Sheet Vinyl Flooring at Kitchen 224 sf Anti Static Flooring at Network 398 sf Glue Down Loop Carpet 7,065 sy Rubber Base 7,475 lf Concrete Floor Sealer at Warehouse 2,118 sf Accessories Fire Extinguishers & Cabinets 6 ea Interior Building Signage 1 ls Toilet Partitions 28 ea Urinal Screens 8 ea Grab Bars 16 ea Toilet Paper Holders 28 ea Soap Dispensers 14 ea Sanitary Napkin Disposal 20 ea Sanitary Napkin Vendor 4 ea Paper Towel Dispenser/Disposal 10 ea Seat Cover Dispensers 28 ea Prefabricated Shower Units 4 ea Mirrors 420 sf Window Coverings at Exterior Windows 9,094 sf Lockers - 12" x 36" 30 ea Mechanical & Electrical Plumbing HVAC Fire Protection 75,312 sf Electrical
Page 2 of 2 EXHIBIT D WORK AGREEMENT 1. CHANGES TO LANDLORD'S WORK AND ADDITIONAL WORK PROVIDED AT TENANT'S EXPENSE All Additional Work (as defined in Section 7.1 of the Lease and Rider No. 16), if any, shall first be approved in writing by Landlord pursuant to Section 2 of this Work Agreement and the costs, fees and expenses thereof shall be paid by Tenant as provided in this Work Agreement, in Section 7.1 of the Lease and Rider No. 16, and in Section 36.1 of the Lease. If a change to Landlord's Work specifically requested by Tenant and agreed to by Landlord directly results in actual savings to Landlord, Tenant shall receive a credit for such actual savings. 2. DESIGN AND CONSTRUCTION OF THE ADDITIONAL WORK 2.1 In the event Tenant desires any Additional Work, as defined in Section 1 of this Work Agreement, Tenant shall retain the services of Zimmer Gunsul Frasca ("ZGF") or other qualified architect, approved in advance by Landlord, to prepare the necessary drawings, including without limitation basic space plans and complete detailed working plans for any of the Additional Work (individually and collectively, the "Plans for Additional Work"). All Plans for Additional Work shall be prepared at Tenant's expense and shall be subject to the prior written approval of Landlord. 2.2 ZGF (at Tenant's cost) shall determine that the work shown on the Plans for Additional Work is compatible with the basic Building plans and that necessary basic Building modifications are included in the Plans for Additional Work. 2.3 Tenant shall be responsible for delays and additional costs in completion of Landlord's Work caused by changes made to Landlord's Work or by the work described in the Plans for Additional Work, by inadequacies in any of the Plans for Additional Work, or by delays in delivery of special materials requiring long lead times. 2.4 Upon completion of the Plans for Additional Work and at the request of Tenant, Landlord and its contractor shall provide to Tenant in writing an estimate of the cost of improvements to be provided at Tenant's expense. Within five days after Tenant's receipt of such estimated cost, Tenant shall delete any items which Tenant elects not to have constructed and shall authorize construction of the balance of the improvements. In the absence of such written authorization, Landlord shall not be obligated to commence or continue work on the Premises, as the case may be, and Tenant shall be responsible for any costs due to any resulting delay in completion of the Premises. 2.5 Prior to commencement of construction of the Additional Work described in the Plans for Additional Work, Tenant shall either (i) deposit with Landlord cash in an amount equal to the estimated cost of the improvements to be installed at Tenant's expense pursuant to 1 Section 1 of this Work Agreement; or (ii) provide Landlord with other evidence or assurance, such as a bond or letter of credit, satisfactory to Landlord of Tenant's ability to pay the estimated cost of such improvements. Landlord's contractor shall then complete the Additional Work in accordance with the Plans for Additional Work. Any additional amounts payable by Tenant for the actual cost of the improvements shall be paid on or before the Commencement Date of the Lease, or upon receipt of the final accounting. If cash is deposited by Tenant as provided above in this Section 2.5, any excess paid by Tenant over the actual cost of the improvements shall be promptly refunded to Tenant by Landlord. 2.6 If Tenant desires any change to the Plans for Additional Work, Tenant shall submit a written request for such change to Landlord, together with all plans and specifications necessary to show and explain changes from the approved the Plans for Additional Work. Any such change shall be subject to Landlord's approval. 2.7 If any work is to be performed in the Premises by Tenant or by Tenant's contractor (which contractor must first be approved in writing by Landlord), such work shall conform to the following requirements: 2.7.1 Such work shall proceed only upon Landlord's written approval of the public liability and property damage insurance carried by Tenant's contractor. Landlord shall have the right to require Tenant's contractor to post a payment or performance bond in an amount equal to the estimated cost of the work to be performed by such contractor. Tenant shall supply Landlord with the name, address, and emergency telephone number for Tenant's contractor and all subcontractors retained by Tenant's contractor. 2.7.2 All such work shall be done in conformity with a valid building permit when required, a copy of which shall be furnished to Landlord before such work is commenced, and in any case, all such work shall be performed in accordance with all applicable governmental regulations and all applicable safety regulations established by Landlord or its contractor for the Center generally. Notwithstanding any failure by Landlord to object to any such work, Landlord shall have no responsibility for Tenant's failure to comply with all applicable governmental regulations. 2.7.3 Landlord may require that all such work be performed by union labor in accordance with any union labor agreements applicable to the trades being employed at the Center. 2.7.4 All such work shall be scheduled through Landlord and Landlord's contractor and shall be performed in a manner and at times which do not impede or delay any work on the Premises being performed by Landlord's contractor. 2.7.5 Tenant's contractor shall store any materials only in the Premises or in such other space as may be designated by Landlord or its contractor from time to time. All trash and surplus construction materials shall also be stored within the Premises and shall be promptly removed from the Center. 2 2.8 Tenant's entry into the Premises for any purpose, including without limitation inspection or performance of work by Tenant or Tenant's contractor, prior to the Commencement Date, shall be subject to all the terms and conditions of the Lease, including without limitation the provisions of the Lease relating to the maintenance of insurance and indemnification by Tenant, but excluding the provisions of the Lease relating to the payment of Rent. Tenant's entry shall mean entry by Tenant, its officers, contractors, subcontractors, licensees, agents, servants, employees, guests, invitees, or visitors (collectively, the "Tenant Related Parties"). 2.9 Tenant shall indemnify and hold harmless Landlord from and against any and all claims, losses, liabilities, and expenses (including without limitation reasonable attorneys' fees) arising out of or in any way related to the activities of Tenant or the Tenant Related Parties in the Premises or the Center. Without limiting the generality of the foregoing, Tenant shall promptly reimburse Landlord upon demand for any extra expense incurred by Landlord as a result of faulty work done by Tenant or the Tenant Related Parties, any delays caused by such work, or inadequate clean-up. If Tenant's delays cause Landlord's Work to be substantially completed later than on December 15, 1997, Tenant's obligation to pay Base Rent and Tenant's share of Expenses shall commence one day earlier than the date of substantial completion of Landlord's Work for each Tenant Delay Day. 3 EXHIBIT E CENTER RULES AND REGULATIONS 1. No sign, placard, picture, name, advertisement or notice, visible from the exterior of leased premises shall be inscribed, painted, affixed, installed or otherwise displayed by any tenant either on its premises or any part of any building or any part of the Center without the prior written consent of Landlord, and Landlord shall have the right to remove any such sign, placard, picture, name, advertisement, or notice in violation of this rule without notice to and at the expense of the tenant. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of the tenant by a person approved by Landlord. 2. No curtains, draperies, blinds, shutters, shades, screens or other coverings, awnings, hangings or decorations shall be attached to, hung or placed in, or used in connection with, any window or door on any premises without the prior written consent of Landlord which consent shall not be unreasonably withheld. No articles shall be placed or kept on the window sills so as to be visible from the exterior of the building. No articles shall be placed against glass partitions or doors which might appear unsightly from outside the tenant's premises. 3. Each tenant shall see that the doors of its premises are closed and securely locked and must observe strict care and caution that all water faucets or water apparatus are entirely shut off before the tenant or its employees leave its premises, and that all utilities shall likewise be carefully shut off, so as to prevent waste or damage. For any default or carelessness, Tenant shall repair all damage sustained by other tenants or occupants of the Center or by Landlord. 4. No tenant shall use, keep or permit to be used or kept in its premises any foul or noxious gas or substance or permit or suffer such premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Center by reason of noise, odors and/or vibrations or interfere in any way with other tenants or those having business in the Center, nor shall any animals or birds be brought or kept in or about any premises of the Center. 5. No cooking shall be done or permitted by any tenant on its premises, except that use by the tenant of Underwriters' Laboratory approved equipment for the preparation of coffee, tea, hot chocolate and similar beverages, and heating of food by conventional microwave ovens, for tenants and their employees shall be permitted, provided that such equipment and use is in accordance with all applicable federal, state and city laws, codes, ordinances, rules and regulations. 6. No premises shall be used for lodging. 1 7. Except with the prior written consent of Landlord, no tenant shall sell, or permit the sale, of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise in or on any part of the Center, nor shall any tenant carry on, or permit or allow any employee or other person to carry on, the business of stenography, typewriting or any similar business in or from any premises for the service or accommodation of occupants of any other portion of the Center, nor shall the premises of any tenant be used for the storage of merchandise or for manufacturing of any kind, or the business of a public barber shop, beauty shop, beauty parlor, nor shall the premises of any tenant be used for any improper, immoral or objectionable purpose, or any business or activity other than that specifically provided for in such tenant's lease. 8. No tenant shall install any radio or television antenna, loudspeaker or any other device on the exterior walls or the roof of the Center. No tenant shall interfere with radio or television broadcasting or reception from or in the Center or elsewhere. 9. Business machines and mechanical equipment belonging to a tenant which cause noise or vibration that may be transmitted to the structure of the building or to any space therein to such a degree as to be objectionable to Landlord or to any tenants in the Center shall be placed and maintained by the tenant, at the tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. 10. No tenant shall place a load upon any floor of its premises which exceeds its load per square foot which such floor was designed to carry. 11. Each tenant shall store all its trash and garbage within the interior of its premises. No material shall be placed in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage in the city without violation of any law or ordinance governing such disposal. All trash, garbage and refuse disposal shall be made only through entryways for such purposes. 12. Canvassing, soliciting, distribution of handbills or any other written material, and peddling in the Center are prohibited and each tenant shall cooperate to prevent the same. No tenant shall make room-to-room solicitation of business from other tenants in the Center. 13. Landlord shall have the right, exercisable without notice and without liability to any tenant to change the name and address of the Center. 14. Each tenant assumes any and all responsibility for protecting its premises from theft, robbery, and pilferage, which includes keeping doors locked and other means of entry to the premises closed. 15. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenant or tenants, but no such waiver by Landlord shall be construed as a 2 waiver of such Rules and Regulations in favor of any other tenant or tenants, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all tenants in the Center. 16. Landlord reserves the right to make such other and reasonable rules and regulations as in its judgment from time to time be needed for safety and security, for care and cleanliness of the Center and for the preservation of good order in the Center. Tenant agrees to abide by all such Rules and Regulations and any additional rules and regulations which are adopted. 17. Landlord reserves the right to designate and regulate the use of the parking spaces at the Center. 18. Each tenant and each tenant's guests shall park between designated parking lines only, and shall not occupy two parking spaces with one car. Vehicles in violation of the above shall be subject to tow-away, at the vehicle owner's expense. 19. Vehicles parking at the Center overnight without prior written consent of Landlord shall be deemed abandoned and shall be subject to tow-away at the vehicle owner's expense. 20. Each tenant shall be responsible for the observance of all of the foregoing Rules and Regulations by such tenants employees, agents, clients, customers, invitees and guests. 21. These Rules and Regulations are in addition to, and shall not be construed to in any way modify, alter or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of premises in the Center. 3 EXHIBIT F EXTERIOR SIGN REGULATIONS These regulations have been established for the purpose of maintaining the overall appearance of Evergreen Corporate Center. Compliance will be strictly enforced. All Tenant signs must be approved by Landlord. Any sign installed without the approval of Landlord will be brought into conformity at the expense of Tenant. Tenant shall submit a sketch of its proposed sign to Landlord for its approval. The approved sketch will be delivered by Landlord to the sign company. Tenant is responsible for the cost of the sign, and Landlord will bill Tenant to recover the cost. Tenant shall be responsible for the fulfillment of all requirements in accordance with this Exhibit F. General Requirements 1. Signs will be permitted only for the purpose of identifying the name and business conducted in a Building. Tenant shall place no more than one sign on a side wall of the Building. 2. Tenant may select the style and color of the individual company's lettering and logo, subject to Landlord's approval as provided above. 3. All signs shall conform to all applicable ordinances, codes, and the covenants, conditions, and restrictions of Tanasbourne Commerce Center, and shall be compatible with the park-like environment of the Center. 4. Placement of the sign and method of attachment to the Building will be as directed by Landlord. 5. Upon removal of any sign, any damage to the Building must be repaired by Tenant at its expense. All signs are the property of Landlord. 6. Except as provided herein, no advertising placards, banners, pennants, names, insignias, trademarks, or other descriptive material shall be affixed or maintained upon the glass panes or exterior walls of the Building, or the landscaped areas, streets, or parking areas. 7. No audible signs will be permitted. Tenant Exterior Sign Standards 1. Signs shall not be larger than 5 percent of the total square footage of the face of the Building and shall not exceed 80 square feet. 2. The Building sign shall not extend above the eave of the sidewall of the Building. 3. Signs may be illuminated. Lighting shall be standard for all buildings in the Center. Specification will be provided by Landlord. 4. Lettering and/or the Company logo shall be brushed aluminum. ADDENDUM TO LEASE DATED: January 15, 1997 BETWEEN: EVERGREEN CORPORATE CENTER LLC, an Oregon limited liability company ("Landlord") AND: MEDICALOGIC, INC., an Oregon corporation ("Tenant") The following modifications and insertions, numbered Rider No. 1 to and including Rider No. 45, are hereby incorporated into the Lease and shall be deemed made at the respective places indicated throughout the Lease. Any reference to the Lease in the following provisions of this Addendum shall be deemed to include this Addendum, unless otherwise specified in such reference. The capitalized terms used in this Addendum which are defined in the Lease shall have the meanings given to them in the Lease. Rider No. 1. Insert Section 1.1(e), Page 1: - ------------------------------------------ The Premises will be in a two story building to be constructed by Landlord and are outlined on the attached Exhibit A. Both floors in the Premises shall be measured in accordance with Portland NAIOP measurement standards, a copy of which is attached as Exhibit A-1. Rider No. 2. Insert Section 1.1(f), Page 1: - ------------------------------------------ At the time this Lease is executed, the Project is under construction. The current conceptual plan for the Project is attached as Exhibit B. The location and size of the buildings shown on Exhibit B may change from time to time. Also, the total amount of square footage in the Project shall vary over the Term of the Lease. Tenant's percent of the Project for purposes of determining Tenant's share of Expenses pursuant to Section 4.3 of the Lease shall be determined by multiplying the Expenses by a fraction, the numerator of which shall be the number of square feet in the Premises from time to time (initially 75,010) and the denominator which shall be the total number of square feet of completed and leasable space in the Project from time to time. The remaining development of the Project shall be compatible with that portion of the Project which is constructed as of the date of this Lease and the portion to be constructed as provided in this Lease. That is, the structures, landscaping and parking shall be similar and no special or materially different amenities in the common areas (such as water fountains, for example) are contemplated and, if Landlord constructs such a special or materially different amenity in the common area, the costs thereof shall not be included in Expenses payable by Tenant unless Tenant first consents to the construction of such amenity. 1 Rider No. 3. Insert Section 1.1(h), Page 1: - ------------------------------------------ The term of the Lease (the "Term") shall commence on the earlier of (a) the date on which Tenant first takes occupancy of the Premises; or (b) the date on which Landlord's Work (as defined below) is substantially completed as certified by Landlord's architect, a temporary certificate of occupancy is received, access to the Premises is completed as required by Laws, and parking areas are completed consistent with the provisions of Section 10.1 (the "Commencement Date"). The Term shall expire, unless sooner terminated or extended pursuant to the provisions of the Lease, 120 months after the Commencement Date. If the Lease is fully executed and delivered by January 17, 1997 and all information and approvals as requested by Landlord regarding details, colors, finishes or other issues relating to Landlord's Work (as defined below) are received by Landlord in writing from Tenant on or before March 15, 1997, then the anticipated substantial completion date of Landlord's Work shall be December 15, 1997, subject to delays caused by Tenant, delays caused by Tenant's requested changes to any plans related to Landlord's Work, or to delays caused by forces and events outside of Landlord's control, such as delays caused by abnormally adverse weather, labor dispute, strike, civil commotion, rebellion, hostilities, military or other usurped power, sabotage, governmental regulations or controls, delay in issuance of any permit beyond 30 days after an application therefor (which is, to the best of Landlord's knowledge, a completed application) is submitted, inability, due to reasons beyond Landlord's control, to obtain labor, services or materials, or acts of God (collectively, "Force Majeure"). If substantial completion of Landlord's Work is delayed past March 31, 1998, as extended, day for day, for days of delay caused by Tenant, by Tenant's requested changes to any plans related to Landlord's Work, or by Force Majeure, then for each day of delay in substantial completion of Landlord's Work beyond March 31, 1998 except for days of delay caused by Tenant, by Tenant's requested changes to any plans related to Landlord's Work, or by delays caused by Force Majeure, Tenant shall receive a credit against Base Rent payable under this Lease in an amount equal to $653.47 per day. Tenant hereby accepts the Landlord's Work Plans (defined below) as complete and as comprising the totality of Landlord's Work. Tenant shall be permitted to enter the Premises approximately 45 days prior to the Commencement Date for the purpose of rough-wiring Tenant's telephone, alarm, and data systems to perimeter walls. Such work shall be in compliance with the provisions of Section 2.7, 2.8 and 2.9 of the Work Agreement attached as Exhibit D. Tenant shall provide promptly upon Landlord's request information regarding details, colors, finishes and other issues relating to Landlord's Work so that Landlord may apply for applicable permits by March 15, 1997. Rider No. 4. Insert Section 2.1, Page 1: - --------------------------------------- Landlord shall give Tenant notice when the Premises are ready for occupancy. Rider No. 5. Insert Section 2.1, Page 1: - --------------------------------------- , and subject to latent defects but only to the extent the costs of correction of such latent defects are paid for under any applicable guaranty, warranty or contractual commitment provided by Baugh Construction Oregon, Inc. (the "Contractor"). Landlord agrees to use commercially reasonable efforts to enforce applicable guaranties, warranties and the construction 2 contract with the contractor (the "Construction Contract") related to correction of latent defects at Tenant's cost and expense. The limitation on Landlord's liability in this Lease related to the Building and Landlord's Work shall not limit the Contractor's liability. The Construction Contract shall contain substantially the same warranty as that which is set forth in AIA Form A201-1976 or terms more favorable to landlord. "Punchlist items" shall mean minor items which do not interfere with Tenant's use of the Premises for its intended purpose. Landlord shall complete all punchlist items within 60 days of the date of Tenant's and Landlord's agreement as to the items on the punchlist, subject to additional time needed to complete warranty items and delays due to Force Majeure including additional time needed to obtain materials. Rider No. 6. Insert Section 2.1(2), Page 2: - ------------------------------------------ the date on which the building permits for Landlord's Work are issued. Rider No. 7. Insert Section 2.1(2), Page 2: - ------------------------------------------ However, Landlord agrees to use commercially reasonable efforts to enforce any applicable guaranties, warranties or Construction Contract claims related to the correction of the violation at Tenant's cost and expense. Landlord represents to Tenant that the Premises are zoned MP by the City of Hillsboro, which zoning designation permits office use. Rider No. 8. Insert Section 3.1, Page 2: - --------------------------------------- one day earlier than the date of substantial completion of Landlord's Work for each day of delay caused by any reason attributable to Tenant (each a "Tenant Delay Day"). Tenant acknowledges that Landlord shall not be obligated to engage overtime labor in order to reduce delay due to Force Majeure unless Tenant requests such overtime labor and pays for such overtime labor. Rider No. 9. Insert Section 4.3(1)(b), Page 2: - --------------------------------------------- excluding janitorial costs related to the interior of buildings in the Project; Rider No. 10. Insert Section 4.3(1)(c), Page 2: - ---------------------------------------------- ; provided, however, that Expenses shall not include maintenance, replacement or repair costs relating to individual tenant premises which maintenance, replacement or repair is in excess of the type of maintenance, replacement or repair required to be provided by Landlord to Tenant under this Lease. Rider No. 11. Insert Section 4.3(1)(e), Page 2: - ---------------------------------------------- Real Property Taxes shall not include assessments (such as local improvement districts) for construction of improvements in the initial development of the Project but Real Property Taxes will include ad valorem taxes assessed on such improvements. 3 Rider No. 12. Insert Section 4.3(1), Page 2: - ------------------------------------------- The term "Expenses" shall not include the following: (i) Ground lease rental. (ii) Amortization and interest pay1ments on Landlord's mortgage financing. (iii) Depreciation. (iv) Costs incurred in the initial development and construction of the Project. (v) The costs of correcting defects in construction which are paid by enforcement of applicable guaranties or warranties. (vi) The cost of tenant improvements provided inside buildings. (vii) Leasing commissions or brokerage commissions. (viii) Legal expenses for disputes with other tenants. (ix) Legal, auditing, and consulting fees other than those incurred in connection with operation, maintenance, repair or replacement of the Project. (x) Costs incurred in performing maintenance and repairs or furnishing services for individual tenants which work or services is in excess of the type of maintenance and repair or services required to be provided by Landlord to Tenant under this Lease. (xi) Expenses incurred in leasing transactions or procuring new tenants. (xii) Expenses for repair or replacement paid by proceeds of condemnation awards and costs due to casualty (other than commercially reasonable deductible amounts under insurance policies which shall be included in Expenses). (xiii) Wages, costs and salaries associated with offsite employees of Landlord other than services provided by such employees which would otherwise be provided by outside persons, and wages, costs and salaries attributable to persons above the level of property manager; provided, however, that Tenant acknowledges the right of Landlord to charge (a) a management fee not to exceed four percent of gross rents and revenues of the Project, (b) construction management fees not to exceed ten percent of the costs, fees and expenses in connection with construction, and (c) an additional charge on costs of labor and personnel not to exceed fifteen percent thereof. (xiv) Any costs representing an amount paid to any entity related to Landlord which is in excess of the amount which would have been paid in the absence of such relationship subject to the proviso regarding the fees and charges set forth in paragraph (xiii) above. 4 (xv) Damages payable by Landlord due to a default by Landlord under any lease or fines, penalties or interest charged by a governmental entity arising from Landlord's violation of any governmental laws, rules, regulations, or ordinances applicable to the Project. Rider No. 13. Insert Section 4.3(3), Page 3: - ------------------------------------------- Tenant shall pay its annual share of estimated Expenses in monthly installments of one-twelfth (1/12) each beginning on the Commencement Date and continuing thereafter on the first day of each calendar month, in advance, throughout the Term. Landlord may revise its estimate of Tenant's share of Expenses from time to time. When Landlord revises its estimate of Tenant's share of Expenses, and Landlord gives written notice to Tenant of such revised estimate, Tenant shall make revised payments of Expenses pursuant to such notice commencing on the first day of the calendar month following Landlord's notice of the revised estimate and continuing on the first day of each calendar month until the estimated payments are again revised. Rider No. 13a. Insert Section 4.3(3), Page 3: - -------------------------------------------- until the earlier of (a) 365 days following the date of receipt of the Notice, or (b) the date Landlord issues its accounting for Expenses for the next succeeding calendar year (the "Objection Deadline") to Rider No. 14. Insert Section 4.3(3), Page 3: - ------------------------------------------- No later than on the Objection Deadline, Tenant's employee or Tenant's authorized representative (which must be a certified public accountant paid on an hourly basis and not on a contingent fee basis) may, at Tenant's expense, after reasonable prior notice to Landlord, and at a reasonable time, audit Landlord's books and records for the calendar year pertaining to the Notice for the purpose of verifying Landlord's calculation of the Expenses for the year in question. If such audit reveals any errors, and if Landlord does not dispute the audit, appropriate adjustments shall be made. If Landlord disputes the results of the audit and Landlord and Tenant are unable to agree on the appropriate adjustment to be made, if any, then the dispute shall be resolved by a nationally recognized accounting firm not then employed by Landlord or Tenant selected by Tenant from a list of three names given by Landlord to Tenant (the "Arbitrator"). The decision by the Arbitrator shall be binding on the parties and any adjustment required by the Arbitrator's decision shall promptly be made after receipt of the Arbitrator's decision. The parties shall share equally the cost of the Arbitrator. Tenant shall give Landlord a copy of the audit results. The fact of the audit itself, the results of the audit, and any adjustments made to Expenses shall be kept confidential by Tenant. Rider No. 15. Insert Section 4.3(4), Page 3: - ------------------------------------------- within five days after it is 5 Rider No. 16. Insert Section 7.1, Page 3: - ---------------------------------------- Landlord shall build the base building in which the Premises are located (the "Building") and Landlord shall provide certain tenant improvements in the Premises, all as specifically described in the scope narrative, the plans, and the specifications prepared by Zimmer Gunsul Frasca, the partition plan, and the electrical plan, all attached as Exhibit C (collectively, the "Landlord's Work Plans"). Landlord shall obtain all permits and approvals required for Landlord's Work. Landlord shall perform all of Landlord's Work in a good and workmanlike manner using new materials. The work specified in the Landlord's Work plans is collectively referred to in this lease as "Landlord's Work". All other improvements, alterations, and modifications to the Premises, additional finish items, all changes to Landlord's Work, and all changes to Landlord's Work plans, if any (collectively and individually, the "Additional Work") shall be first approved in writing by Landlord and the costs, fees, and expenses thereof, including without limitation, the costs, fees, and expenses of obtaining all necessary permits and approvals of design, construction, and installation thereof, together with supervision fees by the manager of the Project and any costs, fees, or expenses incurred due to corresponding changes to other items of Landlord's Work required as a result thereof (collectively, the "Additional TI Costs") shall be paid in full by Tenant prior to the Commencement Date of the Lease (except to the extent payable by Tenant as a First TI Loan or a Second TI Loan pursuant to Section 36.1 of the Lease). The Work Agreement attached as Exhibit D is incorporated in this Lease by this reference. Rider No. 17. Insert Section 7.1, Page 3: - ---------------------------------------- ; provided, however, that (unless required by any Laws) no such modifications, alterations, deletions, or improvements shall reduce the parking ratio for the Project below the ratio set forth in Section 10.1 or materially adversely restrict access to the Premises from N.W. Evergreen Parkway. Rider No. 18. Insert Section 7.1, Page 3: - ---------------------------------------- The current rules and regulations pertaining to the Project with which Tenant shall comply are attached to this Lease as Exhibit E. Rider No. 19. Insert Section 10.1, Page 4: - ----------------------------------------- Tenant shall not park nor allow its employees, invitees, and customers collectively to park in excess of four automobiles for every 1,000 square feet leased by tenant in the center at any point in time. Rider No. 20. Insert Section 10.1, Page 4: - ----------------------------------------- ; provided, however, that (unless required by any laws), landlord shall not have the right to reduce the parking available to tenant below the ratio set forth in this Section. 6 Rider No. 21. Insert Section 11.1, Page 4: - ----------------------------------------- Tenant shall pay its share of utilities used in or related to the operation and maintenance of the Project as part of Expenses as described in Section 4.3(1). Rider No. 22. Insert Section 12.1, Page 4: - ----------------------------------------- Landlord shall maintain, in good condition, the structural parts of the building which shall include only the foundation, the structural parts of the bearing and exterior walls (excluding glass), the structural parts of the subflooring and the structural portions of the roof (excluding skylights), and the unexposed portions of the Rider No. 23. Insert Section 12.1, Page 4: - ----------------------------------------- Except as expressly set forth in the first sentence of Section 12.1 and below in this paragraph, from and after the Commencement Date, Tenant shall be fully responsible for the maintenance, repair, replacement, and operation, in good operating order and condition, of the interior and exterior of the Building, and its systems and equipment including without limitation the heating, ventilating and air conditioning systems and equipment ("HVAC"), the roof, and the elevator. Landlord's sole obligations are set forth in the first sentence of Section 12.1. However, so long as (a) Landlord's designated Project property manager ("Landlord's Property Manager") manages the maintenance and repair of the Building and its systems pursuant to a written property management contract between Tenant and Landlord's Property Manager containing a scope of work reasonably satisfactory to Landlord, and (b) such contract is in full force and effect, then Landlord agrees to be responsible to maintain, repair, and replace the roof and any leaking windows. As of the date of this Lease, Melvin Mark Brokerage Company is Landlord's Property Manager. Tenant shall provide its own janitorial services and, in all respects, maintain the Building in good and clean operating condition throughout the Term of the Lease. Tenant shall provide regular service and maintenance of the HVAC, the elevator, the electrical system, and all other Building systems and equipment, and regular pest control services throughout the Term using contractors first approved by Landlord, which approval shall not be unreasonably withheld. Landlord shall also have the right to approve the scope of work to be provided under each such contract so that Landlord is reasonably satisfied that the Building and its systems and equipment will be properly maintained and inspected throughout the Term. Rider No. 24. Insert Section 12.1, Page 4: - ----------------------------------------- Landlord shall use its commercially reasonable efforts to enforce on Tenant's behalf and at Tenant's expense all applicable construction and equipment warranties. Rider No. 25. Insert Section 13.1, Page 4: - ----------------------------------------- either without Landlord's permission or alterations as to which Landlord required removal in connection with Landlord's approval of the alteration. Whenever Tenant requests Landlord's consent to any alteration, Tenant shall also request Landlord's decision at that time whether Landlord will require the alteration in question to be removed at the end of the Term. If 7 Tenant does not request such decision at that time, or if Landlord responds to such request with a requirement that Tenant remove the alteration in question, then Landlord shall be free to require Tenant to remove such alteration at the end of the Term as provided in this Section 13.1. Rider No. 26. Insert Section 14.1, Page 5: - ----------------------------------------- (except as expressly provided below) Rider No. 27. Insert Section 14.1, Page 5: - ----------------------------------------- Landlord shall indemnify, defend, and hold Tenant harmless from all claims, losses, causes of action, costs and expenses, and damages arising out of (a) Landlord's or its agents' negligence or willful misconduct and/or (b) Landlord's default or violation of any term of this Lease which is not corrected within a reasonable time after Tenant's notice to Landlord thereof. However, Landlord shall never be liable for consequential damages such as lost profits. Rider No. 28. Insert Section 15.1, Page 5: - ----------------------------------------- Neither party shall be liable to the other party for any loss or damage caused by any of the risks covered by "all risk" insurance coverage, and there shall be no subrogated claim by one party's insurance carrier against the other party arising out of any such loss. Rider No. 29. Insert Section 16.1, Page 5: - ----------------------------------------- Then Landlord shall give Tenant a notice as to Landlord's estimate of the time period reasonably required to complete the restoration (the "Damage Assessment"). If the Damage Assessment shall state that the reconstruction shall require more than 270 days to complete following receipt of governmental approvals required therefor, then this Lease may be terminated by Landlord or Tenant by its giving to the other party written notice of such termination within 30 days after Tenant's receipt of the Damage Assessment. In the event of the giving of such notice of termination, this Lease shall expire as of the date of such notice given in accordance with the terms of this paragraph, with the same effect as if such date were the Expiration Date. In the event that Landlord fails to substantially complete the repairs by the date specified in the Damage Assessment, Tenant shall have the right to terminate this Lease with written notice given no later than 15 days after the date specified in the Damage Assessment if Landlord's failure to complete such repairs on the date specified in the Damage Assessment is not caused in whole or in part by delays due to Force Majeure or delays caused by Tenant. If the Lease is not terminated pursuant to this Section 16.1, Rider No. 30. Insert Section 17.1(4), Page 5: - -------------------------------------------- ; provided, however, Landlord shall not use this termination provision in bad faith. 8 Rider No. 31. Insert Section 18.1(4), Page 6: - -------------------------------------------- Which consent shall not be unreasonably withheld or delayed. Landlord may condition its consent on reasonable conditions. Should Landlord withhold its consent to a proposed assignment or subletting or any other transfer of Tenant's rights under this Lease (each a "Transfer") for any of the following reasons, the withholding of consent shall be deemed reasonable: (A) conflict or incompatibility of the proposed use with uses appropriate in a professional business park; (b) financial inadequacy of the proposed transferee as reasonably determined by Landlord; (c) any proposed change in use which would diminish the professional nature of the Project or of the other businesses located in the Project; (d) the proposed use would adversely impact the use of the common facilities by other tenants of the Project; (5) Tenant is then in default of the Lease beyond any applicable cure period; and (6) any other reasonable criteria. Landlord shall not be required to consent to a Transfer to any person or entity with whom Landlord or its agents is then negotiating the terms of a lease of any other portion of the Project; provided, however, that with respect to a sublease of no more than 30 percent of the Premises entered into during the initial two years of the Term, (x) Landlord shall not be allowed to withhold its consent to the sublease to a person or entity based solely on the fact that Landlord or its agents is then negotiating the terms of a lease of another portion of the Project with that same person or entity, and (y) Landlord shall not use financial ability of the proposed subtenant as a criterion for withholding its consent to the sublease. Landlord shall not be required to consent to any Transfer at any time to an existing tenant or occupant of the Project. No Transfer shall result in Tenant being released from any obligation under this Lease. As a condition to Landlord's prior written consent as provided in this Section 18.1, the transferee shall agree in writing to comply with and be bound by all of the terms, covenants, conditions, provisions, and agreements of this Lease and Tenant shall deliver to Landlord promptly after execution an executed copy of all agreements of such compliance by each transferee. Rider No. 32. Insert Section 18.1, Page 6: - ----------------------------------------- ; provided, however, if the net worth of Tenant after the transfer at issue would be less than either (x) the net worth of Tenant as of the date of this Lease, or (y) the net worth of Tenant prior to the transfer, then Landlord may refuse its consent to the transfer at issue. Rider No. 33. Insert Section 18.1, Page 6: - ----------------------------------------- or to transfers to shareholders of record on the date of this Lease or to transfers by shareholders of record on the date of this Lease to family members or trusts for the benefit of family members of such shareholders. Tenant shall have the right to assign this Lease or sublease all or part of the Premises to any entity which is controlled by, under the control of, or under common control with Tenant, or any corporation into which Tenant may be merged or consolidated, or which purchases all or substantially all of the assets of Tenant (each an "Affiliate of Tenant"); provided, however, (a) Tenant shall not be released from its obligations under this Lease, (b) Landlord shall be given at least 15 days prior written notice of the assignment or sublease, (c) Landlord shall be given a copy of the document effecting the assignment or sublease at least 15 days prior to the date on which the assignment or sublease 9 shall occur, and (d) from and after the date of the assignment or sublease, Tenant shall be jointly and severally liable with the Affiliate of Tenant with respect to all obligations of Tenant under this Lease. Rider No. 34. Insert Section 19.1, Page 6: - ----------------------------------------- within ten days after written notice that it is due; provided, however, that Landlord shall not be obligated to give a ten day notice and opportunity to cure more than once during any single twelve-month period. If Tenant fails to pay rent or any other charge on the date it is due a second time within any twelve-month period, such failure to pay rent or other charge shall be an automatic event of default at Landlord's option without need for further notice or opportunity to cure; (b) failure to comply with Laws which failure materially affects the operations or quality of the Project or may result in a claim, fine or penalty against Landlord, failure to carry the insurance required of Tenant under this Lease, or the failure of Tenant to deliver a subordination agreement or estoppel certificate within the time required by Section 22.1 of this Lease within five days after written notice by Landlord. No notice and no opportunity to cure shall be required if Landlord has previously given Tenant notice of failure to comply with the same provision of this Lease; (c) failure to comply with the provisions of Section 10.1 of the Lease within five days after written notice by Landlord; provided, however, that Landlord shall not be obligated to give a five day notice and opportunity to cure more than once during any single twelve-month period. If Tenant fails to comply with the provisions of Section 10.1 of the Lease a second time within any twelve-month period, such failure to comply shall be an automatic event of default at Landlord's option without need for further notice or opportunity to cure; (d) failure of Tenant to comply with any other term or condition of this Lease or to fulfill any other obligation of this Lease within 30 days after written notice from Landlord specifying the nature of the failure or, if such failure cannot be cured within such 30 day period, Tenant shall not be in default if, promptly after Landlord's notice to Tenant, Tenant begins its cure of the failure and diligently prosecutes such cure to completion. Landlord shall not be obligated to give written notice for the same type of failure more than once during any single twelve-month period; at Landlord's option, a failure to perform an obligation again after the first notice during any twelve-month period shall be an automatic event of default, without notice or any opportunity to cure. Rider No. 35. Insert Section 20.1, Page 6: - ----------------------------------------- Notwithstanding any provisions in this Section to the contrary, Landlord shall have the duty to exercise its reasonable efforts to mitigate damages in accordance with Oregon law. 10 Rider No. 36. Insert Section 20.1, Page 6: - ----------------------------------------- after notice thereof by Landlord beyond the cure period set forth in Section 19.1, Rider No. 37. Insert Section 21.1, Page 6: - ----------------------------------------- after reasonable oral notice in non-emergency situations Rider No. 38. Insert Section 22.1, Page 7: - ----------------------------------------- Landlord shall deliver to Tenant within 30 days after execution of this Lease or such additional time as may be reasonably required by Landlord to obtain such agreement, a nondisturbance agreement in form and substance reasonably acceptable to Tenant from any existing mortgagee or beneficiary of a deed of trust with a lien on the Project or any existing ground lessor with respect to the Project. The commencement of Tenant's obligation to pay rent shall be contingent upon Landlord's compliance with the terms of this Section 22.1. Tenant's subordination to any future mortgage, trust deed or ground lease shall be contingent upon the delivery of a non-disturbance agreement in form and substance reasonably acceptable to Tenant from any future mortgagee, beneficiary or ground lessor. Rider No. 39. Insert Section 22.1, Page 7: - ----------------------------------------- Tenant's obligation under the last sentence of this section 22.1 shall be to deliver its most recent audited financial statement (which shall be current at least to the most recently ended fiscal year) and its most recent unaudited financial statement which shall be current at least to the most recently ended calendar quarter of tenant's fiscal year. Landlord agrees to keep confidential any such financial statements which are not already public information except that landlord may disclose all financial statements to its advisors, prospective and current lenders, and prospective and current purchasers. Rider No. 40. Insert Section 23.1, Page 7: - ----------------------------------------- In order for any notices given to Landlord to be effective, such notices must be addressed to Landlord and delivered to the following addresses (or to such other addresses as Landlord may designate in writing from time to time in accordance with the notice provisions of Section 23.1 of the Lease): Melvin Mark Companies Attn: Mr. Daniel J. Petrusich Suite 1380 111 SW Columbia Street Portland, OR 97201 11 With a copy to: Schnitzer Investment Corp. Attn: Mr. Kenneth M. Novack 3200 NW Yeon Street Portland, OR 97210 Rider No. 41. Insert Section 25.1, Page 7: - ----------------------------------------- and damage by fire or other casualty Rider No. 42. Insert Section 25.1, Page 7: - ----------------------------------------- to the extent required pursuant to the provisions of Section 13.1 of this Lease. Restoration of wall surfaces shall not include repainting of wall surfaces but shall include patching and preparing such wall surfaces for paint Rider No. 43. Insert Section 25.1(5), Page 8: - -------------------------------------------- concerning this Lease, the Premises or the Project Rider No. 44. Insert Section 31.1, Page 10: - ------------------------------------------ Landlord represents and warrants to Tenant that, to the best of Landlord's actual and present knowledge, without inquiry except for the review of a Phase I Environmental Property Assessment prepared by PBS Environmental dated December 1995, no hazardous substances have been generated, released, handled, stored, discharged, transported, deposited or disposed in, on, or under or about the Premises or the Project. Rider No. 45. Insert Page 10: The following provisions are hereby added to the - ---------------------------- Lease: 33.1 Option to Extend. ---------------- 33.1.1 If the Lease is not then in default and if Tenant has not assigned the Lease or subleased more than 50% of the Premises, Tenant shall have the right to extend the term of the Lease for two successive periods of five years each (the "Options to Extend"). Tenant shall exercise each Option to Extend by delivering written notice of such exercise not less than 365 days prior to the last day of the then expiring Term. The giving of such notice shall be sufficient to make the Lease binding on the parties for the extended term in question without further action of the parties. The extended term shall commence on the day following the date of expiration of the immediately preceding term. The terms and conditions of the Lease for the extended term shall be identical to the immediately preceding term except for Base Monthly Rent. During the extended term, Base Monthly Rent shall be adjusted to equal the greater of (a) the Base Monthly Rent in effect at the end of the immediately preceding term, or (b) the fair market rental value of the premises for the extended term, determined as hereinafter provided. Within 30 days after the exercise of an Option to Extend, Landlord shall notify Tenant of its determination of the fair market rental value. Within 30 days after the effective date of such notice, Tenant shall either 12 (x) notify Landlord of Tenant's acceptance of Landlord's determination of the fair market rental value, in which event Base Monthly Rent for the extended term shall be as so determined by Landlord; or (y) notify Landlord of Tenant's rejection of Landlord's determination of the fair market rental value, in which event the fair market rental value shall be determined in accordance with Section 33.1.2 below. The failure of Tenant to give any notice within the required time period shall be deemed an acceptance by Tenant of Landlord's determination of the fair market rental value. 33.1.2 Within ten days after Tenant's rejection of Landlord's determination of fair market rental value as provided in Section 33.1.1 above, each party shall designate a representative who is either an Oregon licensed MAI appraiser skilled in determining rental rates for office buildings in western suburban areas of Portland, Oregon, or a real estate broker experienced in leasing office space in office buildings located in the western suburbs of Portland, Oregon. If the two representatives cannot agree within 30 days after their selection on the fair market rental value, then the two representatives so chosen shall select an arbitrator having the above qualifications or, if they cannot agree, the presiding judge of the Circuit Court of Multnomah County or Washington County, Oregon, shall, upon application by either party, select an arbitrator having the above qualifications. Within 90 days prior to the commencement of the extended term, each party's representative shall submit to the arbitrator a written report stating such representative's opinion of the fair market rental value of the Premises for the extended term in question, based on a consideration of all factors appropriate to determining fair market rental value for the extended term in question including without limitation rental rates then being charged (under the most recently executed leases) in space comparable to the Premises in buildings comparable to the Building and concessions available to comparable tenants for comparable space. Within 30 days after receipt of such reports, the arbitrator shall accept one or the other of the reports. The determination of the fair market rental value in the report so accepted shall be binding on the parties; provided, however, that Base Monthly Rent during any extended term shall not in any event be less than Base Monthly Rent payable during the immediately preceding term. The cost of the determination of the fair market rental value pursuant to this Section 33.1.2 shall be shared equally by Landlord and Tenant. If the arbitrator does not decide the fair market rental value prior to the commencement date of the renewal term in question, Base Monthly Rent shall continue to be payable in the amount previously in effect, and retroactive adjustment shall be made when the arbitrator reaches a decision. 34.1 Satellite Dish -------------- 34.1.1 Grant of License. Landlord hereby grants Tenant a nonexclusive license to install on the roof of the building a satellite dish of no more than three feet in diameter and the nonexclusive right to run connecting lines to such satellite dish from the Premises (such satellite dish and such connecting lines and equipment are herein referred to as the "Equipment"). Tenant shall not penetrate the roof in connection with any installation or reinstallation of the Equipment if such penetration may void or adversely affect any applicable guaranty or warranty. The plans and specifications for all the Equipment shall be approved by Landlord in writing prior to any installation. Tenant shall be responsible for any damage to the roof or conduit systems as a result of Tenant's installation, maintenance and/or removal of the Equipment. 13 34.1.2 Location. The location of the satellite dish and the rest of the Equipment shall be subject to Landlord's prior written approval. Tenant shall not change the location of, or alter or install additional Equipment or paint the satellite dish or the other Equipment without Landlord's prior written consent. 34.1.3 Compliance with Law. Tenant, at Tenant's sole expense, shall comply with all Laws regarding the installation, construction, operation, maintenance and removal of the Equipment and shall be solely responsible for obtaining and maintaining in force all permits, licenses and approvals necessary for such operations. 34.1.4 Taxes. Tenant shall be responsible for and promptly shall pay when due all taxes, assessments, charges, fees and other governmental impositions levied or assessed on the Equipment or based on the operation thereof. 34.1.5 Relocation. Landlord may require Tenant to relocate the Equipment during the term of the Lease to a location approved by Tenant, which approval shall not be unreasonably withheld or delayed. Landlord shall reimburse Tenant for any direct third party expenses reasonably incurred by Tenant in so relocating the Equipment upon receipt of invoices evidencing Tenant's incurring of such expenses. 34.1.6 Interference. Operation of the Equipment shall not interfere in any manner with equipment systems or utility systems of other tenants, including without limitation, telephones, dictation equipment, lighting, heat and air conditioning, computers, electrical systems, and elevators. If operation of the Equipment causes such interference, Tenant immediately shall suspend operation of the Equipment until such interference is eliminated. 34.1.7 Maintenance and Repair. Tenant shall maintain the Equipment in good condition and repair, at Tenant's cost and expense. Landlord may from time to time require that Tenant repaint the satellite dish at Tenant's expense to keep the same in an attractive condition. 34.1.8 Indemnity and Insurance. Tenant shall indemnify, defend, protect and hold harmless Landlord pursuant to the Lease from and against any and all claims related to the Equipment or operation of the same as if the Equipment were located wholly within the Premises. Tenant shall provide evidence satisfactory to Landlord that Tenant's property and liability insurance policies required under the Lease include coverage for the Equipment and any claim, loss, damage, or liability relating to the Equipment. 34.1.9 No Landlord Responsibility. Landlord shall have no responsibility or liability whatsoever relating to (i) maintenance or repair of the Equipment; (ii) damage to the Equipment; (iii) damage to persons or property relating to the Equipment or the operation thereof; or (iv) interference with use of the Equipment arising out of utility the interruption or any other cause. Upon installation of the Equipment, Tenant shall accept the area where the Equipment is located in its "as is" condition. Tenant acknowledges that the roof location of the Equipment is suitable for Tenant's needs, and acknowledges that Landlord shall have no 14 obligation whatsoever to improve, maintain or repair the area in which the Equipment will be installed. 34.1.10 Use. Tenant shall use the Equipment solely for operations within the Premises and shall not use or allow use of the Equipment, for consideration or otherwise, for the benefit of other tenants in the project or any other person or entity. 34.1.11 Removal. Tenant shall, at Tenant's sole expense, remove the satellite dish and such other portions of the Equipment as Landlord may designate, and restore the affected areas to their condition prior to installation of the Equipment (i) immediately upon request of Landlord, if Tenant fails to perform any of its obligations under this Section 34.1, (ii) immediately if such removal is required by any governmental agency having jurisdiction over the Equipment, and (iii) in any event, no later than 30 days after expiration or earlier termination of the Lease. If Tenant fails to remove the Equipment when and as required under this Section 34.1, Landlord reserves the right to do so, and the expense of the same shall be immediately due and payable from Tenant to Landlord as additional rent, together with interest and late charges as provided in the Lease. 34.1.12 Survival. The covenants, obligations and indemnities of Tenant under this Section 34.1 shall survive expiration or earlier termination of the Lease for any reason. 35.1 Communication Regarding Available Expansion. ------------------------------------------- In the event Tenant informs Landlord that Tenant desires to lease additional space in the Project, Landlord shall inform Tenant of the available space, if any, which is not subject to prior rights held by other tenants or prospective tenants of the Project and of the terms under which Landlord would be willing to lease such available space to Tenant. 36.1 Tenant Improvement Loans. ------------------------ 36.1.1 First Tenant Improvement Loan. As provided in Section 7.1, Rider 16, and the Work Agreement, Tenant is required to pay the Additional TI Costs in full prior to the Commencement Date of this Lease. If Tenant desires to borrow funds from Landlord for such excess amount, Landlord agrees to loan funds to Tenant in an amount not to exceed $75,010.00 solely for costs, fees, and expenses to design and construct improvements in the Premises (the "First TI Loan"). The First TI Loan shall accrue interest at the rate of 11 percent per annum. Tenant shall repay the First TI Loan with monthly payments sufficient to amortize the First TI Loan over the ten year term of the Lease beginning on the Commencement Date and ending on the expiration date of the initial term of the Lease, taking into account interest at the rate of 11 percent per annum. Payments on the First TI Loan will begin on the Commencement Date and shall continue on the first day of each month throughout the remainder of the initial term of the Lease and shall be paid in full on or before the expiration date of the initial term of the Lease or any earlier termination date. Landlord shall inform Tenant of the monthly amount to be paid under the First TI Loan as soon as practicable after substantial completion of the Tenant improvements. If the amount is not determined prior to the Commencement Date, then Tenant's first payment under the First TI Loan shall be sufficient to pay the monthly payments 15 due from the Commencement Date to the date on which Tenant is informed of the monthly payment amount. At Landlord's option, Landlord may prepare a promissory note which Tenant shall execute and deliver to Landlord, setting forth the terms of Tenant's obligation to repay the First TI Loan. 36.1.2 Second Tenant Improvement Loan. Landlord further agrees to loan additional funds to be applied toward the Additional TI Costs in an amount not to exceed $75,010.00 solely for costs, fees, and expenses to design and construct improvements in the Premises (the "Second TI Loan"). The Second TI Loan shall accrue interest at the rate of 11 percent per annum. Tenant shall repay the Second TI Loan with monthly payments sufficient to amortize the Second TI Loan over the initial two years of the Term beginning on the Commencement Date and ending on the last day of the 24th month of the Term, taking into account interest at the rate of 11 percent per annum. Payments on the Second TI Loan will begin on the Commencement Date and shall continue on the first day of each month thereafter and shall be paid in full on or before the end of the 24th month of the Term or any earlier lease termination date. Landlord shall inform Tenant of the monthly amount to be paid under the Second TI Loan as soon as practicable after substantial completion of the Tenant improvements. If the amount is not determined prior to the Commencement Date, then Tenant's first payment under the Second TI Loan shall be sufficient to pay the monthly payments due from the Commencement Date to the date on which Tenant is informed of the monthly payment amount. At Landlord's option, Landlord may prepare a promissory note which Tenant shall execute and deliver to Landlord, setting forth the terms of Tenant's obligation to repay the Second TI Loan. 37.1 Force Majeure. ------------- Whenever a period of time is prescribed in this Lease for action to be taken by Landlord or for performance of any obligation of Landlord under this Lease, Landlord shall not be responsible for, and there shall be excluded from the computation of such period of time, any delays due to Force Majeure. Whenever a period of time is prescribed in this Lease for action to be taken by Tenant (except for the obligation to pay rent and other expenses or charges) or for performance of any obligation of Tenant under this Lease (except for the obligation to pay rent and other expenses or charges), Tenant shall not be responsible for, and there shall be excluded from the computation of such period of time, any delays due to Force Majeure. 38.1 Publicity. --------- Neither Landlord nor Tenant will issue a press release regarding this Lease without the prior written consent of the other party. 39.1 Authority. --------- The person signing this Lease by Tenant represents that he has been duly authorized by Tenant's board of directors to execute and deliver this Lease which shall be binding on Tenant. 16 Effect of Addendum. The Lease is modified only in the specific respects set forth in this Addendum. Except as expressly modified, the Lease remains in full force and effect. IN WITNESS WHEREOF, the parties have executed this Addendum as part of the Lease as of the date first set forth above. LANDLORD: EVERGREEN CORPORATE CENTER LLC By: Marzer Venture, an Oregon general partnership By: Mark Group Partnership No. 4 By: MELVIN MARK --------------------------- Title: Partner ------------------------ By: Schnitzer Investment Corp., an Oregon corporation By: KEN NOVACK --------------------------- Title: President ------------------------ TENANT: MEDICALOGIC, INC., an Oregon corporation By: MARK K. LEAVITT GUY E. FIELD ------------------------------------- Title: President Controller ---------------------------------- 17 AMENDMENT TO LEASE DATED: July 15, 1999 BETWEEN: EVERGREEN CORPORATE CENTER LLC, an Oregon limited liability company ("Landlord") AND: MEDICALOGIC, INC., an Oregon corporation ("Tenant") A. Landlord and Tenant are parties to an Industrial Business Park Lease dated January 15, 1997 (the "Lease Agreement"), as amended by an Addendum to Lease dated January 15, 1997 (the "Addendum"). The Lease Agreement and the Addendum are collectively referred to in this Amendment to Lease (the "Amendment") as the "Lease." The capitalized terms used in this Amendment which are defined in the Lease shall have the meanings given to them in the Lease. B. After the Lease was executed, the Project was reconfigured. Attached, as Exhibit A, is a current site plan of the Project. Landlord and Tenant desire to expand the Premises by adding to them approximately 27,652 square feet in Building 3 (20540 N.W. Aloclek), as described in this Amendment. NOW, THEREFORE, in consideration of the mutual promises of the parties set forth in this Amendment, Landlord and Tenant agree as follows: 1. Expansion. Commencing on September 1, 1999, approximately 27,652 square feet of space in Building 3 in the area which is crosshatched on the attached Exhibit B (the "Expansion Space") shall be added to the Premises for the Term. Commencing on September 1, 1999, and continuing throughout the Term, the Expansion Space shall be a part of the Premises and subject to all terms and conditions of the Lease except as otherwise provided in this Amendment. The Expansion Space was measured in accordance with Portland NAIOP measurement standards, a copy of which is attached as Exhibit A-I to the Lease Agreement. 2. Rent. Commencing on September 1, 1999, and continuing throughout the Term, Base Monthly Rent shall increase by the following amounts in accordance with the following schedule: Time Period Monthly Base Rent Increase ----------- -------------------------- September 1, 1999 through February 28, 2000 $0 March 1, 2000 through April 30, 2000 $21,569.00 May 1, 2000 through April 30, 2003 $28,482.00 1 Time Period Monthly Base Rent Increase ----------- -------------------------- May 1, 2003 through April 30, 2006 $31,045.00 May 1, 2006 through December 14, 2007 $33,839.00 3. Additional Rent. Commencing on May 1, 2000, and continuing throughout the Term, Tenant's percent of the Project for purposes of determining Tenant's share of Expenses pursuant to Section 4.3 of the Lease Agreement shall be increased. In addition to the Expenses Tenant pays for the Premises, Tenant shall also pay Tenant's share of Expenses for the Expansion Space which shall be a fraction of the Expenses, the numerator of which shall be 27,652, and the denominator of which shall be the total number of square feet of completed and leasable space in the Project from time to time. 4. Improvements to Expansion Space. The provisions of Rider No. I through Rider No. 6 of the Addendum, Rider No. 8 of the Addendum, Rider No. 16 of the Addendum, Rider No. 36.1 of the Addendum, Exhibit C to the Lease and Exhibit D to the Lease shall not apply to the Expansion Space. The provisions of this Section 4 shall control the condition of the Expansion Space and Landlord's work in the Expansion Space. The Expansion Space shall be leased in its AS IS condition except for the work to be performed pursuant to the Work Agreement attached as Exhibit C to this Amendment (the "Expansion Space Work Agreement"). 5. Security Deposit. Contemporaneously with the execution of this Amendment, Tenant shall pay Landlord $33,839.00 as an increased security deposit which shall be held and disbursed in accordance with the provisions of Section 6.1 of the Lease Agreement. 6. First Opportunity to Lease. Throughout the Term, so long as Tenant is not in default of the Lease, Tenant shall have the right of first offer to lease the remainder of space in Building 3 (the "First Offer Space'), in accordance with the terms of this Section 6. In the event that Landlord desires to make a written offer (the "Offer) to a third party to lease all or any portion of the First Offer Space, Landlord shall first present the Offer to Tenant and give Tenant three business days within which to determine whether Tenant will accept the Offer. If Tenant gives Landlord written notice within such three business day period that Tenant elects to accept the Offer, then Tenant shall be bound to enter into a written lease agreement in accordance with the terms of the Offer. If Tenant does not give Landlord such written notice within the three business day period, then Landlord shall be free to lease the First Offer Space to any party on the terms of the Offer or on substantially similar terms. If Landlord does not so lease the First Offer Space, Tenant's right of first offer with respect to the First Offer Space shall revive and continue throughout the Term. 7. Brokerage Commissions. Landlord agrees to pay Tenant's broker, Norris Beggs & Simpson Northwest Limited Partnership ("NBS") a fee in the amount described in a letter addressed to NBS from Melvin Mark Brokerage Company dated June 18, 1999. One half of the commission shall be payable upon full execution of this Amendment by Landlord and Tenant, and the remainder shall be paid when Tenant begins paying rent for the Expansion Space at the rate of $1.03 per square foot. 2 8. Effect of Amendment. The Lease is modified only in the specific respects set forth in this Amendment. Except as expressly modified, the Lease remains in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment as part of the Lease as of the date first set forth above. LANDLORD: EVERGREEN CORPORATE CENTER LLC By: Marzer Venture, an Oregon general partnership By: Mark Group Partnership No. 4 By: MELVIN MARK ---------------------------------------- Title: Partner ------------------------------------- By: Schnitzer Investment Corp., an Oregon corporation By: KENNETH NOVACK ---------------------------------------- Title: President ------------------------------------- TENANT: MEDICALOGIC, INC., an Oregon corporation By: GUY E. FIELD ------------------------------------------------------- Its: VP Finance -------------------------------------------------- 3 EXHIBIT A (Current Site Plan) [Map of site plan showing buildings 1, 2, 3, 4 and 5 with trees and roads] EXHIBIT B (Expansion Space) [Map of floor plan for expansion space in Evergreen Corporate Center Building Three] EXHIBIT C EXPANSION SPACE WORK AGREEMENT ------------------------------ SECTION 1 GENERAL 1.1 Landlord agrees to provide certain improvements in the Expansion Space in accordance with this Expansion Space Work Agreement. Landlord shall pay up to $774,256.00 ($28.00 per square foot in the Expansion Space) (the "TI Allowance") towards the cost of designing and constructing the improvements in the Expansion Space subject to and in accordance with the terms and conditions of this Expansion Space Work Agreement. At least $553,040.00 ($20.00 per square foot in the Expansion Space) of the TI Allowance must be used for improvements made to the Expansion Space on or before May 31, 2000 (the "Initial Improvements") or else the TI Allowance shall be reduced as follows. If $553,040.00 is not spent for improvements made to the Expansion Space on or before May 31, 2000, the TI Allowance shall be reduced by the difference between $774,256.00, and the amount spent for improvements made to the Expansion Space on or before May 31, 2000. Tenant acknowledges that the availability of the TI Allowance is conditioned on Tenant accepting Landlord's work in the Expansion Space on or before May 31, 2000, as described in the certificate attached as Exhibit D (the "Teachers Certificate") to be executed and delivered by Tenant on or before May 31, 2000. If such conditions are fulfilled then, on or before May 31, 2000, Tenant shall execute the Teachers Certificate and send the original and a copy thereof to Landlord. If at least $553,040.00 of the TI Allowance is spent for improvements made to the Expansion Space on or before May 31, 2000, then any remaining amount of the TI Allowance may be spent at any time during the Term. 1.2 All costs, fees, and expenses in connection with the design and construction of the improvements in the Expansion Space in excess of the TI Allowance paid in accordance with Section 1. 1 shall be paid for by Tenant within twenty (20) days after billing therefor. If Tenant desires to borrow funds from Landlord for such excess amount, Landlord agrees to loan funds to Tenant in an amount not to exceed $138,260.00 ($5.00 per square foot in the Expansion Space) solely for costs, fees, and expenses to design and construct improvements in the Expansion Space (the "Expansion TI Loan"). The Expansion TI Loan shall accrue interest at the rate of 11 percent per annum, commencing on the date of the first advance on the Expansion TI Loan (the "First Advance Date') and continuing until such time as the entire Expansion TI Loan and all accrued interest are paid in full. Tenant shall repay the Expansion TI Loan with monthly payments sufficient to amortize the Expansion TI Loan over the period of time beginning on the first Advance Date and ending on December 14, 2007, taking into account interest at the rate of 11 percent per annum. Payments on the Expansion TI Loan will begin on the first day of the first calendar month following the First Advance Date and shall continue on the first day of each month through December 1, 2007 and shall be paid in full on or before December 1, 2007 or any earlier termination date of the Lease. Landlord shall inform Tenant of the monthly amount to be paid under the Expansion TI Loan as soon as practicable after substantial completion of the tenant improvements for which the Expansion TI Loan is used. If the amount is not determined 1 prior to May 1, 2000, then Tenant's first payment under the Expansion TI Loan shall be sufficient to pay the monthly payments due from May 1, 2000 to the date on which Tenant is informed of the monthly payment amount. Upon Landlord's request, Tenant shall execute and deliver to Landlord a promissory note, setting forth the terms of Tenant's obligation to repay the Expansion TI Loan, in the form attached as Exhibit E. 1.3 Throughout the process of design and construction of the Tenant improvements, Patty Sullivan ("Tenant's Construction Representative") shall be available for onsite and telephone consultations and decisions as necessary. Tenant's Construction Representative's address is 20500 N.W. Evergreen Parkway, Hillsboro, Oregon 97124 and her telephone number is 531-7000. Tenant's Construction Representative shall have the authority to bind Tenant as to all matters relating to the tenant improvements. SECTION 2 DESIGN OF TENANT IMPROVEMENTS 2.1 Landlord shall retain the services of a space planner or architect (the "Planner") to prepare the necessary drawings, including without limitation Basic Plans and Working Plans as described below for construction of the tenant improvements (the "Pl1ans"). Promptly after the Planner's requests, Tenant's Construction Representative will meet with the Planner to provide information to the Planner as needed to prepare the Plans and to modify the Plans, as provided in this Expansion Space Work Agreement. 2.2 Within ten business days after Landlord delivers to Tenant a copy of the Basic Plans, Tenant shall either approve the Basic Plans or shall set out the revisions requested by Tenant to the Basic Plans. Also, Tenant shall, within such ten business day period, clearly identify and locate on the Basic Plans (i) any equipment requiring special plumbing or mechanical systems, areas subject to above normal loads, special openings in the floor, ceiling, or walls, and other major or special features; and (ii) locations of telephone and electrical receptacles, outlets, and other items requiring electrical power (for special conditions and equipment, power requirements, and manufacturer's model numbers must be included) 2.3 Landlord shall review any revisions made to the Basic Plans and shall, in writing within five business days after receipt, either approve the revised Basic Plans or reject them, in which case Landlord shall specify in reasonable detail the deficiencies in the Basic Plans as submitted. If the Basic Plans are rejected, Tenant shall resubmit required changes to the Basic Plans as soon as practicable until Landlord's approval has been obtained. Following Landlord's approval of the Basic Plans, the Planner shall produce full working drawings for construction sufficient to obtain all necessary permits and with sufficient detail to construct the improvements, including specifications for every item included thereon (the "Working Plans"). Landlord shall have the right to stop the design process at any point and terminate the Lease if it appears to Landlord that the cost, timing, or some other issue related to the tenant improvements will not be resolved between the parties. 2.4 Tenant must approve the Working Plans for the Initial Improvements to the Premises no later than on December 31, 1999. Tenant shall be responsible for delays and additional costs in completion of the design and construction of Tenant's improvements caused 2 by delays in approving the Working Plans, by changes made to the Working Plans after Landlord delivers them to Tenant or by delays in delivery of special materials requiring long lead times. For any construction of improvements other than the Initial Improvements in the Premises, the Working Plans for such improvements must be completed and approved by Landlord and Tenant at least five months prior to the anticipated substantial completion date of such improvements. SECTION 3 CONSTRUCTION OF TENANT IMPROVEMENTS 3.1 Upon completion of the Working Plans and at the request of Tenant, Landlord and its contractor shall provide to Tenant in writing an estimate of the cost of improvements to be provided at Tenant's expense pursuant to Section 1 of this Expansion Space Work Agreement. Within five days after Tenant's receipt of such estimated cost, Tenant shall delete any items which Tenant elects not to have constructed. Landlord and Tenant shall work together to establish a construction budget reasonably acceptable to both parties. Tenant shall authorize in writing the agreed upon construction budget. In the absence of such written authorization, Landlord shall not be obligated to commence work on the Expansion Space and Tenant shall be responsible for any costs due to any resulting delay in completion of the Expansion Space. 3.2 If Tenant desires any change to its improvements, Tenant shall submit a written request for such change to Landlord, together with all plans and specifications necessary to show and explain changes from the approved Working Plans. Any such change shall be subject to Landlord's approval. Landlord or Landlord's contractor shall notify Tenant in writing of the amount, if any, which will be charged or credited to Tenant to reflect the cost of such change. 3.3 Tenant's entry into the Expansion Space for any purpose, prior to September 1, 1999, shall be subject to all the terms and conditions of the Lease, including without limitation the provisions of the Lease relating to the maintenance of insurance, but excluding the provisions of the Lease relating to the payment of rent. Tenant's entry shall mean entry by Tenant, its officers, contractors, licensees, agents, servants, employees, guests, invitees, or visitors (the "Tenant Parties"). Tenant shall indemnify and hold harmless Landlord from and against any and all claims, losses, liabilities, and expenses (including without limitation attorneys' fees) arising out of or in any way related to the activities of Tenant or the Tenant Parties in the Expansion Space or the Project. 3 EXHIBIT D STATEMENT OF TENANT IN RE: LEASE -------------------------------- Date: May 31, 2000 Teachers Insurance and Annuity Association of America 730 Third Avenue New York, New York 100 17 Attn: ______________________ RE: TIAA Appl. #OR- 108 TIAA Mtge. #000447000 Name of Project: Evergreen Corporate Center Address: 20540 NW Aloclek Hillsboro, Oregon 97124 Ladies and Gentlemen: It is our understanding that you have a mortgage upon the subject premises and as a condition precedent thereof have required this certification of the undersigned. The undersigned, as tenant, under that certain lease dated January 15, 1997, as amended by an Amendment to Lease dated July 15, 1999, made with Evergreen Corporate Center LLC, as landlord, hereby ratifies said lease and certifies that: 1. the "Commencement Date" of said lease is December 15, 1997; and 2. the undersigned is presently solvent and free from reorganization and/or bankruptcy; and 3. the operation and use of the premises do not involve the generation, treatment, storage, disposal or release of a hazardous substance or a solid waste into the environment other than to the extent necessary to conduct its ordinary course of business in the premises and in accordance with all applicable environmental laws, and that the premises are being operated in accordance with all applicable environmental laws, zoning ordinances and building codes; and 4. the current base rental payable pursuant to the terms of said lease is $107,232 per month; and further, additional rental pursuant to said lease is payable as provided in the Lease; and 5. said lease is in full force and effect and has not been assigned, modified, supplemented or amended in any way (except as set forth above) and the undersigned is not in default thereunder; and 1 6. the lease described above represents the entire agreement between the parties as to the leasing of the premises; and 7. the term of said lease expires on December 14, 2007; and 8. Landlord has spent at least $553,040 of the TI Allowance, as defined in the Amendment to Lease, and the work performed by landlord to date in the Expansion Space is acceptable to the undersigned. 9. no rental has been paid in advance and no security (except the security deposit in the amount of $120,839) has been deposited with landlord; and 10. tenant's floor area is 102,662 rentable square feet; and 11. the most recent payment of current basic rental was for the payment due on May 1, 2000, and all basic rental and additional rental payable pursuant to the terms of the lease have been paid up to said date; and 12. the undersigned acknowledges notice that landlord's interest under the lease and the rent and all other sums due thereunder will be assigned to you as part of the security for a mortgage loan by you to landlord. In the event that Teachers Insurance and Annuity Association of America, as lender, notifies the undersigned of a default under the mortgage and demands that the undersigned pay its rent and all other sums due under the lease to lender, tenant agrees that it shall pay its rent and all such other sums to lender. Very truly yours, MEDICALOGIC, INC. By: GUY E. FIELD ------------------------------------- Its: VP Finance ------------------------------------ 2 EXHIBIT E PROMISSORY NOTE --------------- $__________ __________, 1999 Portland, Oregon FOR VALUE RECEIVED, the undersigned, MEDICALOGIC, Inc., an Oregon corporation ("Borrower"), promises to pay to the order of EVERGREEN CORPORATE CENTER LLC, an Oregon limited liability company, at 111 SW Columbia Street, Suite 1380, Portland, Oregon 97201, or such other place as may be designated from time to time in writing by the holder of this Note ("Holder"), the principal sum of ________________________________ Dollars ($____________) in lawful money of the United States of America, plus interest and other charges as provided herein. 1 . Interest Rate. Interest shall accrue on the unpaid principal balance of this Note, from ________________ until paid in full, at a fixed rate of eleven percent (11%) per annum. 2. Payment Schedule. Commencing on _____________________ and continuing on the first day of each calendar month thereafter until and through December 1, 2007 (the "Maturity Date"), Borrower shall make constant equal monthly payments of principal and interest sufficient to amortize fully the principal balance of this Note over a period of time from the date of this Note to December 14, 2007, taking into account interest at the rate of 11 percent per annum. Such payments shall equal $_______ per month. The entire principal balance of and all unpaid accrued interest on this Note shall be due and payable on the Maturity Date. 3. Prepayment. The indebtedness evidenced by this Note may be prepaid in whole or in part at any time without penalty. 4. Time of Essence. Time is of the essence of the performance of Borrower's obligations under this Note. If Borrower fails to make any payment required hereunder within five days after written notice that such payment is due, or if Borrower is in default of its lease between Holder and Borrower dated January 15, 1997, as amended (the "Lease"), such event shall constitute an event of default (an "Event of Default"). Upon the occurrence of an Event of Default, the entire unpaid principal balance of and all unpaid accrued interest on this Note shall become immediately due and payable at Holder's option. Holder's failure to exercise or delay in exercising such option, or any other remedy provided herein, shall not constitute a waiver of the right to do so upon the occurrence of any subsequent Event of Default. 5. Late Fee. If any payment required under this Note is not received by Holder within ten (10) days after the date such payment was due, Borrower shall pay to Holder on demand a late charge in an amount equal to five percent (5%) of the overdue payment. Borrower and Holder agree that the late charge is intended to be a reasonable approximation of actual damages incurred by such overdue payment, which damages are difficult to estimate. The 1 imposition or collection of a late charge is in addition to and not in lieu of any other rights or remedies Holder may have as a result of late payment. 6. Application of Payments. All payments on this Note shall be applied first to the payment of attorneys' fees, costs, and other charges to the extent, if any, provided herein; then to interest accruing hereon; and then to principal. The unpaid principal balance of this Note shall continue to bear interest until and including the date of collection. 7. Attorneys' Fees. If either Holder or Borrower shall institute legal or other proceedings to interpret or enforce this Note, the prevailing party shall recover from the nonprevailing party all costs, attorneys' fees, and expenses incurred by it in connection with such proceedings, whether at trial, on appeal, or on review, in addition to all other amounts allowed by law. 8. Default Interest. All late payments shall bear interest at the Default Rate (as defined in the Lease) from the due date of such payment until paid in full. 9. Miscellaneous. In any provision of this Note is held invalid by a court of competent jurisdiction, the remainder of this Note shall not be affected thereby and shall remain in full force and effect. Borrower hereby waives presentment, demand for payment, notice of dishonor, protest, and notice of protest. BORROWER: MEDICALOGIC, INC., an Oregon corporation By: ------------------------------------ Its: ----------------------------------- 2 EX-10.10 8 EXHIBIT 10.10 FIDEX AMERICAS CORPORATION ONE-TO-MANY SOFTWARE DEPOSIT AGREEMENT 1. FIDEX AMERICAS CORPORATION ("FIDEX"), an Idaho corporation, agrees to allow MedicaLogic, Inc. ("DEVELOPER") to DEPOSIT for potential delivery to certain third parties ("LICENSEES"), the Software, Documentation and/or Other Material deposited herewith, subject to DEVELOPER meeting and continuing to meet all the terms in this Agreement. "LICENSEE" shall be used throughout this Agreement to refer to each LICENSEE who becomes a third party beneficiary of this agreement by meeting the terms and conditions for becoming one. FIDEX and DEVELOPER, IN EXCHANGE FOR THE MUTUAL CONSIDERATION CONTAINED HEREIN, AGREE AS FOLLOWS: 2. LIMITED SCOPE OF AGREEMENT. This Agreement only defines the responsibility of FIDEX relative to the Software deposited and the disposition thereof, and does not define any other terms between LICENSEE and DEVELOPER, and does not waive any rights, legal or otherwise, LICENSEE and DEVELOPER may have against one another. 3. THIRD PARTY BENEFICIARIES. It is contemplated that there will be one or more third party beneficiaries to this Agreement, referred to herein as LICENSEE. Possession by a third party of a copy of this agreement bearing the notarized signatures of both DEVELOPER and FIDEX shall be sufficient proof that said third party participates in this agreement as LICENSEE. 4. "SOFTWARE" AND "DOCUMENTATION". The Software is the source code and related computer files (such as executable program files, compiler, linker, third-party libraries, etc.) used by DEVELOPER to create the software deposited herewith and further identified in Exhibit A, and the Documentation is all documentation agreed to between the parties as necessary to utilize and understand the Software, and as described in Exhibit A. The Software is the proprietary and confidential information of DEVELOPER and DEVELOPER desires to protect such ownership and confidentiality. 5. INSPECTION. FIDEX will allow the inspection of the Software, Documentation and other Materials (other than withdrawal of the Software, Documentation, and other Materials in accordance with the terms hereof) only upon written authorization from DEVELOPER, including the authorization set forth in paragraph 11 of this Agreement, or as otherwise directed by the final order of a court of competent jurisdiction. 6. VERIFICATION. DEVELOPER will be entitled, at reasonable times during normal business hours and upon reasonable notice to FIDEX during the term of this agreement, to inspect the records of FIDEX with respect to the physical status and condition of the Software, Documentation and other Materials. 7. RECEIPT BY FIDEX. DEVELOPER will furnish to FIDEX, at the time of deposit of any Software, a packing list describing all Software, Documentation, or other Materials deposited hereunder. FIDEX will issue a receipt for all Software, Documentation, or other Materials deposited and forward copies of such receipts and packing lists to DEVELOPER. 8. INITIATION OF DELIVERY OF THE SOFTWARE/DOCUMENTATION. In order for the Software and/or Documentation to be delivered by FIDEX to LICENSEE in executable or source code form, each of the following must occur: (1) Receipt by FIDEX of written notification that an event causing delivery has occurred, explaining in detail the basis for the assertion that such an event has occurred; (2) FIDEX confirming that an event causing delivery has occurred; and (3) Prepayment of Fidex's release processing fees. No delivery will occur until FIDEX can confirm to its satisfaction that an event has occurred. 9. RELEASE PROCESSING FEES. The release processing fee is currently $750 when the release is made at LICENSEE's request, and $100 when release is made at DEVELOPER's request. If release is made at Fidex Americas Corporation Escrow #000-877 Software Deposit Agreement, Page 1 LICENSEE's request the fee also includes referral to programmers competent with regards to both the programming language and type of application. The release fee is not subject to change during the first three years of the escrow account. 10. RIGHTS LICENSEE RECEIVES WITH SOFTWARE DELIVERED. DEVELOPER and LICENSEE agree that when and if FIDEX delivers the Software to LICENSEE, LICENSEE only obtains the following rights in the Software, and nothing more: (1) if the Software is delivered in executable form, DEVELOPER grants and LICENSEE receives a complete copy of the Software in executable form, and receives the same license and right to use or otherwise deal with the Software as it had with the original Software it received from DEVELOPER, (2) if the Software is delivered as source code, DEVELOPER hereby grants and LICENSEE receives the license and right to utilize the source code only to maintain and update the Software licensed under the original license/agreement between LICENSEE and DEVELOPER. 11. EVENTS CAUSING DELIVERY OF SOFTWARE Upon occurrence of one or more of the following events ("Release Events"), FIDEX agrees and is hereby specifically authorized and instructed to provide the Software, Documentation, or other Materials to LICENSEE upon written instruction by DEVELOPER or request by LICENSEE. Prior to such request, however (i) LICENSEE must have given written notice to FIDEX of the occurrence of the Release Event (the "Notice of Release Event"); (ii) FIDEX or LICENSEE must have transmitted a copy of the Notice of Release Event to DEVELOPER; and (iii) fifteen (15) days must have elapsed after receipt of Notice of Release Event by DEVELOPER. The following are release events: 11.1 DEVELOPER agrees in writing to the delivery. 11.2 DEVELOPER cannot be located by LICENSEE or by FIDEX as described in paragraph 12 of this Agreement. 11.3 DEVELOPER is unwilling or unable to support the SOFTWARE pursuant to the terms of a valid and existing license agreement with LICENSEE. 11.4 DEVELOPER files for protection under Chapter 7 of the U.S. Bankruptcy Code and such proceeding has not been dismissed within sixty (60) days after it has begun. Notwithstanding the foregoing, the acquisition, merger or reorganization of DEVELOPER shall not be deemed a Release Event provided the successor to DEVELOPER assumes the obligations of DEVELOPER under the License Agreement and this Agreement. 12. DEVELOPER'S DUTY AS TO WHEREABOUTS. It is DEVELOPER'S burden to keep FIDEX fully and timely apprised of its current telephone, telefacsimile and mailing address. Failure to do so may result in a proper transfer of the Software under paragraph 11.2, above, if DEVELOPER cannot be located by FIDEX. Should LICENSEE request delivery of the Software, FIDEX shall immediately attempt to contact DEVELOPER by telephone, telefacsimile, overnight express, and certified mail, return receipt requested. Should FIDEX be unable to contact DEVELOPER within 30 days of notice by certified mail, DEVELOPER will be considered to have ceased to do business for the purposes of this agreement. 13. DISPUTES BETWEEN DEVELOPER AND LICENSEE. If at any time during the life of this escrow any dispute shall arise between DEVELOPER and LICENSEE, FIDEX or any other entity, as to the delivery by FIDEX of the Software, Documentation and other Materials deposited hereunder or as to the ownership or right of possession thereto, FIDEX shall not release the Software, Documentation, and other Materials until: (a) both parties agree to such a release; or (b) a court of competent jurisdiction orders FIDEX to release the Software, Documentation, and other Materials. FIDEX may hold and retain in its possession without liability, any or all of the Software, Documentation and other Materials referred to in this Agreement, until such dispute shall have been settled, or it may at its option, deposit the Software, Documentation and other Materials with the Clerk of the District Court Bonner County Idaho, under the appropriate statutory provisions for interpleader, and thereupon, Fidex Americas Corporation Escrow #000-877 Software Deposit Agreement, Page 2 FIDEX shall be relieved of all liability with respect thereto. FIDEX shall be entitled to all reasonable costs and attorneys' fees incurred therein from LICENSEE and/or DEVELOPER. 14. LICENSE TO FIDEX. DEVELOPER hereby grants to FIDEX the following rights and license to the Software Documentation and other Materials: For any and all purposes consistent with this Agreement, including, without limitation, to copy, use and display the Software and the Documentation: to copy the source code; to use the Software to produce executable copies of the Software; to provide verification services; to deliver copies of the Software (source code and/or executable copies) and/or Documentation and other Materials, to the LICENSEE, consistent with the terms of this Agreement. 14.1 CERTAINTY. If FIDEX is uncertain of its duties or rights hereunder, it will refrain from taking any action other than to retain the Software, Documentation, and other Materials safely until it is directed otherwise in writing by DEVELOPER and LICENSEE jointly or by final order of a court of competent jurisdiction. Except as expressly provided in this agreement, FIDEX agrees that it will not divulge or disclose or otherwise make available to third parties whatsoever, or make any use whatsoever, of the Software or of any information deposited with it by DEVELOPER in connection with this Agreement, without the express prior written consent of DEVELOPER. 14.2 RESTRICTION ON ACCESS. Except as required to carry out its duties hereunder, FIDEX shall not permit any FIDEX employee, LICENSEE or any other person access to the Software, Documentation, and other Materials unless consented to in writing by DEVELOPER. FIDEX shall use its best efforts to avoid unauthorized access to the Software by its employees or any other person. 15. LICENSEE BEARS RISK OF DEFICIENT DEPOSIT. LICENSEE agrees that FIDEX makes no representations or warranties as to what it receives and performs no testing or verification to determine what it has received, whether what it received is what DEVELOPER says it is, or anything other than it has received something from DEVELOPER. Between LICENSEE and FIDEX, LICENSEE bears the entire risk that the escrowed Software is what LICENSEE expects it to be. 16. LICENSEE'S RESPONSIBILITY TO LICENSE THIRD-PARTY FILES. FIDEX, DEVELOPER, and LICENSEE agree that if the escrowed Software includes copyrighted computer files which are not the property of DEVELOPER, such as compiler, linker, and third-party programming libraries, FIDEX shall not release said copyrighted computer files to LICENSEE until one of the following occurs: (1) LICENSEE demonstrates to FIDEX'S satisfaction that LICENSEE or LICENSEE'S agent is licensed to use said copyrighted computer files, or (2) LICENSEE demonstrates to FIDEX'S satisfaction that LICENSEE is unable to obtain said license because the owner of said copyrighted computer files cannot be located. 17. DEVELOPER REPRESENTATIONS/WARRANTIES. DEVELOPER represents and warrants: (a) It is depositing with FIDEX the exact Software, Documentation and other Materials stated in Exhibit A; and (b) To DEVELOPER'S knowledge, there is nothing in the deposited Software which will in any way disable, hinder or interfere with its use by LICENSEE should it later have to be delivered to LICENSEE. 18. PAYMENT/COMPLIANCE. DEVELOPER or LICENSEE agree to pay FIDEX all fees and charges at the rates in effect at the time of the service or charge, including applicable sales tax. DEVELOPER and LICENSEE understand and agree that the applicable fees and charges may be changed by FIDEX from time to time. FIDEX'S costs, expenses, charges and attorney's fees in connection with this Agreement are hereby made a first and paramount lien upon: the Software, Documentation and other Materials deposited. All of FIDEX'S obligations are all strictly conditioned upon FIDEX being paid its fees. 19. FIDEX NOT PART OF ANY TRANSACTION. DEVELOPER and LICENSEE agree that FIDEX HAS NO INVOLVEMENT OR LIABILITY RELATING TO ANY UNDERLYING SOFTWARE LICENSING AGREEMENTS, SERVICE CONTRACTS OR ANY OTHER AGREEMENT BETWEEN DEVELOPER AND LICENSEE, OR ANY OTHER ENTITY. DEVELOPER and LICENSEE further agree that this Fidex Americas Corporation Escrow #000-877 Software Deposit Agreement, Page 3 Agreement creates no obligation on the part of FIDEX, other than to receive, hold, and release the Software, Documentation and other Materials as agreed herein. 20. DISCLAIMER AND LIMITATION OF FIDEX LIABILITY. DEVELOPER and LICENSEE agree that FIDEX shall not be liable: (a) For its acts or omissions in good faith not resulting from gross negligence; (b) For any indirect, special or consequential damages, including, without limitation, lost business or profits; (c) For any direct damages in excess of the amount paid by DEVELOPER or LICENSEE, to FIDEX for the deposit or maintenance fees for the Software in question. Without limiting the foregoing, FIDEX shall not be liable for any of the following: Any obligations between LICENSEE and DEVELOPER; The correctness, completeness or sufficiency of Software, Documentation or other Materials held pursuant to this Agreement; For failure to notify any party of non-payment or declaration of default in any of the terms set forth herein; For the deposit, procurement or renewal of insurance policies or any riders or additional clauses; For payment of insurance premiums or taxes of any kind; or For the performance of any act not expressly set forth in this Agreement even though contained in the documents or materials deposited. 21. TERMINATION. FIDEX may terminate this Agreement at any time for any reason, with 30 days written notice, and without further obligation or liability, by sending DEVELOPER and LICENSEE notice of termination and a pro-rated refund of annual fees. No other fees will be refunded. DEVELOPER may terminate this agreement upon termination of DEVELOPER'S mainenance obligations. Even if terminated, DEVELOPER remains liable to FIDEX for all fees, charges and services provided up to the time of termination. In the event of termination of this Agreement, FIDEX agrees to redeliver to DEVELOPER all Software, Documentation and other Materials deposited hereunder and this agreement will thereupon terminate. 22. DISCHARGE OF FIDEX. FIDEX may be discharged by DEVELOPER at any time for any reason, with thirty (30) days written notice specifying a date when such discharge will take effect. Prior to the effective date of such termination of this Agreement, DEVELOPER will arrange for the services of a new escrow agent reasonably acceptable to LICENSEE. DEVELOPER and LICENSEE agree to execute and deliver another escrow agreement with such new escrow agent having substantially the same terms as this agreement. Upon DEVELOPER'S notifying FIDEX of the name and address of the new escrow agent, FIDEX, agrees to forward the Software, Documentation and other Materials to such new escrow agent. 23. COSTS, ATTORNEYS' FEES. That if any party has to enforce any terms of this Agreement, the prevailing party shall be entitled to all costs and disbursements incurred by that party, including reasonable attorneys' fees. 24. INDEMNIFICATION. DEVELOPER and LICENSEE jointly and severally agree to fully indemnify, defend and hold FIDEX harmless if FIDEX incurs any damage or loss of any kind, as a result of DEVELOPER'S or LICENSEE's conduct, and in the event FIDEX must in any way become involved in a dispute between them. This indemnification includes all FIDEX' damages and losses of any kind, including all costs and attorneys' fees. 25. ARBITRATION/APPLICABLE LAW/JURISDICTION/VENUE. If a dispute arises which involves FIDEX, it is agreed that the exclusive method to resolve the dispute shall be by arbitration in accordance with the State of Idaho's Arbitration Act, unless later agreed in writing by FIDEX. The laws of the State of Idaho shall govern the construction and interpretation of this Agreement and all disputes between the parties, and each party agrees that the trial/arbitration of all disputes involving FIDEX shall be in the State of Idaho, County of Bonner and each agrees to the jurisdiction of the Idaho courts. Each may conduct discovery pursuant to Idaho civil rules. Any action against FIDEX must be brought within one year from the event or action disputed, or it is forever barred. Notwithstanding the foregoing, any party to this agreement may seek injunctive, including preliminary, relief in the U.S. District Court for Eastern Washington, in Spokane, Washington, or in the First District Court of the State of Idaho in Sandpoint, Idaho. Anything other than injunctive relief is subject to the limitations of this section regarding arbitration, applicable law, jurisdiction, and venue if FIDEX is a party to the dispute. 26. MODIFICATION, COMPLETE AGREEMENT. This Agreement contains the entire and final agreement Fidex Americas Corporation Escrow #000-877 Software Deposit Agreement, Page 4 involving FIDEX (not necessarily between LICENSEE and DEVELOPER) and supersedes all prior discussions, negotiations, correspondence and discussion of any kind, and can only be modified in a writing signed by the party against whom enforcement is sought. However, the FIDEX Current Prices and Charges are subject to subsequent unilateral modification by FIDEX with thirty (30) days prior written notice. 27. HEADINGS/TITLES NOT GOVERNING. The headings and titles used herein are for descriptive purposes only and should not be used to construe or interpret the meaning of any paragraphs, sentences or statements made herein. 28. SIGNATURE IN PARTS. This agreement may be executed in several parts and its validity if so executed shall be the same as if all signatures were to appear on one sheet. 29. DEVELOPER AND LICENSEE HAVE FULLY READ AND UNDERSTAND THE TERMS OF THIS AGREEMENT AND AGREE TO BE BOUND BY ALL OF THEM. DATED this 15th day of April, 1996. SOFTWARE DEVELOPER: FIDEX AMERICAS CORPORATION: MedicaLogic, Inc. STEVEN OLSON GUY E. FIELD ---------------------------------- - ---------------------------------- Authorized Signature Authorized Signature Name (Printed): Steven Olson Name (Printed): Guy E. Field ------------------- ------------------ Position: President Position: Controller ------------------------- ------------------------ Notice Address: STATE OF IDAHO ) ------------------ COUNTY OF BONNER ) ss. Telephone: ( ) ---------------------- On this 23 day of April , 19 96 , Telefacsimile: ( ) before me, a Notary Public in and ------------------- for said state, personally appeared Steven Olson, who, being by me STATE OF OR ) first duly sworn, declared that he -------------- is the President of Fidex Americas COUNTY OF WASH ) ss. Corporation, that he signed the ------------- foregoing document as President of the corporation, and that the On this 15 day of April, 1996, statements contained therein are before me, a Notary Public in and true. for said state, personally appeared Guy E. Field , who, being by me JENNIFER FAUBEOTHER, Notary Public first duly sworn, declared that he ------------------- is the of , that he signed the Residing at 11121 Cedar, ID foregoing document as Controller of --------------- the corporation, and that the My commission expires 11/15/00 statements contained therein are -------- true. MARY EVERS ZOUCHA, Notary Public - ----------------- Residing at Beaverton, OR ------------- My commission expires 3/27/99. ------- OFFICIAL SEAL [SEAL] MARY EVERS ZOUCHA NOTARY PUBLIC - OREGON COMMISSION NO. 042533 MY COMMISSION EXPIRES MARCH 27, 1999 Exhibits: Exhibit A: Description of Software and Documentation Submitted for Escrow Exhibit B: LICENSEE registration and signature page. Fidex Americas Corporation Escrow #000-877 Software Deposit Agreement, Page 5 EXHIBIT A DESCRIPTION OF SOFTWARE AND DOCUMENTATION SUBMITTED FOR ESCROW Software Program Name: Logician version 4.6.1_7 E&M Advisor Merge/Delete Patient Encounter Form Editor version 1.6.3 Software Developer MedicaLogic, Inc. 20500 NW Evergreen Parkway Hillsboro, OR 97124 Brief Description of Program: Package of Electronic Medical Record (EMR) products, including scheduling (ScheduLogic), data exchange (LinkLogic), and EMR (Logician) Programming Language and Tools: Compiler, Linker, Import Library Manager, Resource Compiler, Make, Debugger: Microsoft C++ version 4.2b Microsoft Corporation One Microsoft Way Redmond, WA 98052-6399 Database: Multi User Server: Oracle version 7.3 Oracle Corporation 500 Oracle Pkwy Redwood City, CA 94065 Single User Server: Watcom version 4.0 Sybase, Inc. 6475 Christie Avenue Emeryville, CA 94608 Client Network Interface: SQLNet SPX/IPX for Windows SQLNET TCP/IP for Windows version 2.3 Oracle Corporation 500 Oracle Pkwy Redwood City, CA 94065 Client: Windows Libraries version 7.1 Oracle Corporation 500 Oracle Pkwy Redwood City, CA 94065 DB Admin Tools: SQLPLUS version 3.1 Revised 3/4/99 Oracle Corporation 500 Oracle Pkwy Redwood City, CA 94065 Single User Admin Tools: ISQL version 3.2 Sybase, Inc. 6475 Christie Avenue Emeryville, CA 94608 Schema Tools: S-Designer version 4.1 Sybase, Inc. 6475 Christie Avenue Emeryville, CA 94608 Installation: Installation Software: InstallShield version 3 InstallShield Corporation P.O. Box 74904 Chicago, IL 60675-4904 Third-Party Libraries: Database Driver: Watcom ODBC Driver version 3.2 Sybase, Inc. 6475 Christie Avenue Emeryville, CA 94608 Database Driver: ODBC Driver Manager version 2.0 Microsoft Corporation One Microsoft Way Redmond, WA 98052-6399 Report Software: Crystal Reports Print Engine version 4.0 Crystal A. Seagate Software Company 1095 West Pender St., 4th Floor Vancouver, B.C., V6E 2M6 Canada Spell Checker: Visual Spell Checker version 1.01 VisualTools, Inc. 15721 College Blvd. Lenexa, KS 66219 Memory Management: Smartheap version 3.0 MicroQuill Software Publishing Inc. 10500 Valley View Rd. Bothell, WA 98011 Charting/Graphics: ChartFX version 3.0 SoftwareFX, Inc. 7100 West Camino Real, Ste 117 Boca Raton, FL 33433 Imaging: Image Gear Accusoft Corp. Revised 3/4/99 2 Westborough Business Park Suite 3013 Westborough, MA 01581 Third-Party Data: HealthLogic Patient Educational Handouts version: updated annually Clinical Reference Systems 7100 E. Belleview Ave, Suite 208 Greenwood Village, CO 80111 ICD9, CPT4 Coding Superhelp version: updated annually Context Software Systems, Inc. 241 Sourth Frontage Road, Suite 38-39 Burr Ridge, IL 60521 Pharmacologic Medications, Interactions, Drug Handouts version: update quarterly Medi-Span 8425 Woodfield Crossing Blvd. P.O. Box 40930 Indianapolis, IN 46240-0930 SNOMED Coding Superhelp version: updated semi-annually College of American Pathologists 325 Waukegan Road Northfield, IL 60093-2750 Source Code Revision Control: MKS RCS version 2.0 Mortice Kern Systems, Inc. 35 King Street North Waterloo, ONT, N2J 2W9 Canada Documentation: Using Logician Manual Managing Logician Manual Learning Logician Manual LinkLogic Interface Developer's Manual QA Tools: QA Partner version 4.0 Seque Software, Inc. 1320 Center St. Newton Centre, MA 02159 Winrunner version 4.01 Mercury Interactive Corp. 470 Potrero Ave. Sunnyvale, CA 94086 Revised 3/4/99 EXHIBIT B SIGNATURE OF LICENSEE and ACCEPTANCE OF TERMS SOFTWARE DEPOSIT AGREEMENT for Logician The undersigned LICENSEE has fully read and understands the terms of the attached Software Deposit Agreement #000-877 between Fidex Americas Corporation (FIDEX), MedicaLogic, Inc. ("DEVELOPER") and certain third parties ("LICENSEES"), of which this Exhibit is a part, and has carefully reviewed the description of the software deposited, and (1) fully intends to participate in this Agreement as LICENSEE, and (2) agrees to be bound by all the terms of the Agreement. SOFTWARE LICENSEE: __________________________________ Business Name __________________________________ Authorized Signature Name (Printed): __________________ Position: ________________________ Notice Address: __________________ __________________________________ Telephone: (___) _________________ Telefacsimile: (___) _____________ [NOTARY BLOCK NOT TYPED] EX-23.1 9 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors MedicaLogic, Inc.: We consent to the use of our "Form of Independent Auditors' Report," dated October 22, 1999, except as to note 13(d) which is as of November __, 1999, relating to the consolidated balance sheets of MedicaLogic, Inc. as of December 31, 1997 and 1998, and September 30, 1999 and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 1998 and for the nine- month period ended September 30, 1999 which form of report is included in the Registration Statement and Prospectus, dated October 28, 1999, of MedicaLogic, Inc., and to the reference to our firm under the heading "Experts" in the Prospectus. /s/ KPMG LLP Portland, Oregon October 28, 1999 EX-23.2 10 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS The Board of Directors PrimaCis Health Information Technology, Inc.: We consent to the use of our report on the financial statements of PrimaCis Health Information Technology, Inc. as of December 31, 1998 and for the year then ended included herein and to the reference to our firm under the heading "Experts" in the Prospectus. /s/ KPMG LLP Portland, Oregon October 28, 1999 EX-24.2 11 EXHIBIT 24.2 EXHIBIT 24.2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Mark K. Leavitt and David C. Moffenbeier his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign any amendments (whether pre-effective or post-effective) to this registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting unto each of said attorney-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorney-in-fact and agents, or their substitute or substitutes, may do or cause to be done by virtue hereof. Signature Title Date --------- ----- ---- NEAL MOSZKOWSKI Director September 17, 1999 ------------------------- Neal Moszkowski EX-27.1 12 EXHIBIT 27.1
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 7,081 38,059 5,772 (1,235) 0 51,708 15,637 (4,784) 67,727 8,557 0 97,825 0 15,793 (56,357) 67,727 9,620 14,992 813 5,724 23,306 405 180 (13,096) 0 (13,096) 0 0 0 (13,096) (1.61) (1.61)
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