-----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, SbBv3CnBD9tXczHdAL3lseDMjrUKblo0RPYeW2sekwCY7pcKqd2eHAxoCLzy17F5 GkqwXv1IiSjAAUP6fiqxww== 0000950109-97-002021.txt : 19970307 0000950109-97-002021.hdr.sgml : 19970307 ACCESSION NUMBER: 0000950109-97-002021 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970306 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMISYS MANAGED CARE SYSTEMS INC CENTRAL INDEX KEY: 0001003202 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 133355918 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27364 FILM NUMBER: 97551996 BUSINESS ADDRESS: STREET 1: 30 WEST GUDE DR STREET 2: 5TH FL CITY: ROCKVILLE STATE: MD ZIP: 20850 BUSINESS PHONE: 3012518600 MAIL ADDRESS: STREET 1: 30 WEST GUDE DRIVE FIFTH FLOOR CITY: ROCKVILLE STATE: MD ZIP: 20850 FORMER COMPANY: FORMER CONFORMED NAME: ADVANTA SYSTEMS INC DATE OF NAME CHANGE: 19951108 10-K 1 FORM 10-K ================================================================================ Securities and Exchange Commission Washington, D.C. 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 Commission File Number: 0-27364 AMISYS Managed Care Systems, Inc. ----------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3355918 ------------------------ -------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 30 West Gude Drive, 5th Floor Rockville, Maryland 20850 --------------------------------- -------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (301) 251-8600 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value ----------------------------------------------------------- Title of Class Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of February 14, 1997 the aggregate value of the 4,009,800 shares of Common Stock of the Registrant issued and outstanding on such date, excluding 3,748,500 shares held by all affiliates of the Registrant, was approximately $90,722,000. This figure is based on the closing sales price of $22.625 per share of the Registrant's Common Stock as reported on the NASDAQ National Market System on February 14, 1997. Number of shares of Common Stock outstanding as of February 14, 1997: 7,758,300 DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated: ================================================================================ PART I ITEM 1. BUSINESS. Overview AMISYS Managed Care Systems, Inc. ("AMISYS" or the "Company") develops, markets and supports managed health care information systems for payors and providers who offer managed care products and services. The Company provides an integrated system solution, which includes the Company's proprietary AMISYS software, third-party hardware and software and implementation services that automate most of the operational underpinnings of the Company's managed care clients. These products and services are directed at supporting critical "risk-management" operational functions that help ensure the proper balance of premium revenue against health care utilization costs, availability and quality. The Company's AMISYS software contains 29 fully integrated applications designed to support the full range of operations in managed care and risk-management administrative functions, including premium billing and receivables, capitation, utilization management and claims adjudication and payment. Historically, the Company's client base consisted primarily of HMOs. Since 1992, as managed care initiatives have spread throughout the health care system, the Company has broadened its client base to include many new entities that manage health care risk or administer managed health care products. The Company's installed base now includes commercial and Medicaid HMOs, indemnity insurers, integrated delivery systems ("IDSs"), physician-hospital organizations ("PHOs"), third-party administrators ("TPAs"), and mental health and other specialty managed care organizations ("specialty carveouts"). The Company currently has licenses with 80 AMISYS clients supporting 87 sites nationwide. The Company estimates that its clients are utilizing or installing the AMISYS system to administer risk for approximately 8.2 million covered lives. The core architecture of the AMISYS software system allows for a high degree of functionality and flexibility, enabling clients to add or modify insurance products, change or modify contractual arrangements with provider networks, manage complex benefit structures and comply with a wide range of reporting requirements, without the need for software modifications. The AMISYS system, through its "differential-risk management" capability, is able to adapt to the reallocation of risk among the key participants in the health care industry: underwriters, administrators, employer groups, governmental entities, members and providers. The AMISYS system is designed to address a wide range of membership sizes, using the same scaleable hardware platform--Hewlett-Packard's HP3000 line of computers. This focus on a single integrated system solution for a wide range of clients allows the Company to maintain and support one core system for its entire client base, thereby maximizing enhancement and new release value to all clients. The Company's strategy is to build on its strong market position and the comprehensive scope of its client relationships by (i) increasing new sales to the expanding risk-management marketplace, (ii) expanding sales to existing clients, (iii) increasing its recurring revenue base, (iv) exploring strategic acquisitions and (v) migrating AMISYS to client/server technology. Industry Background The health care industry is in a state of significant change with traditional roles played by payors and providers changing and merging. Since the mid-1970s, the managed care industry has grown from approximately 50 HMOs to an industry whose influence is reflected in the operations of almost all health insurance and health care delivery entities. This rapid increase in managed health care organizations is a direct result of the rapidly increasing costs of health care over the past 20 years. The broad pressure to reduce costs without sacrificing quality of care continues to be a primary force in the health insurance industry, further fueled by substantial competition between competing insurance companies and HMOs. In turn, health care delivery organizations competing for discounted fee-for- service or capitated contracts offered by insurance companies and HMOs have felt these pressures through substantial reductions in revenues. These market pressures, as well as the continued efforts to modify governmental 1 involvement in the health care industry and in financing Medicaid and Medicare programs, continue to fuel significant changes in both the health insurance and health care delivery industries. Two of the most profound changes in the health insurance and health care delivery industries are: (i) the demand by the primary entities that finance health care (employers and federal and state governments) that the health care industry continue to offer less expensive but high quality health insurance options and (ii) the resulting pressures on the health care delivery organizations (i.e., providers) to accept lower fees, causing them to turn to full risk-management contracting alternatives. These changes have resulted in the need by a growing number of organizations for risk-management/managed care software to assist in meeting these challenges. In addition to the above-described market opportunities, the need to balance cost and quality of care requires the reporting of every occurrence of service so as to draw a clear utilization and outcome analysis of the provision of health care. While clinically-based data systems are evolving, currently only a risk-management system collects the occurrence of every service during the period of time an individual is insured. Through submission of claims or encounters, providers must furnish managed care organizations with this information in order to be reimbursed and to justify capitation rates. This requirement results in a managed care database that allows analysis of utilization patterns and outcomes. The Company believes that the need to manage risk will be a critical function for both payors and providers. The software vendors serving the traditional insurers, TPAs or government-funded fiscal intermediaries (Medicaid and Medicare) and those servicing hospitals or physician practices generally do not offer scaleable and comprehensive managed care software products. The sophistication and complexity of managed care systems has discouraged both the hospital information systems and insurance systems vendors from developing competitive products serving such purposes. The resulting market dynamic has provided, and is expected to continue to provide, growing opportunities for the Company's products and services. Commercial HMOs are the traditional buyers of the Company's systems. Providers have moved increasingly away from fee-for-service reimbursement and have assumed greater responsibility and risk in providing medical care for defined patient populations. As a result, many of these entities have become risk managers and must perform managed care administrative functions, such as enrollment benefits tracking and capitation management, that require utilization of managed care information systems. Indemnity insurance companies, including Blue Cross and Blue Shield organizations, are increasingly offering HMO-like insurance options and require health information systems that can support the full range of insurance and managed care product lines. Medicare and Medicaid HMOs have emerged in recent years as an alternative to the fiscal intermediary approach. As these entities grow in size and sophistication, the Company believes that many will require managed care information systems comparable to those utilized by commercial HMOs. TPAs are increasingly forming alliances with provider networks to offer managed care products. The Company believes that as these initiatives lead to large-scale managed care operations, many TPAs will utilize managed care information systems. Specialty carveouts have emerged in recent years to assume financial risk for the specific medical needs, including mental health, dental care and radiology, of defined patient populations. The Company believes that an opportunity exists to provide managed care information systems to all of these emerging entities. AMISYS and Related Services The AMISYS system is a flexible and functional risk- management/managed care information system. The AMISYS system has a multi-option structure that enables a user to define multiple managed care insurance product lines and unique business configurations. This core functional architecture applies to each of the integrated applications, from claims processing and billing to correspondence generation and medical management. The AMISYS system makes it possible to manage the operational underpinnings of a risk-management business with a single system. 2 Functional Architecture The key to the AMISYS system's flexibility is its multi-option structure whose key components are: Business Unit--independent geographic or profit center Product Line--type of insurance product Carrier--the underwriter of risk Region--distinct geographic population Delivery System--contracted provider networks Risk Population--identified member populations The multi-option structure allows the AMISYS system to: (i) identify unique populations within product lines and properly isolate those populations to manage risk, provide utilization and cost reports and determine underwriting characteristics; (ii) structure and maintain multiple business relationships between participants in the managed care marketplace; (iii) simultaneously process data using different rules for each set of business relationships; (iv) report and roll-up data by each business relationship; (v) allow for changes in business relationships and contract arrangements; (vi) provide multiple health care insurance options with single-source administration and accountability and (vii) perform differential risk management and/or administration of risk. Major Functional Components Medical Management. The medical management applications focus on facilitating appropriate authorization of services and clinical case tracking of high risk and high cost cases. This application set allows the user to control the utilization of inpatient or special outpatient services in a variety of ways and at varying levels of intensity. The Case Management module contains full recommendation log functionality, assuring that proper medical approval is tracked and reflected in the Claims Adjudication applications. The entire Medical Management application set is integrated with all other applications in the system. Flexibility of Benefit, Provider Pricing, Capitation and Premium Rate Management. The Benefit, Provider Pricing, Capitation and Premium Rate Management applications of the system are significantly enhanced by the use of a proprietary tool that allows for flexible definition of all the parameters used in the configuration of these key system functions. This tool, called key words, fully integrates with the core multi-option architecture of the system and accounts for the flexibility of the entire product. Claims or Encounter Adjudication, Claims Payable and Electronic Batch Claims. Multi-option core architecture provides pricing flexibility in the claims applications arena. This configuration allows the AMISYS system to provide automatic on-line and batch claims adjudication, readjudication and adjustments. In addition, the system includes Liability Recovery/Credit Banking applications that allow for proper tracking, recovery and crediting of coordination of benefits and other third-party reimbursement. The claims payable functions contain a range of features to manage the disbursement and financial control of claims payments. All of these functions are applicable to medical, hospital, drug and dental claims. General Reporting, Utilization Reporting and Data Warehousing. The AMISYS system offers a wide range of reporting packages that provide comprehensive reporting capabilities, including: (i) 250 reports which are standard with the system and include production, membership, general utilization cost, premium receivable and cost allocation reports; (ii) TPA and employer group reports; (iii) Data Warehouse supported by a relational database that stores utilization, premiums, membership and provider data that allows for a wide range of reports and (iv) the HEDIS 3.0 Reporting System developed by the Company that allows for flexible HEDIS reporting. Indemnity Insurer, TPA and PPO Special Functions. The ability of the Company to sell the AMISYS system to indemnity insurers and TPAs is in part dependent upon offering traditional functions along with AMISYS's advanced managed care capabilities. To address these markets, AMISYS offers: (i) fully integrated Life AD&D billing facilitating an integrated Health and Life AD&D premium bill; (ii) split premium billing allowing for partial direct premium payment by an employee; (iii) TPA management allowing for proper tracking of funding levels by self-insured employer groups; (iv) specific and aggregate stop-loss allowing for tracking and management of stop- 3 loss activity levels and reimbursements and (v) for PPO processing, face-sheet generation and member/provider "on-the-fly" editing. The AMISYS system also offers the following third-party interfaces: HPR Inc.'s Code Review, Patterns of Treatment; GMIS Inc.'s Claims Check; Medicode's Rebundling Product/MDR Fee Schedules; EDI Inc.'s Claims, Electronic Funds Transfer, APS Inc.'s Practice Management System, and a Datagate interface engine. Sales and Marketing The Company markets and sells its products primarily through its own direct sales force. The majority of sales prospects are generated from client requests for proposals. The remainder typically comes from industry leads and demand-generation activities such as trade shows and seminars. The typical sales cycle spans a period of nine months from proposal request to contract execution. There are several benchmarks reached during the sales process, including short list, finalist and vendor of choice. The Company's sales and marketing staff dedicates significant amounts of resources during this process, including an evaluation of the potential client, presentations and demonstrations of the AMISYS system, client site visits, corporate visits and contract negotiations. The Company entered into non-exclusive agreements with Cerner Corporation and PHAMIS, Inc., under which the AMISYS system will be offered as a part of the system solutions packages offered by these companies. The Company has also entered into an agreement with Perot under which Perot offers the AMISYS system on a time share basis to smaller managed care clients and pays monthly member fees to the Company. See "Business-Contractual Relationships." Client Services The Company seeks to provide a comprehensive range of services to its clients through its client services and support capabilities. The Client Services Group has four key responsibilities: (i) pre-contracting business needs assessment; (ii) system implementation; (iii) ongoing client support and (iv) special services to clients with specific needs. To address the nationwide scope of support and the close relationship the Company develops with its clients, the Client Services Group is structured into northeast, northcentral, southeast, southwest and west regional teams. A nationwide help desk operates out of the Company's Rockville headquarters. A special services group also based in Rockville addresses nationwide conversion, hardware configuration and business analysis needs. Prior to the execution of new license agreements and for nine to twelve months thereafter, the Company's regional service group works closely with the client to implement the system. The assessment may involve an evaluation of benefit offerings, provider contracting arrangements, utilization management policy review, premium structure review and review of several of the client's other operational areas. Upon completion of the evaluation, the Company's staff works with the client to configure the AMISYS system, complete the conversion and train the client in the configuration, use and operation of the system. Implementation fees are based upon an hourly charge for labor, with the total hours determined during the business assessment. Following implementation, the Company offers ongoing support services for both functional use of the product and software maintenance. Support fees are paid monthly and, in general, contracted annually. The pricing structure of the support fees are based upon a fixed percentage of the license fee and total number of sites to be supported per client. Because many of the Company's clients are growing and the industry and competitive environments are changing, clients often require special services to address one-time needs such as additions of significant new business opportunities. These special services are supplied by the regional service teams on an hourly billing basis. 4 Clients Historically, the Company's client base consisted primarily of HMOs. Since 1992, as managed care initiatives have spread throughout the health care system, the Company has broadened its client base to include many new entities to manage health care risk or administer managed health care products. the Company's installed base now includes commercial and Medicaid HMOs, indemnity insurers, IDSs, PHOs, TPAs and specialty carveouts. The Company currently has licenses with 80 AMISYS clients supporting 87 sites nationwide. The Company estimates that its clients are utilizing or installing the AMISYS system to administer risk for approximately 8.2 million covered lives. The Company has retained all of its AMISYS system clients except three that were acquired and integrated into the acquirer's systems. The following chart, showing the number of system sales to clients in each of the last six years, illustrates the growing diversity of the Company's clients. AMISYS System License Sales (By year contracted)
No Longer Using AMISYS 1990 1991 1992 1993 1994 1995 1996 Total System(1) Total ---- ---- ---- ---- ---- ---- ---- ----- --------- ----- Commercial HMOs............ 4 5 9 4 5 8 8 43 (2) 41 IDSs/Providers............. 0 1 0 4 5 3 2 15 (1) 14 Medicaid HMOs.............. 0 0 2 2 0 5 0 9 0 9 Indemnity Insurers......... 1 0 0 0 3 2 4 10 0 10 PPOs/Specialty carveouts... 0 0 0 1 2 0 1 4 0 4 TPAs....................... 0 0 1 0 0 1 0 2 0 2 --- --- ---- ---- ---- ---- --- ---- ---- ---- Total...................... 5 6 12 11 15 19 15 83 (3) 80 === === === === === === == === === ===
- --------------- (1) These clients were acquired by or merged with other managed care firms. Research, Development and Technology The Company's product development efforts focus on: (i) enhancements to the AMISYS system through new applications and improvements to existing applications; (ii) maintenance of software and (iii) extending product offering to client/server technology platform. The Company believes that timely development of new applications and enhancements is essential to maintain its competitive position in the market. In developing new product enhancements, the Company works closely with clients to determine their ongoing product needs. The Company believes that these collaborative efforts lead to improved functionality and a superior product. The Company also works closely with Hewlett-Packard ("HP") to ensure compatibility with new operating systems and hardware upgrades. The Company's current product research and development enhancement efforts are directed towards developing new applications each year for sale to the existing client base and new clients. The Company expects to introduce a web browser, indemnity functionality, and a stand alone data warehouse. The Company is actively developing a migration of AMISYS to a UNIX/NT, client/server open environment. The migration of AMISYS is being undertaken to address the long-term strategic need to take full advantage of client/server and relational database technology, as they evolve in their ability to handle large and transaction intensive systems. This migration of AMISYS is expected to leverage the Company's current product investment because it allows for the actual migration, rather than the rewrite, of approximately 60% of the existing AMISYS system code. The resulting product will meet open standards, provide graphical user interface, use RDBMS technology and take advantage of client/server scalability. 5 Hardware Platform The AMISYS system currently operates on the Hewlett-Packard HP3000 family of computers. The computers in this family range from the HP3000/918 LX, which supports from four to eight users, to the HP3000/995, which supports over 1,000 users. The HP3000 family is a high-performance on-line transaction processing system that is particularly important in applications such as claims processing. The majority of the models are field upgradeable to the next larger model through a simple change of the main processing board. The memory, disk drives and other peripheral hardware components are interchangeable among various models. Additional software modifications of the AMISYS system are not required in order to expand to the next larger model. The Company is seeking to position the AMISYS system to manage databases in excess of one million lives, a scale which has not yet been commercially achieved. There can be no assurance that the Company will be successful in this regard. The Company considers Hewlett-Packard to have advanced upwardly compatible hardware which allows for large capacity processing without the environmental and personnel requirements of mainframe systems. Migrating AMISYS to Client/Server The Company believes that its continued success will be dependent upon its ability to maintain the AMISYS system at the forefront of new technological developments through new applications and enhancements to the existing product. The Company has identified a significant opportunity in migrating AMISYS to client/server technology, which meets open standards, offers graphical user interfaces and utilizes relational database technology. Initially, client/server technology was not well suited to the risk-management/managed care administrative processing systems marketplace due to the large, complex and transaction intensive processing requirements of managed care organizations. However, recent technological advances may render client/server environment capable of accommodating the complexity and scale of transactions processed by the Company's clients and potential clients and, accordingly, the Company believes technical migration to a client/server environment is practical and appropriate. The Company intends to migrate AMISYS to client/server technology using a new scaleable three-tier architecture that will run on HP 9000, IBM 6000 and DEC ALPHA platforms. The Company's proposed client/server system would have database accessibility to Oracle, Sybase and Informix and would allow the Company to supply both hardware and database-independent solutions, while maintaining the ability to process large and complex transaction loads. A migration of AMISYS to a client/server environment will involve the expenditure of a significant amount of the Company's resources. There can be no assurance that the Company will be able to successfully migrate AMISYS to a client/server environment, that such a migration will not result in unexpected costs, delays or system failures, or that demand will exist for an AMISYS client/server product. Contractual Relationships License Agreements The AMISYS system is offered to clients through license agreements. Pursuant to these agreements, the Company grants to each client a non-exclusive, non-transferable perpetual license to the AMISYS system and third-party software on a user or geographic-specific basis, together with installation, software modifications and training. Under these agreements, clients are required to maintain the confidentiality of the Company's trade secrets and proprietary information. The license agreements provide for initial support of the Company's product for a specified period following installation. Payment terms include milestone payments during the installation process, typically the commencement of installation, delivery of hardware and system operation. In certain contracts, additional payments are due upon the client's achievement of certain membership size levels. 6 Client Support Agreements In addition to license agreements, the Company typically enters into client support agreements having terms from one to five years, but providing for prior termination at the option of the client. These agreements provide for the provision of support services, including hot-line support, a designated account manager, on-site system review, training and software maintenance. Clients pay a fixed monthly fee, normally a percentage of the original license fee, with additional charges payable upon the addition of new geographic sites. In addition, the contracts call for a yearly cost of living percentage increase. Hewlett-Packard Agreement The Company's contract with HP provides for hardware purchases by the Company under discounts varying by HP product. The Company's contracts with HP have had one-year terms, with the most recent contract due to expire in August 1997. The Company is an HP "Preferred Solution Partner" and believes its relations with HP are good. Competition The market for the sale of health care information systems is highly competitive. The Company believes its most significant competitors are Computer Science Corporation, Health Systems Design Corp., Erisco (a division of Cognizant Corporation), The Compucare Company and IDX Systems Corporation. The Company also competes with in-house systems developed by large managed care organizations. Competitive factors in the Company's market include breadth of product features, product quality and functionality, client service and support, price, financial stability and capacity to produce ongoing product enhancements. Certain of the Company's competitors and potential competitors have greater financial, technical, marketing and sales resources than the Company. Proprietary Rights and Licenses The Company relies on a combination of trade secret, trademark and copyright laws, license agreements, nondisclosure and other contractual provisions and technical measures to protect its proprietary rights. The Company distributes the AMISYS system under software license agreements that typically grant clients non-exclusive and non-transferable licenses to use the product. Use of the product is typically restricted to computers at specified locations and is subject to terms and conditions prohibiting unauthorized reproduction or transfer of software products. The Company also seeks to protect its trade secrets and other proprietary information through non-disclosure agreements with employees and consultants. Despite these precautions, there can be no assurance that misappropriation of the Company's proprietary technology will not occur. Although the Company believes that its intellectual property rights do not infringe upon the proprietary rights of others, there can be no assurance that third parties will not assert infringement claims against the Company, and such claims could result in material adverse effects upon the Company. Company Background The Company was founded as a Maryland corporation in 1976, under the name Jurgovan and Blair, Inc. ("JBI"). In July 1986, American International Group, Inc. ("AIG") acquired JBI through the merger of JBI with a wholly-owned subsidiary of AIG. In 1988, JBI was merged with American International Healthcare, Inc. ("AIHI") with JBI surviving the merger. Immediately following the merger, the name was changed to American International Healthcare, Inc. In July 1992, the Company was reorganized by AIG and became solely a software vendor. The other businesses within the Company were transferred to other AIG companies or sold. In May 1994, AIHI was acquired by and merged with AIH Systems, Inc., a Delaware corporation. AIHI survived the merger and immediately changed 7 its name to AIH Systems, Inc. The Company adopted the name Advanta Systems, Inc. in February 1995 and changed its name to AMISYS Managed Care Systems, Inc. in November 1995. The Company's executive offices are located at 30 West Gude Drive, Fifth Floor, Rockville, Maryland 20850. Its telephone number is (301) 251-8600. Employees At December 31, 1996, the Company had a total of 255 employees, 39 of whom were engaged in administration, 26 in sales and marketing, 110 in research and development and 80 in client support. None of the Company's employees are subject to a collective bargaining agreement. The Company believes that its relations with its employees are good. ITEM 2. PROPERTIES. In January 1997 the Company entered into a new lease for its existing office space in Rockville, Maryland for its corporate headquarters. Under the terms of the new lease the Company will expand the office space to 90,000 square feet from the 46,000 square feet previously leased. The additional space will be obtained over a period of 10 months. The Company also leases approximately 3,800 square feet in Seattle, Washington for regional sales. The Company believes that its current facilities are adequate for its current needs and future growth and that additional suitable space will be available as required. ITEM 3. LEGAL PROCEEDINGS. None to report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None to report. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Common stock of AMISYS Managed Care Systems, Inc. is listed on the NASDAQ National Market System under the symbol AMCS. At February 14, 1997 there were approximately 34 shareholders of record. The high and low sales prices for the common stock is presented for each quarter in the last year ended December 31, 1996 and for the period December 20, 1995 (date of the initial public offering) through December 31, 1995. The Company has not paid any dividends on its common stock and does not anticipate any payment of dividends in future periods. Stock Price High Low ---- --- December 31, 1995(1) $ 20.00 $ 15.00 March 31, 1996 23.25 16.00 June 30, 1996 27.875 17.75 September 30, 1996 28.25 19.00 December 31, 1996 27.50 12.25 .......... (1) Price information is reported for the period December 20, 1995, date of initial public offering of common stock, through December 31, 1995. 9 ITEM 6. SELECTED FINANCIAL DATA. The following table summarizes certain selected financial data for the Company, the surviving corporation of a merger between AIHI and AIH Systems, Inc. The selected financial data reflects the segregation of the operating activities for the periods of different ownership. This financial data should be read in conjunction with the Company's financial statements, and the notes thereto, as of December 31, 1996 and 1995 and for the years ended December 31, 1996 and 1995, and the periods May 27, 1994 to December 31, 1994, January 1, 1994 to May 26, 1994, and the report of independent accountants thereon, and with Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 8 "Financial Statements and Supplementary Data" which are included elsewhere in this document.
AMISYS AMISYS AMISYS Combined AMISYS AIHI ------ ------ | -------- | ------ ----------------------------- Year Year | (1) | May 27, Jan. 1, Ended Ended | Year Ended | 1994- 1994 to Years Ended Dec. 31, Dec. 31, | Dec. 31, | Dec. 31, May 26, December 31, 1996 1995 | 1994 | 1994 1994 1993 1992 ---- ---- | ---- | ---- ---- ---- ---- | (unaudited)| | | Statement of Operations Data: | | Revenues | | System sales ...................... 38,476 $26,753 | $17,960 | $11,642 $6,318 $11,698 $ 8,332 Support and maintenance ........... 7,962 5,034 | 4,475 | 2,745 1,730 2,556 3,221 Contract services (2) ............. -- -- | -- | -- -- 1,400 6,529 ------- ------- | ------- | ------- ------ ------- ------- Total revenues ............... 46,438 31,787 | 22,435 | 14,387 8,048 15,654 18,082 Cost of revenues (3) ................. 24,264 17,278 | 12,116 | 7,714 4,402 9,583 13,345 ------- ------- | ------- | ------- ------ ------- ------- Gross profit ......................... 22,174 14,509 | 10,319 | 6,673 3,646 6,071 4,737 ------- ------- | ------- | ------- ------ ------- ------- Operating Expenses | | Sales and marketing ............... 3,935 2,961 | 1,330 | 738 592 1,097 880 Research and development .......... 7,715 5,502 | 4,978 | 3,270 1,708 2,290 2,593 General and administrative (4) .... 5,039 3,871 | 2,538 | 1,738 800 1,838 2,292 Write-off of purchased research and | | development (5) ................. -- -- | 6,516 | 6,516 -- -- -- Write-down of assets (6) .......... -- -- | -- | -- -- -- 8,380 ------- ------- | ------- | ------- ------ ------- ------- Total operating expenses ..... 16,689 12,334 | 15,362 | 12,262 3,100 5,225 14,145 | | Operating income (loss) .............. 5,485 2,175 | (5,043) | (5,589) 546 846 (9,408) Other income (expenses) .............. 1,318 (500) | (357) | (363) 6 (27) (16) ------- ------- | ------- | ------- ------ ------- ------- Income (loss) before income tax | | provision ......................... 6,803 1,675 | (5,400) | (5,952) 552 819 (9,424) Income tax (benefit) provision ....... 2,106 -- | 695 | 476 219 321 (3,100) Cumulative effect of change in | | accounting for income taxes........ -- -- | -- | -- -- -- 241 ------- ------- | ------- | ------- ------ ------- ------- Net income (loss) .................... $ 4,697 $ 1,675 | $(6,095) | $(6,428) $ 333 $ 498 $(6,565) ------- ------- | ------- | ------- ------ ------- ------- Net income (loss) per share (7) ...... $ 0.57 $ 0.28 | $ (1.03) | $ (1.09) Weighted average common and common | | equivalent shares ................. 8,274 5,949 | 5,900 | 5,900
10
AMISYS AIHI ----------------------------------------- | ----------------------- December 31, | December 31, ----------------------------------------- | ----------------------- 1996 1995 1994 | 1993 1992 ---- ---- ---- | ---- ---- (in thousands) | | Balance Sheet Data: | Cash and cash equivalents................. $ 24,087 $ 5,354 $ 2,727 | $ 1,136 $ 118 Short-term investments.................... 2,389 20,400 -- | -- -- Working capital........................... 31,349 26,092 5,110 | 2,315 2,400 Total assets.............................. 44,402 34,045 10,167 | 9,833 10,358 Long-term debt............................ -- -- 10,100 | 1,509 2,158 Stockholders' equity (deficit)............ 33,784 27,317 (6,395) | 2,875 2,378 - ---------------------------------
(1) Includes the results of operations of AIHI for the period prior to the acquisition, January 1, 1994 to May 26, 1994 combined with the actual results of the Company for the remainder of the periods shown. These combined results are unaudited because they represent the sum of the amounts derived by combining the results for the audited period January 1, 1994 to May 26, 1994 and, in the case of the full year 1994 results, the audited period May 27, 1994 to December 31, 1994, during periods of different ownership. (2) Represent revenues generated by a majority-owned subsidiary divested in 1993 and certain health care information consulting operations transferred in 1992 to AIG. (3) Includes cost of revenues of $6.2 million and $1.1 million for 1992 and 1993, respectively, generated by a majority-owned subsidiary divested in 1993 and certain health care information consulting operations transferred in 1992 to AIG. (4) Includes general and administrative expenses of $249,000 and $130,000 for 1992 and 1993, respectively, generated by a majority-owned subsidiary divested in 1993. (5) On May 26, 1994, the Company acquired AIHI in a transaction accounted for as a purchase. The purchase price was allocated among the assets with $6.5 million allocated to purchased research and development. Because the purchased research and development had not reached the stage of technological feasibility, this amount was written off as of the same date. (6) Represents non-recurring, non-cash total charges of $8.4 million recorded at June 30, 1992 to reflect the write-down of assets, primarily capitalized software costs related to an obsolete software product previously sold to a third party. (7) Per share amounts are computed on the basis of Note 1 of Notes to the Financial Statements. 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Overview Background Prior to May 27, 1994, the Company was a wholly owned subsidiary of AIG. In July 1992, the Company was reorganized by AIG, and it became solely a software systems vendor with its other businesses transferred to other AIG companies or sold. The Company was acquired in May 1994 and completed an initial public offering in December 1995. On May 26, 1994, the Company acquired AIHI in a transaction accounted for as a purchase. The purchase price was allocated among the assets with $6.5 million allocated to purchased research and development and $1.2 million allocated to existing software. Both of these allocations were made based on discounted cash flow estimates of the net present value of the products. Because the purchased research and development had not reached the stage of technological feasibility, this amount was written off as of the same date. Revenue Recognition The Company develops, sells and supports an integrated information system solution, AMISYS, to health care payors and providers who offer managed care products and services. As of December 31, 1996, the Company had licenses with 80 AMISYS clients supporting 87 sites nationwide. The Company's revenues are generated primarily from the sale of integrated, enterprise-wide systems. The components of these revenues consist of a license fee for the perpetual use of the software, sales of third-party hardware and software and labor charges to install and configure each system to meet the client's needs. The price of each system will vary based upon many factors including the number of covered lives, the level of third-party products required and the level of installation and configuration work provided by the Company's staff. Revenues are recognized for system sales on a percentage of completion basis measured primarily by the ratio of (i) labor hours incurred to install each specific contract to (ii) total estimated labor hours to complete each specific installation. When the total estimated cost of a contract is expected to exceed the contract price, the total estimated loss is charged to expense in the period when the information becomes known. Because the Company generally bills for installation and implementation on an hourly basis, these labor revenues are recognized as billed. AMISYS systems are installed over a period of time ranging generally from nine months to a year. Because revenues do not begin to be recognized until a client signs a contract and because the length of the installation process depends on factors outside the control of the Company, the Company is unable to predict accurately the amount of revenues it expects to recognize from system sales in any particular period. The Company also recognizes revenues from support and maintenance fees, custom modifications and the sale of third-party products. Support and maintenance fees are billed monthly and recognized as revenues when billed. Third-party products not related to system installations are billed and recognized as revenues upon shipment to the client. Revenues from custom modifications are generally recognized when billed. Backlog As of December 31, 1996, the Company had a total backlog of $14.1 million compared to a backlog of $12.0 million as of December 31, 1995. Backlog is comprised of unrecognized revenues for system sales and support and maintenance for which there are signed agreements expected to be completed within the next twelve months. There can be no assurance that contracts included in backlog will in fact generate the specified revenues or that these revenues will be fully recognized within the twelve-month period. 12 Results of Operations The following table sets forth the results of operations and the percentage of total revenues for each period indicated prepared on the following basis: The results of operations for AIHI for the period January 1, 1994 to May 26, 1994 and for the Company for the period May 27, 1994 to December 31, 1994 have been combined and are presented unaudited. The discussion of results of operations below is also set forth on this basis, which management believes allows for comparability among the periods presented.
AMISYS AIHI AMISYS Combined --------------------- -------- Years Ended December 31, ------------------------------------ 1996 1995 1994 ---- ---- ---- (in thousands) Revenues System sales ......................... $ 38,476 $ 26,753 $ 17,960 Support and maintenance .............. 7,962 5,034 4,475 -------- -------- -------- Total revenues ............... 46,438 31,787 22,435 Cost of revenues ........................ 24,264 17,278 12,116 -------- -------- -------- Gross profit ............................ 22,174 14,509 10,319 Operating expenses Sales and marketing .................. 3,935 2,961 1,330 Research and development ............. 7,715 5,502 4,978 General and administrative ........... 5,039 3,871 2,538 Write-off of purchased research and development ................... -- -- 6,516 -------- -------- -------- Total operating expenses ..... 16,684 12,334 15,362 -------- -------- -------- Operating income (loss) ................. 5,485 2,175 (5,043) Other income (expenses) Interest expense ..................... (38) (622) (410) Interest income ...................... 1,329 101 39 Other ................................ 27 21 14 -------- -------- -------- Total other income (expenses) 1,318 (500) (357) -------- -------- -------- Income (loss) before income tax provision 6,803 1,675 (5,400) Income tax provision ................. 2,106 -- 695 -------- -------- -------- Net income (loss) ....................... $ 4,697 $ 1,675 $ (6,095) -------- -------- --------
13
AMISYS AIHI AMISYS Combined -------------------------- -------- Year Ended December 31, --------------------------------------------- 1996 1995 1994 ---- ---- ---- Statement of Operations Data as Percentages of Total Revenues: Revenues System sales........................................... 82.9% 84.2% 80.1% Support and maintenance................................ 17.1 15.8 19.9 ----- ----- ----- Total revenues................................. 100.0 100.0 100.0 Cost of revenues.......................................... 52.3 54.4 54.0 ----- ----- ----- Gross profit.............................................. 47.7 45.6 46.0 Operating expenses Sales and marketing.................................... 8.5 9.3 5.9 Research and development............................... 16.6 17.3 22.2 General and administrative............................. 10.8 12.2 11.3 Write-off of purchased research and development........ -- -- 29.1 ----- ----- ----- Total operating expenses....................... 35.9 38.8 68.5 ----- ----- ----- Operating income (loss)................................... 11.8 6.8 (22.5) Other income (expenses) Interest expense....................................... (0.1) (1.9) (1.8) Interest income........................................ 2.9 0.3 0.1 Other ............................................... -- 0.1 0.1 ----- ----- ----- Total other income (expenses).................. 2.8 (1.5) (1.6) ----- ----- ----- Income (loss) before income tax provision................. 14.6 5.3 (24.1) Income tax provision................................... (4.5) 0.0 3.1 ----- ----- ----- Net income (loss)......................................... 10.1% 5.3% (27.2%) ----- ----- -----
Years Ended December 31, 1996 and 1995 Revenues. In 1996 revenues increased 46.1% to $46.4 million from $31.8 million in 1995. System sales revenues increased 43.8% to $38.5 million from $26.8 million due to sales of new systems and sales into the existing customer base. Revenues attributable to support and maintenance increased 58.2% to $8.0 million in 1996 from $5.0 million in 1995. This increase is attributable to higher support fees from existing customers and increased consulting revenues. Cost of Revenues. In 1996 cost of revenues increased 40% to $24.3 million from $17.3 million in 1995, improving gross profit margins to 48% from 46%. This improvement reflects a changing mix of revenue toward software products. As of December 31, 1996, there were 80 people engaged in installation and support of new and existing clients compared to 61 at December 31, 1995. Sales and Marketing: In 1996 sales and marketing expenses increased 33% to $3.9 million from $3.0 million in 1995. This increase is due to continued increases in the volume of requests for proposals and other sales efforts. The Company has a long sales cycle for its products which involves detailed demonstrations, contract negotiations and a significant amount of client contact. Sales and marketing personnel increased to 26 as of December 31, 1996 compared to 22 in 1995. 14 Research and Development. In 1996 research and development expenses increased 40% to $7.7 million from $5.5 million. The number of personnel involved in research and development activities increased 45% to 110 at December 31, 1996 compared to 76 at December 31, 1995. General and Administrative. In 1996 general and administrative expenses increased 30% to $5.0 million from $3.9 million in 1995. Additional personnel were added in 1996 in order to provide an infrastructure to support the Company's growth. At December 31, 1996 there were 39 general and administrative personnel compared to 23 as of December 31, 1995. Income Taxes. In 1996 income tax expense was 31% of pre-tax income. There was no provision for income taxes for 1995. As of December 31, 1996, the valuation allowance for the deferred tax asset previously reported with respect to the tax effect of those differences was reduced, reflecting management's estimate that the deferred tax asset would more likely than not be realized. The valuation allowance may be further reduced in future periods resulting in a lower effective tax rate in those periods if the Company continues to report taxable income in future periods or events occur which indicate the remaining deferred tax asset will more likely than not be realized. Such realization is directly dependent on the Company's future operations which in turn are dependent on the Company's product enhancements and technological feasibility being reached as the client/server product. Years Ended December 31, 1995 and 1994 Revenues. In 1995 revenues increased 42% to $31.8 million from $22.4 million in 1994. System sales revenues increased 49% to $26.8 million from $18.0 million due to 19 system sales during the year compared with 15 system sales in 1994. Included in the 19 system sales was one sale which accounted for more than 10% of revenues for the year. In 1995 revenues attributable to support and maintenance increased 12% to $5.0 million from $4.5 million in 1994. A large increase in support and maintenance revenues over the corresponding period in the prior year, due to an expanding client base, was offset by revenues from custom modifications which remained relatively constant with last year. Cost of Revenues. In 1995 cost of revenues increased 43% to $17.3 million from $12.1 million in 1994. During the year ended December 31, 1995, the Company responded to increased growth by hiring and training additional consultants and support personnel to implement and configure the AMISYS system and to train clients. As of December 31, 1995, there were 61 people engaged in installation and support of new and existing clients compared to 48 as of December 31, 1994. Cost of revenues as a percentage of system sales and support and maintenance revenues remained constant at 54% for 1995 compared to 1994. Sales and Marketing. In 1995 sales and marketing expenses increased 123% to $3.0 million from $1.3 million in 1994 as a result of an increase in sales and marketing personnel to 22 as of December 31, 1995 compared to 13 in 1994. This increase was due to an increase in the volume of requests for proposals and other sales efforts. Research and Development. In 1995 research and development expenses increased 11% to $5.5 million from $5.0 million during 1994. Expenses increased as a result of an increase in personnel to 76 as of December 31, 1995 from 46 as of December 31, 1994. This increase reflects the Company's effort to replace contract labor with in-house personnel. General and Administrative. In 1995 general and administrative expenses increased 53% to $3.9 million from $2.5 million in 1994. This increase was primarily attributable to an increase to 23 people at December 31, 1995 from 17 people at December 31, 1994, to assist the Company in managing its growth. Income Taxes. There is no provision for income taxes for 1995 due to the recording of differences between book and taxable income arising out of the allocation of the purchase price for tax purposes among the assets of the Company as of the May 27, 1994 purchase date. As of December 31, 1995, the valuation allowance for deferred taxes previously reported with respect to the tax effect of those differences was reduced in an amount equal to a portion of the current provision, reflecting management's belief that a portion of the deferred tax asset would more likely than not be realized. The remaining valuation allowance exists as of December 31, 1995 because, based on the weight of all available evidence, management believes it is more likely than not that the remaining deferred tax asset will not be realized. To the extent that the Company reports taxable income in future periods, or events occur 15 which indicate that the remaining deferred tax asset will more likely than not be realized, the valuation allowance may be further reduced resulting in a lower effective tax rate in those periods. The Company believes that it is more likely than not that the deferred tax asset will not be realized because such realization is directly dependent on the Company's future operations which in turn are dependent on the Company's client/server product reaching technological feasibility. Although the Company experienced a loss for the year ended December 31, 1994, the Company recorded a tax provision to reflect the timing of deductions allowable for tax purposes compared to book purposes. See Note 7 of Notes to Financial Statements. Years Ended December 31, 1994 and 1993 Revenues. In 1994, revenues increased 43% to $22.4 million from $15.7 million in 1993. Included in 1993 revenues were $1.4 million of contract services revenues from the joint venture divested in 1993. In 1994, revenues from system sales increased 54% to $18.0 million from $11.7 million for 1993 due to the increased number of systems sold. Support and maintenance revenues increased 75% due to increases in custom modifications during 1994. In 1994, total revenues for system sales and support and maintenance (which represent AMISYS system-related revenues) increased 57% from 1993. Cost of Revenues. In 1994, cost of revenues increased 26% to $12.1 million from $9.6 million in 1993. Included in cost of revenues for 1993 were $1.1 million related to contract services revenues from the divested joint venture. In 1994, cost of revenues for system sales and support and maintenance increased 44% to $12.1 million from $8.4 million in 1993. The lower growth rate of cost of sales compared to revenues was due to lower growth rates of amortization and labor. Cost of revenues for system sales and support and maintenance as a percentage of revenues remained constant at 54% for 1994 and 1993. Sales and Marketing. In 1994, sales and marketing expenses increased 21% to $1.3 million from $1.1 million in 1993. This increase was attributable in part to the added cost of selling 15 systems in 1994 compared with 11 systems in 1993. This increase also related to the hiring of additional staff involved in the sale and marketing of the AMISYS system. The number of staff rose to 12 at the end of 1994 compared to 9 at the end of 1993. Research and Development. In 1994, research and development expenses increased 117% to $5.0 million from $2.3 million in 1993. This increase was generally attributable to an increase in personnel to 46 at the end of 1994 from 38 at the end of 1993 and the cost of a significant amount of contract development work performed during 1994. General and Administrative. In 1994, general and administrative expenses increased 38% to $2.5 million from $1.8 million in 1993. Included in general and administrative expenses are the cost of adding personnel to build the infrastructure of the Company and the cost of administering the Company as a free-standing organization. Included in general and administrative expenses for 1993 is $130,000 related to the divested joint venture. Write-Off of Purchased Research and Development. On May 26, 1994, the Company acquired AIHI in a transaction accounted for as a purchase. The purchase price was allocated among the assets, with $6.5 million allocated to purchased research and development. Because the purchased research and development had not reached technological feasibility, this amount was written off as of the same date. Income Taxes. In 1994, income tax expense increased 117% to $695,000 compared to $321,000 in 1993, but declined as a percentage of pre-tax income to 13% in 1994 from 39% in 1993. These rates vary due to the differences in the timing of deductions for expenses for accounting purposes versus tax purposes. Although the Company experienced a loss for the period ended December 31, 1994, the Company recorded a tax provision to reflect the timing of deductions allowable for tax purposes compared to book purposes. The primary expenses giving rise to the book loss which were not allowable for tax purposes were the write-off of purchased research and development costs, expenses associated with the acquisition of AIHI and depreciation and amortization. A valuation allowance was established at December 31, 1994 to fully offset the deferred tax assets associated with the tax effect of future deductible items, since it was more likely than not that the benefit would not be realized. See Note 7 of Notes to Financial Statements. 16 Quarterly Results of Operations The following tables set forth certain unaudited quarterly financial data for the year ended December 31, 1996 and 1995. This quarterly unaudited financial information has been prepared on the same basis as the annual Financial Statements and, in the opinion of the Company's management, reflects all normal recurring adjustments necessary for the fair presentation of the information for the periods presented. Operating results for any quarter are not necessarily indicative of results for any future period. The Company typically experiences fluctuations in its quarterly revenues and expenses. These fluctuations are caused by factors including the timing of the signing of contracts for new system installations, the ability of the client to control the implementation process, the timing of the purchase of third-party products and delivery by vendors and the demand for custom modification.
Three Months Ended ------------------------------------------------------------------------------ December September June March December September June March 31, 1996 30, 1996 30,1996 31,1996 31,1995 30,1995 31,1995 31,1995 -------- -------- ------- ------- ------- ------- ------- ------- Statements of Operations Data: Revenues............................... System sales........................ $11,927 $ 8,379 $ 9,937 $ 8,233 $7,105 $7,762 $6,770 $5,116 Support and maintenance............. 2,343 2,588 1,636 1,395 1,490 1,346 1,066 1,132 ----- ----- ----- ----- ----- ----- ----- ----- Total revenues.................... 14,270 10,967 11,573 9,628 8,595 9,108 7,836 6,248 Cost of revenues....................... 7,859 5,085 6,152 5,168 4,172 4,830 4,565 3,711 ----- ----- ----- ----- ----- ----- ----- ----- Gross profit........................... 6,411 5,882 5,421 4,460 4,423 4,278 3,271 2,537 Operating expenses..................... 4,621 4,333 4,089 3,646 3,453 3,175 2,987 2,719 ----- ----- ----- ----- ----- ----- ----- ----- Operating income (loss)................ 1,790 1,549 1,332 814 970 1,103 284 (182) Income (loss) before income tax provision........................... 2,151 1,873 1,635 1,144 853 987 141 (306) Income tax provision................... 478 656 565 407 -- -- -- -- ----- ----- ----- ----- ----- ----- ----- ----- Net income (loss)...................... $1,673 $1,217 $ 1,070 $ 737 $ 853 $ 987 $ 141 $ (306) ====== ====== ======= ======= ====== ====== ======= ======
Liquidity and Capital Resources On December 26, 1995, the Company raised $29.6 million, net, through the issuance of Common Stock. Of these proceeds, $10.1 million was used to repay subordinated notes issued in connection with the acquisition of AIHI from AIG on May 27, 1994. The terms of the notes required repayment of the notes upon completion of a qualified initial public offering of stock. Since May 27, 1994, the Company has utilized its own resources to fund its operations. During the years ended December 31, 1996 and 1995, the Company generated $1.6 million and $4.6 million of cash from operations, respectively. For the full year 1994, the Company utilized $797,000 of cash for operations. At December 31, 1996, the Company $24.1 million in cash invested in money market funds and short-term time deposits with commercial banks and $2.4 million in short-term investments. As of December 31, 1995, the Company had $5.4 million in cash invested in short-term time deposits with commercial banks and short-term investments of $20.4 million representing net proceeds from the initial public offering of stock after repayment of the subordinated notes. At December 31, 1996 and 1995, the Company had $14.8 million and $6.4 million, respectively, in accounts receivable, net of allowance for doubtful accounts. Accounts receivable are generally collected over a range of 60 to 100 days. The accounts receivable balance does not directly correspond to revenues recognized as the Company recognizes revenues primarily using the percentage of completion basis as the work is performed. Amounts billed to customers may be deferred and recognized in a future period as the work is performed and ordinarily revenues are recognized in periods subsequent to the payment of the invoice. At December 31, 1996 and 1995, the Company had 17 $1.3 million and $2.2 million, respectively, in deferred revenues, substantially all of which is expected to be earned over the subsequent twelve month period. In September 1995, the Company entered into a $4.0 million revolving credit and letter of credit agreement which provides a line of credit for the purpose of funding working capital and capital expenditures and letters of credit to secure certain payables. This agreement is secured by certain assets of the Company and expires in September 1997. The agreement contains certain financial covenants and restrictions on dividend payments, repayment of indebtedness and share repurchases. The Company had borrowings of approximately $391,000, related to funding of capital expenditures, under the line of credit as of December 31, 1996. The Company believes that the cash and short term investments, together with amounts available under the revolving credit agreement and cash generated from operations, will be sufficient to meet anticipated needs for at least the next 12 months. 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS AMISYS Managed Care Systems, Inc.: Page ---- Report of Independent Accountants......................................... 20 Balance Sheets............................................................ 21 Statements of Operations.................................................. 22 Statements of Stockholders' Equity (Deficit).............................. 23 Statements of Cash Flows.................................................. 24 Notes to Financial Statements............................................. 25 INDEX TO SCHEDULES Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is included in the financial statements or notes thereto. 19 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of AMISYS Managed Care Systems, Inc. We have audited the accompanying balance sheets of AMISYS Managed Care Systems, Inc. ("the Company") as of December 31, 1996 and 1995, and the related statements of operations, stockholders' equity (deficit) and cash flows for the years then ended and the period from May 27, 1994 to December 31, 1994, respectively. We have also audited the accompanying statements of operations, stockholder's equity (deficit) and cash flows of American International Healthcare, Inc. ("AIHI"), a wholly owned subsidiary of American International Group, Inc. for the period from January 1, 1994 to May 26, 1994 (see Note 1). These financial statements are the responsibility of the Company's and AIHI's management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the financial position of the Company and AIHI for the periods described above and the results of operations and cash flows of the Company and AIHI for the periods described above, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Washington, D.C. February 11, 1997 20 AMISYS Managed Care Systems, Inc. Balance Sheets (dollars in thousands, except share data) ASSETS
December 31, ------------------------- 1996 1995 ---- ---- Current assets Cash and cash equivalents.............................................. $24,087 $ 5,354 Short-term investments................................................. 2,389 20,400 Accounts receivable, net............................................... 14,781 6,362 Deferred income taxes.................................................. 501 251 Prepaid expenses and other............................................. 209 453 ------- ------- Total current assets............................................... 41,967 32,820 ------- ------- Property and equipment, net................................................ 2,313 970 Purchased software, net.................................................... 122 255 ------- ------- Total assets....................................................... $44,402 $34,045 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable....................................................... $ 3,900 $ 2,164 Accrued salaries and wages 920 495 Accrued expenses....................................................... 3,744 1,745 Income taxes payable................................................... 772 118 Deferred revenue, net.................................................. 1,282 2,206 ------- ------- Total current liabilities.......................................... 10,618 6,728 ------- ------- Commitments and contingencies.............................................. Stockholders' equity....................................................... Common stock, $.001 par value; 25,000,000 shares authorized, 7,754,700 and 7,565,000 shares issued and outstanding as of December 31, 1996 and 1995 respectively......................................... 8 8 Additional paid-in capital............................................. 33,832 32,062 Accumulated deficit.................................................... (56) (4,753) ------- ------- Total stockholders' equity...................................... 33,784 27,317 ------- ------- Total liabilities and stockholders' equity...................... $44,402 $34,045 ======= =======
The accompanying notes are an integral part of these financial statements 21 AMISYS Managed Care Systems, Inc. and American International Healthcare, Inc. A Wholly Owned Subsidiary of American International Group, Inc. Statements of Operations (dollars in thousands, except share data)
AMISYS Managed Care Systems, Inc. AIHI ------------------------------------------------- ----------- For the For the May 27, | January 1 Year Ended Year Ended 1994 to | 1994 to December 31, December 31, December 31, | May 26, 1996 1995 1994 | 1994 ------------ ------------ ------------ | ---------- | Revenues | System sales................................ $38,476 $26,753 $11,642 | $6,318 Support and maintenance..................... 7,962 5,034 2,745 | 1,730 ------- ------- ------- | ------ Total revenues......................... 46,438 31,787 14,387 | 8,048 | Cost of revenues.................................. 24,264 17,278 7,714 | 4,402 ------- ------- ------- | ------ | Gross profit...................................... 22,174 14,509 6,673 | 3,646 | Operating expenses | Sales and marketing......................... 3,935 2,961 738 | 592 Research and development.................... 7,715 5,502 3,270 | 1,708 General and administrative.................. 5,039 3,871 1,738 | 800 Write-off of purchased research and | development............................... -- -- 6,516 | -- ------- ------- ------- | ------ Total operating expenses............... 16,689 12,334 12,262 | 3,100 ------- ------- ------- | ------ | Operating income (loss)........................... 5,485 2,175 (5,589) | 546 Other income (expenses)........................... | Interest expense............................ (38) (622) (387) | (23) Interest income............................. 1,329 101 24 | 15 Other....................................... 27 21 -- | 14 ------- ------- ------- | ------ Total other income (expenses).......... 1,318 (500) (363) | 6 ------- ------- ------- | ------ | Income (loss) before income tax provision ........ 6,803 1,675 (5,952) | 552 Income tax provision........................ 2,106 -- 476 | 219 ------- ------- ------- | ------ | Net income (loss)................................. $ 4,697 $ 1,675 $(6,428) | $ 333 ======= ======= ======= | ====== | Net income (loss) per common share and common | share equivalent................................ $ 0.57 $ 0.28 $ (1.09) | ======= ======= ======= | | Weighted average number of common shares | outstanding..................................... 8,274,566 5,949,128 5,899,950 | ========= ========= ========= |
The accompanying notes are an integral part of these financial statements 22 AMISYS Managed Care Systems, Inc. (For the period May 27, 1994 to December 31, 1994 and for the years ended December 31, 1995 and 1996) and American International Healthcare, Inc. A Wholly Owned Subsidiary of American International Group, Inc. (For the the period January 1, 1994 to May 26, 1994) Statements of Stockholders' Equity (Deficit) (dollars and shares in thousands)
Class B Common Stock common stock Additional ------------------- -------------------- paid-in Accumulated Shares Amount Shares Amount Capital Deficit Total ------ ------ ------ ------ ------- ------- ----- Balance, January 1, 1994............... 2 $20 $ 3,763 $(908) $ 2,875 Forgiveness of amounts due to affiliate -- -- 1,300 -- 1,300 Net income............................. -- -- -- 333 333 ------ ----- ------- ------- ------- Balance, May 26, 1994.................. 2 $20 $ 5,063 $ (575) $ 4,508 ------ ----- ------- ------- ------- - --------------------------------------------------------------------------------------------------------------------------------- Balance, May 27, 1994.................. -- -- -- -- -- -- -- Issuance of Class B common stock....... -- -- 525 $1 $32 -- $33 Net loss............................... -- -- -- -- -- $(6,428) (6,428) ------ ----- --- --- ------- ------- ------- Balance, December 31, 1994............. -- -- 525 1 32 (6,428) (6,395) Redesignation of Class B common stock to Common Stock...................... 525 1 (525) (1) -- -- -- Cancellation of restricted stock award. (24) -- -- -- -- -- -- Conversion of Class A common stock to Common Stock......................... 4,800 5 -- -- 2,395 -- 2,400 Issuance of Common Stock, net of costs................................ 2,264 2 -- -- 29,631 -- 29,633 Deferred stock compensation............ -- -- -- -- 4 -- 4 Net income............................. -- -- -- -- -- 1,675 1,675 ------ ----- --- --- ------- ------- ------- Balance at December 31, 1995........... 7,565 8 -- -- 32,062 (4,753) 27,317 Exercise of options 114 -- -- -- 124 -- 124 Issuance of Common Stock, net of costs................................ 76 -- -- -- 1,094 -- 1,094 Tax benefit associated with stock options -- -- -- -- 502 -- 502 Deferred stock compensation ........... -- -- -- -- 50 -- 50 Net income ............................ -- -- -- -- -- 4,697 4,697 ------ ----- --- --- ------- ------- ------- Balance at December 31, 1996 .......... 7,755 $8 -- -- $33,832 $ (56) $33,784 ====== ===== === === ======= ======= =======
The accompanying notes are an integral part of these financial statements 23 AMISYS Managed Care Systems, Inc. and American International Healthcare, Inc. A Wholly Owned Subsidiary of American International Group, Inc. Statements of Cash Flows (dollars in thousands)
AMISYS Managed Care Systems, Inc. AIHI ------------------------------------- | ---- For the For the May 27, | January 1, Year Ended Year Ended to | to December December December | May 26, 31, 1996 31, 1995 31, 1994 | 1994 -------- -------- -------- | ---- | Cash flows from operating activities: | Net income (loss)....................................................... $ 4,697 $ 1,675 $(6,428) | $ 333 Adjustment to reconcile net income (loss) to net cash provided by | (used in) operating activities, net of disposals:....................... | Provision for doubtful accounts......................................... 111 183 114 | 5 Deferred tax asset...................................................... (250) (648) -- | -- Depreciation and amortization........................................... 883 830 585 | 596 Write-off of purchased research and development......................... -- -- 6,516 | -- Tax benefit associated with stock options............................... 502 -- -- | -- Deferred stock compensation............................................. 50 4 -- | -- (Decrease) increase in cash resulting from changes in assets | and liabilities:..................................................... | Accounts receivable.................................................. (8,530) (327) (1,711) | 362 Income tax receivable................................................ -- (171) -- | -- Deferred income taxes................................................ -- 397 -- | (234) Prepaid expenses and other........................................... 244 (55) 62 | (293) Accounts payable and accrued expenses................................ 4,160 1,073 191 | (1,186) Income taxes payable................................................. 654 98 20 | -- Deferred revenue..................................................... (924) 1,495 247 | 24 ------- ------- ------- | ------- Net cash provided by (used in) operating activities............. 1,597 4,554 (404) | (393) ------- ------- ------- | ------- Cash flows from investing activities: | Purchase of property and equipment...................................... (2,093) (1,060) (134) | (46) Redemptions (purchases) of available-for-sale securities................ 18,011 (20,400) -- | -- Capitalized software development costs.................................. -- -- -- | (100) Purchase of AIHI, net of cash acquired of $1,515........................ -- -- (8,768) | -- ------- ------- ------- | ------- Net cash provided by (used in) investing activities............. 15,918 (21,460) (8,902) | (146) ------- ------- ------- | ------- Cash flows from financing activities: | Advances received from affiliates....................................... -- -- -- | 918 Issuance of common stock, net of costs.................................. 1,218 29,633 2,433 | -- Issuance of subordinated notes.......................................... -- -- 9,600 | -- Repayment of subordinated notes......................................... -- (10,100) -- | -- ------- ------- ------- | ------- Net cash provided by financing activities....................... 1,218 19,533 12,033 | 918 ------- ------- ------- | ------- Net increase in cash and cash equivalents.................................. 18,733 2,627 2,727 | 379 Cash and cash equivalents at beginning of period........................... 5,354 2,727 -- | 1,136 ------- ------- ------- | ------- Cash and cash equivalents at end of period................................. $24,087 $ 5,354 $ 2,727 | $ 1,515 ======= ======= ======= | ======= Supplemental disclosure of cash flow information: | Cash paid for interest.................................................. $ 38 $ 622 $ 387 | $ 24 ======= ======= ======= | ======= Cash paid for income taxes.............................................. $ 1,403 $ 63 $ 621 | $ 193 ======= ======= ======= | ======= Noncash investing and financing activities: | Conversion of Class A common stock................................... $ -- $ 2,400 $ -- | $ -- ======= ======= ======= | ======= Subordinated notes issued to seller.................................. $ -- $ -- $ 500 | $ -- ======= ======= ======= | ======= Forgiveness of amounts due to affiliate.............................. $ -- $ -- $ -- | $ 1,300
The accompanying notes are an integral part of these financial statements 24 AMISYS Managed Care Systems, Inc. (For the years ended December 31, 1996 and 1995 and for the period May 27, 1994 to December 31, 1994) and American International Healthcare, Inc. A Wholly Owned Subsidiary of American International Group, Inc. (For the period January 1, 1994 to May 26, 1994) NOTES TO FINANCIAL STATEMENTS (dollars in thousands) 1. Description of Business and Summary of Significant Accounting Policies Description of Business AMISYS Managed Care Systems, Inc. (the "Company") is a health care information systems company that develops, sells and supports the AMISYS system, a comprehensive managed health care administration and risk management information system. The principal markets for the AMISYS system are U.S. based companies within the managed health care industry. Basis of Presentation The accompanying financial statements represent the accounts of the Company, formerly American International Healthcare, Inc. ("AIHI"), the surviving corporation of a merger between AIHI and AIH Systems, Inc. ("AIH") which was incorporated on May 23, 1994 for the purpose of acquiring AIHI. On May 27, 1994, AIH purchased 100% of the issued and outstanding shares of AIHI from American International Group, Inc. ("AIG"), parent company of AIHI. The financial statements reflect the segregation of the operating activities for the periods related to the different owners. The post acquisition financial statements reflect the purchase accounting adjustments as described in Note 2. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the financial statements and revenues and expenses recognized during the reporting period. Actual results could differ from those estimates. Financial Statement Presentation On November 1, 1995, the Board of Directors authorized and the stockholders approved: (i) a two-for-one stock split of the outstanding shares of the Company's common stock. Accordingly, all references to common stock, options, and per share data have been restated to give effect to the stock split. Revenue Recognition Revenues are derived primarily from the sale of information systems which include software, hardware, installation labor and consulting services. Contracts for the installation of AMISYS information systems are negotiated individually and are non-cancelable. The Company recognizes revenues from the sale of information systems using the percentage-of-completion method as the work is performed, measured primarily by the ratio of labor hours incurred to total estimated labor hours for each specific contract. When the total estimated cost of a contract is expected to exceed the contract price, the total estimated loss is charged to expense in the period when the information becomes known. 25 AMISYS Managed Care Systems, Inc. (For the years ended December 31, 1996 and 1995 and for the period May 27, 1994 to December 31, 1994) and American International Healthcare, Inc. A Wholly Owned Subsidiary of American International Group, Inc. (For the period January 1, 1994 to May 26, 1994) NOTES TO FINANCIAL STATEMENTS (dollars in thousands) Revenues from the sale of additional hardware subsequent to the initial AMISYS software license are recognized upon shipment in satisfaction of non-cancelable agreements and upon determination that collectibility is probable. Revenues from software support and maintenance contracts are recognized ratably as the services are rendered. Amounts billed in advance of satisfying revenue recognition criteria are classified as deferred revenue in the accompanying balance sheet. Costs incurred in excess of the contract percent complete are classified as costs incurred on deferred revenue. Deferred revenue is presented net of costs incurred on deferred revenue. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of 3 months or less to be cash equivalents. Cash and cash equivalents include time deposits with commercial banks used for temporary cash management purposes. Short-Term Investments At December 31, 1996 and 1995 short-term investments which mature within one year have been categorized as available-for-sale and are recorded at fair value. Fair values for available-for-sale securities are based on quoted market prices. The estimated fair value of each investment approximates the cost, and therefore there are no unrealized gains or losses as of December 31, 1996 and 1995. Under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", unrealized gains and losses for available-for-sale securities are reported, net of any related income tax effect, as a separate component of stockholders' equity. Realized gains and losses on the sale of available-for-sale securities are included in the determination of net income in the period of disposition using the specific identification cost method. If the decline in fair value of an available-for-sale security is considered other than temporary, the cost basis of that security is written down to fair value as a new cost basis and the amount of the write-down is accounted for as a realized loss. Available-for-sale securities are summarized as follows:
December 31, 1996 December 31, 1995 Fair Value Cost Fair Value Cost ---------- ---- ---------- ---- Federal agency securities $1,853 $1,853 -- -- Commercial paper 536 536 -- -- Tax-exempt municipal bonds -- -- $15,800 $15,800 Tax-exempt municipal bond funds -- -- 4,600 4,600 ------ ------ ------- ------- $2,389 $2,389 $20,400 $20,400 ====== ====== ======= =======
26 AMISYS Managed Care Systems, Inc. (For the years ended December 31, 1996 and 1995 and for the period May 27, 1994 to December 31, 1994) and American International Healthcare, Inc. A Wholly Owned Subsidiary of American International Group, Inc. (For the period January 1, 1994 to May 26, 1994) NOTES TO FINANCIAL STATEMENTS (dollars in thousands) Concentration of Credit Risk Financial instruments which potentially expose the Company to concentration of credit risk consist primarily of cash, short term investments and trade accounts receivable. The Company places its temporary cash and short-term investments in one or more financial institutions. The Company has not experienced any losses on these investments to date. The Company has not experienced significant losses related to receivables from individual customers or groups of customers in the health care industry. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be inherent in the Company's accounts receivable. The largest customer at December 31, 1996 and 1995, represents 16% and 24%, respectively, of the total accounts receivable balance. Revenues from one customer represent 10% and 18% of total revenues for the years ended December 31, 1996 and 1995, respectively. Property and Equipment Computer equipment, office furniture and fixtures, and leasehold improvements are recorded at cost. Depreciation and amortization of furniture and equipment is recorded using the straight-line method over a useful life of three to five years. Leasehold improvements are amortized over the lesser of their estimated useful life or the lease term. Repairs and maintenance costs are charged to expense as incurred. Upon sale or retirement of property and equipment, the costs and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss on such disposition is included in the determination of net income. Software Development Costs Software development costs, which are primarily comprised of salaries and related costs, are expensed until technological feasibility is established and then capitalized until a marketable product is completed. Technological feasibility is established upon completion of a working model. Amortization of capitalized software costs begins when the related product is available for general release to customers and is provided for each product based on the greater of the amount computed using (i) the ratio of current gross revenues to total current and anticipated future gross revenues for the related software or (ii) the straight-line method over a five-year life or the product's estimated economic life, if shorter. The Company has not capitalized software development costs for the years ended December 31, 1996 and 1995 or the period ended December 31, 1994, as no product development activities were considered to have reached technological feasibility during these periods. 27 AMISYS Managed Care Systems, Inc. (For the years ended December 31, 1996 and 1995 and for the period May 27, 1994 to December 31, 1994) and American International Healthcare, Inc. A Wholly Owned Subsidiary of American International Group, Inc. (For the period January 1, 1994 to May 26, 1994) NOTES TO FINANCIAL STATEMENTS (dollars in thousands) As of May 27, 1994, all unamortized capitalized software development costs were written off as a result of the determination of the fair value of assets at the date of acquisition. Refer to Note 2 "Acquisition" for further discussion. Amortization of software development costs was $448 for the period January 1, 1994 to May 26, 1994. Purchased Software Purchased software represents the fair market value of all rights to the AMISYS software product that were acquired when the Company was purchased from AIG. Purchased software costs are amortized on a straight line basis over their estimated useful life. The Company assesses the net realizable value and useful life of purchased software at each balance sheet date. Effective July 1, 1995, the Company changed its estimate of the useful life of purchased software to increase it from 18 to 42 months. The effect of this change in estimate was to decrease amortization expense and increase net income by $160 or $.03 per common share for the year ended December 31, 1995. Purchased software consists of the following:
December 31, ---------------------- 1996 1995 ---- ---- Capitalized cost....................... $1,157 $1,157 Accumulated amortization............... 1,035 902 ------ ------ Purchased software, net................ $ 122 $ 255 ====== ======
The amount amortized during the years ended December 31, 1996 and 1995 was $133 and $452, respectively. Significant Supplier The Company purchases substantially all of its hardware for resale from a major hardware manufacturer. Purchases from this manufacturer were approximately $9,727, $10,751, $2,875, and $1,788, for the years ended December 31, 1996 and 1995, and the periods May 27, 1994 to December 31, 1994 and January 1, 1994 to May 26, 1994, respectively. Research and Development Research and development costs are charged to expenses as incurred. 28 AMISYS Managed Care Systems, Inc. (For the years ended December 31, 1996 and 1995 and for the period May 27, 1994 to December 31, 1994) and American International Healthcare, Inc. A Wholly Owned Subsidiary of American International Group, Inc. (For the period January 1, 1994 to May 26, 1994) NOTES TO FINANCIAL STATEMENTS (dollars in thousands) Income Taxes The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates, that are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized, to the differences between the financial statement carrying amount and the tax bases of existing assets and liabilities. Under SFAS 109, the effect of a change in tax rates on deferred tax assets and liabilities is recognized in net income in the period in which the tax rate change is enacted. The statement also requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets may not be realized. Net Income Per Common Share Net income per common share is computed on a primary and fully diluted basis using the weighted average number of shares of common stock, assuming conversion of dilutive common stock equivalent shares from common stock options. Primary and fully diluted net income per common share were equivalent for all periods presented. Pursuant to the Securities Exchange Commission's Staff Accounting Bulletin No. 83, common stock and common stock equivalent shares issued by the Company at prices below the public offering price during the twelve month period prior to the offering date of December 20, 1995 (using the treasury stock method and the public offering price of $14.50 per share) have been included in the calculation of common and common equivalent shares as if they were outstanding for all periods presented. Net income per common share subsequent to the Company's initial public offering is calculated in accordance with Accounting Principles Board Opinion No. 15 "Earnings per Share." Reclassifications Certain reclassifications have been made to the prior years' financial statements to conform to the classifications used in the current period. 29 AMISYS Managed Care Systems, Inc. (For the years ended December 31, 1996 and 1995 and for the period May 27, 1994 to December 31, 1994) and American International Healthcare, Inc. A Wholly Owned Subsidiary of American International Group, Inc. (For the period January 1, 1994 to May 26, 1994) NOTES TO FINANCIAL STATEMENTS (dollars in thousands) 2. Acquisition On May 27, 1994, 100% of the stock of AIHI was purchased from AIG. This transaction was accounted for using the purchase method of accounting. The total purchase price of $15,730, including assumed liabilities of $4,947 and acquisition costs of $283, has been allocated to the Company's assets and liabilities based upon their estimated fair values as of the date of purchase. Adjustments necessary to reflect the fair value and purchase price allocations have been reflected in the post-acquisition financial statements. Approximately $1,200 of the purchase price was allocated to AIHI's existing AMISYS software technology and is being amortized over its projected remaining useful life. Approximately $6,500 was allocated to in-process product development of a client/server version of the same software based on the determination of the future product's net present value. The Company used a discounted cash flow model to determine the valuation of both products. At the time of the purchase, management determined that the purchased research and development had not reached technological feasibility and there was no alternative future use for this technology. Accordingly, this in-process product development was written-off as of May 27, 1994. 3. Accounts Receivable The components of accounts receivable are as follows:
December 31, ------------------ 1996 1995 ---- ---- Trade accounts receivable..................... $12,356 $5,792 Unbilled receivable........................... 2,933 967 ------- ------ Total accounts receivable..................... 15,289 6,759 Allowance for doubtful accounts............... (508) (397) ------- ------ Accounts receivable, net...................... $14,781 $6,362 ======= ======
While the Company negotiates its agreements with customers on an individual basis, most agreements call for a substantial initial payment and subsequent payments as set forth in the contract. Unbilled receivables represent amounts recognized as revenues under generally accepted accounting principles in excess of amounts billed under the individual contract. 30 AMISYS Managed Care Systems, Inc. (For the years ended December 31, 1996 and 1995 and for the period May 27, 1994 to December 31, 1994) and American International Healthcare, Inc. A Wholly Owned Subsidiary of American International Group, Inc. (For the period January 1, 1994 to May 26, 1994) NOTES TO FINANCIAL STATEMENTS (dollars in thousands) 4. Property and Equipment Property and equipment consists of the following:
December 31, ------------------ 1996 1995 ---- ---- Computer equipment and software.................... $3,038 $1,056 Office furniture and fixtures...................... 463 361 Leasehold improvements............................. -- 66 ------ ------ 3,501 1,483 Less: accumulated depreciation.................... 1,188 513 ------ ------ Property and equipment, net........................ $2,313 $ 970 ====== ======
Depreciation and amortization expenses were $750, $378, $135, and $148 for the years ended December 31, 1996 and 1995, and the periods May 27, 1994 to December 31, 1994 and January 1, 1994 to May 26, 1994, respectively. During the year ended December 31, 1996 the Company disposed of $75 of fully depreciated leasehold improvements. Refer to Note 2 "Acquisition" regarding adjustment of property and equipment to their estimated fair value. 5. Deferred Revenue Costs and billings to date on uncompleted contracts are as follows:
December 31, ------------------ 1996 1995 ---- ---- Deferred revenue................................... $3,223 $5,532 Costs incurred on deferred revenue................. 1,941 3,192 ------ ------ Deferred revenue, net.............................. $1,282 $2,340 ====== ======
6. Notes Payable Credit Agreement The Company has a $4 million credit agreement with a bank commencing August 18, 1995 and amended September 30, 1996. The credit agreement consists of up to a $3 million revolving loan, of which $1 million may be used for the issuance of a letter of credit, and up to a $3.5 million equipment line of credit. Total combined borrowings under the credit agreement may not exceed $4 million. Borrowings under the revolving line of credit bear interest at the Federal Funds Rate plus 2.0% and are collateralized by the underlying asset base of the Company. The terms of the credit agreement prohibit payment of dividends without the prior consent of the bank and contain other restrictive covenants, the most significant of which requires the Company to maintain a minimum ratio of liabilities to tangible net worth. Any issued letter of credit bears interest at an annual rate of 1%. This agreement is secured by certain assets of the Company and expires in September 1997. 31 AMISYS Managed Care Systems, Inc. (For the years ended December 31, 1996 and 1995 and for the period May 27, 1994 to December 31, 1994) and American International Healthcare, Inc. A Wholly Owned Subsidiary of American International Group, Inc. (For the period January 1, 1994 to May 26, 1994) NOTES TO FINANCIAL STATEMENTS (dollars in thousands) The Company has borrowings of $391 under the equipment line of credit arrangement which bears interest at a weighted average fixed annual rate of 7.69%. These borrowings have been classified as accrued expenses in the balance sheet. The Company has not made any borrowings under the revolving loan of the line of credit arrangement since its inception. Subordinated Notes Payable In connection with the purchase of AIHI, the Company issued a class of subordinated notes dated May 27, 1994, of which $500 was due and payable on May 27, 1999 and $9,600 was due and payable May 27, 2001. These notes, which were issued primarily to the Company's stockholders, had an annual interest rate of 6.25% per year with interest payable monthly. The Company repaid these notes on December 26, 1995 with the proceeds of the initial public offering of the Company's Common Stock. 7. Income taxes The provision for income taxes consists of the following:
Year Ended Year Ended May 27 to January 1, December 31, December 31, December 31, to May 26, 1996 1995 1994 1994 ----------- ----------- ----------- | --------- | Current provision | Federal............................... $2,011 $ 318 $ 421 | $ 325 State................................. 345 86 55 | 17 ----- ----- ---- | ---- 2,356 404 476 | 342 ----- ----- ---- | ---- Deferred benefit | | Federal............................... (221) (318) -- | (123) State................................. (29) (86) -- | -- ----- ----- ---- | ---- (250) (404) -- | (123) ----- ----- ---- | ---- Provision for income taxes.................. $2,106 $ -- $ 476 | $ 219 ----- ----- ---- | ----
32 AMISYS Managed Care Systems, Inc. (For the years ended December 31, 1996 and 1995 and for the period May 27, 1994 to December 31, 1994) and American International Healthcare, Inc. A Wholly Owned Subsidiary of American International Group, Inc. (For the period January 1, 1994 to May 26, 1994) NOTES TO FINANCIAL STATEMENTS (dollars in thousands) The provision for income taxes varies from the amount of income tax expense computed by applying the applicable U.S. federal income tax rate of 34% to pretax income as follows:
Year Ended Year Ended May 27 to January 1, December 31, December 31, December 31, to May 26, 1996 1995 1994 1994 ----------- ----------- ----------- ---------- | Statutory U.S. tax rate................................... 34% 34% (34%) | 34% State income taxes........................................ 4% 5% (5%) | 4% Valuation allowance for net deferred tax assets........... (11%) (39%) 45% | -- Other 4% --% 2% | 2% ---- ---- ---- | ---- 31% --% 8% | 40% ---- ---- ---- | ----
Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. The tax effects of the primary temporary differences giving rise to the Company's net deferred tax asset is comprised of the following:
December 31, ------------------ 1996 1995 ---- ---- Deferred Tax Asset Write-off of purchased research and development................................. $1,877 $2,343 Accounts receivable, due to allowance for doubtful accounts..................... 162 135 Accrued compensation............................................................ 43 -- Accrued liabilities not currently deductible.................................... 59 180 Property and equipment, due to differences in depreciation methods.......................................................... 78 37 Intangible assets, due to differences in amortization........................... -- 97 ------ ------ 2,219 2,792 Deferred Tax Liability Unbilled revenue, deferred for tax.............................................. (924) (349) Other........................................................................... (5) (98) ------ ------ Total deferred tax asset........................................................ 1,290 2,345 Less: valuation allowance...................................................... (789) (2,094) ------ ------ Net deferred tax asset.......................................................... $ 501 $ 251 ------ ------
33 AMISYS Managed Care Systems, Inc. (For the years ended December 31, 1996 and 1995 and for the period May 27, 1994 to December 31, 1994) and American International Healthcare, Inc. A Wholly Owned Subsidiary of American International Group, Inc. (For the period January 1, 1994 to May 26, 1994) NOTES TO FINANCIAL STATEMENTS (dollars in thousands) As of December 31, 1996 and 1995, the deferred tax asset is comprised primarily of the write-off of purchased research and development costs, which are not allowable for tax purposes, but instead represent purchase price associated with the acquisition of AIHI, which for tax purposes is allocable to a purchased intangible asset under Internal Revenue Code Section 197, and is amortized over 15 years. 8. Commitments Operating Leases The Company occupies its office space and uses certain of its equipment under terms of non-cancelable operating leases expiring at various dates through 2001 and thereafter. Future minimum lease payments under non-cancelable operating leases at December 31, 1996 are as follows: 1997.......................................... $ 1,166 1998.......................................... 1,353 1999.......................................... 1,552 2000.......................................... 1,583 2001.......................................... 1,615 Thereafter 8,226 ------- TOTAL......................................... $15,495 ------- Rent expense under non-cancelable operating leases amounted to $646, $510, $388, and $237, net of sublease rental income of $0, $110, $95, and $64, for the years ended December 31, 1996 and 1995, the periods May 27, 1994 to December 31, 1994 and January 1, 1994 to May 26, 1994, respectively. Royalties The Company has agreements under which it has agreed to pay royalties to certain customers who financed the development of optional modules which may be included in the AMISYS software product. These agreements provide for royalty payments to these customers of up to 50% of the product revenue or a fixed amount per module sold. The royalty expense recognized related to these modules for the years ended December 31, 1996 and 1995, and the periods May 27 to December 31, 1994 and January 1, 1994 to May 26, 1994, was $366, $405, $273, and $151, respectively. 9. Class A Common Stock In May 1994, the Company issued 4,800,000 shares of mandatorily redeemable Class A common stock at $0.50 per share and received total cash proceeds of $2,400,000. At December 31, 1994 Class A common stock consisted of 4,800,000 shares authorized, issued, and outstanding. 34 AMISYS Managed Care Systems, Inc. (For the years ended December 31, 1996 and 1995 and for the period May 27, 1994 to December 31, 1994) and American International Healthcare, Inc. A Wholly Owned Subsidiary of American International Group, Inc. (For the period January 1, 1994 to May 26, 1994) NOTES TO FINANCIAL STATEMENTS (dollars in thousands) Each share of Class A common stock was automatically converted into one share of Common Stock upon the closing of the underwritten public offering pursuant to an effective registration statement dated December 20, 1995 under the Securities Act of 1933. 10. Stockholders' Equity Common Stock On November 21, 1995, the Company's certificate of incorporation was amended to redesignate the Class B common stock into Common Stock, without classification. On December 20, 1995, the Company completed its initial public offering of 2,264,000 shares of Common Stock with proceeds to the Company (after underwriting discounts and offering expenses) of $29,633. The offering closed on December 26, 1995. In addition, upon closing of the offering, the Company's certificate of incorporation was amended and restated to eliminate Class A common stock and to authorize the Company to issue 25,000,000 shares of Common Stock, $.001 par value, and 5,000,000 shares of Preferred Stock, $.01 par value. Prior to May 27, 1994, the AIHI's stock consisted of one class of Common Stock of which 2,000 shares were authorized, issued, and outstanding. Split of Common Stock On November 1, 1995, the Board of Directors authorized and the stockholders approved: (i) a two-for-one stock split of the outstanding shares of the Company's Class A and Class B common stock, and (ii) a change in the number of authorized shares of Class A common stock and Class B common stock to 4,800,000 shares and 10,000,000 shares, respectively. All references to common stock, options, and per share data have been restated to give effect to the stock split. 11. Stock-Based Compensation Plans The Company has stock-based compensation plans which are described below. In October 1995 the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123"). SFAS 123 is effective for periods beginning after December 15, 1995. SFAS 123 requires that companies either recognize compensation expense for grants of stock, stock options, and other equity instruments based on fair value, or provide pro forma disclosure of net income and earnings per share in the notes to the financial statements. The Company adopted the disclosure provisions of SFAS 123 in 1996 and has applied Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates as calculated in accordance with SFAS 123, the Company's net income and earnings per share for the year ended December 31, 1996 would have been reduced to the pro forma amounts indicated below. 35 AMISYS Managed Care Systems, Inc. (For the years ended December 31, 1996 and 1995 and for the period May 27, 1994 to December 31, 1994) and American International Healthcare, Inc. A Wholly Owned Subsidiary of American International Group, Inc. (For the period January 1, 1994 to May 26, 1994) NOTES TO FINANCIAL STATEMENTS (dollars in thousands) The weighted average fair value of options issued during the years ended December 31, 1996 and 1995 was equal to $12.66 and $1.52 per share, respectively. The total value of options issued below fair market value for the year ended December 31, 1995 was equal to $1.21 per share. There were no grants issued below fair market value during the year ended December 31, 1996. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: an expected life of 7.6 years, expected volatility of 65%, a dividend yield of 0% and a risk-free interest rate of 6.1%.
1996 1995 ------------ ----------- Net Income Earnings Per Share Net Income Earnings Per Share ---------- ------------------ ---------- ------------------ As Reported $4,697 $0.57 $1,675 $0.28 Proforma 3,539 0.43 1,423 0.24
1994 Equity Incentive Plan The Board of Directors has adopted the 1994 Equity Incentive Plan ("the Plan"). Under the Plan, 1,800,000 shares of Common Stock were reserved for issuance at the discretion of the Board of Directors in the form of stock options, restricted and unrestricted stock awards, and performance awards. Option exercise prices shall be at no less than 100% of the fair market value at date of grant options vest annually over a five year period and may be exercised for a period of up to ten years from the date of grant. As of December 31, 1996 awards for 1,663,934 shares have been granted under the Plan. No stock awards or performance share awards were initially granted under the Plan for the years ended December 31, 1996 and 1995.
Shares available Option Price Weighted Average for grant Plan Activity per share Exercise Price --------- ------------- ------------ ---------------- Balances at May 27, 1994..................... 1,200,000 -- -- -- Restricted stock award ................ (450,000) 450,000 $ .0625 $ .0625 Restricted stock award................. (75,000) 75,000 .0625 .0625 Exercised.............................. -- -- -- -- -------- -------- Balances at December 31, 1994................ 675,000 525,000 -- -- Granted................................ (664,200) 664,200 .0625-12.50 1.757 Plan amendment......................... 600,000 -- -- -- Restricted stock award forfeit......... 24,000 (24,000) .0625 .0625 Canceled............................... 10,000 (10,000) 1.525 1.525 --------- --------- Balances at December 31, 1995................ 644,800 1,155,200 -- -- Granted (474,734) 474,734 14.00-22.00 15.383 Exercised -- (114,200) .0625-2.50 1.125 Canceled 21,350 (21,350) -- 8.086 -------- -------- Balances at December 31, 1996 191,416 1,494,384 $.0625-22.00 -------- --------- ------------
At December 31, 1996 and 1995 options to purchase approximately 74,760 and 63,000 shares of Common Stock were exercisable, respectively, pursuant to the Plan at prices ranging from $.0625 to $15.25. The fair value of options granted during the years ended December 31, 1996 and 1995 was equal to $7,303 and $1,167, respectively. During the year ended December 31, 1996 and in the fourth quarter of 1995, the Company recognized compensation expense with respect to certain vested options in the amount of $50 and $4, respectively, an amount determined to be the difference between the option price and the fair market value of the option at the date of the grant. The Company intends to recognize compensation expense of approximately $50, on an annual basis for a period of 5 years, related to certain other vested options. 36 AMISYS Managed Care Systems, Inc. (For the years ended December 31, 1996 and 1995 and for the period May 27, 1994 to December 31, 1994) and American International Healthcare, Inc. A Wholly Owned Subsidiary of American International Group, Inc. (For the period January 1, 1994 to May 26, 1994) NOTES TO FINANCIAL STATEMENTS (dollars in thousands) The following table summarizes information about stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable Weighted- Weighted- Range of Number Remaining Average Number Average Exercise Prices Outstanding Contractual Life Exercise Price Excecisable Excercise Price --------------- ----------- ---------------- -------------- ----------- --------------- $ 0.0625 96,000 8.0 $ 0.0625 0 $ 0.0625 1.20-1.525 349,400 8.5 1.42 61,400 1.525 2.50 46,800 8.7 2.50 8,600 2.50 9.00-12.50 32,800 8.9 10.77 4,260 9.00 14.00-14.50 350,000 9.9 14.09 0 0.00 15.25 4,000 9.8 15.25 500 15.25 15.50-15.625 16,784 10.0 15.51 0 0.00 19.375 82,550 9.3 19.375 0 0.00 21.50 4,500 9.5 21.50 0 0.00 22.00 10,550 9.7 22.00 0 0.00 ----------- ----------- 993,384 74,760 =========== ===========
Directors' Stock Option Plan On May 28, 1996 the shareholders of the Company approved the Directors' Stock Option Plan ("Directors' Plan"). The Directors' Plan provides for the award of stock options to non-employee directors. Under the Directors' Plan 300,000 shares of Common Stock were reserved for issuance to participants. 37 AMISYS Managed Care Systems, Inc. (For the years ended December 31, 1996 and 1995 and for the period May 27, 1994 to December 31, 1994) and American International Healthcare, Inc. A Wholly Owned Subsidiary of American International Group, Inc. (For the period January 1, 1994 to May 26, 1994) NOTES TO FINANCIAL STATEMENTS (dollars in thousands) The option exercise price shall be at no less than 100% of the fair market value on the date of the grant. Options granted under the Plan become vested in the optionholder immediately and may be exercised six months after the option is granted and for a period of up to ten years from the date of the grant. As of December 31, 1996 awards for 18,000 shares at an exercise price of $23.00 per share have been made under the Directors' Plan. The fair value of these awards is equal to $414. The remaining contractual life of these options is equal to 9.41 years. As of December 31, 1996 no options awarded under the Directors' Plan had been exercised although all shares awarded were exercisable in accordance with the provisions of the Directors' Plan. 12. Retirement Plans The Company has a 401(k) Retirement Savings Plan in which all full-time employees of the Company are eligible to participate. In addition, AIHI employees were eligible to participate in a 401(k) Retirement Savings Plan administered by AIG. Eligibility requirements were substantially the same as under the Company's plan. Participants become eligible to participate in the plan on the first day of employment with the Company and are eligible for employer matching upon joining the plan. The Company matches 33% of participant contributions, up to 6% of each participant's wages. Expenses recognized related to these plans were $159, $90, $21, and $64 for the years ended December 31, 1996 and 1995, and the periods May 27, 1994 to December 31, 1994 and January 1, 1994 to May 26, 1994, respectively. 13. Related Party Transactions During the year ended December 31, 1996, the Board of Directors of the Company paid the Boston Consulting Group $235 for marketing consulting services. A member of the Board of Directors of the Company also serves as a senior advisor to the Boston Consulting Group. On December 26, 1995, the Company repaid $10,100 of subordinated notes issued to certain of the Company's stockholders in connection with the acquisition of AIHI from AIG. The notes were repaid from the proceeds of the Common Stock offering in accordance with the terms of the note agreement. 14. Subsequent Events On February 11, 1997, the Company and HBO & Company (HBOC), a software solutions company in the patient care, clinical and financial management markets, announced the signing of a merger agreement. The agreement, which is subject to Company shareholder and regulatory approval, calls for an exchange of .35 of an HBOC share for each share of Company stock outstanding. The merger is expected to be accounted for as a pooling of interests. 38 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None to report. 39 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Executive Officers and Directors
The executive officers and Directors of the Company are as follows: Name Age Title - ---- --- ----- Kevin R. Brown ............... 49 Chairman, President and Chief Executive Officer Michael L. Carlay............. 53 Vice President, Sales and Marketing Homer Fiuzat.................. 39 Vice President, Development Earle Kirkland................ 40 Vice President, Technologies Kathy Hall Lyons.............. 36 Vice President, Human Resources Hugh McElderry................ 52 Senior Vice President, Operations Robert J. Sullivan............ 48 Vice President, Chief Financial Officer, Secretary and Treasurer Mark A. Walters............... 37 Vice President, Client Services Peter J. Barris(1)............ 45 Director Howard E. Cox, Jr.(1)......... 52 Director Gary Greenfield............... 41 Director Donald B. Hebb, Jr.(1)(2)..... 54 Director Arthur J. Marks(1)(2)......... 52 Director Thomas O. Pyle................ 56 Director
- ------------------- (1) Member of Compensation Committee (2) Member of Audit Committee Mr. Brown joined the Company in 1989 as Senior Vice Presidents of Systems Product and Services and was named President and Chief Executive Officer in 1992. He was named Chairman of the Board of Directors in June 1995. Before joining the Company, Mr. Brown was the Vice President of HMO System Product for The Compucare Company, a health care software provider, from 1986 to 1989 and from 1982 to 1986 he served as Compucare's Facilities Management Site Director for Kaiser-Permante (Mid-Atlantic Region). Mr. Carlay joined the company as Vice President, Sales and Marketing in January 1995. Prior to joining the Company, he served as Vice President of IBAX Healthcare Systems, a developer of hospital information systems software from 1991 to 1994. Priorto joining IBAX, he was a sales and marketing executive at IBM Corp. Mr. Fiuzat joined the Company in June 1990 and has served as Vice President, Development since April 1994. From 1990 to 1994, he was the Company's Director of Software Sales Support. Prior to joining the Company, Mr. Fiuzat spent six years with the Compucare Company in various positions including four years as Director of Development for HMO Systems. Mr. Kirkland has been Vice President, New Technologies for the Company since April 1995. From 1993 to 1995, he was Director of Systems for Health Systems Design Corp., a health care software provider, where he assisted in the development of a client/server software product. For the five years prior to that date, he was Manager of System Development for Norrell Corporation, a home health care company. 40 Ms. Hall Lyons joined the Company as Vice President, Human Resources in May 1995. For approximately two years prior to joining the Company, Ms. Hall Lyons was an independent consultant advising corporations on human resources and organization development issues. For the ten years prior to that date, she was employed with Vitro Corporation, a systems engineering corporation, in various capacities. From 1991 to 1993, Ms. Hall Lyons was Vice President of Human Resources of Vitro Corporation and was responsible for all personnel decisions. Mr. McElderry joined the Company as Senior Vice President, Operations in December 1996. Mr. McElderry served as Executive Vice President of Health Systems Architects, Inc. from 1992 to 1996 where he was responsible for key operating areas of the Company. He was with Blue Cross and Blue Shield of South Carolina from 1972 to 1992 where he served in various positions including ten years as a Senior Vice President. Mr. Sullivan joined the Company as Vice President, Chief Financial Officer in October 1994 and was named Secretary and Treasurer in June 1995. From 1991 until 1994, Mr. Sullivan was Executive Vice President and the Chief Financial Officer of Option Care, Inc., a homecare company. From 1990 to 1991, he was a Vice President and the Chief Financial Officer of E.J. Financial Enterprises. Mr. Walters joined the Company in May 1995 as Vice President, Client Services. Prior to joining the Company, Mr. Walters spent fifteen years with EDS, Inc. a systems developer, the last five years of which he directed a managed care system product group. Directors Mr. Barris has been a Director of the Company since May 1994. He has been a General Partner of New Enterprise Associates, a venture capital firm, since 1992. From 1988 to 1990, Mr. Barris was the President and Chief Operating Officer of Legent Corporation, a software utilities company. Mr. Barris is a Director of Datalogix International, Inc. Mr. Cox has been a Director of the Company since May 1994. He is General Partner of Greylock Limited Partnership, a venture capital firm, and has been associated with Greylock and partnerships affiliated with Greylock for the past 24 years. Mr.Cox is a Director of Stryker Corporation, HPR Inc., Arbor Healthcare and The Vincam Group, Inc. Mr. Greenfield has been a Director of the Company since June 1995. He is the President, Chief Operating Officer and Director of INTERSOLV Inc., a provider of desktop development tools. Mr. Greenfield is also a Director of Hyperion Software, Inc. Mr. Hebb has been a Director of the Company since May 1994. Since December 1993, he has been principally employed as Managing General Partner of ABS Partners, L.P., the general partner of ABS Capital Partners L.P., a private equity fund. Prior to that date, he was principally employed as a Managing Director of Alex. Brown & Sons Incorporated investing private equity funds, and prior thereto served as President and Chief Executive Officer of Alex. Brown Incorporated, the parent of Alex. Brown & Sons Incorporated. Mr. Hebb is a Director of American Radio Systems, Inc. and PowerCerv Corporation. Mr. Marks has been a Director of the Company since May 1994. He has been a General Partner of New Enterprise Associates, a venture capital firm, since 1984. He is a Director of Platinum Software Corp., NETRIX Corporation, Progress Software Corporation and Object Design, Inc. Mr. Pyle has been a Director of the Company since April 1995. He is the Senior Advisor to the Boston Consulting Group. Mr. Pyle was the Chief Executive Officer of Harvard Community Health Plan from 1978 to 1991. He was Chief Executive Officer of MetLife Healthcare Management Company from 1993 to 1994. Mr. Pyle is a Director of Millipore Corp., Unilab Corp. and Lincare Holdings, Inc. 41 Directors' Fees All of the Directors are reimbursed for expenses incurred in connection with their attendance at Board and Committee meetings. Directors receive $2,000 for attendance at each Board meeting. Mr. Brown receives no other compensation for serving as a Director. In May 1996 all Directors, excluding Mr. Brown, were awarded options under the Directors Stock Option Plan to purchase 3,000 shares of Common Stock at an exercise price of $23.00. These options were fully vested in November 1996. Previously, Mssrs. Greenfield and Pyle each were awarded options under the 1994 Equity Incentive Plan to purchase 22,000 shares of Common Stock. These options, which have a weighted average exercise price of $2.50 per share (the fair market value thereof as of the date of grant), are currently 20% vested and will continue to vest at a rate of 20% per year. Compensation Committee Interlocks and Insider Transactions During the fiscal year ended December 31, 1996, Messrs. Barris, Cox, Hebb and Marks served on the Company's Compensation Committee. Messrs. Marks and Barris are general partners of the general partner of New Enterprise Associates VI Limited Partnership ("NEA"). Mr. Cox is a general partner of the general partner of Greylock Equity Limited Partnership ("Greylock") and Mr. Hebb is a general partner of the general partner of ABS Capital Partners, L.P. ("ABS"). In May 1996 NEA, Greylock and ABS sold 569,837, 569,837 and 227,826 shares of AMISYS Common Stock, respectively, in a registered public offering resulting in net proceeds of approximately $13.2 million, $13.2 million and $5.3 million to each of NEA, Greylock and ABS, respectively. Messrs. Barris, Cox, Hebb and Marks as Directors of the Company each received $2,000 for attendance at each Board meeting and were reimbursed for expenses incurred with their attendance at Board and Committee meetings. In May, 1996 each of these Directors was awarded options under the Directors Stock Option Plan to purchase 3,000 shares of Common Stock at an exercise price of $23.00. These options were fully vested in November 1996. ITEM 11. EXECUTIVE COMPENSATION. The following table sets forth certain summary information concerning the compensation paid to the Company's Chief Executive Officer and its four other most highly compensated executive officers for the fiscal years shown.
Long-Term Annual Compensation Compensation -------------------------------------------------- ------------ Other Restricted Securities Name(1) Annual Stock Underlying ------ Year Salary($) Bonus($) Compensation Awards Options ---- --------- -------- ------------ ------ ------- Kevin R. Brown............................... 1996 215,000 $75,000 -- -- 150,000 Chairman, President and 1995 185,000 60,000 -- -- -- Chief Executive Officer 1994 185,000 50,000 -- $22,500 -- Michael L. Carlay............................ 1996 175,000 42,000 -- -- -- Vice President, Sales and Marketing 1995 175,000 40,000 70,700(5) -- 120,000 1994 -- -- -- -- -- Hugh McElderry............................... 1996 200,000(2) -- -- -- 60,000 Senior Vice President, Operations 1995 -- -- -- -- -- 1994 -- -- -- -- -- Robert J. Sullivan........................... 1996 150,000 40,000 -- -- 60,000 Vice President, Chief Financial Officer, 1995 142,000 23,000 63,000(5) -- -- Secretary and Treasurer 1994 142,000(3) 4,000 -- $ 4,688 -- Mark A. Walters.............................. 1996 125,000 36,000 -- -- 20,000 Vice President, Client Services 1995 120,000(4) 25,000 -- -- 69,400 1994 -- -- -- -- -- - -----------------------------------------------------------------------------------------------------------------------------
42 (1) This table presents information concerning the Company's Chief Executive Officer and its four other most highly compensated executive officers (determined by reference to total annual salary and bonuses for the last fiscal year earned by such officers). (2) Represents the annualized salary Mr. McElderry would have received had he joined the Company on January 1, 1996 (3) Represents the annualized salary for Mr. Sullivan would have received had he joined the Company on January 1, 1994. (4) Represents the annualized salary Mr. Walters would have received had he joined the Company on January 1, 1995. (5) Represents the amount received for the reimbursement of non-recurring relocation expenses, net of taxes payable in respect of such amounts. Stock Options Option Grants. The following table contains information with respect to a grant of stock options for Common Stock to each of the Named Executive officers during the year ended December 31, 1996. All such grants were made under the Company's 1994 Equity Incentive Plan (the "Plan"). Under the Plan, options to purchase up to an aggregate of 1,800,000 shares of Common Stock are available for grants to employees of the Company. In 1996, the Board of Directors granted options to purchase a total of 474,734 shares of Common Stock to 227 employees of the Company, including to the Named Executive Officers.
Option Grants in Last Fiscal Year Individual Grants -------------------------------------------- Potential Realized Value at Assumed Annual Rates of Stock Appreciation for Option Term ----------------------------------- Number of % of Total Securities Name Securities Underlying Options ---- Underlying Granted to Employees Exercise Price Expiration Options in Fiscal year ($/Sh) Date(1) 5% 10% ------- ------------------- ------ ------- ------------- ------------ Kevin R. Brown................. 150,000 31.6% $14.00 12/06 $1,855,887 3,912,767 Michael L Carlay............... -- -- -- -- -- -- Hugh McElderry................. 60,000 12.6% $14.50 12/06 712,355 1,535,107 Robert J. Sullivan............. 60,000 12.6% $14.00 12/06 742,355 1,565,107 Mark A Walters................. 20,000 4.2% $14.00 12/06 247,452 521,702 - ---------------------------------------------------------------------------------------------------------------------------
All options included in this table will vest in equal installments over a five-year period beginning one year after the date of each grant. Option Exercises and Year-end Values. The following table provides information regarding the value of all unexercised options held at December 31, 1996 by the Name Executive Officers. Named Executive Officers exercised incentive options to purchase 36,000 shares of Common Stock during the fiscal year. 43
Number of Securities Underlying Value of Unexercised In-the- Unexercised Options at Money Options at December 31, 1996 December 31, 1996(1) Name Unexercisable Exercisable Unexercisable Exercisable ---- ------------- ----------- ------------- ----------- Kevin R. Brown....................... 150,000 -- $ 450,000 -- Michael L. Carlay.................... 96,000 -- $1,626,000 -- Hugh McElderry....................... 60,000 -- $ 150,000 -- Robert J. Sullivan................... 60,000 -- $ 180,000 -- Mark A. Walters...................... 75,520 1,880 $ 849,760 $ 22,840
- ---------------- (1) Based upon the closing price of the Common Stock of $17.00 on December 31, 1996. Employment Agreements Mr. Brown and the Company entered into an agreement in May 1994 which provides that Mr. Brown will serve "at will" as President and Chief Executive Officer of the Company. The agreement provides that in the event that Mr. Brown's employment is terminated by the Board of Directors, Mr. Brown is entitled to severance benefits equal to the amount of his annual salary for a period of one year. A separate agreement provides that Mr. Brown will not, during the course of his employment with the Company and for a period of up to 18 months thereafter, compete with the Company in the business of providing information processing software with respect to managed health care administration to third parties including services as an employee, officer, director, consultant, stockholder or general partner of any person other than the Company. The Company has agreements with each of the remaining executive officers of the Company which generally provide for twelve months of severance pay if the executive is terminated other than for cause. 44 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of February 14, 1997 by (i) each director, (ii) the Chief Executive Officer and each of the other four most highly compensated executive officers whose total annual salary and bonus exceeded $100,000 during the year ended December 31, 1996 (the "Named Executive Officers"), (iii) all persons known to the Company to be beneficial owners of more than 5% of its outstanding Common Stock, (iv) all directors and executive officers as a group and (v) certain other holders. Under the rules of the Securities and Exchange Commission (the "Commission"), a person is deemed a "beneficial owner" of a security if such person has or shares the power to vote or direct the voting of such security or the securities of which that person has the right to acquire beneficial ownership within 60 days. More than one person may be deemed to be a beneficial owner of the same securities.
Names and Addresses of Shares Beneficially Percentage Beneficial Owners Owned Owned ---------------------- ------------------- ---------- Greylock Equity Limited Partnership ............................ 1,430,163 18.43% 1 Federal Street Boston, MA 02110 New Enterprise Associates VI, Limited Partnership .............. 1,237,163 15.95 1119 St. Paul Street Baltimore, MD 21202 ABS Capital Partners, L.P....................................... 572,174 7.38 1 South Street Baltimore, MD 21202 Franklin Resources, Inc. (1).................................... 784,000 10.11 777 Mariners Island Blvd. San Mateo, CA 94404 Nicholas Applegate Capital Management (1)....................... 387,100 4.99 600 West Broadway, 29th Floor San Diego, CA 92101 Peter J. Barris(2).............................................. 1,240,163 15.98 Kevin R. Brown.................................................. 254,000 3.27 Michael L. Carlay(5)............................................ 24,000 * Howard E. Cox, Jr.(3)........................................... 1,433,163 18.47 Hugh McElderry.................................................. -- -- Gary Greenfield................................................. 9,400 * Thomas Pyle..................................................... 7,400 * Donald B. Hebb, Jr.(4).......................................... 575,174 7.41 Arthur Marks(2)................................................. 1,240,163 15.98 Robert J. Sullivan.............................................. 60,000 * Mark A. Walters(6).............................................. 14,280 * All Directors and officers as a group (14 persons)(7)........... 3,644,920 46.59
- ---------- * Less than 1% (1) Based upon a Schedule 13G filed on February 14, 1997. (2) Represents shares held of record by New Enterprise Associates VI, Limited Partnership, of whose general partner Messrs. Barris and Marks are general partners and shares held by other affiliates of NEA and individual options to acquire 3,000 shares of Common Stock issued to Mr. Barris and Mr. Marks as Directors of the Company. (3) Represents shares held of record by Greylock Equity Limited Partnership of which Mr. Cox is a general partner and options to acquire 3,000 shares of Common Stock issued to Mr. Cox as a Director of the Company. 45 (4) Represent shares held of record by ABS Capital Partners, L.P. of whose general partner Mr. Hebb is a general partner and options to acquire 3,000 shares of Common Stock issued to Mr. Hebb as a Director of the Company. (5) Includes options to acquire 24,000 shares of Common Stock, exercisable within 60 days. (6) Includes options to acquire 1,880 shares of Common Stock, exercisable within 60 days. (7) Includes options to acquire 64,660 shares of Common Stock, exercisable within 60 days. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. During the year ended December 31, 1996 the Board of Directors of the Company paid the Boston Consulting Group $235,000 for marketing consulting services. Mr. Thomas Pyle, a member of the Company's Board of Directors, also serves as a senior advisor to the Boston Consulting Group. In May 1996 each of NEA, Greylock and ABS sold 569,837, 569,837 and 227,826 shares of AMISYS Common Stock, respectively, in a registered public offering resulting in net proceeds of approximately $13.2 million, $13.2 million and $5.3 million, respectively. 46 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) Financial Statements All required financial statements of the registrant as set forth under Item 8 of this report on Form 10-K. (a)(2) Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts. All other schedules are omitted because they are not applicable or the required information is included in the Financial Statements or notes thereto. (a)(3) Exhibits The following exhibits are filed with this Form 10-K or incorporated herein by reference to the document set forth next to the exhibit listed below: Exhibit Number Description - ------ ----------- 3.01* Amended and Restated Certificate of Incorporation. 3.02* Amended and Restated Certificate of Incorporation, to become effective upon the closing of this offering. 3.03* By-laws of the Company. 3.04* Amended and Restated By-laws of the Company, to become effective upon the closing of this offering. 4.01* Specimen Stock Certificate. 4.02* Loan and Security Agreement, dated August 18, 1995, between the Company and Signet Bank/Virginia. 4.03* Investment and Stockholders Agreement, dated May 27, 1994, by and among AIH Systems, Inc., American International Healthcare, Inc. and Greylock Equity Limited Partnership, the NEA Investors and ABS Capital Partners, L.P. ("Investment Agreement") 4.04* Amendment No. 1 to Investment Agreement, dated November 3, 1995 by and among the Company and ABS Capital Partners, L.P., Greylock Equity Limited Partnership and New Enterprises Associates VI, Limited Partnership. 4.05* Management Investment and Stockholders' Agreement, dated as of May 27, 1994, by and among AIH Systems, Inc., America International Healthcare, Inc. and the Management Investors and Institutional Investors. ("Management Investment Agreement") 4.06* Amendment No. 1 to Management Investment Agreement, dated November 3, 1995. 10.01* Form of Employment Non-disclosure Agreement. 10.02* 1994 Equity Incentive Plan, as amended. 10.03+** Purchase Agreement, dated August 11, 1996, between the Company and Hewlett-Packard Company. 10.04* Lease Agreement, dated January 31, 1992, between Peter B. Bedford d/b/a Bedford Properties, Inc. and American International Healthcare, Inc. 10.05* Lease Agreement, dated September 11, 1995, between the Company and Cushman & Wakefield. 10.06* Employment Agreement, dated May 27, 1994, between the Company and Kevin R. Brown. 10.07* Employment Agreement, dated May 27, 1994, between the Company and Homer Fiuzat. 10.08* Employment Agreement, dated September 26, 1994, between the Company and Robert J. Sullivan. 47 10.09* Employment Agreement, dated December 23, 1994, between the Company and Michael L. Carlay. 10.10* Employment Agreement, dated March 27, 1995, between the Company and Earle Kirkland. 10.11* Employment Agreement, dated April 21, 1995, between the Company and Mark Walters. 10.12* Employment Agreement, dated May 1, 1995, between the Company and Kathy Hall Lyons. 10.13 Lease Agreement, dated December 4, 1996, between the Company and The Realty Associates Fund III, L.P. 11.01 Computation of Earnings (Loss) Per Share. 23.02 Consent of Coopers & Lybrand L.L.P. -------- * Incorporated by reference from the Registrant's Registration Statement on Form S-1 (No. 33-99030) effective on December 20, 1995. ** Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q/A filed with the Securities and Exchange Commission on November 13, 1996. + CONFIDENTIAL PORTIONS OMITTED AND SUPPLIED SEPARATELY TO THE SECURITIES AND EXCHANGE COMMISSION. (b) Report on 8-K: The Company did not file any reports on Form 8-K during the quarter year ended December 31, 1996. 48 SIGNATURES AND POWER OF ATTORNEY Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMISYS Managed Care Systems, Inc. Dated: March 6, 1997 By /s/ Robert J. Sullivan ------------------------------ Robert J. Sullivan Vice President, Chief Financial Officer Secretary and Treasurer Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the date indicated. /s/ Kevin R. Brown Chief Executive Officer, President and March 6, 1997 - ----------------------------------- Chairman (Principal Executive Officer) Kevin R. Brown /s/ Robert J. Sullivan Vice President, Chief Financial Officer March 6, 1997 - ----------------------------------- Secretary and Treasurer (Principal Robert J. Sullivan Financial Officer) /s/ Peter J. Barris Director March 6, 1997 - ----------------------------------- Peter J. Barris /s/ Howard E. Cox, Jr. Director March 6, 1997 - ----------------------------------- Howard E. Cox, Jr. /s/ Donald B. Hebb, Jr. Director March 6, 1997 - ----------------------------------- Donald B. Hebb, Jr. /s/ Gary Greenfield Director March 6, 1997 - ----------------------------------- Gary Greenfield /s/ Art. J. Marks Director March 6, 1997 - ----------------------------------- Arthur J. Marks /s/ Thomas O. Pyle Director March 6, 1997 - ----------------------------------- Thomas O. Pyle
REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of AMISYS Managed Care Systems, Inc. Our report on the financial statements of AMISYS Managed Care Systems, Inc. and American International Healthcare, Inc., a wholly owned subsidiary of American International Group, Inc., is included on page 20 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 47 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Washington, D.C. February 11, 1997 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AMISYS Managed Care Systems, Inc. (For the period May 27, 1994 to December 31, 1994 and for the year ended December 31, 1995) and American International Healthcare, Inc. A Wholly Owned Subsidiary of American International Group, Inc. (For the period January 1, 1994 to May 26, 1994)
Additions Balance at Charged to Balance at Beginning of Costs and End of Description Period Expenses Deductions Period ----------- ------ -------- ---------- ------ ALLOWANCE FOR DOUBTFUL ACCOUNTS January 1, 1994 to May 26, 1994............... $ 61 $ 5 -- $ 66 - -------------------------------------------------------------------------------------------------------- May 28, 1994 to December 31, 1994.............. 167 114 $ 67 214 December 31, 1995.............................. 214 183 -- 397 December 31, 1996.............................. 397 111 508 DEFERRED TAX ASSET VALUATION ALLOWANCE December 31, 1994.............................. $ -- $2,742 -- $2,742 December 31, 1995.............................. 2,742 -- 648 2,094 December 31, 1996.............................. 2,094 -- 1,305 789
EX-10.13 2 LEASE BETWEEN AMISYS AND REALTY ASSOC. Exhibit 10.13 ================================================================================ LEASE BY AND BETWEEN AMISYS MANAGED CARE SYSTEMS, INC. and THE REALTY ASSOCIATES FUND III, L.P., doing business in Maryland as The Realty Associates Fund III, Limited Partnership of 30 West Gude Drive Rockville, Maryland 20850 DATED December 4, 1996 ================================================================================ TABLE OF CONTENTS
PAGE 1. Basic Lease Provisions.............................................. 1 2. Premises............................................................ 3 2.1. Lease of Premises........................................... 3 2.2. Calculation of Size of Building and Premises................ 3 2.3. Common Areas-Defined........................................ 3 3. Term................................................................ 3 3.1. Term and Commencement Date.................................. 3 3.2. Delay in Possession......................................... 3 3.3. Delays Caused by Tenant..................................... 4 3.4. Tender of Possession........................................ 4 3.5. Early Possession............................................ 4 4. Rent................................................................ 5 4.1. Base Rent................................................... 5 4.2. Operating Expense Increases................................. 5 4.3. Base Rent Increase.......................................... 7 5. Security Deposit.................................................... 8 6. Use................................................................. 8 6.1. Use......................................................... 8 6.2. Compliance with Law......................................... 8 6.3. Condition of Premises....................................... 9 7. Maintenance, Repairs and Alterations................................ 9 7.1. Landlord's Obligations...................................... 9 7.2. Tenant's Obligations........................................ 9 7.3. Alterations and Additions................................... 10 7.4. Failure of Tenant to Remove Property........................ 11 8. Insurance........................................................... 11 8.1. Insurance-Tenant............................................ 11 8.2. Insurance-Landlord.......................................... 12 8.3. Insurance Policies.......................................... 12 8.4. Waiver of Subrogation....................................... 12 8.5. Coverage.................................................... 13 9. Damage or Destruction............................................... 13 9.1. Effect of Damage or Destruction............................. 13 9.2. Definition of Material Damage............................... 13 9.3. Abatement of Rent........................................... 13 9.4. Tenant's Negligence......................................... 14 9.5. Tenant's Property........................................... 14 9.6. Waiver...................................................... 14 10. Real Property Taxes................................................ 14 10.1. Payment of Taxes........................................... 14 10.2. Definition of "Real Property Tax."......................... 14 10.3. Personal Property Taxes.................................... 14 11. Utilities.......................................................... 15 11.1. Services Provided by Landlord.............................. 15 11.2. Services Exclusive to Tenant............................... 15 11.3. Hours of Service........................................... 15 11.4. Excess Usage by Tenant..................................... 15 11.5. Interruptions.............................................. 15 12. Assignment and Subletting.......................................... 16 12.1. Landlord's Consent Required................................ 16 12.2. Standard For Approval...................................... 16 12.3. Additional Terms and Conditions............................ 17 12.4. Additional Terms and Conditions Applicable to Subletting... 18 12.5. Transfer Premium from Assignment or Subletting............. 18 12.6. Landlord's Option to Recapture Space....................... 19
12.7. Landlord's Expenses........................................ 19 13. Default; Remedies.................................................. 19 13.1. Default by Tenant.......................................... 19 13.2. Remedies................................................... 20 13.3. Default by Landlord........................................ 21 13.4. Late Charges............................................... 21 13.5. Interest on Past-due Obligations........................... 22 13.6. Payment of Rent after Default.............................. 22 14. Landlord's Right to Cure Default; Payments by Tenant............... 22 15. Condemnation....................................................... 22 16. Vehicle Parking.................................................... 23 16.1. Use of Parking Facilities.................................. 23 16.2. Parking Charges............................................ 23 17. Broker's Fee....................................................... 24 18. Estoppel Certificate............................................... 24 18.1. Delivery of Certificate.................................... 24 18.2. Failure to Deliver Certificate............................. 24 18.3. Financial Information...................................... 24 19. Landlord's Liability............................................... 24 20. Indemnity.......................................................... 25 21. Exemption of Landlord from Liability............................... 25 22. Hazardous Material................................................. 26 23. Medical Waste Disposal............................................. 26 24. Tenant Improvements................................................ 26 25. Subordination...................................................... 27 25.1. Effect of Subordination.................................... 27 25.2. Execution of Documents..................................... 27 26. Options............................................................ 27 26.1. Definition................................................. 27 26.2. Options Personal........................................... 27 26.3. Multiple Options........................................... 28 26.4. Effect of Default on Options............................... 28 26.5. Limitations on Options..................................... 28 27. Landlord Reservations.............................................. 28 28. Changes to Project................................................. 29 29. Substitution of Other Premises..................................... 29 30. Holding Over....................................................... 30 31. Landlord's Access.................................................. 30 31.1. Access..................................................... 30 31.2. Keys....................................................... 30 32. Security Measures.................................................. 30 33. Easements.......................................................... 31 34. Transportation Management.......................................... 31 35. Severability....................................................... 31
TABLE OF CONTENTS (Continued)
PAGE 36. Time of Essence................................................... 31 37. Definition of Additional Rent..................................... 31 38. Incorporation of Prior Agreements................................. 31 39. Amendments........................................................ 31 40. Notices........................................................... 31 41. Waivers........................................................... 32 42. Covenants......................................................... 32 43. Binding Effect; Choice of Law..................................... 32 44. Attorneys' Fees................................................... 32 45. Auctions.......................................................... 32 46. Signs............................................................. 32 47. Merger............................................................ 33 48. Quiet Possession.................................................. 33 49. Authority......................................................... 33 50. Conflict.......................................................... 33 51. Multiple Parties.................................................. 33 52. Interpretation.................................................... 33 53. Prohibition Against Recording..................................... 33 54. Relationship of Parties........................................... 33 55. Rules and Regulations............................................. 33 56. Right to Lease.................................................... 34 57. Security Interest................................................. 34 58. Security for Performance of Tenant's Obligations.................. 34 59. Financial Information............................................. 34 60. Attachments....................................................... 34 61. WAIVER OF JURY TRIAL.............................................. 35 ADDENDUM............................................................... Add-1 EXHIBIT A.............................................................. A-1 EXHIBIT A-1............................................................ A1-1 EXHIBIT A-2............................................................ A2-1 EXHIBIT B.............................................................. B-1 EXHIBIT C.............................................................. C-1 EXHIBIT D.............................................................. D-1 EXHIBIT E.............................................................. E-1 SCHEDULE 1............................................................. Sch 1-1
iii WEST GUDE OFFICE PARK 30 WEST GUDE DRIVE ROCKVILLE, MARYLAND STANDARD OFFICE LEASE 1. BASIC LEASE PROVISIONS. 1.1. PARTIES: This Lease, dated for reference purposes only December 4, 1996, is made by and between THE REALTY ASSOCIATES FUND III, L.P., a Delaware limited partnership, doing business in Maryland as The Realty Associates Fund III, Limited Partnership ("Landlord") and AMISYS MANAGED CARE SYSTEMS, INC., a Delaware corporation ("Tenant"). 1.2. PREMISES: Suite Numbers 400 and 500 ("Premises A"), Suite Number 100 ("Premises B"), Suite Numbers 300 and 460 ("Premises C"), and Suite Number 350 ("Premises D"), as shown on Exhibit "A" attached hereto. Premises A, Premises B, Premises C and Premises D shall collectively be referred to herein as the "Premises". 1.3. RENTABLE AREA OF PREMISES: 85,832 square feet, comprised of Premises A containing 46,386 rentable square feet, Premises B containing 11,081 rentable square feet, Premises C containing 16,527 rentable square feet and Premises D containing 11,838 rentable square feet. RENTABLE AREA OF PREMISES E: 3,864 rentable square feet. The total rentable area of the Premises and Premises E is 89,696 rentable square feet. 1.4. BUILDING ADDRESS: 30 West Gude Drive, Rockville, Maryland 20850 (the "Building"), which is a part of a four (4) building complex located at 20-50 West Gude Drive, commonly referred to as West Gude Park. 1.5. USE: General office use and a training facility to be located in Premises B, subject to the requirements and limitations contained in Section 6. 1.6. TERM: Ten (10) years, commencing January 1, 1997 and terminating on December 31, 2006, unless sooner terminated pursuant to the terms and conditions of the Lease. 1.7. COMMENCEMENT DATE FOR PREMISES A: January 1, 1997. SEE ADDENDUM PARAGRAPH 1 COMMENCEMENT DATE FOR PREMISES B: January 1, 1997, subject to adjustment in accordance with Section 3 below and Paragraph 1 of the Addendum attached hereto. COMMENCEMENT DATE FOR PREMISES C: April 1, 1997, subject to adjustment in accordance with Section 3 below and Paragraph 1 of the Addendum attached hereto. COMMENCEMENT DATE FOR PREMISES D: December 1, 1998, subject to adjustment in accordance with Section 3 below and Paragraph 1 of the Addendum attached hereto. COMMENCEMENT DATE FOR PREMISES E: Apri1 1, 1997. SEE ADDENDUM PARAGRAPH 21 1.8. BASE RENT: $129,019.57 per month comprised of the following: (i) $17.50 per rentable square foot for Premises A, B, C and D: Base Rent for Premises A of $67,646.25 per month, Base Rent for Premises B of $16,159.79, Base Rent for Premises C of $24,101.88 per month, and Base 1 Rent for Premises D of $17,263.75; and (ii) $11.95 per rentable square foot for Premises E: Storage Base Rent for Premises E of $3,874.90. 1.9. BASE RENT PAID UPON EXECUTION: None. 1.10. SECURITY DEPOSIT: $258,039.14 1.11. TENANT'S SHARE: For Premises A: 33.99%; 42.11% including Premises B (8.12%); 54.22% including Premises C (12.11%); 62.89% including Premises D (8.67%); and 65.69% including Premises E (2.80%). 1.12. BASE YEAR: The calendar year 1997. 1.13. NUMBER OF PARKING SPACES: Reserved: -0-; Unreserved: Tenant shall be entitled to 3.4 unreserved spaces for each 1,000 square feet of space in the Premises (excluding Premises E) from time to time. 1.14. INITIAL MONTHLY PARKING RATES PER SPACE: Reserved: $ N/A; Unreserved: $ -0-. 1.15. REAL ESTATE BROKER: LANDLORD: McShea & Company, Inc. TENANT: Cushman and Wakefield of Maryland, Inc. 1.16. ATTACHMENTS TO LEASE: Addendum, Exhibit A - "Premises"; Exhibit A-1 -"Premises E"; Exhibit A-2 - "Expansion Space"; Exhibit B -"Verification Letter", Exhibit C - "Rules and Regulations", Exhibit D- "Cleaning Specifications"; Exhibit E - "Form Consent to Sublease"; and Schedule 1 - "Work Letter Agreement". 1.17. ADDRESS FOR NOTICES: LANDLORD: THE REALTY ASSOCIATES FUND III, L.P. c/o McShea & Company, Inc. One Bank Street Suite 300 Gaithersburg, Maryland 20878 Attention: Laurie Craft WITH COPY TO: TA Associates Realty 45 Milk Street Boston, Massachusetts 02109 Attention: Mary Lou Boutwell TENANT: AMISYS Managed Care Systems, Inc. 30 West Gude Drive, Suite 500 Rockville, Maryland 20850 Attention: Chief Financial Officer 1.18. AGENT FOR SERVICE OF PROCESS: If Tenant is a corporation, the name and address of Tenant's registered agent for service of process is: CT Corporation System 32 South Street Baltimore, Maryland 21202 2 2. PREMISES. 2.1. LEASE OF PREMISES. The Building, the Common Areas (as defined below), the land upon which the same are located, along with all other buildings IN WEST GUDE PARK and improvements thereon or thereunder, including all parking facilities, are herein collectively referred to as the "Project." Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, upon all of the conditions set forth herein, the Premises, together with certain rights to the Common Areas as hereinafter specified. The Premises shall not include an easement for light, air or view. 2.2. CALCULATION OF SIZE OF BUILDING AND PREMISES. All provisions included in this Lease relating to the number of rentable square feet in the Premises, including, but not limited to, Base Rent and Tenant's Share, shall be adjusted to reflect the actual number of rentable square feet in the Premises. The calculation of the number of rentable square feet in the Premises shall be made by Landlord in accordance with the methods of measuring rentable square feet, as that method is described by the Washington, D.C. Association of Realtors, Inc. If an adjustment to the rentable square feet in the Premises is made after this Lease is executed by Landlord and Tenant, the Base Rent and any advance rent shall be adjusted by multiplying the actual number of rentable square feet in the Premises by the per square foot rental obtained by dividing the Base Rent initially set forth in Section 1.8 by the number of rentable square feet initially set forth in Section 1.3. If the number of rentable square feet in the Premises is changed, Tenant's Share shall be adjusted as provided in Section 4.2(a). 2.3. COMMON AREAS-DEFINED. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Project that are designated by Landlord from time to time for the general non-exclusive use of Landlord, Tenant and the other tenants of the Project and their respective employees, suppliers, customers and invitees, including, but not limited to, common entrances, lobbies, corridors, stairwells, public restrooms, elevators, parking areas, loading and unloading areas, roadways and sidewalks. Landlord may also designate other land and improvements outside the boundaries of the Project to be a part of the Common Areas, provided that such other land and improvements have a reasonable and functional relationship to the Project. 3. TERM. 3.1. TERM AND COMMENCEMENT DATE. The Term and Commencement Date of this Lease are as specified in Sections 1.6 and 1.7. The Commencement Dates set forth in Section 1.7 with the exception of the Premises A Commencement Date are estimated Commencement Dates. When the actual Commencement Dates are established by Landlord, Tenant shall, within ten (10) days after Landlord's request, complete and execute the letter attached hereto as Exhibit "B" and deliver it to Landlord. Tenant's failure to execute the applicable letter attached hereto as Exhibit "B" or respond with objections thereto within said ten (10) day period shall be a material default hereunder and shall constitute Tenant's acknowledgement of the truth of the facts contained in the letter delivered by Landlord to Tenant. SEE ADDENDUM PARAGRAPH 1 3.2. DELAY IN POSSESSION. 3 SEE ADDENDUM PARAGRAPH 2 3.3. DELAYS CAUSED BY TENANT. There shall be no abatement of rent, and the one hundred twenty (120) day period and the subsequent sixty (60) day period specified in Section 3.2 shall be deemed extended, to the extent of any delays caused by acts or omissions of Tenant, Tenant's agents, employees and contractors, or for Tenant delays as defined in the work letter agreement attached to this Lease, if any (hereinafter "Tenant Delays"). The Commencement Date shall not be extended due to Tenant Delays. 3.4. TENDER OF POSSESSION. 3.5. EARLY POSSESSION. 4 4. RENT. 4.1. BASE RENT. Subject to adjustment as hereinafter provided in Section 4.3, Tenant shall pay to Landlord the Base Rent for the Premises set forth in Section 1.8, without offset or deduction on the first day of each calendar month. Base Rent for any period during the Term hereof which is for less than one month shall be prorated based upon the actual number of days of the calendar month involved. Base Rent and all other amounts payable to Landlord hereunder shall be payable to Landlord in lawful money of the United States at the address stated herein or to such other persons or at such other places as Landlord may designate in writing. 4.2. OPERATING EXPENSE INCREASES. Tenant shall pay to Landlord during the Term hereof, in addition to the Base Rent, Tenant's Share of the amount by which all Operating Expenses for each Comparison Year exceeds the amount of all Operating Expenses for the Base Year. If less than 95% of the rentable square feet in the Project is occupied by tenants or Landlord is not supplying services to 95% of the rentable square feet of the Project at any time during any calendar year (including the Base Year), Operating Expenses for such calendar year shall be an amount equal to the Operating Expenses which would normally be expected to be incurred had 95% of the Project's rentable square feet been occupied and had Landlord been supplying services to 95% of the Project's rentable square feet throughout such calendar year. Tenant's Share of Operating Expense increases shall be determined in accordance with the following provisions: THE BASE YEAR OPERATING EXPENSES SHALL INCLUDE AN EXPENSE COMPONENT FOR ELECTRICITY OF ONE AND 65/100 DOLLARS ($1.65) PER SQUARE FOOT. ANY INCREASES IN ELECTRICITY OVER THE $1.65 PER SQUARE FOOT COMPONENT IN ANY COMPARISON YEAR SHALL BE PAID BY TENANT REGARDLESS OF THE TOTAL AMOUNT OF INCREASES IN OPERATING EXPENSES OVER THE BASE YEAR. IN ADDITION, ANY FULL FLOOR OCCUPIED BY TENANT AT ANY TIME DURING THE TERM HEREOF SHALL HAVE A CORE FACTOR OF EIGHT PERCENT (8%), AND ANY FLOOR WHICH IS OCCUPIED BY TENANTS IN ADDITION TO TENANT SHALL HAVE A CORE FACTOR OF FIFTEEN PERCENT (15%). (a) "TENANT'S SHARE" is defined as the percentage set forth in Section 1.11, which percentage has been determined by dividing the number of rentable square feet in the Premises by the total number of rentable square feet in the Project and multiplying the resulting quotient by one hundred (100). In the event that the number of rentable square feet in the Project or the Premises changes, Tenant's Share shall be adjusted in the year the change occurs, and Tenant's Share for such year shall be determined on the basis of the days during such year that each Tenant's Share was in effect. (b) "COMPARISON YEAR" is defined as each calendar year during the Term of this Lease after the Base Year. Tenant's Share of the Operating Expense increases for the last Comparison Year of the Lease Term shall be prorated according to that portion of such Comparison Year as to which Tenant is responsible for a share of such increase. (c) "OPERATING EXPENSES" shall include all costs, expenses and fees incurred by Landlord in connection with or attributable to the Project, including but not limited to, the following items: (i) all costs, expenses and fees associated with or attributable to the ownership, management, operation, repair, maintenance, 5 improvement, alteration and replacement of the Project, or any part thereof, including but not limited to, the following: (A) all surfaces, coverings, decorative items, carpets, drapes, window coverings, parking areas, loading and unloading areas, trash areas, roadways, sidewalks, stairways, landscaped areas, striping, bumpers, irrigation systems, lighting facilities, building exteriors and roofs, fences and gates; (B) all heating, ventilating and air conditioning equipment ("HVAC"), plumbing, mechanical, electrical systems, life safety systems and equipment, telecommunication equipment, elevators, escalators, tenant directories, fire detection systems including sprinkler system maintenance and repair; (ii) the cost of trash disposal, janitorial services and security services and systems; (iii) the cost of all insurance purchased by Landlord and enumerated in Section 8 of this Lease, including any deductibles; (iv) the amount of the real property taxes to be paid by Landlord under Section 10.1 hereof; (v) the cost of water, sewer, gas, electricity, and other utilities available at the Project and paid by Landlord; (vi) the cost of labor, salaries and applicable fringe benefits incurred by Landlord; (vii) the cost of materials, supplies and tools used in managing, maintaining and/or cleaning the Project; (viii) the cost of accounting fees, management fees, legal fees and consulting fees attributable to the ownership, operation, management, maintenance and repair of the Project plus the cost of any space occupied by the property manager and leasing agent (if Landlord is the property manager, Landlord shall be entitled to receive a fair market management fee); (ix) the cost of replacing and/or adding improvements mandated by any law, statute, regulation or directive of any governmental agency and any repairs or removals necessitated thereby; (x) the costs incurred in implementing and operating any transportation management program, ride sharing program or similar program including, but not limited to, the cost of any transportation program fees, mass transportation fees or similar fees charged or assessed by any governmental or quasi-governmental entity; (xi) payments made by Landlord under any easement, license, operating agreement, declaration, restrictive covenant, or instrument pertaining to the payment or sharing of costs among property owners; (xii) personal property taxes imposed upon the fixtures, machinery, equipment, furniture and personal property used in connection with the operation of the Project; and (xiii) the cost of any other service provided by Landlord or any cost that is elsewhere stated in this Lease to be an "Operating Expense." Landlord shall have the right but not the obligation, from time to time, to equitably allocate some or all of the Operating Expenses among different tenants of the Project (the "Cost Pools"). Such Cost Pools may include, but shall not be limited to, the office space tenants of the Project and the retail space tenants of the Project. (d) Operating Expenses shall not include any expenses paid by any tenant directly to third parties, or as to which Landlord is otherwise reimbursed by any third party or by insurance proceeds. SEE ADDENDUM PARAGRAPH 3 (e) If the cost incurred in making an improvement or replacing any equipment is not fully deductible as an expense in the year incurred in accordance with generally accepted accounting principles, the cost shall be amortized over the useful life of the improvement or equipment, as reasonably determined by Landlord, together with an interest factor of twelve percent (12%) per annum on the unamortized cost of such item. (f) Tenant's Share of Operating Expense increases shall be payable by Tenant within thirty (30) days after a reasonably detailed statement of actual expenses is presented to Tenant by Landlord. At Landlord's option, however, Landlord may, from time to time, estimate what Tenant's Share of Operating Expense increases will be provided however, the estimate shall not be greater than six percent (6%) of Tenant's Share of Operating Expense increases in the most recent Comparison Year, and the same shall be payable by Tenant monthly during each Comparison Year of 6 the Lease Term, on the same day as the Base Rent is due hereunder. In the event that Tenant pays Landlord's estimate of Tenant's Share of Operating Expense increases, Landlord shall use its best efforts to deliver to Tenant within one hundred eighty (180) days after the expiration of each Comparison Year a reasonably detailed statement showing Tenant's Share of the actual Operating Expense increases incurred during such year. Landlord's failure to deliver the statement to Tenant within said period shall not constitute Landlord's waiver of its right to collect said amounts or otherwise prejudice Landlord's rights hereunder. If Tenant's payments under this Section 4.2(f) during said Comparison Year exceed Tenant's Share as indicated on said statement, Tenant shall be entitled to credit the amount of such overpayment against Tenant's Share of Operating Expense increases next falling due. If Tenant's payments under this Section 4.2(f) during said Comparison Year were less than Tenant's Share as indicated on said statement, Tenant shall pay to Landlord the amount of the deficiency within thirty (30) days after delivery by Landlord to Tenant of said statement. Landlord and Tenant shall forthwith adjust between them by cash payment any balance determined to exist with respect to that portion of the last Comparison Year for which Tenant is responsible for Operating Expense increases, notwithstanding that the Lease Term may have terminated before the end of such Comparison Year; and this provision shall survive the expiration or earlier termination of the Lease. SEE ADDENDUM PARAGRAPH 4 (g) The computation of Tenant's Share of Operating Expense increases is intended to provide a formula for the sharing of costs by Landlord and Tenant and will not necessarily result in the reimbursement to Landlord of the exact costs it has incurred. SEE ADDENDUM PARAGRAPH 5 4.3. BASE RENT INCREASE. 7 SEE ADDENDUM PARAGRAPH 6 5. SECURITY DEPOSIT. Tenant shall deliver to Landlord at the time it executes this Lease the security deposit set forth in Section 1.10 as security for Tenant's faithful performance of Tenant's obligations hereunder. If Tenant fails to pay Base Rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Landlord may use all or any portion of said deposit for the payment of any Base Rent or other charge due hereunder, to pay any other sum to which Landlord may become obligated by reason of Tenant's default, or to compensate Landlord for any loss or damage which Landlord may suffer thereby. If Landlord so uses or applies all or any portion of said deposit, Tenant shall within ten (10) days after written demand therefor deposit cash with Landlord in an amount sufficient to restore said deposit to its full amount. Landlord shall not be required to keep said security deposit separate from its general accounts. If Tenant performs all of Tenant's obligations hereunder, said deposit, or so much thereof as has not heretofore been applied by Landlord, shall be returned, to Tenant (or, at Landlord's option, to the last assignee, if any, of Tenant's interest hereunder) at the expiration of the Term hereof, and after Tenant has vacated the Premises. No trust relationship is created herein between Landlord and Tenant with respect to said security deposit. Tenant acknowledges that the security deposit is not an advance payment of any kind or a measure of Landlord's damages in the event of Tenant's default. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS SECTION 5, LANDLORD HEREBY AGREES TO DEPOSIT THE SECURITY DEPOSIT INTO AN AUTOMATICALLY RENEWING THIRTY (30) DAY CERTIFICATE OF DEPOSIT, WITH INTEREST ACCRUING THEREON FOR THE BENEFIT OF TENANT. SEE ADDENDUM PARAGRAPH 7 6. USE. 6.1. USE. The Premises shall be used and occupied only for the purpose set forth in Section 1.5 and for no other purpose. If Section 1.5 gives Tenant the right to use the Premises for general office use, by way of example and not limitation, general office use shall not include medical office use or any similar use, laboratory use, any use not characterized by applicable zoning and land use restrictions as general office use, or any use which would require Landlord or Tenant to obtain a conditional use permit or variance from any federal, state or local authority. No exclusive use has been granted to Tenant hereunder. 6.2. COMPLIANCE WITH LAW. Notwithstanding any permitted use inserted in Section 1.5, Tenant shall not use the Premises for any purpose which would violate the Project's certificate of occupancy, any conditional use permit or variance applicable to the Project or violate any covenants, conditions or other restrictions applicable to the Project. Tenant shall, at Tenant's expense, promptly comply with all applicable laws, ordinances, rules, regulations, orders, certificates of occupancy, conditional use permits, variances, covenants and restrictions of record, and requirements of any fire insurance underwriters, rating bureaus or government agencies, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy from that now existing, during the Term or any part of the Term hereof, relating in any manner to the Premises and the occupation and use by Tenant of the Premises. Tenant shall conduct its business and use the Premises in a lawful manner and shall not use or permit the use of the Premises or the Common Areas in any manner that will tend to create waste or a nuisance or shall tend to disturb other occupants of the 8 Project. Tenant shall obtain, at its sole expense, any permit or other governmental authorization required to operate its business from the Premises. Landlord shall not be liable for the failure of any other tenant or person to abide by the requirements of this Section or to otherwise comply with applicable laws and regulations, and Tenant shall not be excused from the performance of its obligations under this Lease due to such a failure. 6.3. CONDITION OF PREMISES. Except for latent defects and except as otherwise provided in this Lease, Tenant hereby accepts the Premises and the Project in their condition existing as of the date this Lease is executed by Landlord and Tenant, subject to all applicable federal, state and local laws, ordinances, regulations and permits governing the use of the Premises, the Project's certificate of occupancy, any applicable conditional use permits or variances, and any easements, covenants or restrictions of record affecting the use of the Premises or the Project. Tenant shall comply with all federal, state and local laws and regulations governing occupational safety and health at Tenant's sole cost and expense. Tenant acknowledges that it has satisfied itself by its own independent investigation that the Premises and the Project are suitable for its intended use, and that neither Landlord nor Landlord's agents has made any representation or warranty as to the present or future suitability of the Premises, or the Project for the conduct of Tenant's business. SEE ADDENDUM PARAGRAPH 8 7. MAINTENANCE, REPAIRS AND ALTERATIONS. 7.1. LANDLORD'S OBLIGATIONS. Landlord shall keep the Project (excluding the interior of the Premises and space leased to other occupants of the Project) in good condition and repair. Except as provided in Section 9.3, there shall be no abatement of rent or liability to Tenant on account of any injury or interference with Tenant's business with respect to any improvements, alterations or repairs made by Landlord to the Project or any part thereof. Tenant expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Tenant the right to make repairs at Landlord's expense or to terminate this Lease because of Landlord's failure to keep the Project in good order, condition and repair. ALL REPAIRS AND MAINTENANCE REQUIRED OF LANDLORD PURSUANT TO THIS SECTION 7.1 SHALL BE PERFORMED IN ACCORDANCE WITH STANDARDS APPLICABLE TO COMPARABLE OFFICE BUILDINGS IN THE ROCKVILLE, MARYLAND AREA 7.2. TENANT'S OBLIGATIONS. (a) Subject to the requirements of Section 7.3, Tenant shall be responsible for payment of the cost of keeping the Premises in good condition and repair, and if Landlord makes any repairs to the Premises, the reasonable cost thereof shall be paid by Tenant to Landlord. Tenant shall be responsible for the cost of painting, repairing or replacing wall coverings, and the cost of repairing or replacing any improvements made to the Premises by Landlord or Tenant. Landlord may, but shall not be obligated to, enter the Premises at all reasonable times to make such repairs, alterations, improvements and additions to the Premises or to any equipment located therein as Landlord deems necessary, in its sole discretion. NOTWITHSTANDING THE FOREGOING, TENANT SHALL HAVE THIRTY (30) DAYS TO PERFORM ITS OBLIGATIONS UNDER THIS SECTION 7.3 PRIOR TO LANDLORD ENTERING THE PREMISES, EXCEPT IN THE EVENT OF AN EMERGENCY OR IF THE REPAIRS ARE TO BASE-BUILDING SYSTEMS OR STRUCTURE. (b) On the last day of the Term hereof, as it may be extended or on any sooner termination, Tenant shall surrender the Premises to Landlord in the same condition as received, (including the improvements) ordinary wear and tear excepted, clean and free of debris and Tenant's personal property. Tenant shall repair any damage to the Premises occasioned by the 9 installation or removal of Tenant's trade fixtures, furnishings and equipment. Except as otherwise stated in this Lease, Tenant shall leave the power panels, electrical distribution systems, lighting fixtures, HVAC, window coverings, wall coverings, carpets, wall panelling, ceilings and plumbing at the Premises and in good operating condition. 7.3. ALTERATIONS AND ADDITIONS. (a) Tenant shall not, without Landlord's prior written consent, which may be given or withheld in Landlord's sole discretion, make any alterations, improvements, additions, utility installations or repairs (hereinafter collectively referred to as "Alterations") in, on or about the Premises or the Project. As used in this Lease, the term "utility installation" shall mean carpeting or other floor covering, window and wall coverings, power panels, electrical distribution systems, lighting fixtures, telephone or computer system wiring, HVAC and plumbing. At the expiration of the Term, Landlord may require the removal of any Alterations installed by Tenant and the restoration of the Premises and the Project to their prior condition, at Tenant's expense. If a work letter agreement is entered into by Landlord and Tenant, Tenant shall not be obligated to remove the tenant improvements constructed in accordance with the work letter agreement. Should Landlord permit Tenant to make its own Alterations, Tenant shall use only such contractor as has been expressly approved by Landlord, and Landlord may require Tenant to provide to Landlord, at Tenant's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alterations, to insure Landlord against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Tenant make any Alterations without the prior approval of Landlord, or use a contractor not expressly approved by Landlord, Landlord may, at any time during the Term of this Lease, require that Tenant remove all or part of the Alterations and return the Premises to the condition it was in prior to the making of the Alterations. In the event Tenant makes any Alterations, Tenant agrees to obtain or cause its contractor to obtain, prior to the commencement of any work, "builders all risk" insurance in an amount approved by Landlord and workers compensation insurance. SEE ADDENDUM PARAGRAPH 9 (b) Any Alterations in or about the Premises that Tenant shall desire to make shall be presented to Landlord in written form, with plans and specifications which are sufficiently detailed to obtain a building permit. If Landlord consents to an Alteration, the consent shall be deemed conditioned upon Tenant acquiring a building permit from the applicable governmental agencies, furnishing a copy thereof to Landlord prior to the commencement of the work, and compliance by Tenant with all conditions of said permit in a prompt and expeditious manner. Tenant shall provide Landlord with as-built plans and specifications for any Alterations made to the Premises. (c) Tenant shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Tenant at or for use in the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or the Project, or any interest therein. If Tenant shall, in good faith, contest the validity of any such lien, Tenant shall furnish to Landlord a surety bond satisfactory to Landlord in an amount equal to such contested lien claim or demand indemnifying Landlord against liability arising out of such lien or claim. In addition, Landlord may require Tenant to pay Landlord's reasonable attorneys' fees and costs in participating in such action. (d) Tenant shall give Landlord not less than ten (10) days' advance written notice prior to the commencement of any work in the Premises by Tenant, and Landlord shall have the right to post notices of non-responsibility in or on the Premises or the Project as provided by law. 10 (e) All Alterations (whether or not such Alterations constitute trade fixtures of Tenant) which may be made to the Premises by Tenant shall be made and done in a good and workmanlike manner and with new materials satisfactory to Landlord and shall be the property of Landlord and remain upon and be surrendered with the Premises at the expiration of the Lease Term, unless Landlord requires their removal pursuant to Section 7.3(a). Provided Tenant is not in default, notwithstanding the provisions of this Section 7.3(e), Tenant's personal property and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises or the Project, shall remain the property of Tenant and may be removed by Tenant subject to the provisions of Section 7.2(b). 7.4. FAILURE OF TENANT TO REMOVE PROPERTY. If this Lease is terminated due to the expiration of its Term or otherwise, and Tenant fails to remove its property as required by Section 7.2(b), in addition to any other remedies available to Landlord under this Lease, and subject to any other right or remedy Landlord may have under applicable law, Landlord may remove any property of Tenant from the Premises and store the same elsewhere at the expense and risk of Tenant and at any time (before or after Landlord stores said property), Landlord may sell any or all such property at public or private sale, in such a manner and at such times and places as Landlord, in its sole discretion, may deem proper, without notice to or demand upon Tenant. Landlord shall apply the proceeds of such sale: first, to the cost and expenses of the sale, including reasonable attorneys' fees actually incurred; second, to the payment of the cost of or charges for storing any such property; third, to the payment of any other sums of money which may then or thereafter be due to Landlord from Tenant under this Lease; and fourth, the balance, if any, to Tenant. 8. INSURANCE. 8.1. INSURANCE-TENANT. (a) During the Term of the Lease and at such other times as Tenant occupies the Premises, Tenant shall keep in force at its expense "commercial general liability" insurance including an ISO broad form endorsement or its equivalent with respect to the Premises with limits of not less than One Million Dollars ($1,000,000) combined single limit or such higher amount as Landlord may reasonably require in writing from time to time. The insurance shall cover liability arising out of Tenant's operations and liability arising out of work performed at the Premises by other persons on behalf of Tenant, and shall specifically include the contractual liability assumed by Tenant under this Lease. Such coverage, if written on a claims-made basis, must provide for a retroactive date which is prior to the date Tenant occupies the Premises, and the same retroactive date shall continue during the entire Term of this Lease. (b) Tenant will also maintain "all risk" extended coverage property insurance written on a one hundred percent (100%) replacement cost basis on Tenant's personal property, all tenant improvements installed at the Premises by Landlord or Tenant, Tenant's trade fixtures and other property. Such policies shall provide protection against any peril included within the classification "fire and extended coverage," against vandalism and malicious mischief, theft, sprinkler leakage and flood damage. If this Lease is terminated as the result of a casualty in accordance with Section 9, the proceeds of said insurance attributable to the replacement of all tenant improvements at the Premises shall be paid to Landlord. (c) Tenant shall, at all times during the Term hereof, maintain in effect workers' compensation insurance as required by applicable law and business interruption insurance satisfactory to Landlord. 11 8.2. INSURANCE-LANDLORD. (a) Landlord shall obtain and keep in force a policy of commercial general liability insurance with coverage against such risks and in such commercially reasonable amounts as Landlord deems advisable insuring Landlord against liability arising out of the ownership, operation and management of the Project. (b) Landlord shall also obtain and keep in force during the Term of this Lease a policy or policies of "all risk" insurance covering loss or damage to the Project in the amount of not less than ninety percent (90%) of the full replacement cost thereof, as reasonably determined by Landlord from time to time. The terms and conditions of said policies and the perils and risks covered thereby shall be determined by Landlord, from time to time, in Landlord's sole but reasonable discretion. In addition, at Landlord's option, Landlord shall obtain and keep in force, during the Term of this Lease, a policy of rental interruption insurance, with loss payable to Landlord, which insurance shall, at Landlord's option, also cover all Operating Expenses. Tenant will not be named as an additional insured in any insurance policies carried by Landlord and shall have no right to any proceeds therefrom. At Landlord's option, Landlord may obtain insurance coverages and/or bonds related to the operation of the parking areas. At Landlord's option, Landlord may obtain coverage for flood and earthquake damages. In addition, Landlord shall obtain such additional insurance as is customarily carried by owners or operators of other comparable office buildings in the geographical area of the Project. The policies purchased by Landlord shall contain such deductibles as Landlord may reasonably determine. In addition to amounts payable by Tenant in accordance with Section 4.2, Tenant shall pay any increase in the property insurance premiums for the Project over what was payable immediately prior to the Commencement Date to the extent the increase is specified by Landlord's insurance carrier as being caused by the nature of Tenant's occupancy or any act or omission of Tenant. 8.3. INSURANCE POLICIES. Tenant shall deliver to Landlord copies of the insurance policies required under Section 8.1 within fifteen (15) days prior to the Commencement Date of this Lease. Tenant's insurance policies shall not be cancelable or subject to reduction of coverage or other modification except after thirty (30) days prior written notice to Landlord. Tenant shall, at least thirty (30) days prior to the expiration of such policies, furnish Landlord with renewals thereof. Tenant's insurance policies shall be issued by insurance companies authorized to do business in the state in which the Project is located, with a general policyholders rating of not less than "A" and a financial rating of not less than "Class X," as rated in the most recent edition of "Best Insurance Reports." Tenant's insurance policies shall be issued as primary policies and not contributing with and not in excess of coverage which Landlord may carry. Landlord, and at Landlord's option the holder of any mortgage or deed of trust encumbering the Project, shall be named as an additional insured on all insurance policies Tenant is obligated to obtain by Section 8.1 above. Tenant's insurance policies shall not include deductibles in excess of Five Thousand Dollars ($5,000). 8.4. WAIVER OF SUBROGATION. Tenant and Landlord each hereby release and relieve the other, and waive their entire right of recovery against the other, for direct or consequential loss or damage arising out of or incident to the perils covered by insurance carried by such party (or required to be carried by such party by this Lease) to the extent of the insurance proceeds actually received, whether due to the negligence of Landlord or Tenant or their agents, employees, contractors and/or invitees. Landlord and Tenant shall each cause the insurance policies they obtain in accordance with this Section 8 to provide that the insurance company waives all right of recovery by subrogation against either party in connection with any damage covered by any policy. 12 8.5. COVERAGE. Landlord makes no representation to Tenant that the limits or forms of coverage specified above or approved by Landlord are adequate to insure Tenant's property or Tenant's obligations under this Lease, and the limits of any insurance carried by either party shall not, except as otherwise provided herein, limit its obligations under this Lease. 9. DAMAGE OR DESTRUCTION. 9.1. EFFECT OF DAMAGE OR DESTRUCTION. If all or part of the Project is materially damaged (as defined in Section 9.2 below) by fire, earthquake, flood, explosion, the elements, riot or any other casualty, Landlord shall have the right in its sole and complete discretion to repair or to rebuild the Project or to terminate this Lease. Landlord shall within ninety (90) days after the occurrence of such damage notify Tenant in writing of Landlord's intention to repair or to rebuild or to terminate this Lease provided that Landlord may terminate this Lease only if it terminates all of the leases in the Building. Tenant shall in no event be entitled to compensation or damages on account of annoyance or inconvenience in making any repairs, or on account of construction, or on account of Landlord's election to terminate this Lease. Notwithstanding the foregoing, if Landlord shall elect to rebuild or repair the Project, but in good faith determines that the Project cannot be rebuilt or repaired within one hundred eighty (180) days after the date of the occurrence of the damage, without payment of overtime or other premiums, and the damage to the Project has rendered the Premises unusable, Landlord shall notify Tenant thereof in writing at the time of Landlord's election to rebuild or repair, and Tenant shall thereafter have a period of thirty (30) days within which Tenant may elect to terminate this Lease, upon written notice to Landlord. Tenant's termination right described in the preceding sentence shall not apply if the damage was caused by Tenant's negligence or willful misconduct. Failure of Tenant to exercise said election within said period shall constitute Tenant's agreement to accept delivery of the Premises under this Lease whenever tendered by Landlord, provided Landlord thereafter pursues reconstruction or restoration diligently to completion, subject to delays beyond Landlord's reasonable control. 9.2. DEFINITION OF MATERIAL DAMAGE. The damage shall be deemed material if, in Landlord's reasonable judgment, the uninsured cost of repairing the damage will exceed One Hundred Thousand Dollars ($100,000). If insurance proceeds are available to Landlord in an amount which is sufficient to pay the entire cost of repairing all of the damage to the Project, the damage shall be deemed material if the cost of repairing the damage exceeds Two Hundred Fifty Thousand Dollars ($250,000). Damage to the Project shall also be deemed material if (a) the Project cannot be repaired to substantially the same condition it was in prior to the damage due to laws or regulations in effect at the time the repairs will be made, (b) the holder of any mortgage or deed of trust encumbering the Project requires that insurance proceeds available to repair the damage in excess of One Hundred Thousand Dollars ($100,000) be applied to the repayment of the indebtedness secured by the mortgage or the deed of trust, or (c) the damage occurs during the last twelve (12) months of the Lease Term. 9.3. ABATEMENT OF RENT. If Landlord elects to repair damage to the Project and all or part of the Premises will be unusable or inaccessible to Tenant in the ordinary conduct of its business until the damage is repaired, and the damage was not caused by the negligence or willful misconduct of Tenant or its employees, agents, contractors or invitees, Tenant's Base Rent and Tenant's Share of Operating Expense 13 increases shall be abated in proportion to the amount of the Premises which is unusable or inaccessible to Tenant in the ordinary conduct of its business until the repairs are completed. 9.4. TENANT'S NEGLIGENCE. If such damage or destruction occurs as a result of the negligence or willful misconduct of Tenant or Tenant's employees, agents, contractors or invitees, and the proceeds of insurance which are actually received by Landlord are not sufficient to repair all of the damage, Tenant shall pay, at Tenant's sole cost and expense, to Landlord upon demand, the difference between the cost of repairing the damage and the insurance proceeds received by Landlord. 9.5. TENANT'S PROPERTY. Unless caused by Landlord's or its agents' negligence or willful misconduct, Landlord shall not be required to repair any injury or damage to, or to make any repairs or replacements of, any fixtures, furniture, equipment or tenant improvements installed in the Premises, and Tenant shall repair and restore all such property at Tenant's sole expense. 9.6. WAIVER. Landlord and Tenant hereby waive the provisions of any statutes which relate to the termination of leases when leased property is damaged or destroyed and agree that such event shall be governed by the terms of this Lease. 10. REAL PROPERTY TAXES. 10.1. PAYMENT OF TAXES. Landlord shall pay the real property tax, as defined in Section 10.2, applicable to the Project subject to reimbursement by Tenant of Tenant's Share of such taxes in accordance with the provisions of Section 4.2. 10.2. DEFINITION OF "REAL PROPERTY TAX." As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed on the Project or any portion thereof by any authority having the direct or indirect power to tax, including any city, county, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of Landlord in the Project or in any portion thereof, as against Landlord's right to rent or other income therefrom, or as against Landlord's business of leasing the Project. The term "real property tax" shall also include any tax, fee, levy, assessment or charge (a) in substitution of, partially or totally, any tax, fee, levy, assessment or charge hereinabove included within the definition of "real property tax", or (b) the nature of which was hereinbefore included within the definition of "real property tax", or (c) which is imposed as a result of a change in ownership, as defined by applicable local statutes for property tax purposes, of the Project or which is added to a tax or charge hereinbefore included within the definition of real property tax by reason of such change of ownership, or (d) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof, or (e) transportation taxes, fees or assessments, including, but not limited to, mass transportation fees, regional transportation district fees, metrorail fees, trip fees and similar fees and assessments, or (f) fees assessed by any air quality management district or other governmental or quasi- governmental entity regulating pollution, or (g) parking fees or parking taxes paid by Landlord, or (h) any reasonable expenses incurred by Landlord in attempting to protest, reduce or minimize real property taxes. 10.3. PERSONAL PROPERTY TAXES. Tenant shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Tenant contained in the Premises or related to Tenant's use of the Premises. If any of Tenant's personal property shall be assessed with Landlord's real property, Tenant shall pay to Landlord the taxes attributable to 14 Tenant within twenty (20) days after receipt of a written statement from Landlord setting forth the taxes applicable to Tenant's property. 11. UTILITIES. 11.1. SERVICES PROVIDED BY LANDLORD. Subject to all governmental rules, regulations and guidelines applicable thereto, Landlord shall use its best efforts to provide HVAC to the Premises for normal office use during the times described in Section 11.3, reasonable amounts of electricity for normal office lighting and fractional horsepower office machines, water in the Premises or in the Common Area for reasonable and normal drinking and lavatory use, replacement light bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures, and building standard janitorial services, AS SET FORTH ON EXHIBIT D ATTACHED HERETO. 11.2. SERVICES EXCLUSIVE TO TENANT. Tenant shall pay for all water, gas, heat, electricity, telephone and other utilities and services supplied and/or metered exclusively to the Premises or to Tenant, together with any taxes thereon. If any such services are not separately metered to the Premises, Tenant shall pay, at Landlord's option, either Tenant's Share or a reasonable proportion to be determined by Landlord of all charges jointly metered with other premises in the Project. 11.3. HOURS OF SERVICE. Building services and utilities shall be provided Monday through Friday from 8:00 a.m. to 6:00 p.m. and Saturdays from 9:00 a.m. to 1:00 p.m. Janitorial services shall be provided Monday through Friday. HVAC and other Building services shall not be provided at other times or on New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas. Landlord shall use its best efforts to provide HVAC to Tenant at times other than those set forth above subject to (a) the payment by Tenant of Landlord's standard charge equal to the actual utility costs for the Premises plus a ten percent (10%) administrative fee, for after hours HVAC and (b) Tenant providing to Landlord at least one (1) business day's advance written notice of Tenant's need for after hours HVAC. As of the date of this Lease, and subject to future increases, the standard charge for after hours HVAC is Forty Dollars ($40.00) per hour. Tenant shall pay all after hours HVAC charges to Landlord within thirty (30) days after Landlord bills Tenant for said charges. SEE ADDENDUM PARAGRAPH 10 11.4. EXCESS USAGE BY TENANT. Notwithstanding the use set forth in Section 1.5, Tenant shall not use Building utilities or services in excess of those used by the average office building tenant using its premises for ordinary office use. Tenant shall not install at the Premises office machines, lighting fixtures or other equipment which will generate above average heat, noise or vibration at the Premises or which will adversely effect the temperature maintained by the HVAC system. If Tenant does use Building utilities or services in excess of those used by the average office building tenant, Landlord shall have the right, in addition to any other rights or remedies it may have under this Lease, to (a) at Tenant's expense, install separate metering devices at the Premises, and to charge Tenant for its usage or (b) require Tenant to pay to Landlord all costs, expenses and damages incurred by Landlord as a result of such usage. 11.5. INTERRUPTIONS. Tenant agrees that Landlord shall not be liable to Tenant for its failure to furnish utilities or other services when such failure is occasioned, in whole or in part, by repairs, replacements, or improvements, by any strike, lockout or other labor trouble, by inability to secure electricity, gas, water, or other fuel at the Project after Landlord's best effort to do so, by any accident or casualty 15 whatsoever, by act or default of Tenant or other parties, or by any other cause beyond Landlord's reasonable control, and such failures shall never be deemed to constitute an eviction or disturbance of Tenant's use and possession of the Premises or relieve Tenant from paying rent or performing any of its obligations under this Lease. Furthermore, unless caused by landlord's negligence, Landlord shall not be liable under any circumstances for loss of property or for injury to, or interference with, Tenant's business, including, without limitation, loss of profits, however occurring, through or in connection with or incidental to a failure to furnish any of the services or utilities as set forth in this Section 11. Landlord may comply with voluntary controls or guidelines promulgated by any governmental entity relating to the use or conservation of energy, water, gas, light or electricity or the reduction of automobile or other emissions without creating any liability of Landlord to Tenant under this Lease. SEE ADDENDUM PARAGRAPH 10 12. ASSIGNMENT AND SUBLETTING. 12.1 LANDLORD'S CONSENT REQUIRED. Tenant shall not voluntarily or by operation of law assign, transfer, hypothecate, mortgage, sublet, or otherwise transfer or encumber all or any part of Tenant's interest in this Lease or in the Premises (hereinafter collectively a "Transfer"), without Landlord's prior written consent, which shall not be unreasonably withheld. Landlord shall respond to Tenant's written request for consent hereunder within thirty (30) days after Landlord's receipt of the written request from Tenant. Any attempted Transfer without such consent shall be void and shall constitute a material default and breach of this Lease. Tenant's written request for Landlord's consent shall include, and Landlord's thirty (30) day response period referred to above shall not commence, unless and until Landlord has received from Tenant, all of the following information: (a) financial statements for the proposed assignee or subtenant for the past three (3) years prepared in accordance with generally accepted accounting principles, (b) federal tax returns for the proposed assignee or subtenant for the past three (3) years, (c) a TRW credit report or similar report on the proposed assignee or subtenant, (d) a detailed description of the business the assignee or subtenant intends to operate at the Premises, (e) the proposed effective date of the assignment or sublease, (f) a copy of the proposed sublease or assignment agreement which includes all of the terms and conditions of the proposed assignment or sublease, and (g) a detailed description of any ownership or commercial relationship between Tenant and the proposed assignee or subtenant. If the obligations of the proposed assignee or subtenant will be guaranteed by any person or entity, Tenant's written request shall not be considered complete until the information described in (a), (b) and (c) of the previous sentence has been provided with respect to each proposed guarantor. "Transfer" shall also include the transfer (a) if Tenant is a corporation, and Tenant's stock is not publicly traded over a recognized securities exchange, of more than twenty five percent (25%) of the voting stock of such corporation during the Term of this Lease (whether or not in one or more transfers) or the dissolution or merger of the corporation, or (b) if Tenant is a partnership or other entity, of more than twenty five percent (25%) of the profit and loss participation in such partnership or entity during the Term of this Lease (whether or not in one or more transfers) or the dissolution or liquidation of the partnership. SEE ADDENDUM PARAGRAPH 11 12.2. STANDARD FOR APPROVAL. Landlord shall not unreasonably withhold its consent to a Transfer provided that Tenant has complied with each and every requirement, term and condition of this Section 12. Tenant acknowledges and agrees that each requirement, term and condition in this Section 12 is a reasonable requirement, term or condition. It shall be deemed reasonable for Landlord to withhold its consent to a Transfer if any requirement, term or condition of this Section 12 is not complied with or: (a) the Transfer would cause Landlord to be in violation of its obligations under another lease or agreement to which Landlord is a party; (b) in 16 Landlord's reasonable judgment, a proposed assignee has a smaller net worth than Tenant had on the date this Lease was entered into with Tenant or is less able financially to pay the rents due under this Lease as and when they are due and payable; (c) a proposed assignee's or subtenant's business will impose a burden on the Project's parking facilities, elevators, Common Areas or utilities that is greater than the burden imposed by Tenant, in Landlord's reasonable judgment; (d) the terms of a proposed assignment or subletting will allow the proposed assignee or subtenant to exercise a right of renewal, right of expansion, right of first offer, right of first refusal or similar right held by Tenant; (e) a proposed assignee or subtenant does not, in Landlord's reasonable judgment, have a good credit rating; (f) (g) a proposed assignee or subtenant refuses to enter into a written assignment agreement or sublease, reasonably satisfactory to Landlord, which provides that it will abide by and assume all of the terms and conditions of this Lease for the term of any assignment or sublease and containing such other terms and conditions as Landlord reasonably deems necessary; (h) the use of the Premises by the proposed assignee or subtenant will not be identical to the use permitted by this Lease; (i) Landlord has ever evicted or been involved in litigation with the proposed assignee or subtenant; (j) any guarantor of this Lease refuses to consent to the Transfer or to execute a written agreement reaffirming the guaranty; (k) Tenant is in default as defined in Section 13.1 at the time of the request; or (l) if requested by Landlord, the assignee or sublessee refuses to sign a non-disturbance and attornment agreement in favor of Landlord's lender, IN SUBSTANTIALLY THE SAME FORM AS THE AGREEMENT SIGNED BY TENANT, IF APPLICABLE. 12.3. ADDITIONAL TERMS AND CONDITIONS. The following terms and conditions shall be applicable to any Transfer: (a) Regardless of Landlord's consent, no Transfer shall release Tenant from Tenant's obligations hereunder or alter the primary liability of Tenant to pay the rent and other sums due Landlord hereunder and to perform all other obligations to be performed by Tenant hereunder or release any guarantor from its obligations under its guaranty. (b) Landlord may accept rent from any person other than Tenant pending approval or disapproval of an assignment or subletting. (c) Neither a delay in the approval or disapproval of a Transfer, nor the acceptance of rent, shall constitute a waiver or estoppel of Landlord's right to exercise its rights and remedies for the breach of any of the terms or conditions of this Section 12. (d) The consent by Landlord to any Transfer shall not constitute a consent to any subsequent Transfer by Tenant or to any subsequent or successive Transfer by an assignee or subtenant. (e) In the event of any default under this Lease, Landlord may proceed directly against Tenant, any guarantors or anyone else responsible for the performance of this Lease, including any subtenant or assignee, without first exhausting Landlord's remedies against any other person or entity responsible therefor to Landlord, or any security held by Landlord. (f) Landlord's written consent to any Transfer by Tenant shall not constitute an acknowledgment that no default then exists under this Lease nor shall such consent be deemed a waiver of any then existing default. 17 (g) The discovery of the fact that any financial statement relied upon by Landlord in giving its consent to an assignment or subletting was materially false shall, at Landlord's election, render Landlord's consent null and void. (h) Landlord shall not be liable under this Lease or under any assignment or sublease to any assignee or subtenant., EXCEPT FOR AN ASSIGNEE TO WHICH LANDLORD HAS OTHERWISE CONSENTED. (i) No assignment or sublease may be modified or amended without Landlord's prior written consent. 12.4. ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Tenant of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Tenant hereby absolutely and unconditionally assigns and transfers to Landlord all of Tenant's interest in all rentals and income arising from any sublease entered into by Tenant, and Landlord may collect such rent and income and apply same toward Tenant's obligations under this Lease; provided, however, that until a default shall occur in the performance of Tenant's obligations under this Lease, Tenant may receive, collect and enjoy the rents accruing under such sublease. Landlord shall not, by reason of this or any other assignment of such rents to Landlord nor by reason of the collection of the rents from a subtenant, be deemed to have assumed or recognized any sublease or to be liable to the subtenant for any failure of Tenant to perform and comply with any of Tenant's obligations to such subtenant under such sublease, including, but not limited to, Tenant's obligation to return any security deposit. Tenant hereby irrevocably authorizes and directs any such subtenant, upon receipt of a written notice from Landlord stating that a default exists in the performance of Tenant's obligations under this Lease, to pay to Landlord the rents due as they become due under the sublease. Tenant agrees that such subtenant shall have the right to rely upon any such statement and request from Landlord, and that such subtenant shall pay such rents to Landlord without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Tenant to the contrary. (b) In the event Tenant shall default in the performance of its obligations under this Lease, Landlord at its option and without any obligation to do so, may require any subtenant to attorn to Landlord, in which event Landlord shall undertake the obligations of Tenant under such sublease from the time of the exercise of said option to the termination of such sublease; provided, however, Landlord shall not be liable for any prepaid rents or security deposit paid by such subtenant to Tenant or for any other prior defaults of Tenant under such sublease. 12.5. TRANSFER PREMIUM FROM ASSIGNMENT OR SUBLETTING. Landlord shall be entitled to receive from Tenant (as and when received by Tenant) as an item of additional rent fifty percent (50%) of all amounts received by Tenant from such assignee or subtenant in excess of the amounts payable by Tenant to Landlord hereunder (the "Transfer Premium"). "Transfer Premium" shall mean all Base Rent, additional rent or other consideration of any type whatsoever payable by the assignee or subtenant in excess of the Base Rent and additional rent payable by Tenant under this Lease. If less than all of the Premises is transferred, the Base Rent and the additional rent shall be determined on a per rentable square foot basis. "Transfer Premium" shall also include, but not be limited to, key money and bonus money paid by the assignee or subtenant to Tenant in connection with such Transfer, and any payment in excess of fair market value for services rendered by Tenant to the assignee or subtenant or for assets, fixtures, inventory, equipment, or furniture transferred by Tenant to the assignee or subtenant in connection with such Transfer. 18 12.6. LANDLORD'S OPTION TO RECAPTURE SPACE. Notwithstanding anything to the contrary contained in this Section 12, except in instances where Landlord has granted its prior consent to a sublease, Landlord shall have the option, by giving written notice to Tenant within thirty (30) days after receipt of any request by Tenant to assign this Lease or to sublease space in the Premises, to terminate this Lease with respect to said space as of the date specified in Tenant's notice. In the event of a recapture by Landlord, if this Lease shall be canceled with respect to less than the entire Premises, the Base Rent, Tenant's Share of Operating Expense increases and the number of parking spaces Tenant may use shall be adjusted on the basis of the number of rentable square feet retained by Tenant in proportion to the number of rentable square feet contained in the original Premises, and this Lease as so amended shall continue thereafter in full force and effect, and upon request of either party, the parties shall execute written confirmation of same. If Landlord recaptures only a portion of the Premises, it shall construct and erect at its sole cost such partitions as may be required to sever the space to be retained by Tenant from the space recaptured by Landlord. Landlord may, at its option, lease any recaptured portion of the Premises to the proposed subtenant or assignee or to any other person or entity without liability to Tenant. Tenant shall not be entitled to any portion of the profit, if any, Landlord may realize on account of such termination and reletting. Tenant acknowledges that the purpose of this Section 12.6 is to enable Landlord to receive profit in the form of higher rent or other consideration to be received from an assignee or sublessee, to give Landlord the ability to meet additional space requirements of other tenants of the Project and to permit Landlord to control the leasing of space in the Project. Tenant acknowledges and agrees that the requirements of this Section 12.6 are commercially reasonable and are consistent with the intentions of Landlord and Tenant. 12.7. LANDLORD'S EXPENSES. In the event Tenant shall assign this Lease or sublet the Premises or request the consent of Landlord to any Transfer, then Tenant shall pay Landlord's reasonable costs and expenses incurred in connection therewith, including, but not limited to, attorneys', architects', accountants', engineers' or other consultants' fees. 13. DEFAULT; REMEDIES. 13.1. DEFAULT BY TENANT. Landlord and Tenant hereby agree that the occurrence of any one or more of the following events is a material default by Tenant under this Lease and that said default shall give Landlord the rights described in Section 13.2. Landlord or Landlord's authorized agent shall have the right to serve any notice of default, notice to pay rent or quit or similar notice. (a) Tenant's failure to make any payment of Base Rent, Tenant's Share of Operating Expense increases, parking charges, charges for after hours HVAC, late charges, or any other payment required to be made by Tenant hereunder, as and when due, where such failure shall continue for a period of five (5) business days after written notice thereof from Landlord to Tenant. In the event that Landlord serves Tenant with a notice to pay rent or quit pursuant to applicable unlawful detainer statutes, such notice shall also constitute the notice required by this Section 13.1(a). (b) The abandonment of the Premises by Tenant in which event Landlord shall not be obligated to give any notice of default to Tenant. (c) The failure by Tenant to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Tenant (other than those referenced in Sections 13.1(a) and (b), above), where such failure shall 19 continue for a period of twenty (20) days after written notice thereof from Landlord to Tenant; provided, however, that if the nature of Tenant's non- performance is such that more than twenty (20) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences such cure within said twenty (20) day period and thereafter diligently pursues such cure to completion. In the event that Landlord serves Tenant with a notice to quit pursuant to applicable unlawful detainer statutes, said notice shall also constitute the notice required by this Section 13.1(c). IF TENANT IS UNABLE TO FULFILL ANY OF ITS OBLIGATIONS HEREUNDER OR IS DELAYED IN DOING SO, AND SUCH INABILITY OR DELAY IS CAUSED BY REASON OF STRIKE OR OTHER LABOR PROBLEMS, ACTS OF GOD, RIOT, INSURRECTION, GOVERNMENTAL ACTIONS OR REQUIREMENTS, OR ANY OTHER CAUSE BEYOND THE REASONABLE CONTROL OF TENANT, THE TIME FOR TENANT'S PERFORMANCE SHALL BE EXTENDED FOR THE PERIOD OF ANY SUCH DELAY. (d)(i) The making by Tenant or any guarantor of any general arrangement or general assignment for the benefit of creditors; (ii) Tenant or any guarantor becoming a "debtor" as defined in 11 U.S.C. 101 or any successor statute thereto (unless, in the case of a petition filed against Tenant or guarantor, the same is dismissed within sixty (60) days); (iii) the institution of proceedings seeking the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days or the institution of a foreclosure proceeding against Tenant's real or personal property; or (iv) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days. In the event that any provision of this Section 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect. (e) The discovery by Landlord that any financial statement, representation or warranty given to Landlord by Tenant, or by any guarantor of Tenant's obligations hereunder, is or was materially false. (f) If Tenant is a corporation or a partnership, the dissolution or liquidation of Tenant. 13.2 REMEDIES. (a) In the event of any default or breach of this Lease by Tenant, Landlord may, at any time thereafter, with or without notice or demand, and without limiting Landlord in the exercise of any right or remedy which Landlord may have by reason of such default: (i) terminate Tenant's right to possession of the Premises by any lawful means, in which case this Lease and the Term hereof shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. If Landlord terminates this Lease, Landlord may recover from Tenant (A) the worth at the time of award of the unpaid rent which had been earned at the time of termination; (B) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (C) the worth at the time of award of the amount by which the unpaid rent for the balance of the Term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; and (D) any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform its obligations under the Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, the cost of recovering possession of the Premises, expenses of releasing, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, any real estate commissions actually paid by Landlord and the unamortized value of any free rent, reduced rent, tenant improvement allowance or other economic concessions provided 20 by Landlord. The "worth at time of award" of the amounts referred to in Section 13.2(a)(i)(A) and (B) shall be computed by allowing interest at the lesser of two percent (2%) per annum over the "prime rate" as established by NationsBank of Maryland, N.A., or the maximum interest rate permitted by applicable law. The worth at the time of award of the amount referred to in Section 13.2(a)(i)(C) shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of Baltimore at the time of award plus one percent (1%). For purposes of this Section 13.2(a)(i), "rent" shall be deemed to be all monetary obligations required to be paid by Tenant pursuant to the terms of this Lease. IN THE EVENT OF A TERMINATION OF TENANT'S RIGHT TO POSSESSION OF THE PREMISES PURSUANT TO THIS SECTION, LANDLORD SHALL USE COMMERCIALLY REASONABLE EFFORTS TO MITIGATE TENANT'S DAMAGES. (ii) maintain Tenant's right of possession in which event Landlord shall have the remedy which permits Landlord to continue this Lease in effect after Tenant's breach and abandonment and recover rent as it becomes due. (iii) collect sublease rents (or appoint a receiver to collect such rent) and otherwise perform Tenant's obligations at the Premises, it being agreed, however, that the appointment of a receiver for Tenant shall not constitute an election by Landlord to terminate this Lease. (iv) pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the state in which the Premises are located. (b) No remedy or election hereunder shall be deemed exclusive, but shall, wherever possible, be cumulative with all other remedies at law or in equity. (c) If Tenant abandons or vacates the Premises, Landlord may re-enter the Premises and such re-entry shall not be deemed to constitute Landlord's election to accept a surrender of the Premises or to otherwise relieve Tenant from liability for its breach of this Lease. No surrender of the Premises shall be effective against Landlord unless Landlord has entered into a written agreement with Tenant in which Landlord expressly agrees to (i) accept a surrender of the Premises and (ii) relieve Tenant of liability under the Lease. The delivery of keys to Landlord or any employee or agent of Landlord shall not constitute the termination of the Lease or the surrender of the Premises. 13.3 DEFAULT BY LANDLORD. Landlord shall not be in default under this Lease unless Landlord fails to perform obligations required of Landlord within thirty (30) days after written notice by Tenant to Landlord and to the holder of any mortgage or deed of trust encumbering the Project whose name and address shall have theretofore been furnished to Tenant in writing, specifying wherein Landlord has failed to perform such obligation; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for its cure, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently pursues the same to completion. This Lease and the obligations of Tenant hereunder shall not be affected or impaired because Landlord is unable to fulfill any of its obligations hereunder or is delayed in doing so, if such inability or delay is caused by reason of strike or other labor problems, acts of God, riot, insurrection, governmental actions or requirements, or any other cause beyond the reasonable control of Landlord, and the time for Landlord's performance shall be extended for the period of any such delay. 13.4 LATE CHARGES. Tenant hereby acknowledges that late payment by Tenant to Landlord of Base Rent, Tenant's Share of Operating Expense increases, parking charges, after hours HVAC charges, or other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, 21 processing and accounting charges and late charges which may be imposed on Landlord by the terms of any mortgage or trust deed encumbering the Project. Accordingly, if any installment of Base Rent, Tenant's Share of Operating Expense increases, parking charges, after hours HVAC charges or any other sum due from Tenant shall not be received by Landlord when such amount shall be due, then, without any requirement for notice to Tenant, Tenant shall pay to Landlord a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder including the assessment of interest under Section 13.5. 13.5 INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any amount due to Landlord that is not paid when due shall bear interest at the lesser of two percent (2%) per annum over the "prime rate" as established by NationsBank of Maryland, N.A., or the maximum rate permitted by applicable law. Payment of such interest shall not excuse or cure any default by Tenant under this Lease; provided, however, that interest shall not be payable on late charges incurred by Tenant nor on any amounts upon which late charges are paid by Tenant. 13.6 PAYMENT OF RENT AFTER DEFAULT. If Tenant fails to pay Base Rent, Tenant's Share of Operating Expense increases, parking charges or any other monetary obligation due hereunder on the date it is due, after Tenant's third failure to pay any monetary obligation on the date it is due, at Landlord's option, all monetary obligations of Tenant hereunder shall thereafter be paid by cashiers check. If Landlord has required Tenant to make said payments by cashiers check, Tenant's failure to make a payment by cashiers check shall be a material default hereunder. 14. LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT. All covenants and agreements to be kept or performed by Tenant under this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any reduction of rent. If Tenant shall fail to perform any of its obligations under this Lease, within a reasonable time after such performance is required by the terms of this Lease, (taking into account the expiration of the notice and cure periods provided herein) Landlord may, but shall not be obligated to, after ten (10) days' prior written notice to Tenant, make any such payment or perform any such act on Tenant's behalf without waiving its rights based upon any default of Tenant and without releasing Tenant from any obligations hereunder. Tenant shall pay to Landlord, within ten (10) days after delivery by Landlord to Tenant of statements therefor, an amount equal to the expenditures reasonably made by Landlord in connection with the remedying by Landlord of Tenant's defaults pursuant to the provisions of this Section 14. 15. CONDEMNATION. If any portion of the Premises or the Project are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs; provided that if so much of the Premises or Project are taken by such condemnation as would substantially and adversely affect the operation and profitability of Tenant's business conducted from the Premises, and said taking lasts for ninety (90) days or more, Tenant shall have the option, to be exercised only in writing within thirty (30) days after Landlord shall have given Tenant written notice of such taking (or in the absence of such notice, within thirty (30) days after the condemning authority shall have taken possession), to terminate this Lease as of the date the condemning authority takes such possession. If a taking lasts for less than ninety (90) days, Tenant's rent shall be abated during said period but Tenant shall not have the right to terminate this Lease. If Tenant does not terminate this Lease in 22 accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the rent and Tenant's Share of Operating Expenses shall be reduced in the proportion that the usable floor area of the Premises taken bears to the total usable floor area of the Premises. Common Areas taken shall be excluded from the Common Areas usable by Tenant and no reduction of rent shall occur with respect thereto or by reason thereof. Landlord shall have the option in its sole discretion to terminate this Lease as of the taking of possession by the condemning authority, by giving written notice to Tenant of such election within thirty (30) days after receipt of notice of a taking by condemnation of any part of the Premises or the Project. Any award for the taking of all or any part of the Premises or the Project under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Landlord, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, as severance damages, or as damages for tenant improvements; provided, however, that Tenant shall be entitled to any separate award for loss of or damage to Tenant's trade fixtures and removable personal property and any award available for the relocation of Tenant's business. In the event that this Lease is not terminated by reason of such condemnation, and subject to the requirements of any lender that has made a loan to Landlord encumbering the Project, Landlord shall to the extent of severance damages received by Landlord in connection with such condemnation, repair any damage to the Project caused by such condemnation except to the extent that Tenant has been reimbursed therefor by the condemning authority. Tenant shall pay any amount in excess of such severance damages required to complete such repair. Except as set forth in this Section 15, Landlord shall have no liability to Tenant for interruption of Tenant's business upon the Premises, diminution of Tenant's ability to use the Premises, or other injury or damage sustained by Tenant as a result of such condemnation. 16. VEHICLE PARKING. 16.1 USE OF PARKING FACILITIES. During the Term and subject to the rules and regulations attached hereto as Exhibit "C" as reasonably modified by Landlord from time to time (the "Rules"), Tenant shall be entitled to use the number of parking spaces set forth in Section 1.13 in the parking facility of the Project at the monthly rate applicable from time to time for monthly parking as set by Landlord and/or its licensee. Landlord may, in its sole discretion, assign tandem parking spaces to Tenant and designate the location of any reserved parking spaces. Landlord reserves the right at any time to relocate Tenant's reserved and unreserved parking spaces. If Tenant commits or allows in the parking facility any of the activities prohibited by the Lease or the Rules, then Landlord shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Tenant, which cost shall be immediately payable by Tenant upon demand by Landlord. Tenant's parking rights are the personal rights of Tenant and Tenant shall not transfer, assign, or otherwise convey its parking rights separate and apart from this Lease. 16.2 PARKING CHARGES. The initial monthly parking rate per parking space is set forth in Section 1.14 and is subject to change by Landlord upon five (5) days' prior written notice to Tenant. Monthly parking fees shall be payable in advance prior to the first day of each calendar month, provided, however, that no fee for parking shall be charged Tenant during the initial term of this Lease. Visitor parking rates shall be determined by Landlord from time to time in Landlord's sole discretion. The parking rates charged to Tenant may not be the lowest parking rates charged by Landlord for the use of the parking facility. Notwithstanding anything to the contrary contained herein, any tax imposed on the privilege of occupying space in the parking facility, upon the revenues received by Landlord from the parking facility or upon the charges paid for the 23 privilege of using the parking facility by any governmental or quasi-governmental entity may be added by Landlord to the monthly parking charges paid by Tenant at any time, or Landlord may require Tenant and other persons using the parking facility to pay said amounts directly to the taxing authority. SEE ADDENDUM PARAGRAPH 12 17. BROKER'S FEE. Tenant and Landlord each represent and warrant to the other that neither has had any dealings or entered into any agreements with any person, entity, broker or finder other than the persons, if any, listed in Section 1.15, in connection with the negotiation of this Lease, and no other broker, person, or entity is entitled to any commission or finder's fee in connection with the negotiation of this Lease, and Tenant and Landlord each agree to indemnify, defend and hold the other harmless from and against any claims, damages, costs, expenses, attorneys' fees or liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings, actions or agreements of the indemnifying party. 18. ESTOPPEL CERTIFICATE. 18.1. DELIVERY OF CERTIFICATE. Tenant shall at any time upon not less than ten (10) BUSINESS days' prior written notice from Landlord execute, acknowledge and deliver to Landlord a statement in writing certifying such information as Landlord may reasonably request including, but not limited to, the following: (a) that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) (b) the date to which the Base Rent and other charges are paid in advance and the amounts so payable, (c) that there are not, to Tenant's knowledge, any uncured defaults or unfulfilled obligations on the part of Landlord, or specifying such defaults or unfulfilled obligations, if any are claimed, and (d) that all tenant improvements to be constructed by Landlord, if any, have been completed in accordance with Landlord's obligations and Tenant has taken possession of the Premises. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Project. 18.2. FAILURE TO DELIVER CERTIFICATE. At Landlord's option, the failure of Tenant to deliver such statement within THREE (3) BUSINESS DAYS AFTER LANDLORD'S SECOND REQUEST THEREFOR shall constitute a material default of Tenant hereunder, or it shall be conclusive upon Tenant that (a) this Lease is in full force and effect, without modification except as may be represented by Landlord, (b) there are no uncured defaults in Landlord's performance, (c) not more than one month's Base Rent has been paid in advance, and (d) all tenant improvements to be constructed by Landlord, if any, have been completed in accordance with Landlord's obligations and Tenant has taken possession of the Premises. 18.3. FINANCIAL INFORMATION. If Landlord desires to finance, refinance, or sell the Project, or any part thereof, Tenant hereby agrees to deliver, and to cause any guarantor of Tenant's obligations to deliver, to any lender or purchaser designated by Landlord such financial statements of Tenant or any guarantor and other information as may be reasonably required by such lender or purchaser. All such financial statements shall be received by Landlord and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. NOTWITHSTANDING THE FOREGOING, SO LONG AS TENANT IS A PUBLICLY TRADED COMPANY WITH PUBLICLY AVAILABLE FINANCIAL INFORMATION, TENANT SHALL NOT BE REQUIRED TO SUBMIT ADDITIONAL FINANCIAL STATEMENTS. 19. LANDLORD'S LIABILITY. Tenant acknowledges that Landlord shall have the right to transfer all or any portion of its interest in the Project and to assign this Lease to 24 the transferee. Tenant agrees that in the event of such a transfer Landlord shall automatically be released from all liability under this Lease; and Tenant hereby agrees to look solely to Landlord's transferee for the performance of Landlord's obligations hereunder after the date of the transfer. Upon such a transfer, Landlord shall, at its option, return Tenant's security deposit to Tenant or transfer Tenant's security deposit to Landlord's transferee and, in either event, Landlord shall have no further liability to Tenant for the return of its security deposit. Subject to the rights of any lender holding a mortgage or deed of trust encumbering all or part of the Project, Tenant agrees to look solely to Landlord's equity interest in the Project for the collection of any judgment requiring the payment of money by Landlord arising out of (a) Landlord's failure to perform its obligations under this Lease or (b) the negligence or willful misconduct of Landlord, its partners, employees and agents. No partner, employee or agent of Landlord shall be personally liable for the performance of Landlord's obligations hereunder or be named as a party in any lawsuit arising out of or related to, directly or indirectly, this Lease and the obligations of Landlord hereunder. The obligations under this Lease do not constitute personal obligations of the individual partners of Landlord and Tenant shall not seek recourse against the individual partners of Landlord or their assets. 20. INDEMNITY. Tenant shall indemnify, defend and hold harmless Landlord, its agents, partners, and employees from and against any and all claims for damage to the person or property of any person or entity arising from Tenant's use of the Project, or from the conduct of Tenant's business or from any activity, work or things done, permitted or suffered by Tenant in or about the Project and shall further indemnify, defend and hold harmless Landlord, its agents, partners and employees from and against any and all claims, costs and expenses arising from any breach or default in the performance of any obligation of Tenant to be performed under the terms of this Lease, or arising from any act or omission of Tenant, or any of Tenant's agents, contractors, employees, or invitees, and from and against all costs, attorneys' fees, expenses and liabilities incurred by Landlord, its agents, partners and employees as the result of any such use, conduct, activity, default or negligence. In case any action or proceeding is brought against Landlord, its agents, partners and employees, Tenant shall defend Landlord, and its agents, partners and employees at Tenant's expense by counsel reasonably satisfactory to Landlord and Landlord shall cooperate with Tenant in such defense. Landlord need not have first paid any claim in order to be so indemnified. This indemnity shall survive the expiration or sooner termination of this Lease. SEE ADDENDUM PARAGRAPH 13 21. EXEMPTION OF LANDLORD FROM LIABILITY. Tenant hereby agrees that Landlord shall not be liable for injury to Tenant's business or any loss of income therefrom or for loss of or damage to the goods, wares, merchandise or other property of Tenant, Tenant's employees, invitees, customers, or any other person in or about the Project, nor shall Landlord be liable for injury to the person of Tenant, Tenant's employees, agents or contractors, whether such damage or injury is caused by or results from any cause whatsoever including, but not limited to, theft, criminal activity at the Project, negligent security measures, bombings or bomb scares, hazardous waste, fire, steam, electricity, gas, water or rain, breakage of pipes, sprinklers, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Project, or from other sources or places, or from new construction or the repair, alteration or improvement of any part of the Project, or of the equipment, fixtures or appurtenances applicable thereto, unless the cause of the damage or injury arises out of Landlord's or its employees or agents negligent or intentional 25 acts. Except for the negligent acts or willful misconduct by Landlord, Landlord shall not be liable for any damages arising from any act or neglect of any other tenant, occupant or user of the Project, nor from the failure of Landlord to enforce the provisions of the lease of any other tenant of the Project. Tenant, as a material part of the consideration to Landlord hereunder, hereby assumes all risk of damage to property of Tenant or injury to persons, in, upon or about the Project arising from any cause, excluding Landlord's negligence or the negligence of its agents, partners or employees, and Tenant hereby waives all claims in respect thereof against Landlord, its agents, partners and employees. 22. HAZARDOUS MATERIAL. For purposes of this Lease, the term "Hazardous Material" means any hazardous substance, hazardous waste, infectious waste, or toxic substance, material, or waste which becomes regulated or is defined as such by any local, state or federal governmental authority. Except for small quantities of ordinary office supplies such as copier toners, liquid paper, glue, ink and common household cleaning materials, Tenant shall not cause or permit any Hazardous Material to be brought, kept or used in or about the Premises or the Project by Tenant, its agents, employees, contractors, or invitees. Tenant hereby agrees to indemnify Landlord from and against any breach by Tenant of the obligations stated in the preceding sentence, and agrees to defend and hold Landlord harmless from and against any and all claims, judgments, damages, penalties, fines, costs, liabilities, or losses (including, without limitation, diminution in value of the Project, damages for the loss or restriction or use of rentable space or of any amenity of the Project, damages arising from any adverse impact on marketing of space in the Project, sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees) which arise during or after the Term of this Lease as result of such breach. This indemnification of Landlord by Tenant includes, without limitation, costs incurred in connection with any investigation of site conditions and any cleanup, remedial removal, or restoration work required due to the presence of Hazardous Material. Tenant shall promptly notify Landlord of any release of a Hazardous Material in the Premises or at the Project of which Tenant becomes aware, whether caused by Tenant or any other person or entity. The provisions of this Section 22 shall survive the termination of the Lease. TO THE BEST OF LANDLORD'S ACTUAL KNOWLEDGE, THERE IS NO HAZARDOUS MATERIAL IN THE BUILDING OR THE PROJECT AS OF THE DATE THIS LEASE IS FULLY EXECUTED BY LANDLORD AND TENANT. 23. MEDICAL WASTE DISPOSAL. If Tenant produces medical waste, Landlord may, at its option, provide medical waste disposal services to Tenant. If Landlord elects to provide such services, Landlord may require Tenant to use said services. Landlord, at its option, may bill Tenant directly for such services, which amounts shall then constitute additional rent hereunder, or Landlord may include the cost of providing such services in Operating Expenses. Tenant waives its right to the fullest extent allowed by law to assert any claim against Landlord in connection with the negligent provision of medical waste disposal services by Landlord. In the event Landlord is unable or chooses not to provide such disposal services to Tenant, Tenant shall arrange for the disposal of its medical waste and such disposal shall be done in compliance with all applicable laws. Tenant hereby agrees to indemnify, defend and hold harmless Landlord against any cost, loss, liability, action, suit or expense (including attorneys' fees) arising out of or relating to the existence of or the disposal of medical waste produced by Tenant at the Premises. 24. TENANT IMPROVEMENTS. Tenant acknowledges and agrees that Landlord shall not be obligated to construct any tenant improvements on behalf of Tenant unless a work letter agreement (the "Work Letter") is attached to this Lease as Schedule 1. If a space plan is attached to the Work Letter, the space plan shall not be effective unless separately initialed by Landlord. Except as set forth in a Work Letter, it is specifically understood and agreed that Landlord has no obligation and has made no promises to alter, remodel, improve, renovate, repair or decorate the Premises, the Project, or any part thereof, or to provide any allowance for such purposes, and that no 26 representations respecting the condition of the Premises or the Project have been made by Landlord to Tenant. SEE ADDENDUM PARAGRAPH 14 25. SUBORDINATION. 25.1. EFFECT OF SUBORDINATION. This Lease, and any Option (as defined in Section 26 below) granted hereby, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the Project and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Tenant's right to quiet possession of the Premises shall not be disturbed if Tenant is not in default and so long as Tenant shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. At the request of any mortgagee, trustee, ground lessor or purchaser at foreclosure, Tenant shall attorn to such person or entity. If any mortgagee, trustee, ground lessor or purchaser at foreclosure shall elect to have this Lease and any Options granted hereby prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Tenant, this Lease and such Options shall conclusively be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease or such Options are dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. 25.2. EXECUTION OF DOCUMENTS. Tenant agrees to execute and acknowledge any documents required to effectuate an attornment, a subordination, or to make this Lease or any Option granted herein prior to the lien of any mortgage, deed of trust or ground lease, as the case may be. Tenant's failure to execute such documents within ten (10) business days after written demand shall constitute a material default by Tenant hereunder or, at Landlord's option, Landlord shall have the right to execute such documents on behalf of Tenant as Tenant's attorney-in-fact. Tenant does hereby make, constitute and irrevocably appoint Landlord as Tenant's attorney-in-fact and in Tenant's name, place and stead, to execute such documents in accordance with this Section 25.2, said appointment to be a power during the Term of this Lease coupled with an interest and irrevocable. 26. OPTIONS. 26.1. DEFINITION. As used in this Lease, the word "Option" has the following meaning: (1) the right or option to extend the Term of this Lease or to renew this Lease, and (2) the option or right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other space within the Project or the right of first offer to lease other space within the Project. Any Option granted to Tenant by Landlord must be evidenced by a written option agreement attached to this Lease as a rider or addendum or said option shall be of no force or effect. 26.2. OPTIONS PERSONAL. Each Option granted to Tenant in this Lease, if any, is personal to the original Tenant and may be exercised only by the original Tenant while occupying the entire Premises (except that with respect to the Option to Renew set forth in the Addendum, Tenant shall only be required to be occupying a minimum of seventy-five percent (75%) of the premises) and may not be exercised or be assigned, voluntarily or involuntarily, by or to any person or entity other than Tenant, including, without limitation, any permitted transferee as defined in Section 12. The Options, if any, herein granted to Tenant are not assignable separate and apart from this Lease, nor may any Option be separated from this Lease in any manner, either by reservation or otherwise. If at any time an Option is exercisable by Tenant, the Lease has been assigned, or a sublease exists as to any portion of the Premises, the Option 27 shall be deemed null and void and neither Tenant nor any assignee or subtenant shall have the right to exercise the Option. 26.3. MULTIPLE OPTIONS. In the event that Tenant has multiple Options to extend or renew this Lease a later Option cannot be exercised unless the prior Option to extend or renew this Lease has been so exercised. 26.4. EFFECT OF DEFAULT ON OPTIONS. Tenant shall have no right to exercise an Option (i) during the time commencing from the date Landlord gives to Tenant a notice of default pursuant to Section 13.1 and continuing until the noncompliance alleged in said notice of default is cured, or (ii) if Tenant is in default of any of the terms, covenants or conditions of this Lease. The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Tenant's inability to exercise an Option because of the provisions of this Section 26.4. 26.5. LIMITATIONS ON OPTIONS. Notwithstanding anything to the contrary contained in any rider or addendum to this Lease, any options, rights of first refusal or rights of first offer granted hereunder shall be subject and secondary to Landlord's right to first offer and lease any such space to any tenant who is then occupying or leasing such space at the time the space becomes available for leasing and shall be subject and subordinated to any other options, rights of first refusal or rights of first offer previously given to any other person or entity, PROVIDED, HOWEVER, THAT, FROM AND AFTER THE DATE THIS LEASE IS FULLY EXECUTED BY LANDLORD AND TENANT, NO NEW OPTIONS SHALL BE GRANTED WITH RESPECT TO THE EXPANSION SPACE PRIOR TO THE EXPIRATION OF THE EXPANSION SPACE OPTION, AS SUCH TERMS ARE DEFINED IN THE ADDENDUM ATTACHED HERETO. SEE ADDENDUM PARAGRAPHS 15, 16, 17, 18 AND 19 27. LANDLORD RESERVATIONS. Landlord shall have the right: (a) to change the name and , IF REQUIRED BY LAW, address of the Project or Building upon not less than ninety (90) days prior written notice; (b) EXCLUDING TENANT'S SIGNS, to, at LANDLORD'S expense AS A PART OF OPERATING EXPENSES, provide and install Building standard graphics on or near the door of the Premises and such portions of the Common Areas as Landlord shall determine, in Landlord's sole discretion; (c) to permit any tenant the exclusive right to conduct any business as long as such exclusive right does not conflict with any rights expressly given herein; and (d) EXCEPT AS OTHERWISE PROVIDED PURSUANT TO ADDENDUM PARAGRAPH 20 to place signs, notices or displays upon the roof, interior, exterior or Common Areas of the Project. Tenant shall not use a representation (photographic or otherwise) of the Building or the Project or their name(s) in connection with Tenant's business or suffer or permit anyone, except in an emergency, to go upon the roof of the Building. Landlord reserves the right to use the exterior walls of the Premises, and the area beneath, adjacent to and above the Premises together with the right to install, use, maintain and replace equipment, machinery, pipes, conduits and wiring through the Premises, which serve other parts of the Project provided that Landlord's use does not unreasonably interfere with Tenant's use of the Premises. 28 28. CHANGES TO PROJECT. PROVIDED THAT TENANT'S USE OF AND ACCESS TO THE PREMISES ARE NOT PERMANENTLY MATERIALLY ADVERSELY AFFECTED THEREBY, Landlord shall have the right, in Landlord's sole discretion, from time to time, to make changes to the size, shape, location, number and extent of the improvements comprising the Project (hereinafter referred to as "Changes") including, but not limited to, the Project interior and exterior, the Common Areas, elevators, escalators, restrooms, HVAC, electrical systems, communication systems, fire protection and detection systems, plumbing systems, security systems, parking control systems, driveways, entrances, parking spaces, parking areas and landscaped areas PROVIDED HOWEVER THAT THE SIZE OF THE COMMON AREAS AND THE SCOPE OF SERVICES OFFERED TO TENANT AS OF THE DATE THIS LEASE IS FULLY EXECUTED BY LANDLORD AND TENANT SHALL NOT BE PERMANENTLY MATERIALLY ADVERSELY DIMINISHED AS A RESULT OF SUCH CHANGES. In connection with the Changes, Landlord may, among other things, erect scaffolding or other necessary structures at the Project, limit or eliminate access to portions of the Project, including portions of the Common Areas, or perform work in the Building, which work may create noise, dust or leave debris in the Building. Tenant hereby agrees that such Changes and Landlord's actions in connection with such Changes shall in no way constitute a constructive eviction of Tenant or entitle Tenant to any abatement of rent. Landlord shall have no responsibility or for any reason be liable to Tenant for any direct or indirect injury to or interference with Tenant's business arising from the Changes, nor shall Tenant be entitled to any compensation or damages from Landlord for any inconvenience or annoyance occasioned by such Changes or Landlord's actions in connection with such Changes. 29. SUBSTITUTION OF OTHER PREMISES. 29 30. HOLDING OVER. If Tenant remains in possession of the Premises or any part thereof after the expiration or earlier termination of the term hereof , as it may be extended hereunder, with Landlord's consent, such occupancy shall be a tenancy from month to month upon all the terms and conditions of this Lease pertaining to the obligations of Tenant, except that during the first two (2) months following the termination of the Lease, Base Rent shall be at one hundred twenty-five (125%) of the Base Rent payable immediately preceding the termination date of this Lease and thereafter the Base Rent payable shall be one hundred fifty percent (150%) of the Base Rent payable immediately preceding the termination date of this Lease, and all Options, if any, shall be deemed terminated and be of no further effect. If Tenant remains in possession of the Premises or any part thereof after the expiration of the Term hereof without Landlord's consent, Tenant shall, at Landlord's option, be treated as a tenant at sufferance or a trespasser. Nothing contained herein shall be construed to constitute Landlord's consent to Tenant holding over at the expiration or earlier termination of the Lease Term. Tenant hereby agrees to indemnify, hold harmless and defend Landlord from any cost, loss, claim or liability (including attorneys' fees) Landlord may incur as a result of Tenant's failure to surrender possession of the Premises to Landlord upon the termination of this Lease. 31. LANDLORD'S ACCESS. 31.1. ACCESS. Landlord and Landlord's agents and employees shall have the right to enter the Premises at reasonable times upon twenty-four (24) hours' advance notice, except in the event of an emergency, where no notice shall be required for the purpose of inspecting the Premises, performing any services required of Landlord, showing the Premises to prospective purchasers, lenders, or tenants, undertaking safety measures and making alterations, repairs, improvements or additions to the Premises or to the Project. In the event of an emergency, Landlord may gain access to the Premises by any reasonable means, and Landlord shall not be liable to Tenant for damage to the Premises or to Tenant's property resulting from such access. Landlord may at any time place on or about the Building for sale or for lease signs and Landlord may at any time during the last one hundred twenty (120) days of the Term hereof place on or about the Premises for lease signs, PROVIDED HOWEVER, THAT THE SIZE AND PLACEMENT OF SUCH SIGNS SHALL NOT UNREASONABLY INTERFERE WITH TENANT'S SIGNAGE. 31.2. KEYS. Landlord shall have the right to retain keys to the Premises and to unlock all doors at the Premises, and in the case of emergency to enter the Premises by any reasonably appropriate means, and any such entry shall not be deemed a forcible or unlawful entry or detainer of the Premises or an eviction. Tenant waives any claims for damages or injuries or interference with Tenant's property or business in connection therewith. Tenant shall provide Landlord with one key for each lock in the Premises. 32. SECURITY MEASURES. Tenant hereby acknowledges that Landlord shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Project, and Landlord shall have no liability to Tenant due to its failure to provide such services. Nothing herein contained shall prevent Landlord, at Landlord's sole option, from implementing security measures for the Project or any part thereof, in which event Tenant shall participate in such security measures and the cost thereof shall be included within the definition of Operating Expenses. Landlord shall have the right, but not the obligation, to require all persons entering or leaving the Project 30 to identify themselves to a security guard and to reasonably establish that such person should be permitted access to the Project. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS SECTION 32, LANDLORD SHALL, THROUGHOUT THE TERM HEREOF AND ANY EXTENSIONS, PROVIDE SECURITY MEASURES COMMENSURATE WITH THOSE SERVICES BEING PROVIDED AT THE TIME OF EXECUTION OF THIS LEASE. 33. EASEMENTS. Landlord reserves to itself the right, from time to time, to grant such easements, rights and dedications that Landlord deems necessary or desirable, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Tenant. Tenant shall sign any of the aforementioned documents within ten (10) BUSINESS days after Landlord's request and Tenant's failure to do so shall constitute a material default by Tenant. The obstruction of Tenant's view, air, or light by any structure erected in the vicinity of the Project, whether by Landlord or third parties, shall in no way affect this Lease or impose any liability upon Landlord. 34. TRANSPORTATION MANAGEMENT. Tenant shall fully comply with all present or future programs implemented or required by any governmental or quasi- governmental entity or Landlord to manage parking, transportation, air pollution, or traffic in and around the Project or the metropolitan area in which the Project is located. 35. SEVERABILITY. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof . 36. TIME OF ESSENCE. Time is of the essence with respect to each of the obligations to be performed by Tenant AND LANDLORD under this Lease. 37. DEFINITION OF ADDITIONAL RENT. All monetary obligations of Tenant to Landlord under the terms of this Lease, including, but not limited to, Base Rent, Tenant's Share of Operating Expenses, parking charges and charges for after hours HVAC shall be deemed to be rent. 38. INCORPORATION OF PRIOR AGREEMENTS. This Lease and the attachments listed in Section 1.16 contain all agreements of the parties with respect to the lease of the Premises and any other matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. Except as otherwise stated in this Lease, Tenant hereby acknowledges that no real estate broker nor Landlord or any employee or agents of any of said persons has made any oral or written warranties or representations to Tenant concerning the condition or use by Tenant of the Premises or the Project or concerning any other matter addressed by this Lease. 39. AMENDMENTS. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. 40. NOTICES. Any notice required or permitted to be given hereunder shall be in writing and may be given by certified mail, return receipt requested, personal delivery, Federal Express or other delivery service. If notice is given by certified mail, return receipt requested, notice shall be deemed given FIVE (5) days after the notice is deposited with the U.S. Mail, postage prepaid, addressed to Tenant or to Landlord at AND THE REPRESENTATIVE the address set forth in Section 1.17. If notice is given by personal delivery, Federal Express or other delivery service, notice shall be deemed given on the date the notice is actually received by Landlord or Tenant. Either party may by WRITTEN notice to the other specify a different address for notice purposes. Notwithstanding the address set forth 31 in Section 1.17 for Tenant, upon Tenant's taking possession of the Premises, the Premises shall constitute Tenant's address for notice purposes. A copy of all notices required or permitted to be given to Landlord hereunder shall be concurrently transmitted to such party or parties at such addresses as Landlord may from time to time designate by WRITTEN notice to Tenant. 41. WAIVERS. No waiver by EITHER PARTY of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by THE OTHER PARTY of the same or any other provision. Landlord's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Landlord's consent to or approval of any subsequent act by Tenant. The acceptance of rent hereunder by Landlord shall not be a waiver of any preceding breach by Tenant of any provision hereof, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. No acceptance by Landlord of partial payment of any sum due from Tenant shall be deemed a waiver by Landlord of its right to receive the full amount due, nor shall any endorsement or statement on any check or accompanying letter from Tenant be deemed an accord and satisfaction. 42. COVENANTS. This Lease shall be construed as though the covenants contained herein are independent and not dependent and Tenant hereby waives the benefit of any statute to the contrary. 43. BINDING EFFECT; CHOICE OF LAW. Subject to any provision hereof restricting assignment or subletting by Tenant, this Lease shall bind the parties, their heirs, personal representatives, successors and assigns. This Lease shall be governed by the laws of the state OF MARYLAND and any litigation concerning this Lease between the parties hereto shall be initiated in the county OF MONTGOMERY. 44. ATTORNEYS' FEES. If Landlord or Tenant brings an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, or appeal thereon, shall be entitled to its reasonable attorneys' fees and court costs to be paid by the losing party as fixed by the court in the same or separate suit, and whether or not such action is pursued to decision or judgment. The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees and court costs reasonably incurred in good faith. Landlord shall be entitled to reasonable attorneys' fees and all other costs and expenses incurred in the preparation and service of notices of default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such default. 45. AUCTIONS. Tenant shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises or the Common Areas. The holding of any auction on the Premises or Common Areas in violation of this Section 45 shall constitute a material default hereunder. 46. SIGNS. Tenant shall not place any sign upon the Premises (including on the inside or the outside of the doors or windows of the Premises) or the Project without Landlord's prior written consent, which may be given or withheld in Landlord's sole 32 discretion. Landlord shall have the right to place any sign it deems appropriate on any portion of the Project except the interior of the Premises. SEE ADDENDUM PARAGRAPH 20 47. MERGER. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, or a termination by Landlord, shall not result in the merger of Landlord's and Tenant's estates, and shall, at the option of Landlord, terminate all or any existing subtenancies or may, at the option of Landlord, operate as an assignment to Landlord of any or all of such subtenancies. 48. QUIET POSSESSION. Provided Tenant is not in default hereunder, Tenant shall have quiet possession of the Premises for the entire Term hereof subject to all of the provisions of this Lease. 49. AUTHORITY. If EITHER PARTY is a corporation, trust, or general or limited partnership, THAT PARTY, and each individual executing this Lease on behalf of such entity, represents and warrants that such individual is duly authorized to execute and deliver this Lease on behalf of said entity, that said entity is duly authorized to enter into this Lease, and that this Lease is enforceable against said entity in accordance with its terms. If EITHER PARTY is a corporation, trust or partnership, THAT PARTY shall deliver to THE OTHER upon demand evidence of such authority satisfactory to Landlord THE REQUESTING PARTY. 50. CONFLICT. Except as otherwise provided herein to the contrary, any conflict between the printed provisions, Exhibits, Addenda or Riders of this Lease and the typewritten or handwritten provisions, if any, shall be controlled by the typewritten or handwritten provisions. 51. MULTIPLE PARTIES. If more than one person or entity is named as Tenant herein, the obligations of Tenant shall be the joint and several responsibility of all persons or entities named herein as Tenant. Service of a notice in accordance with Section 40 on one Tenant shall be deemed service of notice on all Tenants. 52. INTERPRETATION. This Lease shall be interpreted as if it was prepared by both parties and ambiguities shall not be resolved in favor of Tenant because all or a portion of this Lease was prepared by Landlord. The captions contained in this Lease are for convenience only and shall not be deemed to limit or alter the meaning of this Lease. As used in this Lease the words tenant and landlord include the plural as well as the singular. Words used in the neuter gender include the masculine and feminine gender. 53. PROHIBITION AGAINST RECORDING. Neither this Lease, nor any memorandum, affidavit or other writing with respect thereto, shall be recorded by Tenant or by anyone acting through, under or on behalf of Tenant. Landlord shall have the right to record a memorandum of this Lease, and Tenant shall execute, acknowledge and deliver to Landlord for recording any memorandum prepared by Landlord. 54. RELATIONSHIP OF PARTIES. Nothing contained in this Lease shall be deemed or construed by the parties hereto or by any third party to create the relationship of principal and agent, partnership, joint venturer or any association between Landlord and Tenant. 55. RULES AND REGULATIONS. Tenant agrees to abide by and conform to the Rules and to USE REASONABLE EFFORTS TO cause its employees, suppliers, customers and invitees to so abide and conform. Landlord shall have the right, from time to time, to modify, amend and enforce the Rules IN A COMMERCIALLY REASONABLE MANNER. Landlord shall not be responsible to Tenant for the failure of other persons 33 including, but not limited to, other tenants, their agents, employees and invitees to comply with the Rules. 56. RIGHT TO LEASE. Landlord reserves the absolute right to effect such other tenancies in the Project as Landlord in its sole discretion shall determine, and Tenant is not relying on any representation that any specific tenant or number of tenants will occupy the Project. 57. SECURITY INTEREST. 58. SECURITY FOR PERFORMANCE OF TENANT'S OBLIGATIONS. 59. FINANCIAL INFORMATION. From time to time, at Landlord's request, Tenant shall cause the following financial information to be delivered to Landlord, at Tenant's sole cost and expense, upon not less than ten (10) days' advance written notice from Landlord: (a) a current financial statement for Tenant and Tenant's financial statements for the previous two accounting years, (b) a current financial statement for any guarantor(s) of this Lease and the guarantor's financial statements for the previous two accounting years and (c) such other financial information pertaining to Tenant or any guarantor as Landlord or any lender or purchaser of Landlord may reasonably request. All financial statements shall be prepared in accordance with generally accepted accounting principals consistently applied and, if such is the normal practice of Tenant, shall be audited by an independent certified public accountant. NOTWITHSTANDING THE FOREGOING, SO LONG AS TENANT IS A PUBLICLY TRADED COMPANY WITH PUBLICLY AVAILABLE FINANCIAL INFORMATION, TENANT SHALL NOT BE REQUIRED TO SUBMIT ADDITIONAL FINANCIAL STATEMENTS. 60. ATTACHMENTS. The items listed in Section 1.16 are a part of this Lease and are incorporated herein by this reference. SEE ADDENDUM PARAGRAPH 21 34 61. WAIVER OF JURY TRIAL. LANDLORD AND TENANT HEREBY WAIVE THEIR RESPECTIVE RIGHT TO TRIAL BY JURY OF ANY CAUSE OF ACTION, CLAIM, COUNTERCLAIM OR CROSS- COMPLAINT IN ANY ACTION, PROCEEDING AND/OR HEARING BROUGHT BY EITHER LANDLORD AGAINST TENANT OR TENANT AGAINST LANDLORD ON ANY MATTER WHATSOEVER ARISING OUT OF, OR IN ANY WAY CONNECTED WITH, THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES, OR ANY CLAIM OF INJURY OR DAMAGE, OR THE ENFORCEMENT OF ANY REMEDY UNDER ANY LAW, STATUTE, OR REGULATION, EMERGENCY OR OTHERWISE, NOW OR HEREAFTER IN EFFECT. LANDLORD AND TENANT ACKNOWLEDGE THAT THEY HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LANDLORD AND TENANT WITH RESPECT TO THE PREMISES. TENANT ACKNOWLEDGES THAT IT HAS BEEN GIVEN THE OPPORTUNITY TO HAVE THIS LEASE REVIEWED BY ITS LEGAL COUNSEL PRIOR TO ITS EXECUTION. PREPARATION OF THIS LEASE BY LANDLORD OR LANDLORD'S AGENT AND SUBMISSION OF SAME TO TENANT SHALL NOT BE DEEMED AN OFFER BY LANDLORD TO LEASE THE PREMISES TO TENANT OR THE GRANT OF AN OPTION TO TENANT TO LEASE THE PREMISES. THIS LEASE SHALL BECOME BINDING UPON LANDLORD AND TENANT ONLY WHEN FULLY EXECUTED BY BOTH PARTIES AND WHEN LANDLORD HAS DELIVERED A FULLY EXECUTED ORIGINAL OF THIS LEASE TO TENANT. LANDLORD TENANT THE REALTY ASSOCIATES FUND III, L.P., a AMISYS MANAGED CARE SYSTEMS, INC. Delaware limited partnership, doing a Delaware corporation business in Maryland as The Realty Associates Fund III, Limited Partnership By: Realty Associates Fund III GP Limited Partnership, a Delaware limited partnership, Its General Partner By: /s/ ROBERT I. SULLIVAN ------------------------------ ROBERT I. SULLIVAN By: Realty Fund III GP, Inc., a ------------------------------ Massachusetts corporation, (print name) Its General Partner Its: CHIEF FINANCIAL OFFICER ------------------------------ By: Margaret A. Stewart (print title) ------------------------- Its: Vice President ------------------------- 35 ADDENDUM THIS ADDENDUM (the "Addendum") is attached to the Lease dated as of December 4, 1996, by and between THE REALTY ASSOCIATES FUND III, L.P., a Delaware limited partnership, doing business in Maryland as The Realty Associates Fund III, Limited Partnership ("Landlord") and AMISYS MANAGED CARE SYSTEMS, INC., a Delaware corporation ("Tenant") and incorporated herein by reference thereto. To the extent that there are any conflicts between the provisions of the Lease and the provisions of this Addendum, the provisions of this Addendum shall supersede the conflicting provisions of the Lease. 1. TERM AND COMMENCEMENT DATE. -------------------------- a. Notwithstanding anything to the contrary contained in Section 3.1 of the Lease, the Commencement Date for Premises A shall be January 1, 1997. b. Notwithstanding anything to the contrary contained in Sections 1.6, 1.7 or 3.1 of the Lease, the Commencement Dates set forth in Section 1.7 of the Lease with respect to Premises B, Premises C and Premises D are estimated Commencement Dates. Landlord shall use reasonable efforts to deliver Premises B to Tenant on or before January 1, 1997 for purposes of Tenant constructing the Improvements to Premises B, as more particularly set forth in Schedule 1 ---------- attached hereto and made a part hereof. Landlord shall use reasonable efforts to deliver Premises C to Tenant on or before April 1, 1997 for purposes of Tenant constructing the Improvements to Premises C in accordance with Schedule 1. ---------- Landlord shall use reasonable efforts to deliver Premises D to Tenant on or before November 30, 1998 for purposes of Tenant constructing the Improvements to Premises D in accordance with Schedule 1. The actual Commencement Date for each ---------- of Premises B, Premises C and Premises D shall be the earlier of: (i) three (3) months following delivery of possession of Premises B, Premises C and Premises D, as applicable, to Tenant, or (ii) substantial completion of the Improvements to Premises B, Premises C and Premises D, respectively. The Term of the Lease applicable to Premises A, Premises B, Premises C and Premises D shall be computed from January 1, 1997, and accordingly the expiration date of the Lease shall be December 31, 2006, unless sooner terminated pursuant to the terms and conditions of the Lease. 2. DELAY IN POSSESSION. Section 3.2 of the Lease is hereby deleted in ------------------- its entirety and the following Section 3.2 is substituted in lieu thereof: "(a) Notwithstanding the estimated Commencement Dates specified in Section 1.7, if for any reason Landlord cannot deliver possession of Premises B, Premises C and/or Premises D on its respective estimated Commencement Date, Landlord shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Tenant hereunder or extend the Term hereof; provided, however, in such a case, Tenant shall not be obligated to pay rent or perform any other obligation of Tenant under this Lease, except as may be otherwise provided in this Lease, until the respective Commencement Dates set forth in Addendum Paragraph 1. Landlord agrees to use best efforts to deliver the applicable Premises to Tenant within one hundred twenty (120) days following the estimated delivery dates specified in Addendum Paragraph 1. Such efforts shall include evicting the existing tenants if the existing tenants remain in a holdover of their respective leases. If Landlord is unsuccessful in delivering the applicable Premises to Tenant within the aforesaid one hundred twenty (120) days, Landlord shall have an additional sixty (60) days to deliver the applicable Premises to Tenant provided that during said sixty (60) day period Landlord shall pay to Tenant, to the extent Landlord receives holdover rent from any such tenant, fifty percent (50%) of said holdover rent, after deducting all of Landlord's legal expenses incurred in connection with eviction proceedings (the "Net Holdover Rent"). If Landlord shall not have delivered possession of the applicable Premises within said sixty (60) days, Tenant may, at Tenant's option, by notice in writing to Landlord within thirty (30) days after the Add-1 expiration of the sixty (60) day period but prior to delivery of possession of the applicable Premises by Landlord to Tenant, terminate the Lease with respect to that portion of the Premises not so delivered to Tenant. If Tenant terminates the Lease as provided for in the preceding sentence, the parties shall be discharged from all obligations under the Lease with respect to that portion of the Premises not so delivered to Tenant; and provided further that if such written notice by Tenant is not received by Landlord within said thirty (30) day period, Tenant shall not have the right to terminate the Lease with respect to that portion of the Premises, and Landlord shall continue to pay Tenant the Net Holdover Rent until such time as Landlord delivers the applicable Premises to Tenant. (b) If Landlord is unable to deliver possession of the applicable Premises to Tenant on the delivery date specified in Addendum Paragraph 1, due to a "Force Majeure Event", the respective delivery date shall be extended by the period of the delay caused by the Force Majeure Event. A Force Majeure Event shall mean fire, earthquake, weather delays or other acts of God, strikes, boycotts, war, riot, insurrection, embargoes, shortages of equipment, labor or materials, delays in issuance of governmental permits or approvals, or any other cause beyond the reasonable control of Landlord. The provisions of Section 9.1 of the Lease regarding Landlord or Tenant's options to terminate the Lease shall apply to a Force Majeure Event. (c) Tenant acknowledges that the tenant who currently leases Premises D has an option to renew its lease and accordingly Tenant's right to lease Premises D is contingent on the existing tenant not exercising its option to renew. In the event the existing tenant of Premises D exercises its option to renew, Tenant shall no longer have the right to lease Premises D, and Landlord shall have no obligation to lease Premises D to Tenant. 3. OPERATING EXPENSES AND REAL ESTATE TAXES. Notwithstanding anything to ---------------------------------------- the contrary in the definition of "Real Estate Taxes and Operating Expenses," Real Estate Taxes and Operating Expenses shall not include the following: (a) Costs of repairs, restoration, replacements or other work occasioned by (1) fire, windstorm or other casualty of an insurable nature (whether such destruction be total or partial) to the extent that Landlord is reimbursed by insurance, (2) the gross negligence or intentional tort of Landlord, or any subsidiary or affiliate of Landlord, or (3) the act of any other tenant in the Building, or any other tenant's agents, employees, licensees or invitees to the extent Landlord has the right to recover the applicable cost from such person; (b) Leasing commissions, attorneys' fees, costs, disbursements and other expenses incurred in connection with negotiations for leases with tenants, other occupants, or prospective tenants or other occupants of the Building, or similar costs incurred in connection with disputes with tenants, other occupants, or prospective tenants; (c) Allowances, concessions and other costs and expenses incurred in completing, fixturing, furnishing, renovating or otherwise improving, decorating or redecorating space for tenants (including Tenant), prospective tenants or other occupants and prospective occupants of the Building, or vacant, leasable space in the Building; (d) Costs specifically billed to and paid by specific tenants; (e) Payments of principal and interest or other finance charges made on any debt and rental payments made under any ground or underlying lease or leases; Add-2 (f) Costs incurred in connection with the sales, financing, refinancing, mortgaging, selling or change of ownership of the Building, including brokerage commissions, attorneys' and accountants' fees, closing costs, title insurance premiums, transfer taxes as a result of such action, interest charges; (g) Costs, fines, interest, penalties, legal fees or costs of litigation incurred due to the late payment of taxes, utility bills and other costs incurred by Landlord's failure to make such payments when due; (h) Costs incurred by Landlord for trustee's fees, partnership organizational expenses and accounting fees except accounting fees relating solely to the ownership and operation of the Building; (i) Depreciation and capital improvement costs, including rental of same, with respect to the Building, the Project or any equipment, machinery, fixtures or improvements therein, except for the cost of improvements or equipment which are capital in nature and which are installed for the purpose of either (1) reducing Operating Expenses, or (2) of complying with any laws, ordinances, rules and regulations first taking effect after the Premises A Commencement Date (and all such permitted capital costs shall be amortized on a straight-line basis over the useful life of the capital investment items, such useful life being determined in accordance with real estate industry standards, with only the annual amortized portion being included in Operating Expenses for any Comparison Year); (j) Landlord's general corporate overhead and general and administrative expenses; (k) Landlord's net income and franchise taxes; (l) All amounts which would otherwise be included in operating expenses which are paid to any affiliate or subsidiaries of Landlord, or any representative, employee or agent of the same, to the extent the costs of such services exceed the competitive rates for similar services of comparable quality rendered by persons or entities of similar skill, competence and experience; (m) Costs or expenses of utilities directly metered to tenants of the Building and payable separately by such tenants; (n) Increased insurance premiums caused by Landlord's or any other tenant's hazardous acts; (o) Advertising and promotional costs associated with the leasing of the Building; (p) Costs incurred to correct violations by Landlord of any law, rule, order or regulation which was in effect as of the Premises A Commencement Date; (q) Costs incurred for any items to the extent of Landlord's recovery under a manufacturer's, materialman's, vendor's or contractor's warranty; (r) Compensation paid to officers of Landlord or officers of the management agent who are not involved in the operation, management, maintenance or repair of the Building; and (s) Management fees in excess of 4% of gross revenues collected. Add-3 4. RIGHT TO AUDIT. Section 4.2(f) of the Lease is hereby modified by -------------- adding the following at the end of such Section 4.2(f): "If Tenant disputes the amount of actual Operating Expenses set forth in Landlord's statement (the "Statement"), Tenant shall have the right, at Tenant's expense, not later than ninety (90) days following receipt of such Statement, to inspect Landlord's books and records which directly relate to the Operating Expenses for the calendar year which is the subject of the Statement. The audit shall take place at the offices of Landlord where its books and records are located at a mutually convenient time during Landlord's regular business hours provided, however, that Tenant's right to audit shall be limited to the ninety (90) day period following the date that Landlord gives Tenant such Statement. If Tenant disputes Landlord's calculations or determination (Tenant's notice must be given within ten (10) days after the ninety (90) day period referred to herein), such dispute shall be resolved by a public accounting firm reasonably acceptable to each party. If such audit determines that an error has been made in Landlord's determination and calculation which results in Tenant having paid an amount in excess of the actual Operating Expenses by ten percent (10%) or more, Landlord shall pay for the fees and expenses of such firm, otherwise, Tenant shall pay for such fees and expenses. Upon final resolution of the matter, Tenant shall pay any shortfall to Landlord within thirty (30) days after the audit, or in the alternative, if the audit determined that Tenant made an overpayment to Landlord on account of Operating Expenses, Landlord shall reimburse Tenant for such overpayment within thirty (30) days after the audit." 5. OPERATING EXPENSES. Section 4.2 of the Lease is hereby modified by ------------------ adding the following new subsection (h) therein: "(h) Notwithstanding anything to the contrary in this Section 4.2, Tenant shall not be obligated to pay to Landlord its share of increases in Operating Expenses to the extent that such increases exceed six percent (6%) of the previous calendar year's Operating Expenses provided, however, that there shall be no limitation on the payment by Tenant of increases in Operating Expenses that cannot be controlled by Landlord (e.g., utility costs, insurance ---- costs, real property tax increases and any other costs that are beyond Landlord's reasonable control)." 6. BASE RENT INCREASE. Section 4.3 of the Lease is hereby deleted in its ------------------- entirety and the following Section 4.3 is substituted in its place: "The Base Rent set forth in Section 1.8 hereinabove shall be increased by two percent (2%) per annum on each anniversary of the Commencement Date for Premises A, B, C and D, respectively, (unless the applicable Commencement Date is other than the first day of a month, in which event the Base Rent shall be adjusted annually on the first day of the calendar month following the applicable Commencement Date) during the Term of the Lease as follows: PREMISES A (46,386 RENTABLE SQUARE FEET): ----------------------------------------- Lease Period Annual Base Rent Monthly Base Rent 1/1/97-12/31/97 $811,755.00 $ 67,646.25 1/1/98-12/31/98 $827,990.16 $ 68,999.18 1/1/99-12/31/99 $844,549.92 $ 70,379.16 1/1/00-12/31/00 $861,440.88 $ 71,786.74 1/1/01-12/31/01 $878,669.64 $ 73,222.47 1/1/02-12/31/02 $896,243.04 $ 74,686.92 1/1/03-12/31/03 $914,167.92 $ 76,180.66 1/1/04-12/31-04 $932,451.24 $ 77,704.27 1/1/05-12/31/05 $951,100.32 $ 79,258.36 1/1/06-12/31/06 $970,122.36 $ 80,843.53 Add-4 PREMISES B (11,081 RENTABLE SQUARE FEET): ----------------------------------------- Lease Period in Months Annual Base Rent Monthly Base Rent 1-12 $193,917.48 $ 16,159.79 13-24 $197,795.88 $ 16,482.99 25-36 $201,751.80 $ 16,812.65 37-48 $205,786.80 $ 17,148.90 49-60 $209,902.56 $ 17,491.88 61-72 $214,100.64 $ 17,841.72 73-84 $218,382.60 $ 18,198.55 85-96 $222,750.24 $ 18,562.52 97-108 $227,205.24 $ 18,933.77 109-End of Term $231,749.40 $ 19,312.45 PREMISES C (16,527 RENTABLE SQUARE FEET): ----------------------------------------- Lease Period in Months Annual Base Rent Monthly Base Rent 1-12 $289,222.56 $ 24,101.88 13-24 $295,007.04 $ 24,583.92 25-36 $300,907.20 $ 25,075.60 37-48 $306,925.32 $ 25,577.11 49-60 $313,063.80 $ 26,088.65 61-72 $319,325.04 $ 26,610.42 73-84 $325,711.56 $ 27,142.63 85-96 $332,225.76 $ 27,685.48 97-108 $338,870.28 $ 28,239.19 109-End of Term $345,647.64 $ 28,803.97 PREMISES D (11,838 RENTABLE SQUARE FEET): ----------------------------------------- Lease Period in Months Annual Base Rent Monthly Base Rent 1-12 $207,165.00 $ 17,263.75 13-24 $211,308.36 $ 17,609.03 25-36 $215,534.52 $ 17,961.21 37-48 $219,845.16 $ 18,320.43 49-60 $224,242.08 $ 18,686.84 61-72 $228,726.96 $ 19,060.58 73-84 $233,301.48 $ 19,441.79 85-96 $237,967.56 $ 19,830.63 97-108 $242,726.88 $ 20,227.24 109-End of Term $247,581.36 $ 20,631.78" 7. SECURITY DEPOSIT. Section 5 of the Lease is hereby amended by adding ---------------- the following at the end of Section 5: "(a) The security deposit shall be in the form of cash or, at Tenant's option, an irrevocable letter of credit (the "Security Deposit L/C"). If the security deposit is in the form of letter of credit, the Security Deposit L/C shall be delivered to Landlord at Tenant's sole cost and expense. The Security Deposit L/C shall be issued by and drawn on a bank reasonably acceptable to Landlord, in Landlord's sole discretion, and shall name Landlord as Beneficiary. If the maturity date of the Security Deposit L/C is prior to the end of the Term of the Lease, Tenant shall renew the Security Deposit L/C as often as is necessary with the same bank or financial institution (or a similar bank or financial institution reasonably acceptable to Landlord) and upon the same terms and conditions, not less than thirty (30) days prior to the purported expiration date of the Security Deposit L/C. In the event that Tenant fails to timely renew the Security Deposit L/C as aforesaid, Landlord shall be entitled to draw against the entire amount of the Security Deposit L/C. The Security Deposit L/C shall be assignable by Landlord Add-5 and upon such assignment to any party assuming in writing the lessor interest in this Lease, Landlord shall be relieved from all liability to Tenant therefor. "(b) Upon the occurrence of any default by Tenant in the payment of Base Rent (and the expiration of any applicable notice or cure periods) or upon the occurrence of the events described in Section 13.1 of the Lease (and following any applicable notice or cure periods) or in the event that Landlord terminates this Lease in accordance with the terms hereof following a default by Tenant, Landlord shall have the right to draw the entire amount of the Security Deposit L/C. In the event that Tenant defaults (after the expiration of any applicable notice or cure periods) in making any money payment required to be made by Tenant under the terms of this Lease other than the payment of Base Rent, then Landlord shall be entitled to draw upon so much of the Security Deposit L/C as equals the defaulted payment(s), plus any interest or other charges due thereon in accordance with this Lease, plus an additional ten percent (10%) of such total. If Landlord elects to make a partial draw upon the Security Deposit L/C, Tenant shall promptly restore the Security Deposit L/C to its original amount. Landlord's election to make a partial draw upon the Security Deposit L/C shall in no event prejudice or waive Landlord's right to terminate this Lease if permitted under applicable provisions of this Lease, nor shall such election prejudice or waive any other remedy of Landlord reserved under the terms of this Lease, including the right to draw the entire amount of the Security Deposit L/C, if applicable. The Security Deposit L/C shall be available for payment against the presentation of a sight draft by the Landlord (with simultaneous notice to Tenant) together with a certificate from Landlord that Tenant is in default of its obligations hereunder beyond expiration of any applicable notice and cure periods and that Landlord is entitled, by the terms of this Lease, to draw upon the Security Deposit L/C. The proceeds of the Security Deposit L/C, if drawn by Landlord pursuant to the terms hereof, shall be held by Landlord and applied to reduce any amount owed by Tenant to Landlord. Interest shall be payable in accordance with Section 5 of the Lease for any Security Deposit L/C proceeds held on account. "(c) In the event that (1) Landlord draws the full amount of the Security Deposit L/C as a result of a default by Tenant, (2) this Lease is not terminated by Landlord as a result of such default, (3) such default is fully cured by Tenant, and (4) there is no outstanding uncured default by Tenant, then the balance of the sums drawn (after the payment of any sums related to the curing of any defaults) shall be applied first to obtain a replacement letter of credit as security for Tenant's performance hereunder, and the remaining balance, if any, will be refunded to Tenant. Upon the termination of this Lease and the payment in full to Landlord of all damages, costs and expenses to which Landlord is entitled, the balance of any funds drawn from the Security Deposit L/C after satisfying such obligations in full shall be refunded to Tenant. "(d) To the extent that the Security Deposit L/C is either lost or the issuing bank will not honor the Security Deposit L/C, Tenet personally guarantees the proceeds of the Security Deposit L/C and will immediately remit to Landlord the amount of the Security Deposit in cash to be held in accordance with this Section 5 of the Lease." 8. CONDITION OF PREMISES. Section 6.3 of the Lease is hereby amended by --------------------- adding the following to the end of Section 6.3: "Landlord warrants to Tenant that, to the best of Landlord's knowledge, the Building, in the state existing on the date this Lease is executed by Landlord and Tenant, but without regard to alterations or improvements to be made by Tenant or the use for which Tenant will occupy the Premises, does not violate any covenants or restrictions of record, or any applicable building code, regulation or ordinance in effect on such date (collectively, "Law(s)"). To the extent that the Landlord receives any notice from a governmental entity that the Building is not in compliance with the Americans with Disabilities Act ("ADA") or any other Law and the Landlord is obligated pursuant to a final determination to undertake action in order to comply with ADA or any other Law, then in such event Landlord agrees to undertake such Add-6 remedial action at Landlord's sole cost and expense. To the extent that such notice requires action with regard to Tenant's particular use of the Premises, Tenant shall be obligated to undertake such action at Tenant's sole cost and expense." 9. ALTERATIONS AND ADDITIONS. Section 7.3(a) of the Lease is hereby ------------------------- modified by inserting the following at the end of such Section 7.3(a): "Notwithstanding anything to the contrary in Section 7.3(a), Tenant shall have the right to make cosmetic, non-structural Alterations to the Premises without obtaining Landlord's prior written consent, provided that Tenant provides Landlord with prior written notice of its intention to make such Alterations together with the plans and specifications for the same. To the extent Landlord's consent is required pursuant to subsection (a) herein, Landlord agrees to notify Tenant concurrently with Landlord's decision concerning such Alteration whether Landlord will require Tenant to remove such Alteration at the of the Term. For purposes of the Lease, it shall be deemed reasonable for Landlord to require Tenant to perform Alterations during non-business hours if such Alterations will create unreasonable noise, noxious fumes or otherwise interfere with the quiet enjoyment of the other tenants in the Building." 10. UTILITIES. --------- a. Notwithstanding anything to the contrary contained in subsection 11.3 of the Lease, payments by Tenant to Landlord for after hours HVAC shall be equal to Landlord's actual out-of-pocket costs plus a ten percent (10%) administrative fee. b. Notwithstanding anything contained in Section 11 to the contrary, if any interruption of utilities or services shall continue for more than three (3) consecutive business days and shall render all or any portion of the Premises unusable for the normal conduct of Tenant's business, and if Tenant does not in fact use or occupy such portion of the Premises, then all Base Rent and additional rent payable hereunder with respect to such portion of the Premises which Tenant does not occupy shall be abated from and after such third (3rd) business day until full use of such portion of the Premises is restored to Tenant. 11. ASSIGNMENT AND SUBLETTING. Notwithstanding anything to the contrary ------------------------- contained in Section 12 of the Lease, Tenant shall have the right, without Landlord's consent, upon thirty (30) days advance written notice to Landlord, to assign this Lease or sublet the whole or any part of the Premises to any entity which is owned by Tenant or which owns Tenant; provided, that such assignment or sublease is subject to the satisfaction of the following conditions: (a) Tenant shall remain fully liable under the terms of the Lease; (b) In addition to the requirements of this Addendum section, any such assignment or sublease shall be subject to all of the terms, covenants and conditions of the Lease; (c) Landlord shall not be liable to any subtenant; (d) The assignment or sublease will not cause Landlord to be in violation of its obligations under another lease or agreement to which Landlord is a party; (e) The use of the Premises by the assignee or subtenant must be identical to the Tenant's use of the Premises; (f) Prior to the date an assignment or sublease will take effect, the assignee or subtenant and Tenant shall enter into Landlord's standard consent to sublease agreement, attached hereto as Exhibit E or consent to assignment agreement; (g) Prior to the date an assignment or sublease will take effect, any guarantor of Tenant's obligations under the Lease shall give its written consent to the assignment or sublease and shall acknowledge that the guaranty shall remain in full force and effect following the assignment or subletting; and Add-7 (h) Prior to the date an assignment or sublease will take effect, Tenant shall pay the reasonable costs and expenses (including legal fees) incurred by Landlord in confirming that the assignment or sublease meets the requirements of this Addendum section and in preparing any consent to sublease agreement or consent to assignment agreement. 12. PARKING. ------- a. Section 16.1 of the Lease is hereby modified by adding the following to the end of Section 16.1: "If Tenant, Tenant's invitees and/or agents should utilize more than 3.4 spaces per 1,000 square feet of space in the Premises ("Parking Allotment"), and such over usage continues for more than five (5) days after notice thereof from Landlord to Tenant, Landlord shall have the right, in addition to such other rights and remedies that it may have, to institute a parking plan, including but not limited to, any or all of following actions, at Tenant's sole expense, in order to ensure that the Parking Allotment is adhered to by Tenant: (i) segregate Tenant's parking spaces, i.e., assign tandem parking spaces or special areas for Tenant's parking); (ii) to implement a parking sticker program; and/or (iii) to provide Tenant with off-site parking and shuttle service to the Building. b. In addition to the foregoing, Tenant hereby agrees that Landlord upon Landlord's good faith determination that a problem exists, shall have the right from time to time, at Tenant's expense, to monitor the parking of Tenant's vehicles to determine if Tenant is utilizing in excess of the Parking Allotment. Tenant shall be responsible for all costs associated with the evaluation, implementation and monitoring of the parking, including, but not limited to, any fees paid to consultants. Any expenses incurred pursuant to this Paragraph 12 shall be deemed "rent" under the Lease and shall be due within thirty (30) days after Landlord delivers to Tenant a statement of the amount(s) incurred as a result of maintaining the Parking Allotment. 13. INDEMNITY BY LANDLORD. Notwithstanding the provisions of Sections 20 --------------------- and 21 of the Lease to the contrary, Tenant shall not be required to indemnify and hold Landlord harmless from any loss, cost, liability, damage or expense (collectively "Claims"), to any person, property or entity resulting from the negligence or willful misconduct of Landlord or its agents or employees, in connection with Landlord's obligations under the Lease, and Landlord hereby indemnifies and saves Tenant harmless from any such Claims. Tenant's agreement to indemnify and hold Landlord harmless set forth above are not intended to, and shall not relieve any insurance carrier of its obligations under policies required to be carried by Landlord or Tenant pursuant to the provisions of the Lease to the extent that such policies cover the results of such acts or conduct. 14. TENANT IMPROVEMENTS. Section 24 of the Lease is hereby deleted in its ------------------- entirety and the following Section 24 is hereby substituted in lieu thereof: "Tenant shall construct the tenant improvements ("Improvements") for Premises A, Premises B, Premises C and Premises D in accordance with the Work Letter Agreement attached hereto as Schedule 1. Landlord hereby grants to Tenant an ---------- allowance for the Improvements (the "Improvement Allowance") of Eighteen and 60/100 Dollars per square foot of space in the Premises. The Improvement Allowance shall only be used for the items specified in the Cost Breakdown as defined in the Work Letter Agreement. The Improvement Allowance for Premises A may only be used to construct Improvements to Premises A; the Improvement Allowance for Premises B may only be used to construct Improvements to Premises B; the Improvement Allowance for Premises C may only be used to construct Improvements to Premises C and the Improvement Allowance for Premises D may only be used to construct Improvements to Premises D. In addition thereto, if Tenant does not fully draw down the Add-8 Improvement Allowance for a particular space within one hundred twenty (120) days of the date that particular Premises is delivered to Tenant, then any unused portion of that particular Improvement Allowance shall not be paid or refunded to Tenant or be available to Tenant as a credit against any obligations of Tenant under the Lease. Notwithstanding the foregoing, if Tenant has not fully drawn down the Improvement Allowance for a particular space within the aforesaid one hundred twenty (120) day period, but Tenant is diligently pursuing completion of the Tenant Improvements, Landlord shall grant Tenant such additional time as is reasonable to complete the Improvements. 15. EXPANSION SPACE OPTION. ---------------------- (a) Subject to the provisions of Section 26 of the Lease, and provided that Tenant is not in default at the time of Tenant's exercise of the Option, Tenant shall have the one-time Option to expand into 19,514 rentable square feet of space on the second (2nd) floor of the Building and currently known as Suite 200 (the "Expansion Space"), as shown on Exhibit A-2 attached hereto. Tenant shall provide to Landlord on a date that is between September 1, 1998 and November 1, 1998, written notice of Tenant's exercise of the Option to expand into the Expansion Space, time being of the essence. Such notice shall be given in accordance with Section 40 of the Lease. If notification of the exercise of this Option is not so given and received, the Expansion Space Option granted herein shall automatically expire, and Tenant shall have no further Option to expand into the Expansion Space. Landlord shall notify Tenant within thirty (30) days following Tenant's exercise of the Option when Landlord anticipates delivering the Expansion Space to Tenant. Landlord agrees to use best efforts to deliver the Expansion Space to Tenant no later than December 31, 1999. Such efforts shall include evicting the existing tenant if the existing tenant remains in a holdover of its lease. If Landlord is unsuccessful in delivering the Expansion Space to Tenant by December 31, 1999, Landlord shall have an additional sixty (60) days to deliver the Expansion Space to Tenant provided that during said sixty (60) day period Landlord shall pay to Tenant, to the extent Landlord receives holdover rent from the existing tenant, fifty percent (50%) of the Net Holdover Rent (as defined in Paragraph 2 of the Addendum). If Landlord shall not have delivered possession of the Expansion Space within said sixty (60) days, Tenant may, at Tenant's option, by notice in writing to Landlord within thirty (30) days after the expiration of the sixty (60) day period but prior to delivery of the Expansion Space by Landlord to Tenant, rescind its option to lease the Expansion Space. If Tenant rescinds its option as provided for in the preceding sentence, the parties shall be discharged from all obligations under the Lease with respect to the Expansion Space. (b) If Tenant leases the Expansion Space, the commencement date of the Lease with respect to the Expansion Space shall be the earlier to occur of: (i) the date the tenant improvements for the Expansion Space are completed, or (ii) ninety (90) days after the date Landlord delivers the Expansion Space to Tenant. The Base Rent payable for the Expansion Space shall be at the same Base Rent rate in effect for Premises A at the beginning of the Term with respect to the Expansion Space and shall be increased by two percent (2%) per annum on each anniversary date of the Commencement Date of the Lease applicable to the Expansion Space. The Improvement Allowance applicable to the Expansion Space shall be equal to One and 86/100 Dollars ($1.86) per square foot of space in the Expansion Space per year for the number of years remaining in the Term. (For example, if the Expansion Space is taken with six (6) years remaining in the Term x $1.86 per year = an Improvement Allowance of $11.16 per square foot attributable to the Expansion Space.) Tenant shall construct the Improvements for the Expansion Space in accordance with the terms and conditions of Schedule -------- 1 attached hereto. All other terms and conditions of the Lease shall remain the - - same. 16. 40 WEST GUDE DRIVE SPACE OPTION. Subject to the provisions of Section ------------------------------- 26 of the Lease, and provided that Tenant is not in default at the time of Tenant's Add-9 exercise of the Option, Tenant shall have the one-time Option to expand into 10,914 rentable square feet of space on the first (1st) floor of the building located at 40 West Gude Drive, Rockville, Maryland and currently known as Suite 130 (the "40 West Gude Space"). Tenant shall provide to Landlord on a date that is between January 1, 1998 and April 1, 1998, written notice of Tenant's exercise of the Option to expand into the 40 West Gude Space, time being of the essence. Such notice shall be given in accordance with Section 40 of the Lease. If notification of the exercise of this Option is not so given and received, the 40 West Gude Space Option granted herein shall automatically expire, and Tenant shall have no further Option to expand into the 40 West Gude Space. Landlord shall notify Tenant within thirty (30) days following Tenant's exercise of the Option when Landlord anticipates delivering the 40 West Gude Space to Tenant. Landlord agrees to use best efforts to deliver the 40 West Gude Space to Tenant no later than December 31, 1998. Such efforts shall include evicting the existing tenant if the existing tenant remains in a holdover of its lease. If Landlord is unsuccessful in delivering the 40 West Gude Space to Tenant by December 31, 1998, Landlord shall have an additional sixty (60) days to deliver the 40 West Gude Space to Tenant provided that during said sixty (60) day period Landlord shall pay to Tenant, to the extent Landlord receives holdover rent from the existing tenant, fifty percent (50%) of the Net Holdover Rent (as defined in Paragraph 2 of the Addendum). If Landlord shall not have delivered possession of the 40 West Gude Space within said sixty (60) days, Tenant may, at Tenant's option, by notice in writing to Landlord within thirty (30) days after the expiration of the sixty (60) day period but prior to delivery of the 40 West Gude Space by Landlord to Tenant, rescind its option to lease the 40 West Gude Space. If Tenant rescinds its option as provided for in the preceding sentence, the parties shall be discharged from all obligations under the Lease with respect to the 40 West Gude Space. The Base Rent payable for the 40 West Gude Space shall be the Fair Market Rent, as defined below, for the 40 West Gude Space at the time of the estimated commencement date of the Lease with respect to the 40 West Gude Space. If the parties cannot agree upon the Fair Market Rental of the 40 West Gude Space, then the provisions of Paragraph 18(b) of the Addendum shall apply. The term of the Lease applicable to the 40 West Gude Space shall be, at Tenant's option: (i) five (5) years or (ii) coterminous with the term of the existing Lease. 17. RIGHT OF FIRST OFFER. Subject to the provisions of Section 26 of this -------------------- Lease, and provided that Tenant is not in default hereunder at the time of Tenant's exercise of the Option, and subject to all other options held by existing tenants of the Project (as defined in Section 2.1 of the Lease), Tenant shall have a one time right of first offer on any space that becomes available in the Project (the "Option Space"). Prior to leasing the Option Space, Landlord shall give Tenant written notice of its intent to lease the Option Space. Tenant may exercise such right only as to all of the Option Space described in the Landlord's notice, and not to merely a part of such Option Space. Tenant shall have ten (10) business days in which to provide Landlord with written notice of its election to exercise such right. The Base Rent payable for the Option Space shall be at the current rental rate for Premises A at the beginning of the Term applicable to the Option Space and shall be increased by two percent (2%) per annum on each anniversary date of the Commencement Date of the Lease applicable to the Option Space. If Tenant does not give Landlord written notice of its election to lease such Option Space or terms and conditions are not agreed upon within the ten (10) business day period, Landlord shall thereafter be free to lease such Option Space to a third party on any terms and conditions that Landlord shall select, with no further obligation to Tenant. In the event that Landlord offers any space to Tenant pursuant to this right of first offer, and Tenant elects not to lease the space, the space so offered shall no longer be subject to this right of first offer, and thereafter Landlord shall not be obligated to offer said space to Tenant. Add-10 18. OPTION TO RENEW. ---------------- (a) Subject to the provisions of Section 26 of the Lease, and provided that Tenant is not in default at the time of Tenant's exercise of the Option or at the commencement of the extended term, Tenant shall have two (2) five (5) year Options to renew this Lease. Tenant shall provide to Landlord on a date which is prior to the date that each option period would commence (if exercised) by at least two hundred seventy (270) days and not more than three hundred sixty days (360) days, a written notice of the exercise of the option to extend the Lease for the additional Option term, time being of the essence. Such notice shall be given in accordance with Section 40 of the Lease. If notification of the exercise of either Option is not so given and received, all Options granted hereunder shall automatically expire. Base Rent applicable to the Premises for each Option term shall be equal to the "Fair Market Rental" as hereinafter defined. All other terms and conditions of the Lease shall remain the same. (b) If Tenant exercises an Option, Landlord shall then propose the Fair Market Rental by using its good faith judgment. Landlord shall provide Tenant with written notice of such amount within fifteen (15) days after Tenant exercises an Option. Tenant shall have fifteen (15) days ("Tenant's Review Period") after receipt of Landlord's notice of the new base rent within which to accept such rental. In the event Tenant fails to accept in writing such rental proposal by Landlord, then such proposal shall be deemed rejected and Landlord and Tenant shall attempt to agree upon such Fair Market Rental, using their best good faith efforts. If Landlord and Tenant fail to reach agreement within fifteen (15) days following Tenant's Review Period ("Outside Agreement Date") then the parties shall each within ten (10) days following the Outside Agreement Date appoint a real estate broker who shall be licensed in the State of Maryland and who specializes in the field of commercial office space leasing in the Rockville, Maryland market, has at least five (5) years of experience and is recognized within the field as being reputable and ethical. If one party does not timely appoint a broker, then the broker appointed by the other party shall promptly appoint a broker for such party. Such two individuals shall each determine within ten (10) days after their appointment such base rent. If such individuals do not agree on base rent, then the two individuals shall, within five (5) days, render separate written reports of their determinations and together appoint a third similarly qualified individual having the qualifications described above. If the two brokers are unable to agree upon a third broker, the third broker shall be appointed by the President of the District of Columbia Board of Realtors. In the event the District of Columbia Board of Realtors is no longer in existence, the third broker shall be appointed by the President of its successor organization. If no successor organization is in existence, the third broker shall be appointed by the Chief Judge of the Circuit Court of Montgomery County, Maryland. The third individual shall within ten (10) days after his or her appointment make a determination of such base rent. The third individual shall determine which of the determinations of the first two individuals is closest to his own and the determination that is closest shall be final and binding upon the parties, and such determination may be enforced in any court of competent jurisdiction. Landlord and Tenant shall each bear the cost of its broker and shall share equally the cost of the third broker. Upon determination of the base rent payable pursuant to this Section, the parties shall promptly execute an amendment to this Lease stating the rent so determined. (c) The term "Fair Market Rental" shall mean the annual amount per rentable square foot that a willing, comparable renewal tenant would pay and a willing, comparable landlord of a similar office building would accept at arm's length for similar space, giving appropriate consideration to the following matters: (i) annual rental rates per rentable square foot; (ii) the type of escalation clauses (including, without limitation, operating expense, real estate taxes, and CPI) and the extent of liability under the escalation clauses (i.e., whether determined on a "net lease" basis or by increases over a particular base year or base dollar amount); (iii) rent abatement Add-11 provisions reflecting free rent and/or no rent during the lease term; (iv) length of lease term; (v) size and location of premises being leased; and (vi) other generally applicable terms and conditions of tenancy for similar space; provided, however, Tenant shall not be entitled to any tenant improvement or refurbishment allowance. The Fair Market Rental may also designate periodic rental increases, a new Base Year and similar economic adjustments. The Fair Market Rental shall be the Fair Market Rental in effect as of the beginning of the Option period, even though the determination may be made in advance of that date, and the parties may use recent trends in rental rates in determining the proper Fair Market Rental as of the beginning of the Option period. 19. TENANT'S OPTION TO TERMINATE. Subject to the provisions of Section 26 ---------------------------- of the Lease, and provided that Tenant is not in default at the time of Tenant's exercise of the Option, Tenant shall have one (1) option to terminate this Lease. The termination date shall be January 1, 2004 (the "Termination Date"). Tenant shall provide to Landlord on or before January 1, 2003 (the "Notice Date") written notice of the exercise of the Option to terminate this Lease, time being of the essence. Such notice shall be given in accordance with Section 40 of the Lease. If notification of the exercise of this Option is not so given and received, the Option granted hereunder shall automatically expire. As a condition to the effectiveness of this Option, Tenant shall pay to Landlord on the Notice Date an amount equal to: (i) one hundred percent (100%) of all unamortized out-of-pocket costs and expenses incurred by Landlord in connection with the Lease, including, but not limited to, brokerage fees, legal fees, unamortized tenant improvement and architectural costs, as detailed by Landlord in a written statement, plus (ii) Two Million Eight Hundred Thousand and 00/100 Dollars ($2,800,000.00) (items (i) and (ii) are, collectively, the "Termination Payment"). The Termination Payment is in addition to payment by the Tenant of all other amounts payable by Tenant to Landlord pursuant to the Lease prior to the Termination Date. 20. SIGNS. Section 46 of the Lease is hereby amended by adding the ----- following at the end of Section 46: "Provided Tenant occupies at least 46,386 square feet of space in the Building, Tenant shall have the exclusive right to install signage on the exterior facade of the Building, excluding soffits, depicting Tenant's logo and logotype, the size, color, location and installation of which are subject to Landlord's prior written approval (but subject to compliance with all applicable codes). Tenant shall be responsible for obtaining all applicable governmental approvals and permits." 21. STORAGE SPACE LEASE. Subject to and upon the terms set forth in this ------------------- Paragraph 21, Landlord leases approximately Three Thousand Eight Hundred Sixty- Four (3,864) square feet on the lower level in the Building more particularly set forth on Exhibit A-1 attached hereto ("Premises E") to Tenant, and Tenant ----------- leases Premises E from Landlord. (a) Landlord shall deliver Premises E to Tenant in its as-is condition existing on the date this Lease is fully executed by Landlord and Tenant and Landlord shall have no obligation to construct improvements to Premises E, provided, however, if local zoning/building codes require a bathroom to be installed, said installation shall be paid by Tenant, and shall be constructed in accordance with Section 7 of the Lease. (b) Tenant's lease of Premises E shall be coterminous with the Term of the Lease for the Premises. During the initial term of the Lease, and subject to adjustment as hereinafter provided, Tenant shall pay Base Rent equal to Eleven Dollars and 95/100 ($11.95) per rentable square foot ("Storage Base Rent") without offset of deduction on the first day of each calendar month. Tenant shall commence payment of the Storage Base Rent on April 1, 1997, and during the Term hereof, Storage Base Rent shall be increased two percent (2%) on each January 1 thereafter, as follows: Add-12
PREMISES E (3,864 RENTABLE SQUARE FEET): ---------------------------------------- Lease Period Annual Base Rent Monthly Base Rent 4/1/97-12/31/97 $46,174.80 $3,847.90 1/1/98-12/31/98 $47,098.32 $3,924.86 1/1/99-12/31/99 $48,040.32 $4,003.36 1/1/00-12/31/00 $49,001.16 $4,083.43 1/1/01-12/31/01 $49,981.20 $4,165.10 1/1/02-12/31/02 $50,980.80 $4,248.40 1/1/03-12/31/03 $52,000.44 $4,333.37 1/1/04-12/31-04 $53,044.44 $4,420.37 1/1/05-12/31/05 $54,105.36 $4,508.78 1/1/06-12/31/06 $55,187.52 $4,598.96
(c) Commencing April 1, 1998, Tenant shall pay Tenant's Share of increases in Operating Expenses for Premises E in the manner provided in Section 4.2 of this Lease, including, but not limited to, the provision that the Base Year Operating Expenses shall include an expense component for electricity of One and 65/100 Dollars ($1.65) per square foot and that any increases in electricity over the $1.65 per square foot component in any Comparison Year shall be paid by Tenant regardless of the total amount of increases in Operating Expenses over the Base Year. (d) Tenant shall use Premises E for a storage room, a computer room, a mail room, a reprographics room and related back office use. (e) Except as otherwise provided in this Paragraph 21, the terms and conditions of this lease of Premises E shall be as set forth in this Lease with respect to the Premises. Add-13 EXHIBIT A [FLOORING DEPICTING 5TH FLOOR REFERENCE] [30 WEST GUDE DRIVE, ROCKVILLE MD] A-1 EXHIBIT A [FLOORING DEPICTING 4TH FLOOR REFERENCE] [30 WEST DRIVE, ROCKVILLE MD] A-2 EXHIBIT A [FLOORING DEPICTING 3RD FLOOR REFERENCE] [30 WEST GUDE DRIVE, ROCKVILLE MD] A-4 EXHIBIT A [FLOORING DEPICTING 1ST FLOOR REFERENCE] [30 WEST GUDE DRIVE, ROCKVILLE MD] A-3 EXHIBIT A-1 PREMISES E FLOOR PLAN [TO BE INSERTED] A1-1 EXHIBIT A-1 [FLOORING DEPICTING LOWER LEVEL REFERENCE] [30 WEST GUDE DRIVE, ROCKVILLE MD] EXHIBIT A-2 EXPANSION SPACE FLOOR PLAN [TO BE INSERTED] A2-1 EXHIBIT A-2 [FLOORING DEPICTING 2ND FLOOR REFERENCE] [30 WEST GUDE DRIVE, ROCKVILLE MD] EXHIBIT B VERIFICATION LETTER AMISYS MANAGED CARE SYSTEMS, INC., a Delaware corporation,, ("Tenant") hereby certifies that it has entered into a lease with THE REALTY ASSOCIATES FUND III, L.P., a Delaware limited partnership, doing business in Maryland as The Realty Associates Fund III, Limited Partnership ("Landlord") and verifies the following information as of the _______ day of _______________, 19__: Number of Rentable Square Feet in Premises: ____________________________ Commencement Date: ____________________________ Lease Termination Date: ____________________________ Tenant's Share: ____________________________ Initial Base Rent: ____________________________ Billing Address for Tenant: ____________________________ ____________________________ ____________________________ Attention: ____________________________ Telephone Number: ____________________________ Federal Tax I.D. No.: ____________________________ Tenant acknowledges and agrees that all tenant improvements Landlord is obligated to make to the Premises, if any, have been completed, that Tenant has accepted possession of the Premises and that as of the date hereof, there exist no offsets or defenses to the obligations of Tenant under the Lease. Tenant acknowledges that it has inspected the Premises and found them suitable for Tenant's intended commercial purposes. TENANT AMISYS MANAGED CARE SYSTEMS, INC. By:________________________________ ________________________________ (print name) Its:_______________________________ (print title) ACKNOWLEDGED AND AGREED TO: LANDLORD THE REALTY ASSOCIATES FUND III, L.P., a Delaware limited partnership, doing business in Maryland as The Realty Associates Fund III, Limited Partnership By: Realty Associates Fund III GP Limited Partnership, a Delaware limited partnership, Its General Partner By: Realty Fund III GP, Inc., a Massachusetts corporation, Its General Partner By: ____________________________ Its: ____________________________ B-1 EXHIBIT C RULES AND REGULATIONS GENERAL RULES Tenant shall faithfully observe and comply with the following Rules and Regulations. 1. Tenant shall not alter any locks or install any new or additional locks or bolts on any doors or windows of the Premises without obtaining Landlord's prior written consent. Tenant shall bear the cost of any lock changes or repairs required by Tenant. Keys required by Tenant must be obtained from Landlord at a reasonable cost to be established by Landlord. 2. All doors opening to public corridors shall be kept closed at all times except for normal ingress and egress to the Premises. Tenant shall assume any and all responsibility for protecting the Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 3. Landlord reserves the right to close and keep locked all entrance and exit doors of the Project except during the Project's normal hours of business as defined in Section 11.3 of the Lease. Tenant, its employees and agents must be sure that the doors to the Project are securely closed and locked when leaving the Premises if it is after the normal hours of business of the Project. Tenant, its employees, agents or any other persons entering or leaving the Project at any time when it is so locked, or any time when it is considered to be after normal business hours for the Project, may be required to sign the Project register. Access to the Project may be refused unless the person seeking access has proper identification or has a previously received authorization for access to the Project. Landlord and its agents shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Project of any person. In case of invasion, mob, riot, public excitement, or other commotion, Landlord reserves the right to prevent access to the Project during the continuance thereof by any means it deems appropriate for the safety and protection of life and property. 4. No furniture, freight or equipment of any kind shall be brought into the Project without Landlord's prior authorization. All moving activity into or out of the Project shall be scheduled with Landlord and done only at such time and in such manner as Landlord designates. Landlord shall have the right to prescribe the weight, size and position of all safes and other heavy property brought into the Project and also the times and manner of moving the same in and out of the Project. Safes and other heavy objects shall, if considered necessary by Landlord, stand on supports of such thickness as is necessary to properly distribute the weight, and Tenant shall be solely responsible for the cost of installing all supports. Landlord will not be responsible for loss of or damage to any such safe or property in any case. Any damage to any part of the Project, its contents, occupants or visitors by moving or maintaining any such safe or other property shall be the sole responsibility and expense of Tenant. 5. The requirements of Tenant will be attended to only upon application at the management office for the Project or at such office location designated by Landlord. Tenant shall not ask employees of Landlord to do anything outside their regular duties without special authorization from Landlord. 6. Tenant shall not disturb, solicit, or canvass any occupant of the Project and shall cooperate with Landlord and its agents to prevent the same. Tenant, its employees and agents shall not loiter in or on the entrances, corridors, sidewalks, lobbies, halls, stairways, elevators, or any Common Areas for the purpose of smoking tobacco products or for any other purpose, nor in any way obstruct such areas, and shall use them only as a means of ingress and egress for the Premises. Smoking shall not be permitted in the Common Areas. C-1 7. The toilet rooms, urinals and wash bowls shall not be used for any purpose other than that for which they were constructed, and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees or agents, shall have caused it. 8. Except for vending machines intended for the sole use of Tenant's employees and invitees, no vending machine or machines other than fractional horsepower office machines shall be installed, maintained or operated upon the Premises without the written consent of Landlord. 9. Tenant shall not use or keep in or on the Premises or the Project any kerosene, gasoline or other inflammable or combustible fluid or material. Tenant shall not bring into or keep within the Premises or the Project any animals, birds, bicycles or other vehicles. 10. Tenant shall not use, keep or permit to be used or kept, any foul or noxious gas or substance in or on the Premises, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Project by reason of noise, odors, or vibrations, or to otherwise interfere in any way with the use of the Project by other tenants. 11. No cooking shall be done or permitted on the Premises, nor shall the Premises be used for the storage of merchandise, for loading or for any improper, objectionable or immoral purposes. Notwithstanding the foregoing, Underwriters' Laboratory approved equipment and microwave ovens may be used in the Premises for heating food and brewing coffee, tea, hot chocolate and similar beverages for employees and visitors of Tenant, provided that such use is in accordance with all applicable federal, state and city laws, codes, ordinances, rules and regulations; and provided further that such cooking does not result in odors escaping from the Premises. 12. Landlord shall have the right to approve where and how telephone wires are to be introduced to the Premises. No boring or cutting for wires shall be allowed without the consent of Landlord. The location of telephone call boxes and other office equipment affixed to the Premises shall be subject to the approval of Landlord. Tenant shall not mark, drive nails or screws, or drill into the partitions, woodwork or plaster contained in the Premises or in any way deface the Premises or any part thereof without Landlord's prior written consent. Tenant shall not install any radio or television antenna, satellite dish, loudspeaker or other device on the roof or exterior walls of the Project. Tenant shall not interfere with broadcasting or reception from or in the Project or elsewhere. 13. Landlord reserves the right to exclude or expel from the Project any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of these Rules and Regulations. 14. Tenant shall not waste electricity, water or air conditioning and agrees to cooperate fully with Landlord to ensure the most effective operation of the Project's heating and air conditioning system, and shall refrain from attempting to adjust any controls. Tenant shall not without the prior written consent of Landlord use any method of heating or air conditioning other than that supplied by Landlord. 15. Tenant shall store all its trash and garbage within the interior of the 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 in the vicinity of the Project without violation of any law or ordinance governing such disposal. All trash, garbage and refuse disposal shall be made only through entry-ways and elevators provided for such purposes at such times as Landlord shall designate. C-2 16. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 17. No awnings or other projection shall be attached to the outside walls or windows of the Project by Tenant. No curtains, blinds, shades or screens shall be attached to or hung in any window or door of the Premises without the prior written consent of Landlord. All electrical ceiling fixtures hung in the Premises must be fluorescent and/or of a quality, type, design and bulb color approved by Landlord. Tenant shall abide by Landlord's regulations concerning the opening and closing of window coverings which are attached to the windows in the Premises. The skylights, windows, and doors that reflect or admit light and air into the halls, passageways or other public places in the Project shall not be covered or obstructed by Tenant, nor shall any bottles, parcels or other articles be placed on the windowsills. 18. Tenant shall not employ any person or persons other than the janitor of Landlord for the purpose of cleaning the Premises unless otherwise agreed to in writing by Landlord. Except with the prior written consent of Landlord, no person or persons other than those approved by Landlord shall be permitted to enter the Project for the purpose of cleaning same. Landlord shall in no way be responsible to Tenant for any loss of property on the Premises, however occurring, or for any damage done to the effects of Tenant or any of its employees or other persons by the janitor of Landlord. Janitor service shall include ordinary dusting and cleaning by the janitor assigned to such work and shall not include cleaning of carpets or rugs, except normal vacuuming, or moving of furniture and other special services. Window cleaning shall be done only by Landlord at reasonable intervals and as Landlord deems necessary. PARKING RULES 1. Parking areas shall be used only for parking by vehicles no longer than full size, passenger automobiles herein called "Permitted Size Vehicles". 2. Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Landlord for such activities. Users of the parking area will obey all posted signs and park only in the areas designated for vehicle parking. 3. Parking stickers or identification devices shall be the property of Landlord and shall be returned to Landlord by the holder thereof upon termination of the holder's parking privileges. Tenant will pay such replacement charges as is reasonably established by Landlord for the loss of such devices. Loss or theft of parking identification stickers or devices from automobiles must be reported to the parking operator immediately. Any parking identification stickers or devices reported lost or stolen found on any unauthorized car will be confiscated and the illegal holder will be subject to prosecution. 4. Landlord reserves the right to relocate all or a part of parking spaces from floor to floor, within one floor, and/or to reasonably adjacent off site locations(s), and to allocate them between compact and standard size and tandem spaces, as long as the same complies with applicable laws, ordinances and regulations. 5. Unless otherwise instructed, every person using the parking area is required to park and lock his own vehicle. Landlord will not be responsible for any damage to vehicles, injury to persons or loss of property, all of which risks are assumed by the party using the parking area. 6. Validation of visitor parking, if established, will be permissible only by such method or methods as Landlord may establish at rates determined by Landlord, in Landlord's sole discretion. C-3 7. The maintenance, washing, waxing or cleaning of vehicles in the parking structure or Common Areas is prohibited. 8. Tenant shall be responsible for seeing that all of its employees, agents and invitees comply with the applicable parking rules, regulations, laws and agreements. Garage managers or attendants are not authorized to make or allow any exceptions to these Parking Rules and Regulations. Landlord reserves the right to terminate parking rights for any person or entity that willfully refuses to comply with these rules and regulations. 9. Every driver is required to park his own car. Where there are tandem spaces, the first car shall pull all the way to the front of the space leaving room for a second car to park behind the first car. The driver parking behind the first car must leave his key with the parking attendant. Failure to do so shall subject the driver of the second car to a Fifty Dollar ($50.00) fine. Refusal of the driver to leave his key when parking in a tandem space shall be cause for termination of the right to park in the parking facilities. The parking operator, or his employees or agents, shall be authorized to move cars that are parked in tandem should it be necessary for the operation of the garage. Tenant agrees that all responsibility for damage to cars or the theft of or from cars is assumed by the driver, and further agrees that Tenant will hold Landlord harmless for any such damages or theft. 10. No vehicles shall be parked in the parking garage overnight. The parking garage shall only be used for daily parking and no vehicle or other property shall be stored in a parking space. Landlord reserves the right at any time to change or rescind any one or more of these Rules and Regulations, or to make such other and further reasonable Rules and Regulations as in Landlord's reasonable judgment may from time to time be necessary for the management, safety, care and cleanliness of the Project, and for the preservation of good order therein, as well as for the convenience of other occupants and tenants therein. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenant, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant, nor prevent Landlord from thereafter enforcing any such Rules or Regulations against any or all tenants of the Project. Tenant shall be deemed to have read these Rules and Regulations and to have agreed to abide by them as a condition of its occupancy of the Premises. C-4 EXHIBIT D CLEANING SPECIFICATIONS [TO BE INSERTED] D-1 Exhibit D CLEANING SCHEDULE NIGHTLY (BETWEEN THE HOURS OF 7:00 P.M. AND 6:00 A.M., MONDAY THROUGH FRIDAY, LEGAL HOLIDAYS EXCEPTED). 1. Clean lavatories as follows: (a) Sweep and wash floors, using an odorless disinfectant in wash water. (b) Wash and polish all mirrors, powder shelves, bright work, and enamel surfaces. (c) Thoroughly scour, wash and disinfect all basins, bowls, and urinals. (d) Wash and disinfect all toilet seats, both sides. (e) Wash all partitions tile walls, towel, paper, and sanitary napkin dispenser, and receptacles as required. (f) Empty and clean paper towel and sanitary disposal receptacles. (g) Fill toilet tissue holders, soap dispensers and bathroom towel dispensers, materials to be furnished by Landlord. 2. Empty and clean all waste receptacles, ashtrays and sand ums. Utilize plastic bag liners in all waste receptacles. 3. Wash, clean and disinfect all water fountains and water coolers. 4. Hand dust all office furniture and fixtures, shelves, sills and other dust collecting surfaces. 5. Remove all rubbish and trash from Premises. 6. Vacuum all rugs carpeting and remove any spots or stains. 7. Dust mop all uncarpeted areas, Using treated mops and damp mop, as necessary to remove any stains or spills. 8. Damp mop floors in entrance foyers, elevator lobbies, and public corridors, if applicable. 9. Wet sponge wipe table tops in employee lounge, including cleaning of any spills, if applicable. 10. During nightly tour, close all windows and blinds, extinguish lights, lock doors and report any malfunctions. 11. keep storage and slop sink rooms in a clean and orderly manner. WEEKLY 1. Damp mop and buff polish all uncarpeted areas. 2. Wash all directory board, display, entry door, and side light glass, as necessary. MONTHLY 1. All uncarpeted floor areas to be washed, waxed and machine polished. 2. Clear air conditioning grilles as required. 3. High dusting: (a) Dust in place all pictures, frames, charts, graphs and similar wall hangings. (b) Dust clean all vertical surfaces, such as walls, partitions, doors, books and other surfaces not reached in nightly cleaning. (c) Dust clean all exposed pipes, air conditioning louvers, ducts and other areas not reached in nightly cleaning. (d) Dust clean all lighting fixtures. (e) Dust all mine blinds. 4. Remove all finger marks and smudges from doors, partitions, woodwork, window ledges and window mullions. 5. Wash, clean, and disinfect all lavatory vinyl. SEMI-ANNUALLY 1. Wash all windows inside and out. ANNUALLY 1. Clean all vinyl. EXHIBIT E CONSENT TO SUBLEASE THIS CONSENT TO SUBLEASE ("Consent Agreement") dated as of ________199__ is made with reference to that certain sublease (the "Sublease") ________ 19__ by and between ________________("Tenant") and __________ ("Sublessee"), and is entered into between the foregoing parties and __________ ("Landlord"), having an address at ________________ with reference to the following facts: A. Landlord and Tenant are the parties to that certain master lease (the "Master Lease") dated as of ____________, 19__ respecting certain premises ("Premises") known as Suite(s) ___, located in the building ("Building") located at ________________________. B. Tenant and Sublessee wish to enter into the Sublease respecting the portion of the Premises described therein (the "Sublease Premises"). C. The Master Lease provides that Tenant may not enter into any sublease without Landlord's prior written approval. D. Tenant and Sublessee have herewith presented the fully-executed Sublease to Landlord for Landlord's approval, and Landlord is willing to approve the same, upon all of the terms and conditions hereinafter appearing. NOW, THEREFORE, for good valuable consideration, the parties hereto agree as follows: 1. Neither the Master Lease, the Sublease nor this Consent Agreement shall be deemed to grant Sublessee any rights whatsoever against Landlord. Sublessee hereby acknowledges and agrees that its sole remedy for any alleged or actual breach of its rights in connection with the Sublease Premises shall be solely against Tenant. 2. This Consent Agreement shall not release Tenant from any existing or future duty, obligation or liability to Landlord, pursuant to the Master Lease, nor shall this Consent Agreement change, modify or amend the Master Lease in any manner. This Agreement shall not be deemed Landlord's consent to any further subleases. 3. (a) In the event of Master Lease Termination (as hereinafter defined) prior to the termination of the Sublease, at Landlord's option, Sublessee agrees to attorn to Landlord and to recognize Landlord as Sublessee's Landlord under the Sublease, upon the terms and conditions and at the rental rate specified in the Sublease, and for the then remaining term of the Sublease, except that Landlord shall not be bound by any provision of the Sublease which in any way increases Landlord's duties, obligations or liabilities to Sublessee beyond those owed to Tenant under the Master Lease. Sublessee agrees to execute and deliver at any time and from time to time, upon the request of Landlord, any instruments which may be necessary or appropriate to evidence such attornment. Landlord shall not (i) be liable to Sublessee for any act, omission or breach of the Sublease by Tenant, (ii) be subject to any offsets or defenses which Sublessee might have against Tenant, (iii) be bound by any rent or additional rent which Sublessee might have paid in advance to Tenant, (iv) be bound to honor any rights of Sublessee in any security deposit made with Tenant except to the extent Tenant has turned over such security deposit to Landlord. Tenant hereby agrees that in the event of Master Lease Termination, Tenant shall immediately pay or transfer to Landlord any security deposit, rent or other sums then held by Tenant. (b) "Master Lease Termination" means any event, which by voluntary or involuntary act or by operation of law, might cause or permit the Master Lease to be terminated, expired, canceled, foreclosed against, or otherwise come to an end, including but not limited to (i) a default by Tenant under the Master Lease of any of the terms or provisions thereof, (ii) foreclosure proceedings brought by the holder of any mortgage or trust deed to which the Master Lease is subject; or (iii) the termination of Tenant's leasehold estate by dispossession proceeding or otherwise. (c) In the event of attornment hereunder, Landlord's liability shall be limited to matters arising during Landlord's ownership of the Building and in the event that Landlord (or any successor owner) shall convey or dispose of the Building to another party such party shall thereupon be and become Landlord hereunder and shall be deemed to have fully assumed and be liable for all obligations of this Consent Agreement or the Sublease to be performed by Landlord which first arise after the date of conveyance including the return of any security deposit, and Tenant shall attorn to such other party, and Landlord (or such successor owner) shall, from and after date of conveyance, be free of all liabilities and obligations hereunder not then incurred. The liability of Landlord to Sublessee for any default by Landlord under this Consent Agreement or the Sublease after such attornment or arising in connection with Landlord's operation management, leasing, repair, renovation, alteration any other matter relating to the Building or the Sublease Premises, shall be limited to the interest of the Landlord in the Building (and proceeds thereof). Under no circumstances shall any present or future general partner of Landlord (if Landlord is a partnership) have any liability for the performance of Landlord's obligation under this Consent Agreement or the Sublease. 4. In addition to Landlord's rights under Section 3 hereof, in the event Tenant is in default under any of the terms and provisions of the Master Lease, Landlord may elect to receive directly from Sublessee all sums due or payable to Tenant by Sublessee pursuant to the Sublease, and upon receipt of Landlord's notice, Sublessee shall thereafter pay to Landlord any and all sums becoming due or payable under the Sublease and Tenant shall receive from Landlord a corresponding credit for such sums against any payments then due or thereafter becoming due from Tenant. Neither the service of such written notice nor the receipt of such direct payments shall cause Landlord to assume any of Tenant's duties, obligations and/or liabilities under the Sublease, nor shall such event impose upon Landlord the duty or obligation to honor the Sublease, nor subsequently to accept Sublessee's attornment pursuant to Section 3(a) hereof. 5. Sublessee hereby acknowledges that it has read and has knowledge of all of the terms, provisions rules regulations of the Master Lease and agrees not to do or omit to do anything which would E-1 cause Tenant to be in breach of the Master Lease. Any such act or omission shall also constitute a breach of this Consent Agreement and shall entitle Landlord to recover any damage, loss, cost or expense which it thereby suffers, from Sublessee, whether or not Landlord proceeds against Tenant. 6. In the event of any Litigation between the parties hereto with respect to the subject matter hereof, the unsuccessful party agrees to pay the successful party all costs, expenses and reasonable attorney's fees incurred therein by the successful party, which shall be included as a part of the judgment therein rendered. 7. This Consent Agreement shall be binding upon an inure to the benefit of the parties' respective successors and assigns, subject to all agreements and restrictions contained in the Master Lease, the Sublease and herein with respect to subleasing, assignment, or other transfer. The agreements contained herein constitute the entire understanding between the parties with respect to the subject matter hereof, and supersede all prior agreements, written or oral, inconsistent herewith. No amendment, modification or change therein will be effective unless Landlord shall have given its prior written consent thereto. This Consent Agreement may be amended only in writing, signed by all parties hereto. 8. Notices required or desired to be given hereunder shall be effective either upon personal delivery or three (3) days after deposit in the United States mail, by certified mail, return receipt requested, addressed to the Landlord at the address set forth above, or to Tenant or Sublessee at the address of the Premises or of the Sublease Premises, respectively. Any party may change its address for notice by giving notice in the manner hereinabove provided. 9. As a condition to the effectiveness of Landlord's consent to the Sublease, Tenant agrees to pay Landlord concurrently with Tenant's delivery of an executed counterpart hereof, Dollars ($______) in reimbursement of Landlord's reasonable attorneys' fees and administrative expenses incurred in connection with this Consent Agreement, as additional rent. Landlord's acceptance of such fee shall impose no duty on Landlord to approve or execute the Sublease. Tenant shall also promptly pay Landlord any share of bonus rents, or other items required under the Master Lease in connection with subleases. 10. Notwithstanding anything to the contrary set forth herein or elsewhere, if the Master Lease was guaranteed at the time of execution or at any time prior hereto by any guarantor, the Landlord may at any time hereafter declare all of its agreement in this Consent Agreement to be null and void and or no force and effect unless and until Landlord receives a counterpart of this Consent Agreement indicating approval thereof by any and all such guarantor(s), and their spouses (if any). 11. Tenant and Sublessee agree to indemnify and hold Landlord harmless from and against any loss, cost, expense, damage or liability, including reasonable attorney's fees, incurred as a result of a claim by any person or entity (i) that is entitled to a commission, finder's fee or like payment in connection with the Sublease or (ii) relating to or arising out of the Sublease or any related agreements or dealings. 12. Tenant agrees to hold any and all payments due under the Sublease as a trust fund to be applied first to the satisfaction of all of Tenant's obligations under the Master Lease and hereunder before using any part thereof for any other purpose. IN WITNESS WHEREOF, the following parties have executed this Consent Agreement as of the date first above written. TENANT: By:________________________________ Its:_______________________________ SUBLESSEE: ___________________________________ By:________________________________ Its:_______________________________ LANDLORD: ___________________________________ By:________________________________ Its:_______________________________ GUARANTOR(S) (and spouse) ___________________________________ ___________________________________ E-2 SCHEDULE 1 WORK LETTER AGREEMENT (Improvement Allowance) 1. PLANS. Tenant shall cause its architects and engineers to prepare and submit to Landlord for approval detailed plans, specifications and working drawings ("Plans") for the construction of Tenant's leasehold improvements ("Improvements") to the Premises. Landlord reserves the right to approve any space planner, architect or engineer employed by Tenant. Tenant's Plans shall include items and information as Landlord shall reasonably require to evaluate Tenant's work. Tenant shall use the Plans to obtain all permits and approvals which are necessary to construct the Improvements. All Improvements shall be constructed in a good and workmanlike manner and in accordance with all applicable laws, codes and regulations, including the Americans with Disabilities Act ("ADA"). It is expressly agreed that (a) Tenant shall not commence any such work until said Plans have been approved by Landlord, and (b) the Plans which have been so approved by Landlord shall be used by Tenant to obtain all permits that are necessary to construct the Improvements. As used herein, the term "Improvements" shall include all work to be done in the Premises pursuant to the Plans, including, but not limited to: demolition work, partitioning, doors, ceiling, floor coverings, wall finishes (including paint and wallcoverings), window coverings, electrical (including lighting, switching, telephones, outlets, computer and special electrical equipment, etc.), plumbing, heating, ventilating and air conditioning, fire protection, cabinets and other millwork. After approval of the Plans by Landlord, no further changes to the Plan shall be made without the prior written approval of Landlord. Tenant acknowledges that Landlord's review and approval of the Plans is not conducted for the purpose of determining the accuracy and completeness of the Plans, their compliance with applicable codes and governmental regulations including ADA, or their sufficiency for purposes of obtaining a building permit, all of which shall remain the responsibility of Tenant and Tenant's architect. Accordingly, Landlord shall not be responsible for any delays in obtaining the building permit due to the insufficiency of the Plans or any delays due to changes in the Plans required by the applicable governmental regulatory agencies reviewing the Plans. 2. IMPROVEMENT ALLOWANCE. Tenant shall provide Landlord with a breakdown of the estimated total cost of the Improvements ("Cost Breakdown"). Landlord hereby grants to Tenant an "Improvement Allowance" of Eighteen and 60/100 Dollars ($18.60) per square foot of space in the Premises, excluding Premises E (i.e., the Improvement Allowance attributable to Premises A is $862,779.60; the Improvement Allowance attributable to Premises B is $206,106.60; the Improvement Allowance attributable to Premises C is $307,402.20; and the Improvement Allowance attributable to Premises D is $220,186.80). The Improvement Allowance shall be disbursed to Tenant not more frequently than once per month based on disbursement requests submitted by Tenant to Landlord and certified by Tenant's architect. Such disbursement request shall set forth the total amount incurred, expended and/or due for each requested item less prior disbursements and a description of the work performed, and materials supplied and/or costs incurred or due with respect to each item for which disbursement is requested. Each such disbursement request shall be accompanied by invoices, vouchers, statements, affidavits, payroll records and/or other documents reasonably requested by Landlord, which substantiate costs incurred to justify such a disbursement, together with lien waivers for those contractors and materialmen providing construction services or materials. In addition, each disbursement shall be subject to inspection and approval of completed work by Landlord's construction Sch 1-1 engineer. In the event the Cost Breakdown exceeds the Improvement Allowance, Tenant shall pay from another source of funds the amount by which the Cost Breakdown exceeds the Improvement Allowance prior to any disbursement of the Improvement Allowance by Landlord. If, at any time during the construction of the Improvements, the total amount remaining to be paid for construction of the Improvements exceeds the amount of the Improvement Allowance remaining to be disbursed, at Landlord's option, no further disbursement of the Improvement Allowance shall be made by Landlord unless, and until Tenant has expended such sums as to cause the Improvement Allowance to again be sufficient to pay the remaining costs. In the event the actual cost of the Improvements is less than the Improvement Allowance, the unused portion of the Improvement Allowance shall not be paid or refunded to Tenant or be available to Tenant as a credit against any obligations of Tenant under the Lease. IF, AS A RESULT OF THE BUILD-OUT OF THE IMPROVEMENTS, CHANGES ARE REQUIRED TO THE BASE BUILDING LIFE-SAFETY PANEL, THEN THE COST OF MAKING SUCH CHANGES TO THE LIFE-SAFETY PANEL SHALL BE BORNE BY LANDLORD. 3. CONSTRUCTION OF IMPROVEMENTS. 3.1 Tenant shall obtain Landlord's approval of Tenant's contractor. Additionally, Tenant shall submit a copy of the proposed construction contract to Landlord for Landlord's approval. Landlord's approval, when required in this Work Letter Agreement, shall be given or denied (as applicable) within ten (10) business days of receipt of the necessary information from Tenant. Tenant's contractors and subcontractors shall be required to provide the following types of insurance, in the minimum amounts indicated, naming Landlord (and Landlord's mortgagee, if required by Landlord) as additional insured: (a) Workmen's Compensation with full statutory limits for employer's liability. (b) Commercial General Liability Insurance including direct and contingent liability in the aggregate amount of One Million and No/100 Dollars ($1,000,000.00) combined single limit coverage per occurrence for personal injury, death or property damage. (c) The Liability Policy shall include coverage for Broad Form Hold Harmless Agreement as is contained in the standard contract. (d) Automobile Liability insurance with bodily injury limits of $250,000 per person, $500,000 per accident, and $50,000 per accident for Property Damage. Original policies or copies of all of the foregoing insurance shall be delivered to Landlord before construction of the Improvements is started and before Tenant's contractor's equipment is placed upon the Premises. In all other respects, the insurance coverage above mentioned shall comply with the Lease provisions. 3.2 It is agreed that Tenant assumes the entire responsibility and liability due to its negligence, including statutory or common law, for any and all injuries or death of any or all persons, including its contractor, subcontractors and employees, and for any and all damages to property caused by or resulting from or arising out of any act or omission on the part of Tenant, its contractor, subcontractors or employees, in the prosecution of the work thereunder. With respect to such work Tenant agrees to indemnify and save harmless Landlord, its mortgagee, architect, engineers and their employees and all other tenants of the Property from and against all losses and expense, including legal fees, which they may suffer or pay as the result of claims or lawsuits due to, because of or arising out of any and all such injuries, death or damage, whether real or alleged, and Tenant, its contractor and subcontractors shall assume and defend at their own expense all such claims or lawsuits. Tenant agrees to insure this assumed liability in its Comprehensive General Liability Policy and the Sch 1-2 original or copy of the policy delivered to Landlord shall indicate this contractual coverage. 3.3 For and during the period of construction, Tenant shall provide and pay for all utilities consumed upon the Premises during said period and for the removal of all temporary connections. 3.4 Upon completion of the Improvements, Tenant's contractors and/or subcontractors shall provide Landlord, without cost to Landlord, with one (1) set of transparent "as built" drawings. 3.5 Completion. Tenant shall endeavor to cause the contractor to substantially complete construction of the Improvements in a diligent manner. It shall be the sole responsibility of Tenant to file all drawings and specifications, pay all fees and obtain all permits and applications from any governmental authorities having jurisdiction, and to obtain any certificates or approvals, including a certificate of occupancy, required to enable Tenant to occupy the Premises. Landlord shall not be liable for any loss or damages as a result of delays in construction of the Premises. No delay in completion of construction of the Improvements shall delay the Commencement Date of the Lease beyond the date specified in the Lease. 4. INCORPORATION. This Agreement is and shall be incorporated by reference in the Lease, and all of the terms and conditions of the Lease are and shall be incorporated herein by this reference. Sch 1-3 EX-11.01 3 COMPUTATION OF EARNINGS Exhibit 11.01 AMISYS Managed Care Systems, Inc. Computation of Earnings Per Share (in thousands, except per share data)
For the year For the year May 27, 1994 ended ended to December 31, 1996 December 31, 1995 December 31, 1994 ----------------- ----------------- ----------------- Net income (loss) $4,697 $1,675 $(6,428) ================ ================= ================= Weighted average Class A common shares outstanding 4,800,000 Weighted average common shares outstanding 7,565,000 5,244,000 450,000 Common shares issued within one year of initial public offering 75,000 75,000 Weighted average options exercised during the period 59,195 Weighted average shares issued during initial public offering 67,674 Weighted average shares issued during secondary public offering 43,526 Stock options issued within one year of initial public offering (using the treasury stock method and the initial) public offering price of $14.50 per share) 562,484 574,950 Stock options issued (using the treasury stock method and the average price of $20.82) 606,845 -------------------------------------------------------------------- Weighted average number of common shares outstanding 8,274,566 5,949,158 5,899,950 ==================================================================== Net income (loss) per common share and common share equivalent $0.57 $0.28 $1.09 ====================================================================
EX-23.02 4 CONSENT OF COOPERS & LYBRAND L.L.P. Exhibit 23.02 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of AMISYS Managed Care Systems, Inc. on Form S-8 of our report, dated February 11, 1997, on our audits of the balance sheets of AMISYS Managed Care Systems, Inc. ("the Company"), as of December 31, 1995 and December 31, 1996, and the related statements of operations, stockholders' equity and cash flows for the period from May 27, 1994 to December 31, 1994 and for the years ended December 31, 1995 and 1996, respectively, and the statements of operations, stockholders' equity (deficit) and cash flows of American International Healthcare, Inc. ("AIHI"), a wholly owned subsidiary of American International Group, Inc. for the period from January 1, 1994 to May 26, 1994 and the related financial statement schedule, which report is included in this Annual Report on Form 10-K. We also consent to the reference to our firm under the caption "Experts" in the registration statement. Washington, D.C. March 6, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K (FILE NO. 0-22614) WHICH INCLUDES BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOR THE PERIOD PRESENTED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 24,087 2,389 15,289 508 0 41,967 3,501 1,188 44,402 10,618 0 0 0 8 33,776 44,402 46,438 46,438 24,264 40,948 0 0 38 6,803 2,106 4,697 0 0 0 4,697 0.57 0.57
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