-----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, Fc0ZGysQDyufJ69PkO+RTyBB9VvrR45jsB+TTrzIrKoXLM5rvYz5KcGRnWkCGvPV O1pmD6uUFddE0SbbHqipEA== 0000891618-99-005814.txt : 19991224 0000891618-99-005814.hdr.sgml : 19991224 ACCESSION NUMBER: 0000891618-99-005814 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19991223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEOFORMA COM INC CENTRAL INDEX KEY: 0001096219 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-89077 FILM NUMBER: 99779580 BUSINESS ADDRESS: STREET 1: 3235-7 SCOTT BOULEVARD CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4086545700 S-1/A 1 FORM S-1/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1999 REGISTRATION NO. 333-89077 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ NEOFORMA.COM, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 5961 77-0424252 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
3255-7 SCOTT BLVD. SANTA CLARA, CALIFORNIA 95054 (408) 654-5700 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ROBERT J. ZOLLARS CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER 3255-7 SCOTT BLVD. SANTA CLARA, CALIFORNIA 95054 (408) 654-5700 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: GORDON K. DAVIDSON, ESQ. WILLIAM H. HINMAN, JR., ESQ. DAVID K. MICHAELS, ESQ. SHEARMAN & STERLING SCOTT J. LEICHTNER, ESQ. 1550 EL CAMINO REAL FENWICK & WEST LLP MENLO PARK, CA 94025 TWO PALO ALTO SQUARE (650) 330-2200 PALO ALTO, CA 94306 (650) 494-0600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ________________. If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ________________. If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ________________. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- PROPOSED PROPOSED MAXIMUM MAXIMUM TITLE OF EACH CLASS AMOUNT OFFERING AGGREGATE AMOUNT OF OF SECURITIES TO BE PRICE OFFERING REGISTRATION TO BE REGISTERED REGISTERED PER SHARE PRICE(1) FEE - ---------------------------------------------------------------------------------------------------------------------------- Common Stock, $0.001 par value per share................................. 8,050,000(2) $10.00 $80,500,000 $21,252(3) - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933. (2) Includes 1,050,000 shares subject to the underwriters' over-allotment option. (3) Previously paid. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED DECEMBER 23, 1999 PROSPECTUS 7,000,000 SHARES [NEOFORMA.COM LOGO] COMMON STOCK ------------------------ This is Neoforma.com, Inc.'s initial public offering of common stock. We expect the public offering price to be between $8.00 and $10.00 per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the common stock will be quoted on the Nasdaq National Market under the symbol "NEOF." INVESTING IN OUR COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 6 OF THIS PROSPECTUS. ------------------------
PER SHARE TOTAL --------- ----- Public offering price...................................... $ $ Underwriting discount...................................... $ $ Proceeds, before expenses, to Neoforma.com, Inc............ $ $
The underwriters may also purchase up to an additional 1,050,000 shares at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares of common stock will be ready for delivery in New York, New York on or about , 2000. ------------------------ MERRILL LYNCH & CO. BEAR, STEARNS & CO. INC. ROBERTSON STEPHENS VOLPE BROWN WHELAN & COMPANY WILLIAM BLAIR & COMPANY ------------------------ The date of this prospectus is , 2000. 3 COVER ARTWORK INSIDE FRONT COVER OF PROSPECTUS: OVERLEAF PAGE CAPTION AT TOP OF PAGE: "empowering healthcare commerce" In the middle of the page, there is a photograph of the Neoforma.com homepage with links to Neoforma.com's three primary services: Shop, Auction and Plan. CAPTION AT LOWER MIDDLE OF PAGE: "Empowering healthcare worldwide by uniting people, information, and commerce." The Neoforma.com logo appears at the bottom right corner. GATE FOLD PAGES CAPTION AT CENTER PAGES: "Healthcare Purchasing Lifecycle" In the background, there are images of healthcare professionals at work. In the center of the gatefold pages, there are three images of web pages from the Neoforma.com website, arranged in a circular pattern. The three images depict web pages for Neoforma.com's three primary services: Shop, Auction and Plan. There are arrows connecting each image, with the word "Information" embedded in each arrow. CAPTION AT TOP RIGHT OF PAGES: Neoforma.com's Plan, Auction and Shop services together address all stages of the healthcare purchasing process, from planning through procurement to liquidation." CAPTION AT BOTTOM RIGHT OF PAGES: "Neoforma.com Shop - Our Shop service enables transactions between purchasers and sellers of new medical equipment, products, and supplies by providing them with online access to one another and the cost-efficiencies of e-commerce." This caption is next to the image of the web page for Neoforma.com's Shop service. CAPTION AT BOTTOM LEFT OF PAGES: "Neoforma.com Auction - Our Auction service offers a comprehensive solution to the challenge of managing used and refurbished equipment and surplus products through online listings and both live and online auctions." This caption is next to the image of the web page for Neoforma.com's Auction service. CAPTION AT TOP LEFT OF PAGES: "Neoforma.com Plan - Our Plan service provides photographic images and interactive content demonstrating the use of medical supplies and equipment in various procedural settings, simplifying the process of planning and equipping medical facilities." This caption is next to the image of the web page for Neoforma.com's Plan service. The Neoforma.com logo appears at the bottom right corner. 4 TABLE OF CONTENTS Prospectus Summary.......................................... 3 Risk Factors................................................ 6 Special Note Regarding Forward-Looking Statements and Industry Data............................................. 19 Use of Proceeds............................................. 20 Dividend Policy............................................. 20 Capitalization.............................................. 21 Dilution.................................................... 22 Selected Consolidated Financial Data........................ 23 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 24 Business.................................................... 34 Management.................................................. 50 Certain Transactions........................................ 63 Principal Stockholders...................................... 68 Description of Capital Stock................................ 71 Shares Eligible for Future Sale............................. 75 Underwriting................................................ 77 Legal Matters............................................... 80 Experts..................................................... 80 Where You Can Find More Information......................... 80 Index to Consolidated Financial Statements.................. F-1
------------------------ You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. Except as otherwise indicated, all information in this prospectus assumes: - the conversion of all outstanding shares of preferred stock into 41,420,953 shares of common stock upon the consummation of this offering, based upon an assumed initial offering price of $9.00 per share; and - no exercise of the underwriters' over-allotment option. Neoforma, Neoforma.com, the Neoforma.com logo, Shop, Auction and Plan are our trademarks or service marks. Each trademark or service mark of any other company appearing in this prospectus belongs to its holder. We incorporated in California on March 4, 1996 and reincorporated in Delaware on November 4, 1998. Our address is 3255-7 Scott Boulevard, Santa Clara, California, 95054, and our telephone number is (408) 654-5700. 2 5 PROSPECTUS SUMMARY This summary may not contain all of the information that may be important to you. You should carefully read the entire prospectus, including "Risk Factors" and the financial statements and related notes included in the prospectus, before making an investment decision. NEOFORMA.COM, INC. Neoforma.com is a leader in the emerging market of providing business-to-business e-commerce services to purchasers and sellers of medical products, supplies and equipment. Our services provide an open, online marketplace where any manufacturer or distributor may list and sell medical products. By aggregating a large number of suppliers and products, our services enable physicians, hospitals and other healthcare providers to efficiently purchase a wide range of new and used medical products. To increase the breadth and usage of our services, we have entered into strategic alliances with leading Internet, technology and healthcare-related organizations and medical products suppliers, such as Dell, General Electric Medical Systems, Healtheon/WebMD, Owens & Minor, SAP, Superior Consultant and VerticalNet. We offer three primary services that together address the entire healthcare purchasing lifecycle. Our Shop service, introduced in August 1999, provides a unified marketplace where purchasers can easily locate and buy new medical products, and suppliers can access new customers and markets. Healthcare providers can use Shop to purchase a wide range of products, from disposable gloves to surgical instruments and diagnostic equipment. Our Auction service creates an efficient marketplace for idle assets by enabling users to list, sell and buy used and refurbished equipment and surplus medical products. We introduced our initial Auction service, an online listing service called AdsOnline, in May 1999, our second Auction service, a live auction service called AuctionLive, in August 1999, and our third Auction service, an online auction service called AuctionOnline, in November 1999. Our Plan service, introduced in July 1998, provides interactive content to healthcare planners and designers, including 360 degree interactive photographs of rooms and suites in medical facilities that we believe represent industry best practices, together with floor plans and information about the products in the room. This information helps reduce the complexities of planning and outfitting healthcare facilities, which we believe increases the appeal of our website to the facility planners responsible for many product purchasing decisions. According to information published by the Health Industry Manufacturers' Association, we estimate that the worldwide market for new medical products, supplies and equipment is more than $145 billion, and is growing at an estimated 6% per year. In the U.S. alone, there are over 20,000 manufacturers and distributors that supply new medical products to over 200,000 healthcare providers, including hospitals, physicians' offices and other healthcare delivery sites. In the market for used or surplus medical products, sellers typically are manufacturers and large healthcare providers located in U.S. urban centers, while buyers typically are healthcare providers located outside of the U.S. or in rural markets in the U.S. Recently the widespread adoption of the Internet for business communications and transactions has created an opportunity for organizations to streamline business processes and to connect purchasers and sellers in otherwise fragmented markets. Because of the inefficiencies inherent in the traditional procurement process for medical products and the industry's high degree of fragmentation, we believe that participants in this industry will increasingly conduct business online to take advantage of the efficiencies of business-to-business e-commerce. Our online marketplace provides significant benefits to both purchasers and sellers of new and used medical products, supplies and equipment. By aggregating product information from numerous suppliers, we offer healthcare providers a central, easy-to-use location for the purchase of medical products, enabling them to significantly reduce transaction and procurement costs. By aggregating a wide range of purchasers, we enable any supplier to offer its new and used medical products on a global 3 6 basis, significantly expanding its market exposure without the expense associated with building or extending traditional distribution channels. Our objective is to become the leading online marketplace for new and used medical products. Key elements of our strategy to meet this objective include: - Build on our position as one of the first to offer comprehensive e-commerce services to our market and increase recognition of our brand; - Increase adoption of our online marketplace to create a network effect where the value of our marketplace significantly increases with each additional user; - Increase functionality of our services to drive broad market adoption; - Establish strategic alliances with leading industry participants; and - Expand internationally. Because we have only recently introduced our services, it is difficult to evaluate our business and our future prospects. We have generated revenue of only $464,000 for the nine months ended September 30, 1999, which consisted primarily of transaction fees paid by sellers of medical products using our AuctionLive service. We have recognized limited revenue to date from services offered through our website. We expect that in the future, our principal source of revenue will be transaction fees paid by the sellers of medical products that use our Shop and Auction services. We also expect to generate revenue from sponsorship fees paid by suppliers and service providers for the right to feature their brands and products on our Plan service. We expect to continue to have operating losses and negative cash flow for the foreseeable future. THE OFFERING Common stock offered............................... 7,000,000 shares Common stock to be outstanding after this offering......................................... 57,794,833 shares Use of proceeds.................................... For general corporate purposes, including sales and marketing, product development and working capital. Proposed Nasdaq National Market symbol............. NEOF
The number of shares of our common stock that will be outstanding after this offering is based on the actual number outstanding on September 30, 1999, and includes the shares of common stock issuable upon conversion of the 12,693,633 shares of our Series E and Series E-1 preferred stock that we issued in October 1999 and of the 176,057 shares of our Series E preferred stock that in November 1999 we agreed to issue and sell to Fisher Scientific International, Inc., and the 350,000 shares of common stock that we issued to the former shareholders of FDI Information Resources, Inc. in connection with our acquisition of substantially all of the assets of FDI in November 1999. The number of shares outstanding also assumes the conversion of all outstanding shares of preferred stock into 41,420,953 shares of common stock based upon an assumed initial offering price of $9.00 per share. The number of shares outstanding excludes: - 5,112,965 shares issuable upon the exercise of stock options outstanding as of September 30, 1999, at a weighted average exercise price of $0.20 per share; - 858,147 shares issuable upon the exercise of warrants outstanding as of September 30, 1999, at a weighted average exercise price of $0.61 per share; and - 8,409,309 shares available for future issuance under our stock plans as described under "Management -- Employee Benefit Plans"; since September 30, 1999, we have granted options to purchase 1,520,000 of these shares to new members of our management team. - up to 2,000,000 shares of our common stock that we would issue if we complete the acquisition of a developer of content management software that we are currently negotiating. 4 7 SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The summary consolidated financial information below should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the related notes included elsewhere in this prospectus.
PERIOD FROM INCEPTION YEAR ENDED NINE MONTHS ENDED (MARCH 6, 1996) DECEMBER 31, SEPTEMBER 30, TO DECEMBER 31, ---------------- ------------------ 1996 1997 1998 1998 1999 ---------------- ------ ------- ------- -------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Total revenue....................... $ -- $ -- $ -- $ -- $ 464 Loss from operations................ (196) (408) (4,607) (2,350) (25,420) Net loss............................ (54) (416) (4,563) (2,308) (25,614) Basic and diluted net loss per share............................. (0.01) (0.05) (1.65) (0.61) (14.20) Weighted-average shares -- basic and diluted........................... 8,000 8,083 2,762 3,807 1,804 Pro forma basic and diluted loss per share............................. (0.36) (0.94) Weighted average shares -- pro forma basic and diluted................. 12,848 27,225
SEPTEMBER 30, 1999 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents............................ $ 655 $72,155 $129,345 Working capital...................................... (9,110) 62,390 119,580 Total assets......................................... 16,003 87,503 144,693 Notes payable, less current portion.................. 8,069 8,069 8,069 Mandatorily redeemable convertible preferred stock... 15,870 -- -- Total stockholders' equity (deficit)................. (18,771) 74,902 132,092
See Note 2 of notes to consolidated financial statements for a description of the method we used to compute our basic and diluted net loss per share. The above table summarizes our consolidated balance sheet as of September 30, 1999: - on an actual basis; - on a pro forma basis to reflect - the sale of 12,418,633 shares of our Series E and Series E-1 preferred stock for net proceeds of approximately $70.5 million and the issuance of 275,000 shares of our Series E-1 preferred stock in connection with a strategic alliance in October 1999, - the issuance of 176,057 shares of our Series E preferred stock that in November 1999 we agreed to sell to Fisher Scientific for net proceeds of approximately $1.0 million, - the issuance of 350,000 shares of common stock to the former shareholders of FDI Information Resources in connection with our acquisition of substantially all of the assets of FDI in November 1999, and - the conversion of all outstanding shares of preferred stock into 41,420,953 shares of common stock, based upon an assumed initial offering price of $9.00 per share; and - on a pro forma as adjusted basis to further reflect the application of the net proceeds from the sale of 7,000,000 shares of common stock in this offering at an assumed initial public offering price of $9.00 per share, after deducting the underwriting discount and estimated offering expenses. 5 8 RISK FACTORS Before you invest in our common stock, you should carefully consider the risks described below, together with all of the other information included in this prospectus. RISKS RELATED TO OUR BUSINESS BECAUSE WE HAVE ONLY RECENTLY INTRODUCED OUR PRIMARY SERVICES AND BECAUSE WE OPERATE IN A NEW AND RAPIDLY EVOLVING MARKET, YOU MAY HAVE DIFFICULTY ASSESSING OUR BUSINESS AND OUR FUTURE PROSPECTS We incorporated in March 1996. Prior to May 1999, our operations consisted primarily of the initial planning and development of our marketplace and the building of our operating infrastructure. We introduced our initial Auction service, AdsOnline, in May 1999, our second Auction service, AuctionLive, in August 1999 and our third Auction service, AuctionOnline, in November 1999 and we introduced our Shop service in August 1999. As a result, we have generated revenues of only $464,000 for the nine months ended September 30, 1999. Because we have only recently introduced our services, it is difficult to evaluate our business and our future prospects. For example, it is difficult to predict whether the market will accept our services and the level of revenue we can expect to derive from our services. Because we are an early stage company in the online market for the purchase and sale of new and used medical products, supplies and equipment, which is a new and rapidly evolving market, we cannot be certain that our business strategy will be successful. Our business will be seriously harmed, and may fail entirely, if we do not successfully execute our business strategy or if we do not successfully address the risks we face. In addition, due to our limited operating history, we believe that period-to-period comparisons of our revenue and results of operations are not meaningful. WE HAVE A HISTORY OF LOSSES, ANTICIPATE INCURRING LOSSES IN THE FORESEEABLE FUTURE AND MAY NEVER ACHIEVE PROFITABILITY We have experienced losses from operations in each period since our inception, including net losses of $25.6 million for the nine months ended September 30, 1999. In addition, as of September 30, 1999, we had an accumulated deficit of approximately $30.6 million. We have not achieved profitability and we expect to continue to incur substantial operating losses for the foreseeable future. We have generated limited revenue to date. If our revenue does not increase substantially or if our expenses increase further than we expect, we may never become profitable. We anticipate that our operating losses will increase in the future, as we expect substantial increases in our costs and expenses in a number of areas, including: - marketing and promotion of our company and our services, including building recognition of our brand name; - expanding our direct field sales force; - expanding and enhancing our operating infrastructure, including hardware and software systems and administrative personnel; - extending the functionality of our online marketplace; and - expanding our services. 6 9 OUR OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT, AND IF WE FAIL TO MEET THE EXPECTATIONS OF INVESTORS OR SECURITIES ANALYSTS, THE MARKET PRICE OF OUR COMMON STOCK WOULD LIKELY DECLINE SIGNIFICANTLY Our revenue and operating results are likely to fluctuate significantly from quarter to quarter, due to a number of factors. These factors include: - the amount and timing of payments to our strategic partners; - variability in the amount of equipment that we auction in a given quarter; - changes in the fees we charge users of our services; - budgetary fluctuations of purchasers of medical products, supplies and equipment; and - changes in general economic and market conditions. Fluctuations in our operating results may cause us to fail to meet the expectations of investors or securities analysts. If this were to happen, the market price of our common stock would likely decline significantly. In addition, as a result of our limited operating history, the emerging nature of our market and the evolving nature of our business model, we are unable to accurately forecast our revenue. We incur expenses based predominantly on operating plans and estimates of future revenue. Our expenses are to a large extent fixed. We may be unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfalls. Accordingly, a failure to meet our revenue projections would have an immediate and negative impact on profitability. IF BUYERS AND SELLERS OF MEDICAL PRODUCTS DO NOT ACCEPT OUR BUSINESS MODEL OF PROVIDING AN ONLINE MARKETPLACE FOR THE PURCHASE AND SALE OF MEDICAL PRODUCTS, DEMAND FOR OUR SERVICES MAY NOT DEVELOP AND THE PRICE OF OUR COMMON STOCK WOULD DECLINE We offer an online marketplace that aggregates a number of suppliers and purchasers of medical products. This business model is new and unproven and depends upon buyers and sellers in this market adopting a new way to purchase and sell medical products, supplies and equipment. If buyers and sellers of medical products do not accept our business model, demand for our services may not develop and the price of our common stock would decline. Suppliers and purchasers of medical products could be reluctant to accept our new, unproven approach, which involves new technologies and may not be consistent with their existing internal organization and procurement processes. Suppliers and purchasers may prefer to use traditional methods of selling and buying medical products, such as using paper catalogs and interacting in person or by phone with representatives of manufacturers or distributors. In addition, many of the individuals responsible for purchasing medical products do not have ready access to the Internet and may be unwilling to use the Internet to purchase medical products. Even if suppliers and purchasers accept the Internet as a means of selling and buying medical products, they may not accept our online marketplace for conducting this type of business. Instead, they may choose to establish and operate their own websites to purchase or sell new and used medical products. Reluctance of suppliers and purchasers to use our services would seriously harm our business. 7 10 IF WE CANNOT QUICKLY BUILD A CRITICAL MASS OF PURCHASERS AND SUPPLIERS OF MEDICAL PRODUCTS, SUPPLIES AND EQUIPMENT, WE WILL NOT ACHIEVE A NETWORK EFFECT AND OUR BUSINESS MAY NOT SUCCEED To encourage suppliers to list their products on our online marketplace, we need to increase the number of purchasers who use our services. However, to encourage purchasers to use our marketplace, it must offer a broad range of products from a large number of suppliers. If we are unable to quickly build a critical mass of purchasers and suppliers, we will not be able to benefit from a network effect, where the value of our services to each participant significantly increases with the addition of each new participant. Our inability to achieve a network effect would reduce the overall value of our Shop and Auction services to purchasers and suppliers and, consequently, would harm our business. IF WE ARE UNABLE TO EXPAND OUR REGISTERED USER BASE AND THE FUNCTIONALITY OF OUR SERVICES, WE MAY NOT PROVIDE AN ATTRACTIVE ALTERNATIVE TO THE WEBSITES OR SYSTEMS USED BY LARGE HEALTHCARE ORGANIZATIONS AND WE MAY NOT ACHIEVE MARKET ACCEPTANCE WITH THESE ORGANIZATIONS Currently, we believe that most of the registered users of our website are relatively small healthcare providers such as physicians offices, and these users have accounted for most of the purchases of new medical products through Shop. It is important to our success that our services be used by large healthcare organizations, such as hospitals, integrated delivery networks and members of large purchasing organizations. In order for these large organizations to accept our services, we must integrate our services with their information systems. In addition, we will need to develop customer-specific pricing capabilities before these organizations can use our services to purchase products covered by their negotiated agreements with suppliers. Finally, we will need to significantly increase the number of suppliers using our services to address the needs of these large organizations, which typically require a wide range of medical products. Many of these large healthcare organizations have established, or may establish, websites that enable sales of their products directly to consumers or electronic data interchange systems designed specifically for their needs and integrated with their existing processes and technologies. If we are unable to extend our capabilities and expand our registered user base as described above, we may not provide an attractive alternative to these websites or systems and may not achieve market acceptance by these large organizations. IF WE DO NOT SUCCEED IN EXPANDING THE BREADTH OF THE PRODUCTS OFFERED THROUGH OUR ONLINE MARKETPLACE, SOME PURCHASERS OF MEDICAL PRODUCTS MAY CHOOSE NOT TO UTILIZE OUR SERVICES WHICH WOULD LIMIT OUR POTENTIAL MARKET SHARE The future success of our Shop service depends upon our ability to offer purchasers a wide range of medical products. The products currently listed on our Shop service are primarily oriented to the physicians' office market. Large healthcare organizations generally require a much broader range of products. To increase the breadth of the products listed on Shop, we must establish relationships with additional suppliers and expand the number and variety of products listed by existing suppliers. If we are unable to maintain and expand the breadth of medical products, supplies and equipment listed on Shop, the attractiveness of our services to purchasers will be diminished, which would limit our potential market share. 8 11 A number of factors could significantly reduce, or prevent us from increasing, the number of suppliers and products offered on our online marketplace, including: - reluctance of suppliers to offer medical products in an online marketplace that potentially includes their competitors; - exclusive or preferential arrangements signed by suppliers with our competitors; - perceptions by suppliers that we give other suppliers preferred treatment on our online marketplace; and - consolidation among suppliers, which we believe is currently occurring. WE EXPECT THAT A SIGNIFICANT PORTION OF THE MEDICAL PRODUCTS, SUPPLIES AND EQUIPMENT SOLD THROUGH OUR SHOP SERVICE WILL COME FROM A LIMITED NUMBER OF KEY MANUFACTURERS AND DISTRIBUTORS, AND THE LOSS OF A KEY MANUFACTURER OR DISTRIBUTOR COULD RESULT IN A SIGNIFICANT REDUCTION IN THE REVENUE WE GENERATE THROUGH THIS SERVICE Although to date we have generated only minimal revenues from our Shop service, we expect that a significant portion of the products to be sold through and revenue to be generated from our Shop service will come from a limited number of key manufacturers and distributors. These parties are generally not obligated to list any medical products on our Shop service. If any of these key manufacturers or distributors cease doing business with us or reduce the number of products they list on our Shop service, the revenue we generate through this service could be significantly reduced. Our supplier agreements are nonexclusive and, accordingly, these suppliers can sell their medical products, supplies and equipment to purchasers directly or through our competitors. IF WE DO NOT TIMELY ADD PRODUCT INFORMATION TO OUR ONLINE MARKETPLACE OR IF THAT INFORMATION IS NOT ACCURATE, OUR REPUTATION MAY BE HARMED AND WE MAY LOSE USERS OF OUR ONLINE SERVICES Currently, we are responsible for entering product information into our database and categorizing the information for search purposes. If we do not do so in a timely manner, we will encounter difficulties in expanding our online marketplace. We currently have a backlog of products to be entered in our system. We will not derive revenue from the sale of products by these suppliers until the information is entered in our system. Timely entering of this information in our database depends upon a number of factors, including the format of the data provided to us by suppliers and our ability to accurately enter the data in our product database, any of which could delay the actual entering of the data. We use an independent company to assist us in digitizing and inputting the data provided to us by suppliers, and we rely on this company to accurately input the data. If this company fails to input data accurately, our reputation could be damaged, and we could lose users of our online services. IF SUPPLIERS DO NOT TIMELY PROVIDE US WITH ACCURATE, COMPLETE AND CURRENT INFORMATION ABOUT THEIR PRODUCTS, WE MAY BE EXPOSED TO LIABILITY OR THERE MAY BE A DECREASE IN THE ADOPTION AND USE OF OUR ONLINE MARKETPLACE If suppliers do not provide us in a timely manner with accurate, complete and current information about the products they offer and promptly update this information when it changes, our database will be less useful to purchasers. We cannot guarantee that the product information available from our services will always be accurate, complete and current, or that it will comply with governmental regulations. This could expose us to liability if this incorrect information harms users of our services or result in decreased adoption and use of our online marketplace. 9 12 BECAUSE SOME OF THE PARTICIPANTS IN OUR ONLINE MARKETPLACE ARE STOCKHOLDERS OR HAVE STRATEGIC RELATIONSHIPS WITH US, WE MAY FIND IT DIFFICULT TO ATTRACT COMPETING COMPANIES, WHICH COULD LIMIT THE BREADTH OF PRODUCTS OFFERED ON AND USERS OF OUR ONLINE MARKETPLACE Some suppliers participating in our online marketplace are our stockholders or have strategic relationships with us. For example, General Electric Medical Systems is entitled to sponsor rooms in our Plan service and has agreed to conduct other activities with us, and an affiliate of General Electric Medical Systems has recently acquired 2,035,563 shares of our preferred stock which will convert into 2,261,737 shares of common stock upon the completion of the offering, based upon an assumed initial public offering price of $9.00 per share. See "Business -- Suppliers." These relationships may deter other suppliers, particularly those that compete directly with these participants, from participating in our online marketplace due to perceptions of bias in favor of one supplier over another. This could limit the array of products offered on our online marketplace, damage our reputation and limit our ability to maintain or increase our user base. IF WE FAIL TO DEVELOP THE CAPABILITY TO INTEGRATE OUR ONLINE SERVICES WITH ENTERPRISE SOFTWARE SYSTEMS OF PURCHASERS AND SUPPLIERS OF MEDICAL PRODUCTS AND TO ENABLE OUR SERVICES TO SUPPORT CUSTOMER-SPECIFIC PRICING, THESE ENTITIES MAY CHOOSE NOT TO UTILIZE OUR ONLINE MARKETPLACE, WHICH WOULD HARM OUR BUSINESS If we do not maintain and expand the functionality and reliability of our services, purchasers and suppliers of medical products may not use our marketplace. We believe that we must develop the capability to integrate our online services with enterprise software systems used by many suppliers of medical products and by many large healthcare organizations, and to enable our services to support customer-specific pricing. We may incur significant expenses to develop these capabilities, and may not succeed in developing them in a timely manner. In addition, developing the capability to integrate our services with suppliers' and purchasers' enterprise software systems will require the cooperation of and collaboration with the companies that develop and market these systems. Suppliers and purchasers use a variety of different enterprise software systems provided by third-party vendors or developed internally. This lack of uniformity increases the difficulty and cost of developing the capability to integrate with the systems of a large number of suppliers and purchasers. Failure to provide these capabilities would limit the efficiencies that our services provide, and may deter many purchasers and suppliers from using our online marketplace, particularly large healthcare organizations. WE FACE INTENSE COMPETITION, AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY, WE MAY BE UNABLE TO MAINTAIN OR EXPAND THE BASE OF PURCHASERS AND SELLERS OF MEDICAL PRODUCTS USING OUR SERVICES AND WE MAY LOSE MARKET SHARE OR BE REQUIRED TO REDUCE PRICES The online market for medical products, supplies and equipment is new, rapidly evolving and intensely competitive. Our primary competition includes e-commerce providers that have established online marketplaces for medical products, supplies and equipment. We also face potential competition from a number of sources. Many companies have created websites to serve the information needs of healthcare professionals. Many of these companies are introducing e-commerce functions that may compete with our services. In addition, providers of online marketplaces and online auction services that currently focus on other industries could expand the scope of their services to include medical products. Existing suppliers of medical products may also establish online marketplaces that offer services to suppliers and purchasers, either on their own or by partnering with other companies. Moreover, live auction houses focusing on medical products may establish online auction services. See "Business -- Competition" for more information about our current and potential competitors. 10 13 Competition is likely to intensify as our market matures. As competitive conditions intensify, competitors may: - enter into strategic or commercial relationships with larger, more established healthcare, medical products and Internet companies; - secure services and products from suppliers on more favorable terms; - devote greater resources to marketing and promotional campaigns; - secure exclusive or preferential arrangements with purchasers or suppliers that limit sales through our marketplace; and - devote substantially more resources to website and systems development. Many of our existing and potential competitors have longer operating histories in the medical products market, greater name recognition, larger customer bases and greater financial, technical and marketing resources than we do. As a result of these factors, our competitors and potential competitors may be able to respond more quickly to market forces, undertake more extensive marketing campaigns for their brands and services and make more attractive offers to purchasers and suppliers, potential employees and strategic partners. In addition, new technologies may increase competitive pressures. We cannot be certain that we will be able to maintain or expand our user base. We may not be able to compete successfully against current and future competitors and competition could result in price reductions, reduced sales, gross margins and operating margins and loss of market share. IF WE ARE NOT ABLE TO INCREASE RECOGNITION OF THE NEOFORMA.COM BRAND NAME, OUR ABILITY TO ATTRACT USERS TO OUR ONLINE MARKETPLACE WILL BE LIMITED We believe that recognition and positive perception of the Neoforma.com brand name in the healthcare industry are important to our success. We intend to significantly expand our advertising and publicity efforts in the near future. However, we may not achieve our desired goal of increasing the awareness of the Neoforma.com brand name. Even if recognition of our name increases, it may not lead to an increase in the number of visitors to our online marketplace or increase the number of users of our services. IF PARTICIPATING SELLERS ON OUR SHOP AND AUCTION SERVICES DO NOT PROVIDE TIMELY AND PROFESSIONAL DELIVERY OF MEDICAL PRODUCTS, SUPPLIES AND EQUIPMENT, PURCHASERS MAY NOT CONTINUE USING OUR SERVICES We rely on suppliers to deliver the medical products, supplies and equipment sold through our Shop service to purchasers. We also often rely on sellers to deliver products sold through our Auction service. In addition, suppliers do not guarantee the availability or timely delivery of products listed on to Shop. If these sellers fail to make delivery in a professional, safe and timely manner, then our services will not meet the expectations of purchasers, and our reputation and brand will be damaged. In addition, deliveries that are non-conforming, late or are not accompanied by information required by applicable law or regulations could expose us to liability or result in decreased adoption and use of our services. 11 14 WE MAY BE SUBJECT TO LITIGATION FOR DEFECTS IN PRODUCTS SUPPLIED BY SELLERS USING OUR SERVICES, AND THIS TYPE OF LITIGATION MAY BE COSTLY AND TIME-CONSUMING TO DEFEND Because we facilitate the sale of new and used medical products by sellers using our services, we may become subject to legal proceedings regarding defects in these medical products, even though we generally do not take title to these products. Any claims, with or without merit, could: - be time-consuming to defend; - result in costly litigation; or - divert management's attention and resources. IF WE ARE UNABLE TO ATTRACT QUALIFIED PERSONNEL OR RETAIN OUR EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL, WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IN OUR INDUSTRY Our success depends on our ability to attract and retain qualified, experienced employees. Competition for qualified, experienced employees in both the Internet and the healthcare industry, particularly in the San Francisco Bay Area, is intense, and we may not be able to compete effectively to retain and attract employees. Should we fail to retain or attract qualified personnel, we may not be able to compete successfully in our industry, and our business would be harmed. We believe that our success will depend on the continued services of executive officers and other key employees. Other than initial offer letters containing information regarding compensation, we currently have employment agreements with only two members of our senior management. However, these agreements do not prevent these executives from terminating their employment at any time. As a result, our employees, including these executives, serve at-will and may elect to pursue other opportunities at any time. The loss of any of our executive officers or other key employees could harm our business. Other than the limited key person life insurance policies we have with our founders, Jeffrey H. Kleck and Wayne D. McVicker, we do not maintain any key person life insurance. MANY OF OUR EXECUTIVES AND OTHER EMPLOYEES HAVE RECENTLY JOINED OUR COMPANY, AND IF THEY ARE UNABLE TO EFFECTIVELY WORK TOGETHER, WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR GROWTH AND OPERATIONS Many of our executive officers and other employees joined us only recently and have had a limited time to work together. For example, our Chief Executive Officer, Robert J. Zollars, joined us in July 1999, our Chief Financial Officer, Frederick J. Ruegsegger, joined us in July 1999, our Executive Vice President of Products and Services, Bhagwan D. Goel, joined us in October 1999, our Executive Vice President of Sales, Daniel A. Eckert, accepted employment with us in July 1999 and joined us in November 1999 and our Executive Vice President of Strategy and Marketing, Robert W. Rene, joined us in December 1999. We cannot assure you that they will be able to work effectively together to manage our growth and continuing operations. OUR STRATEGY TO EXPAND OUR SERVICES INTERNATIONALLY IN ORDER TO INCREASE THE USE OF OUR ONLINE MARKETPLACE BY SUPPLIERS AND PURCHASERS OF MEDICAL PRODUCTS MAY REQUIRE SIGNIFICANT MANAGEMENT ATTENTION AND FINANCIAL RESOURCES, AND IF WE ARE UNABLE TO EXECUTE THIS STRATEGY, OUR GROWTH WILL BE LIMITED AND OUR OPERATING RESULTS MAY BE HARMED In order to increase the market awareness and the use of our online marketplace by suppliers of medical products, we intend to expand our services internationally. If we fail to execute this strategy, 12 15 our growth will be limited and our operating results may be harmed. We have limited experience with the healthcare industry outside the U.S. and with marketing our services internationally. Our entry into international markets may require significant management attention and financial resources, which may harm our ability to effectively manage our existing business. Furthermore, entry into some international markets would require us to develop foreign language versions of our services. Accordingly, our planned international expansion may not be successful. We cannot be sure that we will be able to attract purchasers and sellers of medical products in foreign jurisdictions to our online marketplace. In addition, the market for the purchase and sale of medical products in many foreign countries is different from that in the U.S. For example, in many foreign countries, the government or a government-controlled entity is the principal purchaser of medical products. Competitors which have greater local market knowledge may exist or arise in these international markets and impede our ability to successfully expand in these markets. WE MAY CONTINUE TO MAKE NEW ACQUISITIONS, WHICH COULD HARM OUR PROFITABILITY, PUT A STRAIN ON OUR RESOURCES, OR CAUSE DILUTION TO OUR STOCKHOLDERS We may find it necessary to make acquisitions of technologies and other companies in order to expand our business and the services we offer. For example, on August 6, 1999, we acquired General Asset Recovery LLC, a live auction house and asset management company focused on medical products. In addition, on November 18, 1999, we acquired substantially all of the assets of FDI Information Resources, Inc., a developer of software that facilitates the planning and design of healthcare facility projects. Integrating newly acquired organizations and technologies into our company could be expensive, time consuming and may strain our resources. In addition, we may lose current users of our services if any acquired companies have relationships with competitors of our users. Consequently, we may not be successful in integrating any acquired businesses or technologies and may not achieve anticipated revenue and cost benefits. In addition, future acquisitions could result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or amortization expenses related to goodwill and other intangible assets, any of which could harm our business. For example, in connection with the acquisition of General Asset Recovery, we recorded approximately $9.7 million in goodwill, which will be amortized over a period of seven years, and in connection with the FDI acquisition, we will record an aggregate of approximately $3.3 million in goodwill in the fourth quarter of 1999, which will be amortized over a period of three years. IF WE ARE UNABLE TO MAINTAIN OUR STRATEGIC ALLIANCES OR ENTER INTO NEW ALLIANCES, WE MAY BE UNABLE TO INCREASE THE ATTRACTIVENESS OF OUR ONLINE MARKETPLACE OR PROVIDE SATISFACTORY SERVICES TO USERS OF OUR SERVICES Our business strategy includes entering into strategic alliances with leading technology and healthcare-related companies to increase users of our online marketplace, increase the number and variety of products that we offer and provide additional services and content to our users. We may not achieve our objectives through these alliances. These agreements do not, and future relationships may not, afford us any exclusive marketing or distribution rights. Many of these companies have multiple relationships and they may not regard us as significant for their business. These companies may pursue relationships with our competitors or develop or acquire services that compete with our services. In addition, in many cases these companies may terminate these relationships with little or no notice. If any existing alliance is terminated or we are unable to enter into alliances with leading technology and healthcare-related companies, we may be unable to increase the attractiveness of our online marketplace or provide satisfactory services to purchasers and suppliers of medical products. 13 16 OUR RECENT GROWTH HAS PLACED A SIGNIFICANT STRAIN ON OUR MANAGEMENT SYSTEMS AND RESOURCES, AND IF WE FAIL TO SUCCESSFULLY MANAGE FUTURE GROWTH, WE MAY NOT BE ABLE TO MANAGE OUR BUSINESS EFFICIENTLY AND MAY BE UNABLE TO EXECUTE OUR BUSINESS PLAN We have grown rapidly and will need to continue to grow to execute our business strategy. Our total number of employees grew from four as of December 31, 1997, to 48 as of December 31, 1998, 148 as of September 30, 1999 and 235 as of December 16, 1999, and we anticipate further significant increases in the number of our employees. Our growth has placed significant demands on management as well as on our administrative, operational and financial resources and controls. We expect our future growth to cause similar, and perhaps increased, strain on our systems and controls. For example, our rapid growth requires that we integrate and manage a large number of new employees. In addition, we will need to substantially upgrade our information systems including our accounting system. We also will need to institute new systems such as an auction inventory tracking system. Any failure to successfully upgrade our systems and controls could result in inefficiencies in our business and could cause us to be unable to implement our business plan. IF OUR SYSTEMS ARE UNABLE TO PROVIDE ACCEPTABLE PERFORMANCE AS THE USE OF OUR SERVICES INCREASES, WE COULD LOSE USERS OF OUR SERVICES AND WE WOULD HAVE TO SPEND CAPITAL TO EXPAND AND ADAPT OUR NETWORK INFRASTRUCTURE, EITHER OF WHICH COULD HARM OUR BUSINESS AND RESULTS OF OPERATIONS We introduced our Shop service in August 1999, the AdsOnline component of our Auction service in August 1999 and the AuctionOnline component of our Auction service in November 1999. Accordingly, we have processed a limited number and variety of transactions on our website. To date, these transactions have consisted of sales of new medical products through Shop and sales of used and refurbished medical products on AdsOnline. Our systems may not accommodate increased use while providing acceptable overall performance. We must continue to expand and adapt our network infrastructure to accommodate additional users and increased transaction volumes. This expansion and adaptation will be expensive and will divert our attention from other activities. If our systems do not continue to provide acceptable performance as use of our services increases, our reputation may be damaged and we may lose users of our services. OUR INFRASTRUCTURE AND SYSTEMS ARE VULNERABLE TO NATURAL DISASTERS AND OTHER UNEXPECTED EVENTS, AND IF ANY OF THESE EVENTS OF A SIGNIFICANT MAGNITUDE WERE TO OCCUR, THE EXTENT OF OUR LOSSES COULD EXCEED THE AMOUNT OF INSURANCE WE CARRY TO COMPENSATE US FOR ANY LOSSES The performance of our server and networking hardware and software infrastructure is critical to our business and reputation and our ability to process transactions, provide high quality customer service and attract and retain users of our services. Currently, our infrastructure and systems are located at one site at Exodus Communications in Sunnyvale, California, which is an area susceptible to earthquakes. We depend on our single-site infrastructure and any disruption to this infrastructure resulting from a natural disaster or other event could result in an interruption in our service, reduce the number of transactions we are able to process and, if sustained or repeated, could impair our reputation and the attractiveness of our services or prevent us from providing our services entirely. Our systems and operations are vulnerable to damage or interruption from human error, natural disasters, power loss, telecommunications failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. We do not have a formal disaster recovery plan or alternative provider of hosting services. In addition, we may not carry sufficient business interruption insurance to compensate us for losses that could occur. Any failure on our part to expand our system or Internet infrastructure to keep up with the demands of our users, or any system failure that causes an interruption in service or a decrease in responsiveness of our online services or website, could result in 14 17 fewer transactions and, if sustained or repeated, could impair our reputation and the attractiveness of our services or prevent us from providing our services entirely. IF WE ARE UNABLE TO SAFEGUARD THE SECURITY AND PRIVACY OF THE CONFIDENTIAL INFORMATION OF THE USERS OF OUR ONLINE MARKETPLACE, THESE USERS MAY DISCONTINUE USING OUR SERVICES A significant barrier to the widespread adoption of e-commerce is the secure transmission of personally identifiable information of Internet users as well as other confidential information over public networks. If any compromise or breach of security were to occur, it could harm our reputation and expose us to possible liability. We use SSL, or secure sockets layer, an Internet security technology, at appropriate points in the transaction flow and encrypt information on our servers to protect user information during transactions, and we employ a security consulting firm that periodically tests our security measures. Despite these efforts, a party may be able to circumvent our security measures and could misappropriate proprietary information or cause interruptions in our operations. We may be required to make significant expenditures to protect against security breaches or to alleviate problems caused by any breaches. IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, OUR COMPETITORS MAY GAIN ACCESS TO OUR TECHNOLOGY, WHICH COULD HARM OUR BUSINESS We regard our intellectual property as critical to our success. If we are unable to protect our intellectual property rights, our business would be harmed. We rely on trademark, copyright and trade secret laws to protect our proprietary rights. We have applied for registration of several marks including the Neoforma.com logo. Our trademark registration applications may not be approved or granted, or, if granted, may be successfully challenged by others or invalidated through administrative process or litigation. WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY CLAIMS AND WE COULD SUBSEQUENTLY LOSE OUR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD RESULT IN OUR INABILITY TO OPERATE OUR CURRENT BUSINESS We may from time to time be subject to claims of infringement of other parties' proprietary rights or claims that our own trademarks, patents or other intellectual property rights are invalid. Any claims of this type, with or without merit, could be time consuming to defend, result in costly litigation, divert management attention and resources or require us to enter into royalty or license agreements. License agreements may not be available on commercially reasonable terms, if at all. In addition, there has been a recent increase in the number of patent applications related to the use of the Internet to perform business processes. Enforcement of intellectual property rights in the Internet sector will become a greater source of risk as the number of business process patents increases. The loss of access to any key intellectual property right could result in our inability to operate our current business. IF WE FAIL TO LICENSE THIRD-PARTY SOFTWARE INCORPORATED IN OUR SERVICES, WE MAY NOT BE ABLE TO OPERATE OUR ONLINE MARKETPLACE We currently rely on software that we have licensed from a number of suppliers. For example, we use software that we license from NetDynamics, Inc., a subsidiary of Sun Microsystems, to provide part of our website infrastructure, we use information retrieval software that we license from SearchCafe Development Corporation to provide part of our search capabilities and we use software that we license from Moai, Inc. to provide a substantial part of the functionality of our AuctionOnline service. These licenses may not continue to be available to us on commercially reasonable terms, or at all. In addition, the licensors may not continue to support or enhance the licensed software. In the future, we expect to license other third party technologies to enhance our services, to meet evolving 15 18 user needs or to adapt to changing technology standards. Failure to license, or the loss of any licenses of, necessary technologies could impair our ability to operate our online marketplace until equivalent software is identified, licensed and integrated or developed by us. In addition, we may fail to successfully integrate licensed technology into our services, which could similarly harm development and market acceptance of our services. RISKS RELATED TO OUR INDUSTRY THE SUCCESS OF OUR BUSINESS DEPENDS ON THE PARTICIPANTS IN THE MARKET FOR MEDICAL PRODUCTS, SUPPLIES AND EQUIPMENT ACCEPTING THE INTERNET FOR DISTRIBUTION AND PROCUREMENT Business-to-business e-commerce is currently not a significant sector of the market for medical products, supplies and equipment. The Internet may not be adopted by purchasers and suppliers in the medical products, supplies and equipment market for many reasons, including: - reluctance by the healthcare industry to adopt the technology necessary to engage in the online purchase and sale of medical products; - failure of the market to develop the necessary infrastructure for Internet-based communications, such as wide-spread Internet access, high-speed modems, high-speed communication lines and computer availability; - their comfort with existing purchasing habits, such as ordering through paper-based catalogs and representatives of medical manufacturers and distributors; - their concern with respect to security and confidentiality; and - their investment in existing purchasing and distribution methods and the costs required to switch methods. Should healthcare providers and suppliers of medical products choose not to utilize or accept the Internet as a means of purchasing and selling medical products, our business model would not be viable. REGULATION OF THE INTERNET IS UNSETTLED, AND FUTURE REGULATIONS COULD INHIBIT THE GROWTH OF E-COMMERCE AND LIMIT THE MARKET FOR OUR SERVICES A number of legislative and regulatory proposals under consideration by federal, state, local and foreign governmental organizations may lead to laws or regulations concerning various aspects of the Internet, such as user privacy, taxation of goods and services provided over the Internet and the pricing, content and quality of services. Legislation could dampen the growth in Internet usage and decrease or limit its acceptance as a communications and commercial medium. If enacted, these laws and regulations could limit the market for our services. In addition, existing laws could be applied to the Internet, including consumer privacy laws. Legislation or application of existing laws could expose companies involved in e-commerce to increased liability, which could limit the growth of e-commerce. IF REGULATIONS WITH RESPECT TO HOW AUCTIONS MAY BE CONDUCTED ARE IMPOSED BY STATES, OUR BUSINESS COSTS MAY INCREASE, WHICH WOULD HARM OUR RESULTS OF OPERATIONS Numerous states, including the State of California, where our headquarters are located, have regulations regarding how auctions may be conducted and the liability of auctioneers in conducting these auctions. No legal determination has been made with respect to the applicability of these regulations to our online business to date and little precedent exists in this area. One or more states 16 19 may attempt to impose these regulations upon us in the future, which could increase our cost of doing business. IF THERE ARE CHANGES IN THE POLITICAL, ECONOMIC OR REGULATORY HEALTHCARE ENVIRONMENT THAT AFFECT THE PURCHASING PRACTICE AND OPERATION OF HEALTHCARE ORGANIZATIONS, OR IF THERE IS CONSOLIDATION IN THE HEALTHCARE INDUSTRY, WE COULD BE REQUIRED TO MODIFY OUR SERVICES OR TO INTERRUPT DELIVERY OF OUR SERVICES The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. Factors such as changes in reimbursement policies for healthcare expenses, consolidation in the healthcare industry and general economic conditions affect the purchasing practices and operation of healthcare organizations. Changes in regulations affecting the healthcare industry, such as any increased regulation by the Food and Drug Administration of the purchase and sale of medical products, could require us to make unplanned enhancements of our services, or result in delays or cancellations of orders or reduce demand for our services. Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state level. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry providers operate. We do not know what effect any proposals would have on our business. Many healthcare industry participants are consolidating to create integrated healthcare delivery systems with greater market power. As the healthcare industry consolidates, competition to provide services to industry participants will become more intense and the importance of establishing a relationship with each industry participant will become greater. These industry participants may try to use their market power to negotiate fee reductions of our services. If we were forced to reduce our fees, our operating results could suffer if we cannot achieve corresponding reductions in our expenses. OUR BUSINESS DEPENDS UPON THE DELIVERY OF ACCURATE ELECTRONIC INFORMATION VIA THE INTERNET, AND IF YEAR 2000 ISSUES CAUSE LONG-TERM INOPERABILITY OF THE INTERNET OR OUR ONLINE MARKETPLACE, WE COULD LOSE USERS OF OUR SERVICES OR BE UNABLE TO CONTINUE OUR BUSINESS Significant uncertainty exists concerning the potential costs and effects associated with any year 2000 compliance problems. Any year 2000 compliance problems faced by us, users of our online marketplace and strategic partners could seriously harm our business. In addition, our ability to operate our business depends upon delivery of accurate, electronic information via the Internet. To the extent year 2000 issues result in the long-term inoperability of the Internet or our online marketplace, our business would be seriously harmed. For more information regarding this risk, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000." RISKS RELATED TO THIS OFFERING THE PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY, WHICH COULD LEAD TO LOSSES FOR INDIVIDUAL STOCKHOLDERS The trading prices of many stocks of Internet-related companies have experienced extreme price and volume fluctuations. Because we are an Internet-related company, we expect our stock price to be similarly volatile. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. These fluctuations may continue and could harm our stock price. 17 20 Any negative change in the public's perception of the prospects of Internet-related companies could also depress our stock price, regardless of our results. WE COULD BE SUBJECT TO SECURITIES CLASS ACTION LITIGATION IF OUR STOCK PRICE IS VOLATILE, WHICH COULD BE COSTLY AND TIME-CONSUMING TO DEFEND AND COULD DAMAGE OUR REPUTATION In the past, there have been class action lawsuits filed against companies after periods of fluctuations in the market price of their securities. If we were subject to this type of litigation, it would be a strain on our personnel and financial resources, and divert management's attention from running our company and could negatively affect our public image and reputation. OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS WILL CONTINUE TO HOLD A SUBSTANTIAL PORTION OF OUR STOCK SUBSEQUENT TO THE COMPLETION OF THIS OFFERING, AND, CONSEQUENTLY, COULD MAKE SOME TRANSACTIONS MORE DIFFICULT OR IMPOSSIBLE TO COMPLETE WITHOUT THE SUPPORT OF THESE STOCKHOLDERS Based on the number of shares of our common stock outstanding as of September 30, 1999, executive officers, directors and current holders of 5% or more of our outstanding common stock will, in the aggregate, own approximately 58.2% of our outstanding common stock after this offering. As a result, these stockholders will be able to influence significantly all matters requiring approval by our stockholders, including the election of directors and the approval of significant corporate transactions. This concentration of ownership may also delay, deter or prevent a change in control of our company and may make some transactions more difficult or impossible without the support of these stockholders. WE HAVE ADOPTED ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT THE SALE OF OUR COMPANY AND DIMINISH THE VOTING RIGHTS OF THE HOLDERS OF OUR COMMON STOCK Provisions of our certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. For a description of these provisions, see "Description of Capital Stock -- Anti-Takeover Provisions." AN AGGREGATE OF 50,734,833 SHARES, OR 87.8%, OF OUR OUTSTANDING STOCK, WILL BECOME ELIGIBLE FOR RESALE IN THE PUBLIC MARKET BETWEEN 180 DAYS AND ONE YEAR AFTER THIS OFFERING, AND FUTURE SALES OF THIS STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE Sales of substantial amounts of our common stock in the public market after this offering could reduce the prevailing market prices for our common stock. Of the 57,794,833 shares of common stock to be outstanding upon the closing of this offering, the 7,000,000 shares offered in this offering will be freely tradable without restriction or further registration, other than shares purchased by our officers, directors or other affiliates within the meaning of Rule 144 under the Securities Act of 1933, which will be restricted from sale until 180 days after the date of this prospectus under the terms of agreements between these affiliates and the underwriters. The underwriters may, at their discretion and without notice, release all or a portion of the shares subject to lock-up agreements. An additional 60,000 shares held by an existing stockholder prior to this offering will be eligible for immediate sale in the public market without restriction. The remaining 50,734,833 shares of our common stock held 18 21 by existing stockholders upon the completion of this offering will become eligible for resale in the public market as follows:
NUMBER OF SHARES OUTSTANDING AFTER THE OFFERING DATE WHEN SHARES BECOME AVAILABLE FOR RESALE IN THE PUBLIC MARKET - ----------------- ----------------------------------------------------------------- 34,830,623 180 days after the date of this prospectus under the terms of agreements between the stockholders and the underwriters or us, provided that the underwriters can waive this restriction at any time. 28,173,146 of these shares will also be subject to sales volume restrictions under Rule 144 under the Securities Act. 15,904,210 Upon expiration of applicable one-year holding periods under Rule 144, which will expire between August 27, 2000 and October 14, 2000, subject to sales volume restrictions under Rule 144.
In addition, we intend to file a registration statement on Form S-8 under the Securities Act after the date of this offering to register shares of our common stock issued or reserved for issuance under our various stock plans. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA This prospectus contains forward-looking statements that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions. We cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks outlined under "Risk Factors" and elsewhere in this prospectus. This prospectus contains estimates of market growth related to the Internet. These estimates have been included in studies published by Forrester Research, Efficient Healthcare Consumer Response and the Health Industry Manufacturers' Association. These estimates assume that certain events, trends and activities will occur. Although we believe that these estimates are generally indicative of the matters reflected in those studies, these estimates are inherently imprecise, and we caution you to read these estimates in conjunction with the rest of the disclosure in this prospectus, particularly the "Risk Factors" section. 19 22 USE OF PROCEEDS The net proceeds to us from the sale of the 7,000,000 shares of common stock offered by us will be approximately $57.2 million, or approximately $66.0 million if the underwriters' over-allotment option is exercised in full, based on an assumed initial public offering price of $9.00 per share and after deducting the underwriting discount and estimated offering expenses. We intend to use the net proceeds from this offering primarily for general corporate purposes, including sales and marketing, product development and working capital. We may use a portion of the net proceeds from this offering to acquire or invest in businesses, technologies or services that are complementary to our business. However, we have no present commitments with respect to any transactions of this type. We will retain broad discretion in the allocation and use of the net proceeds of this offering. Pending these uses, we intend to invest the net proceeds in short-term, investment-grade, interest-bearing securities. DIVIDEND POLICY We have never declared or paid cash dividends on our capital stock. We intend to retain any future earnings to finance future growth and do not anticipate paying cash dividends for the foreseeable future. In addition, the terms of our credit facilities prohibit us from paying cash dividends on our capital stock without prior consent of the lender. 20 23 CAPITALIZATION The following table sets forth our cash and cash equivalents and capitalization as of September 30, 1999: - on an actual basis; - on a pro forma basis to reflect - the sale of 12,418,633 shares of our Series E and Series E-1 preferred stock for net proceeds of approximately $70.5 million and the issuance of 275,000 shares of our Series E-1 preferred stock in connection with a strategic alliance we entered into in October 1999, - the issuance of 176,057 shares of our Series E preferred stock that in November 1999 we agreed to sell to Fisher Scientific for net proceeds of approximately $1.0 million, - the issuance of 350,000 shares of common stock to the former shareholders of FDI Information Resources in connection with our acquisition of substantially all of the assets of FDI in November 1999, and - the conversion of all outstanding shares of preferred stock into 41,420,953 shares of common stock, based upon an assumed initial public offering price of $9.00 per share; and - on a pro forma as adjusted basis to further reflect the application of the net proceeds from the sale of 7,000,000 shares of common stock in this offering at an assumed initial public offering price of $9.00 per share, after deducting the underwriting discount and estimated offering expenses.
SEPTEMBER 30, 1999 ------------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ---------- ----------- ------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Cash and cash equivalents................................... $ 655 $ 72,155 $129,345 ======== ======== ======== Notes payable, less current portion......................... 8,069 8,069 8,069 -------- -------- -------- Mandatorily redeemable convertible preferred stock, $0.001 par value, 15,682,823 shares authorized, 15,261,298 issued and outstanding, actual; 15,682,823 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted.................................................. 15,870 -- -- -------- -------- Stockholders' equity (deficit): Preferred stock, $0.001 par value; 11,860,000 shares authorized, 11,860,000 shares issued and outstanding, actual; 11,860,000 shares authorized, no shares issued and outstanding, pro forma; 5,000,000 shares authorized, no shares issued and outstanding, pro forma as adjusted................................................ 12 -- -- Common stock, $0.001 par value; 200,000,000 shares authorized, 9,023,880 shares issued and outstanding, actual; 200,000,000 shares authorized, 50,794,833 shares issued and outstanding, pro forma; 200,000,000 shares authorized, 57,794,833 shares issued and outstanding, pro forma as adjusted................................... 9 51 58 Additional paid-in capital.................................. 55,833 149,486 206,676 Valuation of warrants....................................... 3,621 3,621 3,621 Notes receivable from stockholders.......................... (1,302) (1,302) (1,302) Deferred compensation....................................... (46,297) (46,297) (46,297) Deficit accumulated during the development stage............ (30,647) (30,647) (30,647) -------- -------- -------- Total stockholders' equity (deficit).................... (18,771) 74,902 132,092 -------- -------- -------- Total capitalization............................... $ 5,168 $ 82,971 $140,161 ======== ======== ========
- ------------------------- The number of shares of common stock outstanding set forth in the table above excludes the following: - 5,112,965 shares issuable upon the exercise of stock options outstanding as of September 30, 1999, at a weighted average exercise price of $0.20 per share; - 858,147 shares issuable upon the exercise of warrants outstanding as of September 30, 1999, at a weighted average exercise price of $0.61 per share; and - 8,409,309 shares available for future issuance under our stock plans as described under "Management -- Employee Benefit Plans"; since September 30, 1999, we have granted options to purchase 1,520,000 of these shares to new members of our management team. - up to 2,000,000 shares of our common stock that we would issue if we complete the acquisition of a developer of content management software that we are currently negotiating. The number of shares of common stock into which each share of our Series E and Series E-1 preferred stock will be converted upon completion of this offering may be adjusted under some circumstances as described in Note 9 of notes to consolidated financial statements. 21 24 DILUTION As of September 30, 1999, our pro forma net tangible book value was approximately $61.0 million, or $1.20 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by 50,794,833 shares of common stock outstanding after giving effect to the sale of 12,693,633 shares of our Series E and Series E-1 preferred stock in October 1999, the issuance of 176,057 shares of our Series E preferred stock that in November 1999 we agreed to sell to Fisher Scientific, the issuance of 350,000 shares of common stock to the former shareholders of FDI Information Resources in connection with our acquisition of substantially all of the assets of FDI in November 1999 and the conversion of all outstanding shares of preferred stock into 41,420,953 shares of common stock upon completion of this offering, based upon an assumed initial public offering price of $9.00 per share. After giving effect to the receipt of the proceeds from the sale of 7,000,000 shares of our common stock in this offering and after deducting the estimated underwriting discount and estimated offering expenses, our pro forma net tangible book value as of September 30, 1999 would have been approximately $118.2 million, or $2.05 per share. This represents an immediate increase in pro forma net tangible book value of $0.85 per share to existing stockholders and an immediate dilution of $6.95 per share to new investors purchasing shares at the assumed initial public offering price. The following table illustrates the per share dilution: Assumed initial public offering price per share............. $ 9.00 Pro forma net tangible book value per share as of September 30, 1999..................................... $ 1.20 Increase per share attributable to new investors.......... 0.85 Pro forma net tangible book value per share after this offering.................................................. 2.05 ------ Dilution per share to new investors......................... $ 6.95 ======
The following table summarizes as of September 30, 1999, on the pro forma basis described above, the number of shares of common stock purchased from us, the total cash consideration paid to us and the average price per share paid by existing stockholders and by new investors purchasing shares of common stock in this offering, before deducting the underwriting discount and estimated offering expenses:
SHARES PURCHASED TOTAL CONSIDERATION -------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ------------ ------- ------------- Existing stockholders............... 50,794,833 87.9% $ 89,012,000 58.6% $1.75 New investors....................... 7,000,000 12.1 63,000,000 41.4 9.00 ---------- ----- ------------ ----- Total..................... 57,794,833 100.0% $152,012,000 100.0% ========== ===== ============ =====
The above discussion and tables assume no exercise of any stock options or warrants outstanding as of September 30, 1999. As of September 30, 1999, we had outstanding options to purchase 5,112,965 shares of our common stock at a weighted average exercise price of $0.20 per share and warrants to purchase 858,147 shares of our common stock at a weighted average exercise price of $0.61 per share. If all of these options and warrants are exercised, - there will be an additional $0.17 per share of dilution to new public investors; - existing stockholders would hold 89.0% of our common stock and new investors would hold 11.0% of our common stock; and - existing stockholders would have paid 59.0% of total consideration for our common stock, at an average price per share of $1.60, and new investors would have paid 41.0% of total consideration. Please see "Capitalization," "Management -- Employee Benefit Plans" and Notes 10 and 11 of notes to consolidated financial statements. 22 25 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data for the period from inception (March 6, 1996) through December 31, 1996, as of and for the years ended December 31, 1997 and 1998 and for the nine months ended September 30, 1998 and 1999 are derived from our consolidated financial statements, which have been audited by Arthur Andersen LLP, independent public accountants, and are included elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 1996 are derived from audited financial statements not included in this prospectus. When you read this selected consolidated financial data, it is important that you also read the historical financial statements and related notes included in this prospectus, as well as the section of this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." Historical results are not necessarily indicative of future results. See Note 2 of notes to consolidated financial statements for an explanation of the determination of the number of shares used in computing per share amounts.
PERIOD FROM INCEPTION YEAR ENDED NINE MONTHS ENDED (MARCH 6, 1996) TO DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ------------------- ------------------- 1996 1997 1998 1998 1999 --------------------- ------ -------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenue: Transaction fees................................ $ -- $ -- $ -- $ -- $ 451 Website sponsorship fees and other.............. -- -- -- -- 13 ------ ------ -------- ------- -------- Total revenue................................. -- -- -- -- 464 Operating Expenses: Operations...................................... -- -- 627 458 2,399 Product development............................. 31 179 1,491 801 4,321 Selling and marketing........................... 111 153 1,409 761 5,096 General and administrative...................... 54 76 1,075 330 5,812 Amortization of intangibles..................... -- -- -- -- 230 Amortization of deferred compensation........... -- -- 5 -- 5,662 Cost of warrant issued to recruiter............. -- -- -- -- 2,364 ------ ------ -------- ------- -------- Loss from operations.......................... (196) (408) (4,607) (2,350) (25,420) Other Income (Expense): Interest income................................. -- -- 66 51 173 Interest expense................................ -- (15) (22) (9) (337) Other........................................... 142 7 -- -- (30) ------ ------ -------- ------- -------- Net loss...................................... $ (54) $ (416) $ (4,563) $(2,308) $(25,614) ====== ====== ======== ======= ======== Basic and diluted net loss per share.............. $(0.01) $(0.05) $ (1.65) $ (0.61) $ (14.20) ====== ====== ======== ======= ======== Weighted-average shares -- basic and diluted...... 8,000 8,083 2,762 3,807 1,804 ====== ====== ======== ======= ======== Pro forma basic and diluted loss per share (unaudited)..................................... $ (0.36) $ (0.94) ======== ======== Weighted-average shares -- pro forma basic and diluted (unaudited)............................. 12,848 27,225 ======== ========
DECEMBER 31, ------------------------ SEPTEMBER 30, 1996 1997 1998 1999 ---- ----- ------- ------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $ 7 $ 32 $ 812 $ 655 Working capital............................................. 38 (23) 214 (9,110) Total assets................................................ 51 55 1,672 16,003 Notes payable, less current portion......................... 75 385 279 8,069 Mandatorily redeemable convertible preferred stock.......... -- -- 3,884 15,870 Total stockholders' equity (deficit)........................ (34) (390) (3,155) (18,771)
23 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of factors including those discussed in "Risk Factors" and elsewhere in this prospectus. OVERVIEW Neoforma.com is a leading provider of business-to-business e-commerce services in the large and highly fragmented market for medical products, supplies and equipment. Our marketplace aggregates suppliers of a wide range of new and used medical products and presents their offerings to the physicians, hospitals and other healthcare organizations that purchase these products. We believe that our services will streamline procurement processes and extend the reach of existing sales and distribution channels, as well as reduce transaction costs for both buyers and sellers of medical products, supplies and equipment. We offer three primary services. Our Shop service provides a unified marketplace where purchasers can easily identify, locate and purchase new medical products and suppliers can access new customers and markets. Healthcare providers can use Shop to purchase a wide range of products, from disposable gloves to surgical instruments and diagnostic equipment. Our Auction service creates an efficient marketplace for idle assets by enabling users to list, sell and buy used and refurbished equipment and surplus medical products. Our Plan service provides interactive content to healthcare facility planners and designers, including 360 degree interactive photographs of rooms and suites in medical facilities that we believe represent industry best practices, together with floor plans and information about the products in the room. This information helps reduce the complexities of planning and outfitting facilities, which we believe increases the appeal of our website to the facility planners responsible for many product purchasing decisions. We incorporated on March 4, 1996. From inception, our operating activities have related primarily to the initial planning and development of our marketplace and the building of our operating infrastructure. We first introduced the Neoforma.com website in 1997 and have since released a number of enhancements to provide new services and content. Initially, our website provided only information for healthcare professionals. We began offering e-commerce services with the introduction of our initial Auction service, AdsOnline, in May 1999 and expanded our services with the introduction of our second Auction service, AuctionLive, in August 1999, our third Auction service, AuctionOnline, in November 1999 and Shop in August 1999. Since we introduced our Auction and Shop services, we have focused on expanding and enhancing our services, establishing relationships with suppliers of medical products, expanding our purchaser base, developing strategic alliances, promoting our brand name and building our operating infrastructure. We have recognized limited revenue to date. We expect that our principal source of revenue will be transaction fees paid by the sellers of medical products that use our Shop and Auction services. These transaction fees represent a negotiated percentage of the sale price of the medical products sold through Shop or Auction. We expect our Plan service to facilitate transactions on our Shop and Auction services by linking Plan content to products and equipment listed on Shop and Auction. We recognize transaction fees as revenue when the seller confirms a purchaser's order. For live and online 24 27 auction services, we recognize seller transaction fees, as well as a buyer's premium, when the product is sold. We also expect to receive revenue from the following sources: - sponsorship fees paid by sellers of medical products and services used in planning and outfitting healthcare facilities in exchange for the right to feature their brands and products on our Plan service; - subscription fees paid by healthcare providers and manufactures and distributors of medical products for our management and disposition of their used medical equipment through our asset recovery service on Auction; - license fees from the sale of software tools and related technical information for the equipping and planning of healthcare facilities; - development fees from participating sellers to digitize their product information for display on our website; and - product revenue related to the sale of medical equipment that we purchase for resale through our live and online auction services. Development fees are recognized as development services are performed. Sponsorship and subscription fees will be recognized ratably over the period of the agreement. Product revenue representing the difference between the amount we pay for the equipment and the price paid on resale is recognized when the product is shipped or delivered, depending on the shipping terms associated with each transaction. With respect to software licenses, we expect to generally recognize revenue upon shipment of the product and will recognize revenue from related service contracts, training and customer support ratably over the period of the related contract. Our operating expenses have increased significantly since our inception, and the rate of this increase has accelerated since our introduction of our Auction and Shop services. These increases are primarily due to additions to our staff as we have expanded all aspects of our operations. We incurred expenses in the amount of $3.1 million, including $2.4 million related to the valuation of a warrant issued to an executive search firm, in connection with the hiring of Robert J. Zollars, our Chief Executive Officer, and five other executive officers who have been hired since February 1999. As a result of our expansion, we have grown from four employees as of December 31, 1997, to 48 full-time employees as of December 31, 1998, to 148 full-time employees as of September 30, 1999 to 235 full-time employees as of December 16, 1999. If the initial public offering price of our common stock is less than $10.00 per share, we will record a non-cash preferred stock dividend of up to approximately $22.0 million relating to the beneficial conversion rights held by our Series E and Series E-1 preferred stockholders that would be triggered on the effective date of this offering. If the public offering price is $10.00 per share or more, there will not be a preferred stock dividend charge. On August 6, 1999, we acquired General Asset Recovery LLC, or GAR, a live auction house and asset management company focused on medical products. The total purchase price was approximately $9.7 million, including $1.7 million in cash, the issuance of a promissory note in the principal sum of $7.8 million, the assumption of $100,000 in liabilities and acquisition-related expenses of approximately $100,000. The promissory note is payable over five years and bears interest at 7% per annum. This acquisition was accounted for using the purchase method of accounting. As a result of this acquisition, we began recording an aggregate of approximately $9.7 million in goodwill beginning in the third quarter of fiscal year 1999, which will be amortized on a straight-line basis over a seven-year period. 25 28 On November 18, 1999, we acquired substantially all of the assets of FDI Information Resources, Inc., or FDI, a developer of software that facilitates the planning and design of healthcare facility projects. The total purchase price consisted of 350,000 shares of our common stock and up to $75,000 to reimburse costs incurred by FDI in connection with the acquisition. This acquisition was accounted for using the purchase method of accounting. As a result of this acquisition, we will record an aggregate of approximately $3.3 million in goodwill beginning in the fourth quarter of fiscal 1999, which will be amortized on a straight-line basis over a three-year period. In order to acquire certain software and technology, we are currently in negotiations to acquire a content software management company. If we complete this transaction, we would issue up to 2,000,000 shares of our common stock, including shares issuable upon the exercise of assumed options, to the former shareholders of the acquired company. Since inception, we have incurred significant losses and, as of September 30, 1999, had an accumulated deficit of $30.6 million. We expect operating losses and negative cash flow to continue for the foreseeable future. We anticipate our losses will increase significantly due to substantial increases in our expenses for sales and marketing, product development, operating infrastructure, general and administrative staff and development of strategic alliances. We have a limited operating history on which to base an evaluation of our business and prospects. You must consider our prospects in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets such as the online market for the purchase and sale of new and used medical products, supplies and equipment. To address these risks, we must, among other things, expand the number of users of our online services, enter into new strategic alliances, increase the functionality of our services, implement and successfully execute our business and marketing strategy, respond to competitive developments and attract, retain and motivate qualified personnel. We may not be successful in addressing these risks, and our failure to do so could seriously harm our business. RESULTS OF OPERATIONS Due to our limited operating history, we believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as an indication of future performance. NINE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999 Revenue. Since inception, we have been in the development stage and have had only limited revenue. We had total revenue of $464,000 for the nine months ended September 30, 1999 primarily from transaction fees paid by sellers of medical products using our AuctionLive service. We did not have any revenue for the nine months ended September 30, 1998. Operations. Operations expenses consist primarily of expenditures for digitizing and inputting content and for the operation and maintenance of our website. These expenditures consist primarily of fees for independent contractors and personnel expenses for our customer support and site operations personnel. Operations expenses increased from approximately $458,000 for the nine months ended September 30, 1998 to $2.4 million for the nine months ended September 30, 1999. The increase was primarily due to an increase in operations personnel costs from approximately $127,000 to $1.3 million and an increase in payments to third party consultants from approximately $207,000 to $936,000. These increases were primarily due to increased expenditures for digitizing and inputting content and for the enhancement of the infrastructure of our website. We expect our operations 26 29 expenses to significantly increase as we expand our operating infrastructure and add content and functionality to our website. Product Development. Product development expenses consist primarily of personnel expenses and consulting fees associated with the development and enhancement of our services and website. Product development expenses increased from $801,000 for the nine months ended September 30, 1998 to $4.3 million for the nine months ended September 30, 1999. The increase was primarily due to an increase in personnel costs from approximately $236,000 to $2.1 million and an increase in fees paid to third parties from approximately $476,000 to $1.9 million. These increases were primarily due to increased expenses incurred during development of our Auction and Shop services. We believe that continued investment in product development is critical to attaining our strategic objectives and, as a result, expect product development expenses to increase significantly in future periods. We expense product development costs as they are incurred. Selling and Marketing. Selling and marketing expenses consist primarily of salaries, commissions, advertising, promotions and related marketing costs. Selling and marketing expenses increased from approximately $761,000 for the nine months ended September 30, 1998 to $5.1 million for the nine months ended September 30, 1999. The increase was primarily due to an increase in sales and marketing personnel costs from approximately $355,000 to $2.4 million, an increase in expenses related to travel from approximately $37,000 to $494,000 and an increase in expenses related to advertising and attendance at trade shows from approximately $141,000 to $1.6 million. These increases were primarily due to significant expansion of our sales and marketing efforts and the hiring of additional sales and marketing personnel. We intend to significantly increase our selling and marketing expenses as we expand our sales force and invest in new marketing campaigns. In addition, we expect to make significant payments in connection with our strategic alliances with Superior Consultant, ECRI and VerticalNet, which will further increase our selling and marketing expenses in the periods in which these payments are made. See "-- Liquidity and Capital Resources." General and Administrative. General and administrative expenses consist of expenses for executive and administrative personnel, facilities, professional services and other general corporate activities. General and administrative expenses increased from approximately $330,000 for the nine months ended September 30, 1998 to $5.8 million for the nine months ended September 30, 1999. The increase was primarily due to an increase in executive and administrative personnel costs from approximately $54,000 to $1.6 million, an increase in facilities expenses from approximately $135,000 to $552,000, an increase in recruiting, legal and accounting and litigation settlement expenses from approximately $109,000 to $1,646,000, primarily as a result of litigation with respect to the hiring of one of our executive officers, and an increase in expenses related to other consultants from approximately $109,000 to $849,000, in each case associated with our growth. We expect general and administrative expenses to increase as we continue to expand our staff and incur additional costs to support the growth of our business and the costs of being a public company. We further expect our general and administrative expenses to increase due to the integration of GAR and FDI with our business. Amortization of Intangibles. Intangibles include goodwill and the value of software purchased in acquisitions. Intangibles are amortized on a straight-line basis over a period of three to seven years. Amortization of intangibles increased to $230,000 for the nine months ended September 30, 1999. The increase was a result of the acquisition of GAR in August 1999. We expect that the amortization of intangibles will increase significantly in future periods due to the acquisition of substantially all of the assets of FDI in November 1999. Amortization of Deferred Compensation. Deferred compensation represents the aggregate difference, at the date of grant, between the exercise price of stock options and the estimated fair 27 30 value for accounting purposes of the underlying stock. Deferred compensation is amortized over the vesting period of the underlying options, generally four years, based on an accelerated vesting method. In connection with the grant of stock options to employees during fiscal 1998 and for the nine months ended September 30, 1999, we recorded deferred compensation of $52 million. For the nine months ended September 30, 1999, we recognized amortization of deferred compensation of $5.7 million. At September 30, 1999, the remaining deferred compensation of approximately $46.3 million will be amortized as follows: $6.8 million in the last quarter of fiscal 1999, $21.1 million during fiscal 2000, $11.1 million during fiscal 2001, $5.6 million during fiscal 2002 and $1.7 million during fiscal 2003. The amortization expense relates to options awarded to employees in all operating expense categories. The amount of deferred compensation has not been separately allocated to these categories. The amount of deferred compensation expense to be recorded in future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited. During the year ended December 31, 1998 and the nine months ended September 30, 1999, we recorded deferred compensation of $52,000 and $651,000 related to options granted to non-employees as determined based upon the fair value at the date of issuance. Cost of warrant issued to recruiter. For the nine months ended September 30, 1999, we recorded $2.4 million related to the valuation of a warrant issued to an executive search firm in connection with services rendered in the search for our Chief Executive Officer. Other Income (Expense). Other income (expense) consists of interest and other income and expense. Interest income for the nine months ended September 30, 1999 was $173,000 compared to $51,000 for the nine months ended September 30, 1998. The increase in interest income was due to an increase in our average net cash and cash equivalents balance as a result of our issuance of preferred stock in February 1999. Interest expense increased from $9,000 for the nine months ended September 30, 1998 to $337,000 for the nine months ended September 30, 1999, primarily as a result of the amortization of the fair value of a warrant issued in connection with a loan received during the period, together with an increase in debt. PERIOD FROM INCEPTION TO DECEMBER 31, 1996, AS COMPARED TO YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1998 Revenue. We had no revenue for the period from inception to December 31, 1998. Operations. We had no operations expenses in 1996 and 1997. We began operating and maintaining our website and acquiring and processing content in 1998, and as a result, incurred operations expenses of $627,000. Product Development. Product development expenses increased from $31,000 in 1996 to $179,000 in 1997 to $1.5 million in 1998. The increase in 1998 was primarily due to increased personnel expenses as we developed features and added functionality to our website. Selling and Marketing. Selling and marketing expenses increased from $111,000 in 1996 to $153,000 in 1997 to $1.4 million in 1998. The increase in 1998 was primarily due to the significant expansion of our sales and marketing efforts and the hiring of additional sales and marketing personnel. General and Administrative. General and administrative expenses increased from $54,000 in 1996 to $76,000 in 1997 to $1.1 million in 1998. The increase in 1998 was primarily due to expenses related to increased personnel, professional service fees and facility expenses associated with our growth. 28 31 Amortization of Deferred Compensation. Amortization of deferred compensation for the fiscal year ended December 31, 1998 was $5,000. No amortization of deferred compensation was expensed for fiscal years 1997 or 1996. Other Income (Expense). Interest income increased from none in 1996 and 1997 to $66,000 in 1998. The increase in interest income was due to an increase in cash and cash equivalents that resulted from our issuance of preferred stock during 1998. Interest expense increased from none in 1996 to $15,000 in 1997 to $22,000 in 1998. Other income was $142,000 in 1996, $7,000 in 1997 and none in 1998. Other income was primarily related to fees received from projects unrelated to our current business model. Income Taxes. As of December 31, 1998, we had federal and state net operating loss carryforwards of approximately $4.5 million which will be available to reduce future taxable income. The federal net operating loss carryforwards expire beginning in 2013 through 2018. A valuation allowance has been recorded for the entire deferred tax asset as a result of uncertainties regarding the realization of the asset due to our lack of earnings history. Federal and state tax laws impose significant restrictions on the amount of the net operating loss carryfowards that we may utilize in a given year. See Note 12 of notes to consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES We have funded our operations since inception primarily through the private placement of equity securities, through which we have raised net proceeds of $17.5 million through September 30, 1999. We have also financed our operations through an equipment loan and lease financing and bank and other borrowings. As of September 30, 1999, we had outstanding bank and other borrowings of $11.6 million. As of September 30, 1999, we had approximately $655,000 of cash and cash equivalents. Since September 30, 1999, we have raised additional net cash proceeds of $70.5 million from our October 1999 sale of our Series E and Series E-1 preferred stock. In November 1999, we agreed to issue Series E preferred stock to Fisher Scientific for net proceeds of $1.0 million. In June 1998, we entered into a $750,000 secured credit facility with Silicon Valley Bank. This facility included a $225,000 term loan due December 1999 and an equipment loan facility providing for up to $525,000 of equipment loans. In July 1999, we converted the $404,000 of outstanding equipment loans into a term loan due July 2000. Our term loans from Silicon Valley Bank bear interest at the lender's prime rate (8.25% as of September 30, 1999). At September 30, 1999, there were borrowings of approximately $225,000 outstanding under the term loan and $404,000 outstanding under the equipment loan. This facility is secured by substantially all of our assets other than equipment. In consideration for this credit facility, we granted Silicon Valley Bank a warrant to purchase 45,000 shares of our Series C preferred stock at an exercise price of $0.77 per share. In consideration for the conversion of our equipment loan to a term loan and the release of its security interest in equipment, we granted Silicon Valley Bank a warrant to purchase 10,000 shares of our Series D preferred stock at an exercise price of $1.18 per share. In May 1999, Comdisco provided us with a $2.0 million subordinated loan to provide working capital. We agreed to pay Comdisco principal and interest at a rate of 12.5% per annum in 36 equal monthly installments, commencing July 1999. This loan is secured by all of our assets. In connection with this loan, we issued Comdisco a warrant to purchase 228,813 shares of our Series D preferred stock at $1.18 per share. As of September 30, 1999, the outstanding balance on the note was approximately $1.9 million. In July 1999, Comdisco provided us with a $2.5 million loan and lease facility to finance computer hardware and software equipment. Amounts borrowed to purchase hardware bear interest at 29 32 9% per annum and are payable in 48 monthly installments consisting of interest only payments for the first nine months and principal and interest payments for the remaining 39 months, with a balloon payment of the remaining principal payable at maturity. Amounts borrowed to purchase software bear interest at 8% per annum and are payable in 30 monthly installments consisting of interest only payments for the first four months and principal and interest payments for the remaining 26 months, with a balloon payment of the remaining principal payable at maturity. As of September 30, 1999, we had outstanding approximately $1.3 million in hardware loans due September 2003 and approximately $254,000 in software loans due March 2002. This facility is secured by the computer equipment purchased with the loans. In connection with this facility, we issued Comdisco a warrant to purchase 137,711 shares of our Series D preferred stock at $1.18 per share. In August 1999, as a result of the GAR acquisition, we issued a promissory note in the principal amount of $7.8 million payable monthly over five years bearing interest at a rate of 7% per annum. As of September 30, 1999, the outstanding balance on the note was approximately $7.6 million. In May 1999, we entered into an agreement with ECRI, a non-profit health services research agency focusing on healthcare technology. The agreement provides us with content from ECRI's database of information about medical products and manufacturers and a license to use elements of its classification system. In addition, the agreement provides for joint marketing activities and collaboration in the development of Plan's database of product and vendor information. This agreement requires us to make revenue sharing payments to ECRI during the three-year term of the agreement and for two years following expiration or termination of the agreement based on a percentage of revenue derived from our Plan service. During the second and third years of the term of the agreement, we are required to pay to ECRI a minimum nonrefundable fee equal to $600,000 per year, which shall be credited against any revenue sharing payments payable to ECRI. In October 1999 we entered into an agreement with Superior Consultant Company, Inc., a wholly owned subsidiary of Superior Consultant Holdings Corporation, providing for collaboration between us and Superior. Superior is a supplier of Digital Business Transformation(TM) services to large healthcare organizations, including Internet-related services, systems integration, outsourcing and consulting, which enable Superior clients to utilize digital technologies and process innovations to improve their businesses. Under the agreement, we have agreed to market Superior's services to our users, and Superior has agreed to introduce our services to appropriate clients, based on their interests, and to incorporate our services into its Digital Business Transformation(TM) offerings. The agreement also provides for joint marketing activities. In consideration, we have agreed to make payments to Superior in an aggregate amount of up to approximately $2.0 million, as well as a percentage of specified Neoforma.com e-commerce transaction revenue and potential fixed payments based on the success of our joint marketing activities. We have also agreed to utilize Superior's services on a preferred basis for systems integration, development, infrastructure, process improvement and consulting assistance, totaling at least $1.5 million of services from Superior, at a discount from Superior's standard fees. Our agreement with Superior expires in October 2002. See "Certain Transactions -- Commercial Transactions" for more information regarding this agreement and our relationship with Superior. In October 1999, we entered into an agreement with Dell Marketing, L.P. pursuant to which we agreed to develop complementary marketing programs with Dell and establish hyperlinks between our respective internet websites. We agreed to use Dell as our exclusive supplier of desktops, portables, workstations, servers and storage devices unless such products did not meet our reasonable technical requirements. We also agreed to purchase at least $5.0 million of Dell products and $100,000 of data center consulting services. See "Certain Transaction -- Commercial Transactions" for more information regarding this agreement and our relationship with Dell. 30 33 In November 1999, we entered into a co-branding agreement with VerticalNet, Inc. Under the agreement, VerticalNet will transfer to our website all listings of new and used medical products offered for sale through its website (on an exclusive basis to the extent it has the right to do so), and we will transfer to VerticalNet all listings of used and excess laboratory products offered for sale on our website (on an exclusive basis to the extent we have the right to do so). We have also agreed to establish links between our respective websites. In addition, VerticalNet will develop and maintain a co-branded career center and a co-branded training and education center, and will provide us with specified content created for its medical online communities. VerticalNet also has the non-exclusive right to sell sponsorships on our Plan service and the exclusive right to sell advertising on the co-branded sites. We have agreed to pay VerticalNet $2,000,000 of development and promotional fees over the next two years under this agreement, of which we paid $687,000 in the fourth quarter of 1999. We and VerticalNet have agreed to each pay the other commissions equal to a percentage of net revenues earned through product listings transferred to its website by the other, and to share specified sponsorship and advertising revenue. Net cash used in operating activities was $87,000 for the period from inception through December 31, 1996, $322,000 for the year ended December 31, 1997 and $4.0 million for the year ended December 31, 1998. Net cash used in operating activities for the nine months ended September 30, 1999 was $10.4 million. Net cash used in operating activities from inception through September 30, 1999 related primarily to funding net operating losses and increases in prepaid expenses, which were partially offset by increases in accrued expenses and accounts payable. Net cash used in investing activities was $1,000 for the period from inception through December 31, 1996, $13,000 for the year ended December 31, 1997 and $825,000 for the year ended December 31, 1998. Net cash used in investing activities for the nine months ended September 30, 1999 was $5.4 million. Net cash used in investing activities from inception through the nine months ended September 30, 1999 related primarily to the purchase of equipment to operate our website and cash paid for the acquisition of General Asset Recovery LLC. Net cash provided by financing activities was $95,000 for the period from inception through December 31, 1996, $360,000 for the year ended December 31, 1997 and $5.6 million for the year ended December 31, 1998. For the nine months ended September 30, 1999, net cash provided by financing activities was $15.7 million. Net cash provided from financing activities for the period from inception to September 30, 1999 related primarily to preferred stock issuances of approximately $17.1 million. We currently anticipate that the net proceeds of this offering, together with our available funds, will be sufficient to meet our anticipated needs for working capital and capital expenditures through the next 12 months. Our future long-term capital needs will depend significantly on the rate of growth of our business, the timing of expanded service offerings and the success of these services once they are launched. Any projections of future long-term cash needs and cash flows are subject to substantial uncertainty. If the net proceeds of this offering, together with our available funds and cash generated from operations, are insufficient to satisfy our long-term liquidity requirements, we may seek to sell additional equity or debt securities, obtain a line of credit or curtail expansion of our services. If we issue additional securities to raise funds, those securities may have rights, preferences or privileges senior to those of the rights of our common stock and our stockholders may experience dilution. We cannot be certain that additional financing will be available to us on favorable terms when required, or at all. 31 34 YEAR 2000 Many existing computer programs use only two digits to identify a year. These programs were designed and developed without addressing the impact of the upcoming change in the century. If not corrected, many computer software applications could fail or create erroneous results by, at or beyond the year 2000. We use software, computer technology and other services internally developed and provided by third-party vendors that may fail due to the year 2000 phenomenon. We depend on a third party to host our servers, telecommunications vendors to maintain our network and other third-party carriers to deliver orders to customers. Because we are a comparatively new enterprise, the majority of software and hardware we use to manage our business has all been recently purchased or developed by us. While this does not completely protect us against year 2000 exposure, we believe our exposure is limited because the technology we use to manage our business is not based upon legacy hardware and software systems. State of Readiness. We are in the process of reviewing the year 2000 compliance of both internally developed and third-party systems. Internally developed systems include the software used to provide our website's search, customer interaction, transaction-processing and monitoring capabilities. Our third-party systems include software and hardware, and computer technology, back-up, hosting, accounting, database and security systems. We are working with vendors of these third-party systems to obtain assurances that their software, hardware or services are year 2000 compliant. To ensure that both our internally developed and third-party systems are year 2000 compliant, we continually assess, analyze and, where necessary, correct potential non-compliance issues. We expect to complete this assessment process during the fourth quarter of 1999. Based on our assessment to date and our planned activities, we believe that our internally developed and third-party systems will be year 2000 compliant. The failure of our software and computer systems, or those of our third-party suppliers, to be year 2000 compliant, would seriously harm our business. The year 2000 readiness of the general system necessary to support our operations is difficult to assess. For instance, we depend on the integrity and stability of the Internet to provide our services. We also depend on the year 2000 compliance of the computer systems used by consumers. Thus, the system necessary to support our operations consists of a network of computers and telecommunications systems located throughout the world and operated by numerous unrelated entities and individuals, none of which has the ability to control or manage the potential year 2000 issues that may impact the entire system. Our ability to assess the reliability of this system is limited and relies on generally available news reports, surveys and industry data. Based on these sources, we believe most entities and individuals that rely significantly on the Internet are reviewing and attempting to remediate issues relating to year 2000 compliance, but it is not possible to predict whether these efforts will be successful in reducing or eliminating the potential negative impact of year 2000 issues. The failure of our software and computer systems and those of our third-party suppliers to be year 2000 complaint would seriously harm our business. Cost. As of September 30, 1999, we had incurred immaterial costs in connection with identifying, evaluating and addressing year 2000 compliance issues. We anticipate that any future costs will not exceed $500,000. Most of these expenses are expected to relate to operating costs associated with time spent by our employees in the evaluation process. There may be some charges related to remediation if any issues are identified during our assessment process. If these expenses are higher than anticipated, our business could suffer. 32 35 Risks. We cannot assure you that we will achieve full year 2000 compliance before the end of 1999. A failure of our computer systems or the failure of purchasers or suppliers of medical products to effectively upgrade their software and systems for transition to the year 2000 could seriously harm our business. In addition, we cannot be certain that governmental agencies, utility companies, Internet access companies, third-party service providers and others outside of our control will be year 2000 compliant. The failure by these entities to be year 2000 compliant could result in a systemic failure beyond our control, such as a prolonged Internet, telecommunications or electrical failure, that could prevent us from delivering our services to our customers, decrease the use of the Internet or prevent users from accessing our website, any of which could seriously harm our business. Contingency Plan. At this time, we are developing a contingency plan to address situations that may result if we or our vendors are unable to achieve year 2000 compliance. The cost of developing and implementing such a plan, if necessary, could be material. Any failure of our material systems, our vendors' material systems or the Internet to be year 2000 compliant could have material adverse consequences for us. Such consequences could include difficulties in operating our website effectively, taking product orders, making product deliveries or conducting other fundamental parts of our business. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, which we will be required to adopt for the year ending December 31, 2000. This statement establishes a new model for accounting for derivatives and hedging activities. SFAS No. 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. Because we currently hold no derivative financial instruments and do not currently engage in hedging activities, adoption of SFAS No. 133 is expected to have no material impact on our financial condition or results of operations. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires entities to capitalize some of the costs related to internal-use software once the applicable criteria have been met. SOP No. 98-1 is effective for our 1999 financial statements. The adoption of SOP No. 98-1 did not have a material impact on our June 30, 1999 financial statements. In April 1998, the AICPA issued SOP 98-5, Reporting for the Costs of Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to new operations to be expensed as incurred. In addition, all start-up costs that were capitalized in the past must be written off when SOP No. 98-5 is adopted. SOP No. 98-5 is effective for our 1999 financial statements. The adoption of SOP No. 98-5 did not have a material impact on our June 30, 1999 financial statements. 33 36 BUSINESS Neoforma.com is a leading provider of business-to-business e-commerce services in the large and highly fragmented market for medical products, supplies and equipment. Our services enable users to efficiently and cost-effectively buy and sell new and used medical products in an open, online marketplace. Our marketplace aggregates suppliers of a wide range of medical products and presents their offerings to the physicians, hospitals and other healthcare organizations that purchase these products. We believe that our services provide supply chain efficiencies for both suppliers and purchasers of medical products and extend the reach of existing sales and distribution channels. Neoforma.com offers three primary services that together address the entire healthcare purchasing lifecycle, from planning through procurement to liquidation. Our Shop service provides a unified marketplace where purchasers can easily locate and buy new medical products, and suppliers can access new customers and markets. Our Auction service creates an efficient marketplace for idle assets by enabling users to list, sell and buy used, refurbished and surplus medical products. Our Plan service provides interactive content to healthcare facility planners to reduce the complexities of planning and outfitting facilities. INDUSTRY BACKGROUND GROWTH OF THE INTERNET AND BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE The Internet is rapidly changing the competitive landscape of many industries, creating significant opportunities for companies to expand and improve their businesses. Companies have increasingly begun to use the Internet to create business-to-business networks to streamline complex processes, purchase and sell goods and exchange information among fragmented groups of customers, manufacturers and distributors. Forrester Research has estimated that U.S. business-to-business e-commerce, defined as the total volume of intercompany trade of goods and services in which the final order is placed over the Internet, will increase from $109 billion in 1999 to $1.3 trillion in 2003. Business-to-business e-commerce enables purchasers and sellers in fragmented markets to reduce supply chain inefficiencies. Sellers are able to cost-effectively access global markets, streamline their sales, marketing and distribution operations, reduce their time to market and efficiently distribute updated product information. Buyers can improve their purchasing process and easily access current product information and a broad range of products and services. Because a growing number of businesses are establishing their own e-commerce websites, it is difficult for any individual business to attract a significant number of online customers. As a result, companies are increasingly realizing the value of a global online marketplace that aggregates purchasers and sellers. MEDICAL PRODUCTS, SUPPLIES AND EQUIPMENT MARKET Market for New Products According to information published by the Health Industry Manufacturers' Association, we estimate the market for new medical products, supplies and equipment totaled more than $145 billion worldwide in 1998, including more than $60 billion in the U.S. This market is currently growing at a rate of 6% per year worldwide and 7% per year in the U.S. This market is comprised of a wide range of products, including consumable supplies such as syringes and gloves, reusable medical products such as surgical instruments, and sophisticated diagnostic equipment such as magnetic resonance imaging systems. The traditional supply chain for new medical products is highly fragmented and inefficient. In the U.S. alone, products are supplied by over 20,000 manufacturers and distributors, ranging from 34 37 small companies offering single products to Fortune 500 corporations with comprehensive offerings. These suppliers serve a diverse group of buyers, including hospitals, physician practices and clinics. The U.S. market includes approximately 6,000 hospitals, 185,000 physicians' offices and thousands of non-hospital healthcare delivery sites such as outpatient care facilities, nursing homes and ambulatory surgery centers. These organizations may purchase medical products directly or through centralized buying organizations such as group purchasing organizations, or GPOs, and integrated delivery networks of care providers, or IDNs. Buyers within each of these organizations may purchase products from thousands of suppliers. The high degree of buyer and supplier fragmentation results in significant inefficiencies at each step of the procurement process. In the U.S., healthcare providers are under increasing pressure to reduce costs because of increased competition, as well as the ongoing tightening of reimbursement policies by private payors and the government. According to Efficient Healthcare Consumer Response, a 1996 independent study commissioned by a number of industry participants, the supply-chain costs of distributing medical products total approximately $23 billion per year, of which an estimated $11 billion could be eliminated by more efficient sharing of information, management of orders and movement of products. As a result, healthcare providers are increasingly seeking new ways to make their supply chain more efficient. Market for Used and Surplus Products Healthcare providers must continuously upgrade their medical equipment in order to remain competitive and keep up with advances in medical technology. Without an efficient, global market for the sale of replaced equipment, these organizations are left with idle equipment for either storage or disposal. Manufacturers taking trade-ins of existing equipment in connection with sales of new products also generate significant used equipment inventory. For both healthcare providers and manufacturers, an inability to efficiently dispose of idle assets increases their operational costs and ties up capital that could be used for more productive purposes. It has traditionally been difficult for buyers and sellers in the market for used, refurbished and surplus medical products, supplies and equipment to locate one another. While much of the demand for used equipment comes from healthcare providers located outside of the U.S. or in rural markets in the U.S., much of the supply comes from healthcare providers in urban centers in the U.S. or from manufacturers. The market is currently served primarily by local auction houses, equipment brokers and refurbishers that are often unable to reach buyers and sellers outside their local markets. As a result, we believe this market is significantly under-served and highly inefficient and a significant opportunity exists to provide buyers and sellers of used medical products, supplies and equipment with a unified marketplace. LIMITATIONS OF TRADITIONAL APPROACHES TO BUYING AND SELLING MEDICAL PRODUCTS Healthcare Providers Purchasing decisions in physicians' offices and other small healthcare facilities are generally made by nurses, office managers or administrative staff. Purchasing activities include searching through paper catalogs, placing and tracking orders via telephone or fax machines and receiving frequent, time-consuming visits from numerous medical supply representatives. This approach makes it difficult and time-consuming for buyers to identify, compare and purchase specific items. Moreover, these inefficiencies can lead to clinical delays and purchases that are based on convenience instead of best practices or cost. 35 38 Large healthcare organizations manage their buying activity through a centralized purchasing group as well as at the departmental level. Pricing is either negotiated or based on long term contracts, depending on the institution's buying power, membership in an IDN or GPO affiliations. The purchasing process involves evaluating products, negotiating price and delivery, ensuring compliance with purchasing contracts and placing and tracking orders through a variety of paper and electronic means. Outdated product and price information, lack of compliance with negotiated contracts and the significant effort required to manage a multitude of suppliers and orders can result in errors and inefficiencies. Manufacturers and Distributors Manufacturers and distributors have limited resources to support the growing challenge of marketing and selling to the increasingly complex worldwide healthcare market. Many organizations lack the necessary infrastructure to establish a worldwide sales and marketing presence. In addition, the high cost of printing and distributing paper catalogs limits the ability of suppliers to cost-effectively provide timely updates of important catalog product and pricing information. Although many suppliers offer online versions of their catalogs, this does not address the primary cause of inefficiency for buyers -- the inability to quickly and easily find products and consolidate orders from different suppliers through a single source. MARKET OPPORTUNITY We believe that a significant opportunity exists for a business-to-business e-commerce solution that creates an open and efficient marketplace for purchasers and sellers of both new and used medical products, supplies and equipment. A unified online marketplace can offer several important advantages: - Purchasers and sellers of new and used medical products can have global access to each other, creating new levels of efficiency in the supply chain; - Industry, product and pricing information can be centralized, updated and organized for simplified access; and - The time and costs involved with traditional paper, telephone and fax purchasing methods can be significantly reduced. THE NEOFORMA.COM SOLUTION Neoforma.com is a leading provider of business-to-business e-commerce solutions for purchasers and suppliers of medical products, supplies and equipment. Our services address the traditional limitations of the medical products supply chain by enabling our users to efficiently and cost-effectively buy and sell new and used medical products in an open, online marketplace. Shop, Auction and Plan together address the entire healthcare purchasing lifecycle, from planning through procurement to liquidation. We believe that our services provide a number of benefits that will attract a growing number of purchasers and suppliers of new and used medical products to our marketplace. As more purchasers realize these benefits and use our services, we believe that they will attract more suppliers to our marketplace. As more suppliers offer products and content through our marketplace, we believe that more buyers will be encouraged to use our services, resulting in a network effect, where the value of our services to each participant increases significantly with the addition of each new participant. 36 39 BENEFITS TO HEALTHCARE PROVIDERS: - Convenient, Unified Marketplace. We provide healthcare providers a central, easy-to-use location to identify and purchase a wide range of medical products from many suppliers. This reduces the time required to contact multiple distributors and suppliers using traditional paper or telephone approaches, or single-supplier Internet-based or electronic data interchange solutions. - Reduced Processing Costs. Our services streamline the purchasing process, allowing healthcare providers to reduce their procurement costs and benefit from centralized purchasing, tracking and record-keeping. - Improved Access to Current Information. We provide online access to current product information, which is a significant improvement over paper-based catalogs that are often outdated. Our easy-to-use search capabilities enable healthcare providers to quickly locate products and obtain current information from multiple suppliers. Additionally, we provide previously unavailable information regarding used, refurbished and surplus medical products. - Efficient Marketplace for Idle Assets. Our Auction service provides an efficient marketplace for the purchase and sale of used and surplus medical products, allowing healthcare providers to maximize the value of their idle assets. BENEFITS TO MANUFACTURERS AND DISTRIBUTORS: - Access to New Customers and Markets. Our Shop and Auction services allow sellers to offer new and used products globally, extending their reach to new customers and markets. Our Plan service provides a new way for suppliers to feature their products being used in a best practices environment. - Participation in an Open Marketplace. We believe that by providing an open marketplace where any supplier can list and sell its products, we increase the attractiveness of our marketplace to a large number of suppliers. By providing purchasers with access to products from a wide range of suppliers, we can attract more purchasers to our marketplace, further increasing the value of our services to suppliers. - Increased Efficiencies and Reduced Transaction Costs. Because our services streamline and extend their distribution channels, suppliers can reduce their selling and marketing costs and time to market. For example, suppliers can reduce their costs of printing and distributing paper catalogs and taking individual orders by fax or by telephone. In addition, our services eliminate the costs and expenditures required for suppliers to establish and maintain their own e-commerce sites. - Efficiency in Distributing New Information. Our marketplace allows suppliers to efficiently reach customers and distribute product information, reducing the delays associated with printed catalog distribution. We enable suppliers to quickly and easily update product, pricing and other information on our website to address changes in their product line and respond to market requirements. STRATEGY Our objective is to become the leading online marketplace for new and used medical products, supplies and equipment. Our goal is to provide comprehensive services that together address the 37 40 entire healthcare purchasing lifecycle, from planning through procurement to liquidation. Key elements of our strategy include: Build on First Mover Advantage and Increase Brand Recognition. We believe that our position as one of the first companies to offer comprehensive business-to-business e-commerce services for new and used medical products, supplies and equipment provides us with a first mover advantage that can enable us to attract a critical mass of suppliers and purchasers. To increase the number of purchasers and sellers that use our services, we intend to aggressively promote the Neoforma.com brand by advertising, participating in industry events and trade shows and conducting targeted promotions and public relations. Increase Adoption of Our Online Marketplace to Create Network Effect. We intend to continue to add suppliers and purchasers to become the most comprehensive online marketplace for medical products, supplies and equipment. By adding suppliers and broadening the range of products available in our marketplace, we create additional value for purchasers. By attracting more purchasers to our marketplace, we create additional value for suppliers. As a result, we believe that we can create a network effect, where the value of our services to each participant increases significantly with the addition of each new participant. Increase Functionality to Drive Broad Market Adoption. We plan to expand the functionality of our services, increasing their value to both current and future purchasers and suppliers. For example, we intend to develop new information reporting and order management features as well as the capability to integrate our services with the information systems used by many suppliers and purchasers. In addition, we intend to develop the functionality to allow suppliers to provide customer-specific pricing. We believe that these enhancements will allow our services to become more closely integrated into the supply chain processes of distributors and group purchasing organizations and will be particularly important to large purchasers of medical products. Establish Strategic Alliances With Leading Industry Participants. We intend to continue to enter into alliances with leading Internet, technology and healthcare-related organizations to increase usage of our services, broaden the scope of our content, extend our technology and gain additional marketing resources. Our current strategic partners include Cisco, Dell, Healtheon/WebMD, SAP, Superior Consultant and VerticalNet. In addition, we have strategic relationships with key suppliers, such as General Electric Medical Systems and Owens & Minor. We plan to strengthen and broaden these relationships and enter into new strategic alliances and key supplier relationships. Expand Internationally. We believe that the capabilities of the Internet and the fragmented nature of many international markets for new and used medical products provide a significant opportunity for the creation of a global marketplace. We intend to capitalize on this opportunity by developing country-specific web pages for selected international markets and actively marketing and promoting our services. Based on information provided by registered users, or visitors to our website who have completed the registration process, we believe that our registered user base already includes approximately 14,000 users located in over 100 countries. Approximately 4% of these registered users have purchased products on our online marketplace. NEOFORMA SERVICES We offer three primary services -- Shop, Auction, and Plan -- that together address the entire healthcare purchasing lifecycle, from planning through procurement to liquidation. We also offer a wide range of content to healthcare practitioners and purchasers to enable them to make more informed purchasing decisions. 38 41 Shop Our Shop service, released in August 1999, provides a unified marketplace where purchasers can easily identify, locate and purchase new medical products, and suppliers can access new customers and markets. Shop currently has over 109,000 different stockkeeping units, or SKUs, available for purchase under agreements with 132 manufacturers and distributors. Our agreements with distributors provide listings of products from an additional 550 manufacturers. We have agreements with additional manufacturers and distributors that will provide us with access to an estimated 32,000 additional SKUs, which we are currently adding to Shop. The products currently available through Shop range from disposable gloves to surgical instruments and diagnostic equipment. We believe that these products represent a significant portion of the products commonly used in physicians' offices, our initial target market. Shop provides detailed descriptions, photographic images and vendors' shipping and billing policies for listed products. We currently provide pricing information for more than 75% of the SKUs listed on Shop. With regard to products that do not contain pricing information, prospective purchasers are provided with contact information to allow them to obtain price quotes directly from the seller of the product. Listings are displayed in a consistent format and organized by standard classification schemes to facilitate the selection of products. Shop's search capabilities further assist purchasers in locating and selecting products from multiple suppliers. Moreover, we also provide suppliers the ability to directly update their product information on our website to include revised pricing, new product introductions or additional information. Purchasers can use Shop to order products at listed prices or to obtain price quotes from the supplier. Shop accelerates the process of negotiating and completing transactions between purchasers and sellers. Our system automatically notifies the supplier via an email when the purchaser places an order through Shop. When the supplier responds to or updates the order in any fashion, our system automatically notifies the buyer. This process is aided by our customer service organization, which answers questions about our system as necessary. We do not take ownership or possession of the products sold through Shop. Suppliers are responsible for providing product availability and delivery information through our website. They are also responsible for shipping, delivery, and returns. Suppliers can choose to accept payment by open accounts with the purchasers, payment upon delivery, letter of credit, or credit card. The purchaser is required to provide payment information to the supplier through our website when placing the order, and the supplier is responsible for payment processing and collection. We derive our revenue from Shop from transaction fees charged to suppliers for confirmed orders, and fees to digitize their product information for display on our website and for maintenance of product information and content on our website. As of December 16, 1999, we have derived approximately $38,000 in revenues from our Shop services. Shop product information is provided to us by suppliers in a variety of electronic formats or in paper form, and is internally reviewed and categorized by our medical editors. We use an independent firm to assist us in converting this information into a consistent electronic format that conforms to our classification systems. We believe that our ability to process large volumes of product information allows us to rapidly increase our product database and provides significant flexibility to suppliers in loading and updating information. We plan to extend Shop's functionality by introducing new information reporting and order management features, allowing users to track their use of our services and helping them better ensure compliance with their procurement procedures and policies. We also intend to enable Shop to electronically transmit information directly to the order management and purchasing systems used by 39 42 many large suppliers and medical product purchasers. In addition, we intend to develop customer-specific pricing capabilities, allowing our services to better integrate with the processes of distributors and large purchasing organizations. We believe these enhancements will be particularly important to large purchasing organizations, such as hospitals, IDNs and members of GPOs, that are focused on achieving new efficiencies and frequently rely on pre-negotiated pricing. Our future success relies on our ability to address the needs of large healthcare providers by successfully developing and introducing these capabilities in a timely manner. See "Risk Factors -- If we are unable to expand our registered user base and the functionality of our services, we may not provide an attractive alternative to the websites or systems used by large healthcare organizations and we may not achieve market acceptance with these organizations." Auction Our Auction service enables users to list, sell and buy used and refurbished equipment and surplus medical products. Auction includes online listings of used, refurbished and surplus products for bids through our AdsOnline service, live auctions through our AuctionLive service and online auctions through our AuctionOnline service. We introduced our AdsOnline service in May 1999, which enables sellers to list their used, refurbished and surplus medical products for bids from prospective buyers. When a buyer submits a bid for a product listed on AdsOnline, the seller is automatically notified via an email from our website that a buyer has placed a bid for one of its products. The seller can then access our website to obtain information about the bid, including the identity of the buyer, the amount of the bid and the period of time that the buyer has indicated that it will keep its bid open. The seller can accept the bid it finds most attractive or choose not to accept any bids. The buyer is automatically notified via an email if a seller has accepted its bid. We introduced our AuctionLive service in August 1999 with the acquisition of General Asset Recovery, a live auction house and asset management company focused on medical products. Our live auctions are conducted by us either at one of our warehouses in Chicago or onsite at a seller's facility. These auctions are conducted by an auctioneer, where each product may have a minimum opening price and the product is sold to the highest bidder. In addition, our website contains photographs and more detailed information regarding products that will be available in future live auctions. We introduced our AuctionOnline service in November 1999. This service enables sellers to sell their used and surplus medical products, individually or in lots, to the highest bidder in an online auction. Prospective bidders can access a product webpage for each item that typically features a concise product description and full-color image. In addition, a table lists the minimum opening bid, the bid range, the minimum incremental bid, the current winning bidders and the amount of their bids and the time of auction close. After a prospective buyer bids on a product, the corresponding bidder list is instantly updated to reflect the bid and the prospective buyer's new position in the list of bidders. When the auction closes, the highest bidder wins the product at his or her final bid price. Our AuctionOnline service automatically determines the winning bidder and sends an e-mail message to confirm his or her purchase the same day. We offer a complete solution for managing used, refurbished and surplus healthcare equipment. We work with sellers to determine which of our three Auction services is the best method for selling their used, refurbished and surplus medical products. Our Auction agreements typically appoint us as seller's agent for the purpose of selling their designated used, refurbished and surplus medical products through any of our Auction services. Purchasers may choose to remit the purchase price to us in a variety of payment methods and we then send these proceeds, net of our commissions and 40 43 fees and any taxes owed by the purchaser, to the seller within a specified time period. We generally take possession of products sold through our Auction services, and in shipping the sold items to the winning bidders, we transfer the risk of loss or damage to the purchaser once the product leaves our warehouse. We are not responsible for delivery and returns. For products sold through our AdsOnline service for which we do not take possession, payment alternatives, shipping, delivery and return obligations are substantially identical to those for our Shop service. We also provide an online asset recovery service that allows sellers to specify that their products initially be offered to their other departments and facilities and subsequently to the public. In addition, the seller may choose to offer unsold products for charitable donation. We have entered into agreements with several IDNs and a number of other healthcare providers to allow them to use this additional service. We derive revenue from our Auction service primarily from commissions paid by sellers, equal to a percentage of the sale price. In addition, in our live and online auctions, the purchaser also typically pays a fee, commonly referred to as a buyer's premium, equal to a percentage of the purchase price. We also derive revenues from subscription fees we charge sellers that utilize our asset recovery service. Plan Our Plan service, first introduced in July 1998 and enhanced in November 1999, provides interactive content to architects, healthcare facility planners and materials managers and purchasers to reduce the complexities of planning and outfitting facilities. Plan offers interactive photographic images of actual rooms and suites from medical facilities that we believe represent industry best practices, together with floor plans and descriptions of products typically used in these rooms. This service allows users to conduct virtual tours of these facilities, providing rich information for considering room plans and equipment purchases. Visitors can zoom in to see room details, including equipment placement, and can navigate to view different parts of the room in these 360 degree panoramic images. Plan currently displays more than 1,000 rooms from the University of Chicago's Center for Advanced Medicine and three additional facilities, and we intend to continue to add rooms from other advanced facilities. Site visitors can browse a list of departments or can search to find specific rooms. The responsibility for designing and equipping facilities is shared by architects, facility and equipment planners and materials managers and purchasers. Because there is little standardized information, these professionals must spend substantial time determining and coordinating project requirements. The information provided through Plan allows these professionals to match facility requirements to real-world examples. This enables these professionals to find necessary information that may not have been included in their original project plans and to move quickly from information gathering to creating designs and equipment lists. Plan associates each room with a list of product categories, typically found there. These categories link to our Shop and Auction services, enabling these professionals to view and purchase equipment in a few steps. We have recently begun offering suppliers and service providers the ability, for a fee, to sponsor rooms on Plan. By sponsoring rooms that feature one or more of their products or that are associated with the services they provide, suppliers and service providers can use these rooms as part of their own marketing campaigns. As a result of our acquisition of FDI Information Resources, Inc. in November 1999, we began selling licenses for software tools and technical specification information for the construction and redesign of healthcare facility projects. We intend to add new fee-based services to Plan, such as subscription-based access to more detailed content and data. 41 44 Resources In addition to our three principal services, since July 1998, we have provided healthcare professionals with information resources to assist them in making informed and efficient purchasing decisions. Healthcare professionals can receive personalized news, review online product and vendor information and obtain information from other websites. In addition, users can access online continuing medical education courses and research regulatory and shipping requirements that may affect the price or delivery of their purchases. In September 1999, we significantly expanded the amount of information that we provide, and organized this information into a separate Resources section of our website to facilitate its use. SUPPLIERS Shop. As of December 16, 1999, we had online commerce agreements with 132 manufacturers and distributors to list their products on Shop. The following representative suppliers have products listed directly on Shop:
DISTRIBUTORS MANUFACTURERS ------------ ------------- Alimed Accurate Surgical Independence Medical ARO Surgical Instruments Maintenance Warehouse Critikon Medline General Electric Medical Systems Optimal Wholesale Medical Hospital Associates Owens & Minor Howard Instruments PSS World Medical Protocol Systems Sammons Preston Sparta Surgical Ves International
Our agreements with distributors provide listings of products from an additional 550 manufacturers, including 3M, Beckman Coulter, Becton Dickinson, C.R. Bard and Smith & Nephew. Our agreements with these suppliers provide for the payment to us of a fee equal to a negotiated percentage of the purchase price of products than they sell through Shop. These agreements generally do not require that the supplier list any specific number of products or maintain any listing for any period of time. Auction. On Auction, suppliers include hospitals and healthcare organizations liquidating used equipment, manufacturers and distributors selling surplus products and finance companies selling leased equipment at the end of the lease term. We have entered into agreements with a number of Auction suppliers for whom we provide asset recovery services, including manufacturers such as General Electric Medical Systems and Stryker and large healthcare organizations such as Banner Health System, Saint Barnabas Health Care System and Voluntary Hospitals of America. See "-- Neoforma Services -- Auction" for a description of these agreements. Strategic Supplier Relationships. We work with a number of key suppliers, including Owens & Minor, General Electric Medical Systems or GEMS, and GeriMedix. We currently list from Owens & Minor approximately 1,625 products aimed at traditional physician's offices for sale through Shop. Under our October 1999 agreement with General Electric Medical Systems, GEMS has agreed to list products on Shop. GEMS also has the option to sponsor rooms on Plan on mutually agreed upon terms, and in the event that it sponsors any rooms, GEMS has agreed to promote Plan to its customers. In addition, GEMS has agreed to use Auction to sell a specified number of items of 42 45 equipment. This agreement expires in December 2000, subject to automatic renewal unless either party elects to terminate. In connection with this agreement, we issued approximately 275,000 shares of our preferred stock to GE Capital Equity Investments, an affiliate of GEMS, in October 1999. GE Capital Equity Investments, Inc., also purchased 1,760,563 additional shares of preferred stock in our October 1999 financing. Under our November 1999 agreement with GeriMedix, a regional distributor of medical products and supplies to the long-term care facility market, we have agreed to collaborate with GeriMedix to enable GeriMedix to offer its products for sale in our online marketplace and through a co-branded website. In connection with this agreement, we agreed to purchase 5% of the equity interest of IntraMedix LLC, the majority owner of GeriMedix, for $2.5 million. PURCHASERS Purchasers currently using Shop include physician offices, multi-specialty groups, clinics and other healthcare providers. Buyers for large organizations, such as hospitals, IDNs and GPOs that purchase a large volume of products under negotiated contracts with suppliers, currently use Shop primarily to purchase products for which they do not have existing supplier contracts. We plan to add customer-specific pricing capabilities in order to enable these organizations to use Shop for their purchases of products for which they have contracts. Our Auction services have been used by a wide range of healthcare providers to purchase used, refurbished and surplus medical products. We believe that a large percentage of the products that are sold through our Auction services are purchased for use outside the U.S. or in rural communities in the U.S. If we are not able to quickly build a critical mass of purchasers who use our services, and increase the use of our services by large healthcare providers, our ability to expand our business would be seriously harmed. STRATEGIC ALLIANCES We enter into alliances with leading Internet, technology and healthcare-related organizations and medical products suppliers to increase usage of our services, broaden the scope of our content, extend the functionality of our technology and build additional marketing resources. We have entered into strategic alliances in the following areas. Web Portals. Many healthcare professionals use specific portal websites that provide a variety of healthcare-related information, online interaction and e-commerce services. We believe that, by entering into relationships with companies that operate these websites, we can attract their visitors to use our services and build our brand recognition. We have developed strategic alliances with VerticalNet, Healtheon/WebMD and MD On-Line to provide us with increased market visibility and site traffic. VerticalNet owns and operates a number of industry-specific websites known as vertical trade communities, including health industry communities such as Medical Design Online, Hospital Networks.com and Nurses.com. Under our recent agreement, VerticalNet has agreed to use our marketplace to offer any medical products listed for sale on its vertical trade communities, and we have agreed to use VerticalNet to offer any used and excess laboratory products listed for sale on our marketplace. We have also agreed to establish links between our respective websites. In addition, VerticalNet will develop and maintain a co-branded career center and a co-branded training and education center, and will provide us with specified content created for its medical online 43 46 communities. VerticalNet will also have the non-exclusive right to sell sponsorships on our Plan service website and the exclusive right to sell advertising on the co-branded sites. Our agreement with VerticalNet expires in 2001, subject to automatic renewals for additional one-year periods unless either party elects to terminate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" for more information about our agreement with VerticalNet. Under our agreement with Healtheon/WebMD, we are an e-commerce provider of medical supplies and equipment for Healtheon's registered users, which include physicians and hospital and clinical administrators. Healtheon's registered users can purchase medical products, supplies and equipment in a co-branded environment on Neoforma.com without the need to register on our site. We also provide e-commerce services for MD On-Line, an Internet-based content provider for the physician market. Our agreements with Healtheon and MD On-Line require us to pay these companies specified percentages of our revenue generated by their users. These agreements each expire in 2000, subject to automatic renewals for additional one-year periods unless either party elects to terminate. Computer Hardware Providers. We believe that alliances with computer hardware providers will help us build recognition of our brand. We have established relationships with Dell Marketing, an affiliate of Dell Computer, and Cisco Systems. We have entered into an agreement with Dell to develop and undertake complementary marketing programs and to link our websites. See "Certain Transactions -- Commercial Agreements" for more information about our agreement with Dell. Our agreement with Cisco provides for complementary marketing efforts and for joint promotional activities. For example, Cisco uses our website as a means of demonstrating its equipment to healthcare providers. As a result, we gain increased exposure of our services to large healthcare organizations. In addition, we agreed to use Cisco technologies in our website. This agreement expires in 2002. Information Technology Partners. We believe that by integrating our services with existing information systems used by many purchasers and sellers of medical products, we will further streamline their medical products supply chains. We have entered into an agreement with Superior Consultant, a supplier of Digital Business Transformation(TM) services to large healthcare organizations, including Internet-related services, systems integration, outsourcing and consulting, which enable Superior clients to utilize digital technologies and process innovations to improve their businesses. Under the agreement, we have agreed to market Superior's services to our users, and Superior has agreed to introduce our services to appropriate clients, based on their interests, and to incorporate our services into its Digital Business Transformation(TM) offerings. The agreement also provides for joint marketing activities. See "Certain Transactions -- Commercial Agreements" for more information about our agreement with Superior Consultant. We are collaborating with SAP, a leading provider of enterprise software, to integrate our services with SAP's R/3 enterprise software products. This integration is intended to further automate the procurement process by allowing transactions to be communicated directly to these systems. In addition, we are integrating our services with MySAP.com, SAP's Internet business service. Content Providers. We believe that as we increase the breadth and depth of our content for our online marketplace, we will be able to attract and retain more users. Since content is often expensive and time-consuming to develop, we enter into relationships with other companies to provide content for our marketplace. ECRI, a leading non-profit health services research agency focusing on healthcare technology, provides us with detailed information about medical products and technology and facility planning. NewsReal has created a specialized healthcare headlines service to provide our users with personalized healthcare business news from over 60 different sources. Reuters provides us 44 47 with its standard healthcare business news feed. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" for a description of our agreement with ECRI. Medical Product Suppliers. We believe that by establishing relationships with key suppliers of medical products, we increase the depth and breadth of the products listed on our online marketplace, and benefit from their marketing resources. We have entered into agreements with Owens & Minor, General Electric Medical Systems and GeriMedix. See "Suppliers -- Strategic Supplier Relationships" for more information about our strategic supplier relationships. TECHNOLOGY In order to establish a secure and reliable marketplace for suppliers and purchasers of new and used medical products, our underlying infrastructure is built on an open, multi-tier, distributed architecture using well-established applications and hardware from leading technology companies such as Sun Microsystems, Netscape and Oracle. Our infrastructure enables us to continuously enhance the features and functionality of our services to meet the evolving needs of our users. INFRASTRUCTURE Open Architecture. Our open architecture supports integration with our users' many existing legacy systems. The ability to integrate these diverse systems has enabled us to aggregate a wide range of purchasers and suppliers in our marketplace. Our architecture is based on industry standards such as Java, enabling us to rapidly introduce new features and functionality. Scalability, Performance and Availability. Our highly modular, distributed architecture is designed to enable us to readily add capacity as the number of users and transactions increase on our system. We have fully redundant hardware systems, which when combined with our distributed architecture, enables us to provide our services on an uninterrupted basis, even in the event of partial system failure. By locating our data center at an Exodus Communications hosted facility, we are able to easily and rapidly expand our network bandwidth and maintain the physical security of our systems. Secure e-Commerce Marketplace. Our platform contains a variety of features to ensure the secure transmission of business information among multiple trading partners and to protect against communication failures. We use SSL, or secure sockets layer, an Internet security technology, at appropriate points in the transaction flow to protect user information during transactions. User information is encrypted to provide a high degree of security. Our employees do not have access to user information, except as necessary to perform customer service functions. The system authenticates users through standard secure login and password technologies. FUNCTIONALITY Our systems are designed to replace manual processes traditionally used by purchasers and suppliers. We have incorporated these processes into an easy-to-use, intuitive online marketplace that can be accessed with standard web browsers, without requiring any special software. To support our online marketplace, we have developed customized search technologies to meet the requirements of purchasers of medical products, supplies and equipment. In order to enable users to quickly navigate to individual products, we have incorporated industry standard classifications, which support the purchasing process by grouping items that are similar and by mapping to other industry standard classification systems. Our search function allows users to continually refine and 45 48 hone their searches to help them to quickly and efficiently locate a particular item. Additionally, we use three-dimensional visualization technologies which enhance suppliers' ability to display and feature their medical products, supplies and equipment. Although to date we have not experienced unscheduled system interruptions of our online marketplace, outages may occur from time to time as system usage increases. The volume of traffic on our website and the number of transactions being conducted by users has been increasing and will require us to expand and upgrade our technology, transaction processing systems and network infrastructure and add new engineering personnel. We may be unable to accurately project the rate or timing of increases, if any, in the use of our services or timely expand and upgrade our systems and infrastructure to accommodate such increases in a timely manner. Any failure to expand or upgrade our systems to keep pace with the growth in demand for capacity could cause the website to become unstable and possibly cease to operate for periods of time. Unscheduled downtime could harm our business. SALES, MARKETING AND SUPPORT We sell our services through our direct field sales force and our internal telemarketing staff. Our direct field sales force focuses on purchasers in physician offices, clinics, hospitals and large healthcare organizations. Our direct field sales force has significant experience in the sale of medical products, equipment and information technology systems. Our telemarketing programs are directed primarily at suppliers of medical products, supplies and equipment. We plan to augment our internal sales resources by working with the sales forces of our strategic partners. Our marketing programs include traditional and Internet-based marketing initiatives to increase awareness of the Neoforma.com brand and attract new purchasers and suppliers to our services. These programs include a variety of public relations initiatives, such as participation in industry conferences and trade shows, and ongoing relationships with healthcare, Internet and technology reporters and industry analysts. We also promote our services through advertising in healthcare industry trade journals and business publications. In addition, we conduct web-based marketing activities to attract new users to our online marketplace. Our relationships with Internet healthcare companies such as Healtheon/WebMD and MD On-Line, suppliers such as General Electric Medical Systems and Owens & Minor, technology companies such as Cisco, Dell and SAP, and professional services providers such as Superior Consultant provide us with additional marketing resources. These companies conduct a number of activities designed to strengthen awareness of our brand and our services. Our worldwide sales and marketing group consisted of 75 full-time employees as of December 16, 1999. We intend to expand our sales and marketing group and to establish additional sales offices. Competition for sales and marketing personnel is intense, and we may not be able to attract, assimilate or retain additional qualified personnel in the future. We believe that we can strengthen our relationships with purchasers and suppliers by providing good account management, customer support and service. Our customer service group provides ongoing support to customers, including site assistance, product searches, basic product questions and order processing questions. PRODUCT DEVELOPMENT We intend to continue to expand and enhance the functionality of our services. We are currently focusing our product development resources on integrating our services with other information 46 49 systems used by suppliers and purchasers of healthcare products. In addition, we are developing the capability to allow suppliers to provide customer-specific pricing through Shop, and providing increased functionality to our online Auction service. Our future success, and in particular, our ability to fully address the needs of large healthcare providers, depends on our ability to successfully develop and introduce these capabilities in a timely manner. There are a number of risks and challenges involved in the development of new features and technologies. See "Risk Factors -- If we fail to develop the capability to integrate our online services with enterprise software systems of purchasers and suppliers of medical products and to enable our services to support customer-specific pricing, these entities may choose not to utilize our online marketplace, which would harm our business." Our product development organization includes our product strategy group and our engineering group. The product strategy group is responsible for translating user needs into specifications and prototypes for new functions and services. Our engineering group is responsible for developing the technology that implements these initiatives, and maintaining and improving the technology, infrastructure and databases that we use to provide our services. As of December 16, 1999, our product development organization included 54 full-time employees. Our quality assurance group works with our product development organization throughout the development cycle to ensure that the new features and functions of our website meet our standards. In addition, we have a seven person group that focuses on emerging technologies and market opportunities. In cases requiring specialized expertise, we have augmented the resources of our product development organization with independent contractors. Our product development expenses were $179,000 in 1997, $1.5 million in 1998 and $4.3 million in the first nine months of 1999. To date, substantially all software development costs related to our services have been expensed as incurred. We believe that significant investments in product development will be required to remain competitive. PROPRIETARY RIGHTS AND LICENSING Our success and ability to compete depend on our ability to develop and maintain the proprietary aspects of our technology. We rely on a combination of copyright, trademark and trade secret laws and contractual restrictions to establish and protect the proprietary aspects of our technology. We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. Finally, we seek to avoid disclosure of our intellectual property by restricting access to our source code and by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, and to determine the validity and scope of the proprietary rights of others. Any resulting litigation could result in substantial costs and diversion of resources and could seriously harm our business. Our success and ability to compete also depend on our ability to operate without infringing upon the proprietary rights of others. In the event of a successful claim of infringement against us and our failure or inability to license the infringed technology, our business would be seriously harmed. COMPETITION The online market for medical products, supplies and equipment is new, rapidly evolving and intensely competitive. Our primary competition includes e-commerce providers that have established online marketplaces for medical products, supplies and equipment. These competitors include 47 50 companies such as Medibuy, Promedix and Cimtek Medical. Medibuy provides an auction site for the sale of used, refurbished and surplus products, and has announced plans to introduce e-commerce services for new products. Cimtek Medical and Promedix have websites for the sale of new products. Promedix has recently entered into an agreement to be acquired by Chemdex, a leading provider of e-commerce solutions to the life sciences industry. We also face potential competition from a number of sources. Many companies have created websites to serve the information needs of healthcare professionals, providing medical information, discussion groups, bulletin boards and directories. Many of these companies are introducing e-commerce functions that may compete with our services. In addition, providers of online marketplaces and online auction services that currently focus on other industries could expand the scope of their services to include medical products. Existing suppliers of medical products may also establish online marketplaces that offer services to suppliers and purchasers, either on their own or by partnering with other companies. Moreover, live auction houses focusing on medical products may establish online auction services. New companies may also be formed that compete with us. We believe that companies in our market compete to provide services to suppliers based on: - brand recognition; - number of purchasers using their services, and the volume of their purchases; - level of bias, or perceived bias, towards particular suppliers; - compatibility with suppliers' existing distribution methods; - the amount of the fees charged to suppliers; - ease of use and convenience; - ability to integrate their services with suppliers' existing systems and software; and - quality and reliability of their services. In addition, we believe that companies in our market compete to provide services to purchasers based on: - brand recognition; - breadth, depth and quality of product offerings; - ease of use and convenience; - ability to integrate their services with purchasers' existing systems and software; - quality and reliability of their services; and - customer service. Competition is likely to intensify as our market matures. As competitive conditions intensify, competitors may: - enter into strategic or commercial relationships with larger, more established healthcare, medical products and Internet companies; - secure services and products from suppliers on more favorable terms; - devote greater resources to marketing and promotional campaigns; - secure exclusive arrangements with buyers that impede our sales; and - devote substantially more resources to website and systems development. Our current and potential competitors' services may achieve greater market acceptance than ours. Our existing and potential competitors may have longer operating histories in the medical products market, greater name recognition, larger customer bases or greater financial, technical and marketing resources than we do. As a result of these factors, our competitors and potential competitors may be able to respond more quickly to market forces, undertake more extensive marketing campaigns for their brands and services and make more attractive offers to purchasers and suppliers, potential employees and strategic partners. In addition, new technologies may increase competitive pressures. We cannot be certain that we will be able to expand our purchaser and 48 51 supplier base, or retain our current purchasers and suppliers. We may not be able to compete successfully against current and future competitors and competition could seriously harm our revenue, gross margins and market share. EMPLOYEES As of December 16, 1999, we had 235 full-time employees, including 54 in product development, 75 in sales, marketing and customer service, 14 in business development, 62 in operations, and 30 in general and administrative functions. Our future success will depend in part on our ability to attract, train, retain, integrate and motivate highly qualified sales, technical and management personnel, for whom competition is intense. Our employees are not represented by any collective bargaining unit, and we have never experienced a work stoppage. We believe our relations with our employees are good. We also use independent contractors to support our services. We use a firm based in India to digitize and format product information for our Shop service. We plan to use a third party specializing in Internet support to respond to our most common customer service requests. We also use independent contractors for specific product development services requiring specialized expertise. FACILITIES Our executive, administrative and operating offices are located in approximately 33,378 square feet of leased office space located in Santa Clara, California under leases expiring in April 2004 and September 2006. We are currently seeking a larger facility in the Santa Clara area to support our growth. We also maintain 19,875 square feet of office and warehouse space for our AuctionLive service in the metropolitan area of Chicago, Illinois. We have also entered into a lease for a second warehouse in the Chicago, Illinois metropolitan area, expiring in November 2001, to provide an additional 120,000 square feet of space to store consigned items until they are sold in auctions. 49 52 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth information regarding our executive officers and directors as of December 21, 1999:
NAME AGE POSITION ---- --- -------- EXECUTIVE OFFICERS AND DIRECTORS: Robert J. Zollars.................... 42 Chairman, President and Chief Executive Officer Jeffrey H. Kleck..................... 39 Co-founder and Vice President Wayne D. McVicker.................... 40 Co-founder, Senior Vice President of Research and Development and Director Frederick J. Ruegsegger.............. 44 Chief Financial Officer Bhagwan D. Goel...................... 36 Executive Vice President of Products and Services Robert Flury......................... 49 Senior Vice President of Business Development Daniel A. Eckert..................... 35 Executive Vice President of Sales and President of Neoforma Shop Robert W. Rene....................... 42 Executive Vice President of Strategy and Marketing S. Wayne Kay......................... 49 Senior Vice President Erik Tivin........................... 34 Vice President of Auction Services and President of Neoforma GAR, Inc. David Douglass....................... 47 Director Terence Garnett...................... 42 Director Madhavan Rangaswami.................. 44 Director Richard D. Helppie................... 43 Director Andrew J. Filipowski................. 49 Director
Robert J. Zollars has served as our Chairman, President and Chief Executive Officer since July 1999. From January 1997 to July 1999, he served as Executive Vice President and Group President of Cardinal Health, Inc., a healthcare products and services company, where he was responsible for four of its wholly-owned subsidiaries: Pyxis Corporation, Owen Healthcare, Inc., Medicine Shoppe International and Cardinal Information Corporation. From January 1992 to December 1996, he served as President of Hospital Supply, Scientific Products and U.S. Distribution of Baxter Healthcare Corporation, which in October of 1996 was spun off as Allegiance Corporation, a healthcare products and service company. Mr. Zollars holds an M.B.A. in finance from John F. Kennedy University and a B.S. in marketing from Arizona State University. Jeffrey H. Kleck has served as a Vice President since July 1999, and co-founded Neoforma.com in April 1996. Dr. Kleck served as our Chief Executive Officer from March 1996 to July 1999 and as one of our directors from April 1996 to October 1999. Dr. Kleck was a senior engineer from June 1991 to February 1997 and Marketing Product Manager from February 1997 to February 1998 at Varian Associates, Inc., a manufacturer of medical radiology equipment. He is a visiting scientist at Los Alamos Laboratory. Dr. Kleck holds a Ph.D. in biomedical physics from, and is a member of the faculty of the School of Medicine at, the University of California, Los Angeles. He holds an M.S. in engineering management from Stanford University and M.S. and B.S. degrees in nuclear engineering from Texas A&M University. Wayne D. McVicker has served as our Senior Vice President of Research and Development since October 1999 and as a director since April 1996. Mr. McVicker co-founded Neoforma.com in April 1996, and served as our President from April 1996 to February 1999 and as our Vice President of 50 53 Strategy from February 1999 to October 1999. From September 1987 to February 1997, Mr. McVicker worked at Varian Associates, Inc., as manager of its architectural planning department. In addition, Mr. McVicker is a licensed architect. Frederick J. Ruegsegger has served as our Chief Financial Officer since July 1999. From December 1996 to July 1999, Mr. Ruegsgegger worked at Axys Pharmaceuticals, Inc., a biopharmaceutical company, most recently as Senior Vice President of Finance and Corporate Development and Chief Financial Officer. From July 1993 to December 1996, Mr. Ruegsegger was President, Chief Executive Officer and a director of EyeSys Technologies Inc., an eye care diagnostic equipment and software company. Mr. Ruegsegger holds a Master of Management from J. L. Kellogg Graduate School of Management, Northwestern University, and a B.S. in economics from the University of Illinois. Bhagwan D. Goel has served as our Executive Vice President of Products and Services since October 1999. From October 1998 to September 1999, Mr. Goel was Senior Vice President and General Manager, Commerce at InfoSeek Corporation, a provider of Internet services and software. From October 1996 to September 1998, Mr. Goel was Vice President of Products and Services at Internet Shopping Network Inc., an online retailer. From November 1993 to October 1995, Mr. Goel was Vice President of Product Development at Worldview Systems Corporation, a provider of online travel information. From October 1989 to October 1995, Mr. Goel worked at Knowledgeset Corporation, a software company that provides electronic retrieval systems, most recently as Director of Product Development. Mr. Goel holds an M.S. in electrical engineering from the University of Toledo and a B.S. in electrical engineering from the Indian Institute of Technology, New Delhi. Robert Flury has served as our Senior Vice President of Business Development since February 1999. From December 1997 to January 1999, Mr. Flury was Vice President and General Manager of the healthcare business unit at PeopleSoft Inc., an enterprise software company. From February 1997 to December 1997, Mr. Flury was a senior vice president at Visix Software Inc., a software company. From October 1994 to February 1997, Mr. Flury was a Senior Vice President of the middleware line of business at Software AG, an enterprise software company. Mr. Flury is a C.P.A. and holds an M.B.A. and a B.B.A. in accounting from Georgia State University. Daniel A. Eckert has served as our Executive Vice President of Sales since August 1999 and President of Neoforma Shop since November 1999. From April 1998 to August 1999, Mr. Eckert was President and Chief Operating Officer of Fisher Healthcare, a division of Fisher Scientific International, which is a distributor of medical products. From September 1992 to April 1998, Mr. Eckert held several positions at McKesson Corporation, including Senior Vice President of Corporate Sales for the Health Systems Group, Senior Vice President of Sales and Marketing for McKesson/General Medical Corporation and Vice President of Acute Care. Mr. Eckert holds an A.B. degree in English and political science from Occidental College, and completed the Fuqua School of Business' Healthcare Distributor Executive Program at Duke University. Robert W. Rene has served as our Executive Vice President of Strategy and Marketing since December 1999. From April 1999 to December 1999, Mr. Rene was a strategy, marketing and Internet business development consultant to e-commerce companies. From January 1998 to April 1999, Mr. Rene was Executive Vice President, Marketing at United Paramount Network, a television network. From April 1996 to September 1997, Mr. Rene held several positions at Americast, a company which provides digital cable service, including Senior Vice President, Marketing/Strategy/ Business Development, Chief Marketing Officer and Senior Vice President, Marketing/Advertising. From December 1993 to March 1996, Mr. Rene held several positions at Young & Rubicam, Inc., a marketing and communications enterprise, including Senior Vice President, Marketing/Corporate 51 54 Ventures and Account Managing Director. Mr. Rene holds a J.D. and an M.B.A. from Stanford University and a B.A. in Economics/Government from Cornell University. S. Wayne Kay has served as our Senior Vice President since December 1999. From February 1994 to December 1999, Mr. Kay was the President and Chief Executive Officer of the Health Industry Distributors Association, a business trade association of medical products distributors and home healthcare providers. Mr. Kay holds a B.S. in microbiology from Virginia Tech, a B.A. in Business Administration from the University of San Francisco and an M.B.A. from Pepperdine University. Erik Tivin has served as our Vice President of Auction Services and President of Neoforma GAR, Inc. since August 1999. From July 1998 to August 1999, Mr. Tivin served as owner and President of General Asset Recovery, LLC., a live auction house, which was acquired by Neoforma.com. From January 1990 to July 1998, he served as President of General Industrial Tool, a wholesale industrial equipment company. David Douglass has served as one of our directors since February 1999. Since February 1990, Mr. Douglass has served as a General Partner at Delphi Ventures L.P., a venture capital firm. Mr. Douglass holds an M.B.A. from Stanford University and a B.A. in political science from Amherst College. Terence Garnett has served as one of our directors since April 1998. Mr. Garnett has been a managing director of Garnett Capital since January 2000. Before joining Garnett Capital, from April 1995 to December 1999, Mr. Garnett was a venture partner of Venrock Associates, a venture capital firm. From August 1994 to April 1995, Mr. Garnett was a private investor. From October 1991 to August 1994, he was a senior vice president of worldwide marketing and business development and senior vice president of the new media division at Oracle Corporation, a software company. He also serves as a director of Niku Corp., CrossWorlds Software, Inc. and several other private companies. Mr. Garnett holds an M.B.A. from Stanford University and a B.S. in computer science from the University of California, Berkeley. Madhavan Rangaswami has served as one of our directors since April 1998. Since February 1997, Mr. Rangaswami has served as a Managing Director at Sand Hill Group LLC, a consulting and private investment company. From March 1995 to March 1996, Mr. Rangaswami served as Vice President of Worldwide Marketing at the Baan Company N.V., an enterprise software company. Prior to that, he held executive positions at Avalon Software Inc., a software company, and Oracle Corporation. Mr. Rangaswami holds an M.B.A. from Kent State University, and degrees in law and accounting from the University of Madras. Richard D. Helppie has served as one of our directors since October 1999. Since August 1996, he has served as Chairman of the board of directors and Chief Executive Officer of Superior Consultant Holdings Corporation, a consulting firm comprised of two subsidiaries founded by Mr. Helppie, Superior Consultant Company, Inc. and UNITIVE Corporation. He has served as Chairman of the board of directors and Chief Executive Officer of Superior Consultant Company, a healthcare management and information systems consulting firm, since 1984 and as Chief Executive Officer of UNITIVE Corporation, a information technology consulting firm, since 1993. He has also served as President of Clearwater Aviation Company, Inc. since 1993. In addition, Mr. Helppie is a director of drkoop.com, Inc. Andrew J. Filipowski has served as one of our directors since October 1999. He is the President, Chief Executive Officer and Chairman of the Board of divine interVentures, inc., a venture investment firm that he co-founded in May 1999. He is also Chairman of the Board of PLATINUM Venture Partners, Inc., a venture investment firm that he founded in February 1992. Mr. Filipowski 52 55 founded PLATINUM technology, inc. in April 1987 and served as its President, Chief Executive Officer and Chairman of the Board until it was acquired by Computer Associates in June 1999. PLATINUM technology, inc. was a software company that produced, acquired and distributed system software tools. Mr. Filipowski serves on the board of directors of Blue Rhino Corporation, Bluestone Software, Inc., eShare Technologies, Inc., Platinum Entertainment, Inc., and System Software Associates, Inc. BOARD COMPOSITION Our amended and restated bylaws provide for a board of directors consisting of seven members. Our amended and restated certificate of incorporation and bylaws, each of which will become effective following the completion of this offering, provide that our board of directors will be divided into three classes, each serving staggered three-years terms: Class I, whose term will expire at the annual meeting of stockholders to be held in 2000; Class II, whose term will expire at the annual meeting of stockholders to be held in 2001; and Class III, whose term will expire at the annual meeting of stockholders to be held in 2002. As a result, only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their terms. Messrs. Douglass, McVicker and Rangaswami have been designated as Class I directors; Messrs. Filipowski and Garnett have been designated as Class II directors; and Messrs. Helppie and Zollars have been designated as Class III directors. BOARD COMMITTEES The audit committee consists of Messrs. Filipowski, Garnett and Rangaswami. The audit committee: - reviews our financial statements and accounting practices; - makes recommendations to the board of directors regarding the selection of independent public accountants; and - reviews the results and scope of the audit and other services provided by our independent public accountants. The compensation committee consists of Messrs. Douglass, Filipowski and Helppie. The compensation committee: - reviews and recommends to the board of directors the compensation and benefits of all of our officers, directors and consultants; and - reviews general policy relating to compensation and benefits. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The compensation committee of our board of directors is currently comprised of Messrs. Douglass, Filipowski and Helppie. None of these individuals has at any time been one of our officers or employees. For a description of the transactions between Neoforma.com and members of the compensation committee and entities affiliated with the compensation committee members, see "Certain Transactions." Robert J. Zollars, our President and Chief Executive Officer, is a member of the board of directors of divine interVentures, inc., of which Mr. Filipowski is President, Chief Executive Officer and Chairman of the board of directors. 53 56 EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS Mr. Zollars. In July 1999, we entered into an at-will employment agreement with Robert J. Zollars for him to serve as our Chairman, President and Chief Executive Officer. Under this agreement, Mr. Zollars receives a salary equal to $500,000 for the first year of the agreement, which can be increased by us in subsequent years. Mr. Zollars is also entitled to a $250,000 bonus if he continues to be employed by us on December 31, 1999. Beginning in 2000 and for each following year while he is employed by us, Mr. Zollars is eligible to receive a bonus payment of at least $500,000 for that fiscal year, based upon whether we achieve revenue and profitability targets and/or other organizational milestones to be specified by our board of directors. Upon entering into this employment agreement, Mr. Zollars received an option to purchase 1,637,160 shares of our common stock and an option to purchase 3,602,315 shares of our common stock, each at an exercise price of $0.10 per share. Both options were immediately exercisable and Mr. Zollars exercised these options in full in July 1999. As of September 30, 1999, all of the shares purchased under the option for 3,602,315 shares were subject to a repurchase right that lapses at a rate of 900,578 shares after his first year of employment and 75,048 shares per month thereafter. If we are acquired or if a change in control of Neoforma.com occurs, the then unvested portion of his option will become vested. Mr. Zollars is eligible to receive from us a moving assistance loan of $2.5 million, which will be forgiven in equal monthly installments on the last day of each month from the date of closing on his new home through June 30, 2003. Mr. Zollars also has the right to be reimbursed by us up to $300,000 for any loss on the sale of his previous home. We are obligated to reimburse Mr. Zollars for an additional $338,000 plus additional moving expenses incurred in connection with his joining us. If Mr. Zollars' employment is terminated other than for disability or cause, or if Mr. Zollars resigns for good reason, he will be entitled to receive an amount equal to his annual salary, bonus and benefits. In addition, our right to repurchase all outstanding stock held by Mr. Zollars will lapse and the forgiveness of the home loan will be treated as if he had been employed by us for 12 additional months after the termination of employment. Good reason includes a reduction in his duties or responsibilities or a reduction in his salary, bonus or other benefits. Mr. Tivin. In August 1999, we entered into an employment agreement with Erik Tivin for him to serve as our Vice President of Auction Services and President of Neoforma GAR, Inc. This agreement expires on December 31, 2001. Under this agreement, Mr. Tivin receives a salary equal to $100,000 per year. Mr. Tivin is also eligible to receive a bonus payment of at least $50,000 per year that he is still employed by us, based upon our financial performance. Upon entering into this employment agreement, Mr. Tivin received an option to purchase 550,000 shares of our common stock at $0.10 per share. This option is immediately exercisable. As of September 30, 1999, 33,333 of the shares underlying the option had vested and none had been exercised. The shares underlying the option vest at a rate of 33,333 shares per month for the first 12 months of his employment and at a rate of 4,167 shares per month during each of months 13 through 47, with the balance of the remaining options vesting in month 48, so long as he is employed by us. In addition, in the event of a change of control of Neoforma.com and termination of Mr. Tivin's employment, 50% of the then unvested portion of Mr. Tivin's option shall immediately vest. Mr. Ruegsegger. In June 1999, we entered into an offer letter with Frederick J. Ruegsegger for him to serve as our Chief Financial Officer. Under this offer letter, Mr. Ruegsegger receives a salary equal to $200,000 per year. Mr. Ruegsegger is eligible to receive a bonus of up to $12,500 each quarter, based upon performance milestones to be specified by our president and assessed by our board of directors. Mr. Ruegsegger is also entitled to repayment of the outstanding amount of a 54 57 $25,000 relocation loan. Upon entering into employment with us, Mr. Ruegsegger received an option to purchase 604,555 shares of our common stock at $0.50 per share. This option is immediately exercisable and Mr. Ruegsegger has exercised the option in full. As of September 30, 1999, all of the shares underlying the option were subject to a right of repurchase. The shares underlying the option vest over four years, with one fourth of the shares vesting at the end of the first year of employment with us and an additional one forty-eighth vesting each month thereafter, for so long as he is employed by us. If Mr. Ruegsegger's employment is terminated other than for cause, he will be entitled to receive an amount equal to three months of his salary. In addition, in the event of a change of control of Neoforma.com and termination of Mr. Ruegsegger's employment, 50% of the then unvested portion of Mr. Ruegsegger's option shall immediately vest. Mr. Goel. In September 1999, we entered into an offer letter with Bhagwan D. Goel for him to serve as our Executive Vice President of Products and Services. Under this offer letter, Mr. Goel receives a salary equal to $225,000 per year. Mr. Goel received a $50,000 bonus when he commenced his employment with us and is entitled to receive a bonus of $50,000 after one year of employment. Upon entering into employment with us, Mr. Goel received an option to purchase 595,000 shares of our common stock at $3.00 per share. This option is immediately exercisable. As of September 30, 1999, this option had not yet been granted. The shares underlying the option vest in equal monthly installments over four years, for so long as he is employed by us. If Mr. Goel's employment is terminated other than for cause, he will be entitled to receive an amount equal to 12 months of his salary. In addition, in the event of a change of control of Neoforma.com and termination of Mr. Goel's employment, 50% of the then unvested portion of Mr. Goel's option shall immediately vest. Mr. Flury. In December 1998, we entered into an offer letter with Robert Flury for him to serve as our Vice President of Enterprise Sales. Under this offer letter, Mr. Flury receives a salary equal to $175,000 per year. Mr. Flury is entitled to receive a bonus of $25,000 each quarter during his first year with us, and thereafter is eligible to earn a bonus of up to $25,000 each quarter, based upon performance milestones to be specified by our president and assessed by our board of directors. Upon entering into employment with us, Mr. Flury received an option to purchase 609,392 shares at $0.10 per share. This option is immediately exercisable. As of September 30, 1999, none of the shares underlying the option had vested and none had been exercised. The shares underlying the option vest over four years, with one fourth of the shares vesting at the end of the first year of employment with us and an additional one forty-eighth vesting each month thereafter, for so long as he is employed by us. If Mr. Flury's employment is terminated other than for cause, he will be entitled to receive an amount equal to three months of his salary. In addition, in the event of a change of control of Neoforma.com and termination of Mr. Flury's employment, 50% of the then unvested portion of Mr. Flury's option shall immediately vest. Mr. Eckert. In July 1999, we entered into an offer letter with Daniel A. Eckert for him to serve as our Executive Vice President of Sales. Under this offer letter, Mr. Eckert receives a salary equal to $250,000 per year. Mr. Eckert received a $50,000 bonus when he commenced his employment with us and is entitled to receive a bonus of $50,000 per year, based upon performance milestones to be specified by our president and assessed by our board of directors. Upon entering into employment with us, Mr. Eckert received an option to purchase 450,000 shares of our common stock at $0.50 per share. This option is immediately exercisable and Mr. Eckert has exercised the option in full. The shares underlying the option vest in equal monthly installments over four years, for so long as he is employed by us. If Mr. Eckert's employment is terminated other than for cause, he will be entitled to receive an amount equal to 6 months of his salary. In the event of a change of control of Neoforma.com, 50% of the then unvested portion of Mr. Eckert's option shall immediately vest. 55 58 Mr. Rene. In December 1999, we entered into an offer letter with Robert W. Rene for him to serve as our Executive Vice President of Strategy and Marketing. Under this offer letter, Mr. Rene receives a salary equal to $150,000 per year for the first year of his employment with us, during which he is not entitled to receive a bonus. During Mr. Rene's second year of employment with us, his minimum compensation, salary plus bonus, will be $350,000 per year. Mr. Rene's compensation for his third and subsequent years of employment with us will be determined in future discussions. The annual bonus for Mr. Rene's second and subsequent years of employment with us will be based upon the achievement of performance milestones to be specified by our Chairman or Chief Executive Officer and assessed by our board of directors. The amount of this annual bonus will be determined by our board of directors. Upon entering into employment with us, Mr. Rene received an option to purchase 700,000 shares of our common stock at $7.00 per share. This option is immediately exercisable and Mr. Rene exercised this option in full. The shares underlying the option vest over four years, with one fourth of the shares vesting at the end of the first year of employment with us and an additional one forty-eighth vesting each month thereafter, for so long as he is employed by us. In the event of a change of control of Neoforma.com and termination of Mr. Rene's employment without cause or constructive termination of Mr. Rene's employment without good reason, our right to repurchase Mr. Rene's option shall lapse as to 50% of the then unvested portion of Mr. Rene's option. Mr. Kay. In December 1999, we entered into an offer letter with S. Wayne Kay for him to serve as a Senior Vice President. Under this offer letter, Mr. Kay receives a salary equal to $200,000 per year. Mr. Kay received a $40,000 bonus when he commenced his employment with us and is entitled to receive a quarterly bonus of $12,500 based upon the achievement of milestones to be specified by our Chairman or Chief Executive Officer and assessed by our board of directors. Upon entering into employment with us, Mr. Kay received an option to purchase 225,000 shares of our common stock at $7.00 per share. This option is immediately exercisable. The shares underlying the option vest in equal monthly installments over four years, for so long as he is employed by us. If Mr. Kay's employment is terminated other than for cause, he will be entitled to receive an amount equal to 12 months of his salary. In addition, in the event of a change of control of Neoforma.com and termination of Mr. Kay's employment without cause or constructive termination of Mr. Kay's employment without good reason, 50% of the then unvested portion of Mr. Kay's option shall immediately vest. DIRECTOR COMPENSATION Our directors do not receive cash compensation for their services as directors but are reimbursed for their reasonable and necessary expenses for attending board and board committee meetings. Each eligible director who is not our employee and who is or becomes a member of our board will be automatically granted an option to purchase 100,000 shares of common stock under our 1999 Equity Incentive Plan, unless that director has previously received an option grant. Immediately following each annual meeting of stockholders, each eligible director will automatically be granted an option to purchase 25,000 shares of common stock under our 1999 Equity Incentive Plan, provided that the director is a member of the board on that date and has served continuously as a member of the board for a period of at least one year since the date of the director's initial grant. All options will have an exercise price equal to the fair market value of our common stock on the date of grant. The options will have 10-year terms and will terminate three months following the date the director ceases to be one of our directors or consultants or 12 months after any termination due to death or disability. Options granted under the plan will generally vest over four years. Any unvested shares subject to these options will become immediately vested and exercisable upon a transaction which results in a change in our control. 56 59 EXECUTIVE COMPENSATION The following table shows all compensation awarded to, earned by or paid for services rendered to us in all capacities during 1998 by our then chief executive officer and our other current or former executive officers who earned at least $100,000 in 1998. SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION ------------------- SECURITIES NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS --------------------------- -------- -------- ------------------ Jeffrey H. Kleck.................................... $ 91,929 $ -- -- Co-founder and Vice President(1) Wayne D. McVicker................................... 122,150 -- -- Co-founder, Senior Vice President of Research and Development and a director(2) Stephen A. Pieraldi................................. 104,421 -- 175,000 Vice President of Business Development(3)
- --------------- (1) Mr. Kleck was our Chief Executive Officer and a director in 1998. (2) Mr. McVicker was our President in 1998. (3) Mr. Pieraldi was our Vice President of Sales in 1998. The executive officers listed below joined us after 1998 and are not included in the tables relating to summary compensation and option grants in 1998. Robert J. Zollars, our Chairman, President and Chief Executive Officer, joined us in July 1999. Mr. Zollars is compensated at an annual rate of $500,000. He will receive a bonus of $250,000 if he continues to be employed by us on December 31, 1999. Mr. Zollars received an option to purchase 1,637,160 shares of our common stock and an option to purchase 3,602,315 shares of our common stock, each at $0.10 per share. Both options were immediately exercisable and Mr. Zollars exercised these options in full in July 1999. As of September 30, 1999, all of the shares underlying the option for 3,602,315 shares were subject to a repurchase right that lapses at a rate of 900,578 after his first year of employment and 75,048 shares per month thereafter. Frederick J. Ruegsegger, our Chief Financial Officer, joined us in July 1999. Mr. Ruegsegger is compensated at an annual rate of $200,000. He is eligible to receive a bonus of up to $12,500 each quarter. Mr. Ruegsegger was also granted an option to purchase 604,555 shares of our common stock at $0.50 per share. This option is immediately exercisable and Mr. Ruegsegger has exercised the option in full. As of September 30, 1999, all of the shares underlying the option were subject to a repurchase right that lapses at a rate of 151,138 shares after his first year of employment and 12,594 shares per month thereafter. Bhagwan D. Goel, our Executive Vice President of Products and Services, joined us in October 1999. Mr. Goel is compensated at an annual rate of $225,000. He received a $50,000 bonus upon joining us. Mr. Goel was also granted an option to purchase 595,000 shares of our common stock at $3.00 per share. This option is immediately exercisable. The shares underlying the option will vest at a rate of 12,395 shares per month. Robert Flury, our Senior Vice President of Business Development, joined us in February 1999. Mr. Flury is compensated at an annual rate of $175,000. He is entitled to receive a bonus of $25,000 each quarter. Mr. Flury was also granted an option to purchase 609,392 shares of our common stock 57 60 at $0.10 per share. This option is immediately exercisable. As of September 30, 1999, the option had not yet been exercised. The shares underlying the option will vest at a rate of 152,348 shares after his first year of employment and 12,695 shares per month thereafter. Daniel A. Eckert, our Executive Vice President of Sales and President of Neoforma Shop, accepted employment with us in July 1999. Mr. Eckert is compensated at an annual rate of $250,000. He received a $50,000 bonus upon joining us and is entitled to receive a bonus of up to $50,000 each year. Mr. Eckert was also granted an option to purchase 450,000 shares at $0.50 per share. This option is immediately exercisable and Mr. Eckert has exercised this option in full. The shares underlying the option will vest in equal monthly installments over four years. For more information regarding the terms of employment agreements and offer letters with our executive officers, see "-- Employment Contracts and Change of Control Arrangements." OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth each grant of stock options during the fiscal year ended December 31, 1998 to each of the executive officers named in the Summary Compensation Table above. We granted the option listed below at an exercise price equal to the fair market value of our common stock, as determined by our board of directors on the date of grant. The option becomes exercisable as to 25% of the underlying shares upon the first anniversary of the date of grant and an additional 2.083% per month thereafter. The option expires on the earlier of 10 years from the date of grant or three months after termination of employment.
POTENTIAL REALIZABLE NUMBER PERCENTAGE OF VALUE AT ASSUMED OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS PRICE APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM(2) OPTIONS EMPLOYEES PRICE EXPIRATION ---------------------- NAME GRANTED IN 1998(1) PER SHARE DATE 5% 10% ---- ---------- ------------- --------- ---------- --------- --------- Jeffrey H. Kleck................ -- -- -- -- -- -- Wayne D. McVicker............... -- -- -- -- -- -- Stephen A. Pieraldi............. 175,000 12.2% $0.05 05/26/2008 $11,756 $36,640
- ------------------------- (1) Based on an aggregate of 1,457,700 shares underlying the options granted to our employees during fiscal 1998. (2) Potential realizable values are computed by (a) multiplying the number of shares of common stock subject to a given option by the deemed fair market value of the underlying common stock at December 31, 1999, (b) compounding the aggregate stock value derived from the foregoing calculation at an annual rate of 5% or 10% over the 10 year term of the option, and (c) subtracting from that result the aggregate option exercise price. The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent our estimates or projections of future common stock prices. 58 61 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES The following table sets forth the number of shares of common stock acquired and the value realized upon exercise of stock options during 1998 and the number of shares of common stock subject to exercisable and unexercisable stock options held as of December 31, 1998 by each of the executive officers named in the Summary Compensation Table. Value at fiscal year end is the difference between the exercise price and the deemed fair market value of the underlying common stock at December 31, 1998.
NUMBER OF SECURITIES VALUE OF UNEXERCISED NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT SHARES OPTIONS AT FISCAL YEAR END FISCAL YEAR END ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- -------- ----------- ------------- ----------- ------------- Jeffrey H. Kleck............... -- -- -- -- -- -- Wayne D. McVicker.............. -- -- -- -- -- -- Stephen A. Pieraldi............ -- -- -- 175,000 -- $8,750
EMPLOYEE BENEFIT PLANS 1997 Stock Plan Our 1997 Stock Plan was adopted by our board of directors in January 1997. As of September 30, 1999, there were outstanding options to purchase a total of 5,128,549 shares of common stock under this plan, and 2,659,309 shares remained available for future grants. This plan will terminate immediately prior to this offering, and no further options will be granted. However, the termination of this plan will not affect any outstanding options, which will remain outstanding until they are exercised, terminate or expire. 1999 Equity Incentive Plan Our 1999 Equity Incentive Plan will become effective on the date of this prospectus and will serve as the successor to our 1997 Stock Plan. We have reserved 5,000,000 shares of common stock for issuance under this plan. The number of shares reserved for issuance under this plan will be increased to include: - any shares reserved under our 1997 Stock Plan not issued or subject to outstanding grants on the date of this prospectus; - any shares issued under our 1997 Stock Plan that are repurchased by us at the original purchase price; and - any shares issuable upon exercise of options granted under our 1997 Stock Plan that expire or become unexercisable without having been exercised in full. The number of shares reserved under this plan will be increased automatically on January 1 of each year by an amount equal to 5% of our total outstanding shares as of the immediately preceding December 31. Our board of directors or compensation committee may reduce the amount of the increase in any particular year. The following shares will be available for grant and issuance under our 1999 Equity Incentive Plan: - shares issuable upon exercise of an option granted under this plan that is terminated or cancelled before the option is exercised; - shares issued upon exercise of an option granted under this plan that are subsequently repurchased by us at the original purchase price; 59 62 - shares subject to awards granted under this plan that are subsequently forfeited or repurchased by us at the original issue price; and - shares subject to stock bonuses granted under this plan that otherwise terminate without shares being issued. Our 1999 Equity Incentive Plan will terminate in 2009, unless earlier terminated in accordance with the terms of the plan. Our 1999 Equity Incentive Plan authorizes the award of options, restricted stock awards and stock bonuses. No person will be eligible to receive more than 4,000,000 shares in any calendar year under this plan (4,500,000 in the case of new employees). This plan is administered by the compensation committee of our board of directors, which currently consists of Messrs. Douglass, Filipowski and Helppie, all of whom are outside directors, as defined under applicable federal tax laws. The committee has the authority to interpret this plan and any agreement made under the plan, grant awards and make all other determinations for the administration of this plan. Also, our outside directors are entitled to receive automatic annual grants of options to purchase shares of our common stock, as described under "-- Director Compensation." Our 1999 Equity Incentive Plan provides for the grant of both incentive stock options that qualify under Section 422 of the Internal Revenue Code, and nonqualified stock options. Incentive stock options may be granted only to employees. Nonqualified stock options, and all other awards other than incentive stock options, may be granted to employees, officers, directors, consultants, independent contractors and advisors of Neoforma.com or subsidiary of Neoforma.com. However, consultants, independent contractors and advisors are only eligible to receive awards if they render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. The exercise price of incentive stock options must be at least equal to the fair market value of our common stock on the date of grant. The exercise price of incentive stock options granted to 10% stockholders must be at least equal to 110% of that value. The exercise price of nonqualified stock options must be at least equal to 85% of the fair market value of the our common stock on the date of grant. The maximum term of options granted under our 1999 Equity Incentive Plan is 10 years. Except as provided under the 1999 Equity Incentive Plan, awards granted under the plan may not be transferred in any manner other than by will or by the laws of descent and distribution. The compensation committee may allow exceptions to this restriction with respect to awards that are not incentive stock options. Options granted under our 1999 Equity Incentive Plan generally expire three months after the termination of the optionee's service. Except for options granted to outside directors, in the event of a change in control of Neoforma.com, if the successor does not assume outstanding options, they will expire upon conditions determined by the compensation committee. Alternatively, the compensation committee may accelerate the vesting of awards upon a change in control. 1999 Employee Stock Purchase Plan Our 1999 Employee Stock Purchase Plan will become effective on the first day on which price quotations are available for our common stock on the Nasdaq National Market. We have initially reserved 750,000 shares of common stock for issuance under this plan. The number of shares reserved for issuance under our 1999 Employee Stock Purchase Plan will be increased automatically on January 1 of each year by an amount equal to 1% of our total outstanding shares as of the immediately preceding December 31. Our board of directors or compensation committee may reduce the amount of the increase in any particular year. Our compensation committee will administer our 1999 Employee Stock Purchase Plan. Employees generally will be eligible to participate in our 1999 Employee Stock Purchase Plan if they are employed by Neoforma.com, or any subsidiaries that Neoforma.com designates, for more than 20 hours per week and more than five months in a calendar year. Employees are not eligible to participate in our 1999 Employee Stock Purchase Plan if they are 5% stockholders, or would become 5% stockholders as a result of their participation in this plan. 60 63 Under our 1999 Employee Stock Purchase Plan, eligible employees may acquire shares of our common stock through payroll deductions. Eligible employees may select a rate of payroll deduction between 1% and 15% of their cash compensation and are subject to maximum purchase limitations. Participation in this plan will end automatically upon termination of employment for any reason. A participant will not be able to purchase shares having a fair market value of more than $25,000, determined as of the first day of the applicable offering period, for each calendar year in which the employee participates in this plan. Each offering period under this plan will be for two years and will consist of four six-month purchase periods. The first offering period is expected to begin on the first business day on which price quotations for our common stock are available on the Nasdaq National Market. The first purchase period may be more or less than six months long. Offering periods thereafter will begin on February 1 and August 1. The purchase price for common stock purchased under this plan will be 85% of the lesser of the fair market value of our common stock on the first day of the applicable offering period or the last day of each purchase period. The compensation committee will have the power to change the duration of offering periods. Our 1999 Employee Stock Purchase Plan is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. This plan will terminate in 2009, unless it is terminated earlier pursuant to its terms. 401(k) Plan. We sponsor a defined contribution plan intended to qualify under Section 401 of the Internal Revenue Code. Participants may make pre-tax contributions to the plan of up to 15% of their eligible earnings, subject to a statutorily prescribed annual limit. Participants are fully vested in their contributions and the investment earnings. We do not make matching contributions to the 401(k) plan. Contributions by the participants to the 401(k) plan, and the income earned on these contributions, are generally not taxable to the participants until withdrawn. Contributions are held in trust as required by law. Individual participants may direct the trustee to invest their accounts in authorized investment alternatives. INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY Our amended and restated certificate of incorporation includes a provision that eliminates the personal liability of a director for monetary damages resulting from breach of his fiduciary duty as a director, except for liability: - for any breach of the director's duty of loyalty to us or our stockholders; - for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; - under section 174 of the Delaware General Corporation Law regarding unlawful dividends and stock purchases; or - for any transaction from which the director derived an improper personal benefit. Our amended and restated bylaws provide that: - we are required to indemnify our directors and officers to the fullest extent permitted by the Delaware General Corporation law, subject to limited exceptions; - the rights conferred in the amended and restated bylaws are not exclusive; and 61 64 - we are required to advance expenses, as incurred, to our directors and executive officers in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions. In addition to the indemnification required by our amended and restated certificate of incorporation and bylaws, before the completion of this offering, we intend to enter into indemnity agreements with each of our current directors and officers. These agreements provide for the indemnification of our officers and directors for all expenses and liabilities incurred in connection with any action or proceeding brought against them by reason of the fact that they are or were our agents. We also intend to obtain directors' and officers' insurance to cover our directors, officers and some of our employees for certain liabilities, including public securities matters. We believe that these indemnification provisions and agreements and this insurance are necessary to attract and retain qualified directors and officers. The limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and bylaws may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against directors and officers, even though an action, if successful, might benefit us and other stockholders. Furthermore, the value of a stockholder's investment may decline to the extent we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions. At present, there is no pending litigation or proceeding involving any of our directors, officers or employees regarding which indemnification from us is sought, nor are we aware of any threatened litigation that may result in claims for indemnification by us. 62 65 CERTAIN TRANSACTIONS Other than compensation agreements and other arrangements, which are described in "Management," and the transactions described below, since we incorporated in March 1996, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or will be a party: - in which the amount involved exceeded or will exceed $60,000, and - in which any director, executive officer, holder of more than 5% of our common stock or any member of their immediate family had or will have a direct or indirect material interest. The agreements described below are included as exhibits to the registration statement of which this prospectus forms a part. TRANSACTIONS WITH PROMOTER In May 1996, in connection with our formation and initial financing, Jeffrey H. Kleck, our co-founder and Vice President, purchased four million shares of our common stock at $0.00375 per share in exchange for $10,000 in cash and intellectual property relating to our Plan service and Wayne D. McVicker, our co-founder, Senior Vice President of Research and Development and a director, purchased four million shares of our common stock at $0.00375 per share in exchange for $10,000 in cash and intellectual property relating to our Plan service. Messrs. Kleck and McVicker each hold more than 5% of our common stock. STOCK FINANCINGS/STOCK EXCHANGES Series A preferred stock exchange In April 1998, we issued 9,000,000 shares of our Series A preferred stock in exchange for 9,000,000 shares of previously issued common stock. The following directors, executive officers and/or 5% stockholders purchased our Series A preferred stock: - Wayne D. McVicker -- 4,000,000 shares; and - Jeffrey H. Kleck -- 4,000,000 shares. Series B preferred stock financing In April 1998, we sold 2,860,000 shares of our Series B preferred stock for approximately $0.50 per share. The following directors, executive officers and/or 5% stockholders purchased our Series B preferred stock: - Terence J. and Katrina A. Garnett, Trustees of the Garnett Family Trust UDT 4/2/97 -- 500,000 shares; and - Madhavan Rangaswami -- 200,000 shares. Terence J. Garnett, one of our directors, is a trustee of the Garnett Family Trust UDT 4/2/97. Madhavan Rangaswami is one of our directors. 63 66 Series C preferred stock financing In June 1998, we sold 5,064,937 shares of our Series C preferred stock for approximately $0.77 per share. The following directors, executive officers and/or 5% stockholders purchased our Series C preferred stock: - Terence J. and Katrina A. Garnett, Trustees of the Garnett Family Trust UDT 4/2/97 -- 754,870 shares; - Venrock Associates -- 1,467,073 shares; - Venrock Associates II, L.P. -- 1,944,724 shares; and - Madhavan Rangaswami -- 351,732 shares. Venrock Associates and Venrock Associates II, L.P. together hold more than 5% of our common stock. Both entities are limited partnerships managed by a group of individuals who serve as general partners of both partnerships. Terence J. Garnett, one of our directors, is a consultant to Venrock Associates and Venrock Associates II, L.P. but does not share voting or dispositive power over the shares held by these entities. Series D preferred stock financing In February 1999, we sold 10,196,361 shares of our Series D preferred stock for approximately $1.18 per share. The following directors, executive officers and/or 5% stockholders purchased our Series D preferred stock: - Delphi BioInvestments IV, L.P. -- 59,915 shares; - Delphi Ventures IV, L.P. -- 2,906,187 shares; - Terence J. Garnett -- 50,848 shares; - Terence J. and Katrina A. Garnett, Trustees of the Garnett Family Trust UDT 4/2/97 -- 423,728 shares; - Venrock Associates -- 694,915 shares; and - Venrock Associates II, L.P. -- 1,000,000 shares. Delphi Ventures IV, L.P. and Delphi BioInvestments IV, L.P. together hold more than 5% of our common stock. Both entities are limited partnerships managed by Delphi Management Partners IV, L.L.C., of which David L. Douglass, one of our directors, is a managing member. Series E and Series E-1 preferred stock financing In October 1999, we sold an aggregate of 12,418,633 shares of our Series E and Series E-1 preferred stock for approximately $5.68 per share and issued an additional 275,000 shares of Series E-1 preferred stock in connection with entering into a strategic alliance in October 1999. The following directors, executive officers and/or 5% stockholders purchased our Series E and Series E-1 preferred stock: - Dell USA L.P. -- 4,401,408 shares; - Venrock Associates -- 133,033 shares; - Venrock Associates II, L.P. -- 191,438 shares; - Venrock Entrepreneurs Fund -- 17,077 shares; - Superior Consultant Company -- 880,282 shares; - divine interVentures, inc. -- 1,056,338 shares; and 64 67 - Terence J. and Katrina A. Garnett, Trustees of the Garnett Family Trust UDT 4/2/97 -- 10,563 shares. Dell USA L.P. holds more than 5% of our common stock. Venrock Entrepreneurs Fund, L.P., together with Venrock Associates and Venrock Associates II, L.P., holds more than 5% of our common stock. Venrock Entrepreneurs Fund, L.P., is a limited partnership managed by Venrock Management LLC, its sole general partner. The managing members of Venrock Management LLC are a group of individuals, most of whom are general partners of Venrock Associates and Venrock Associates II, L.P. Terence J. Garnett, one of our directors, is a consultant to Venrock Entrepreneurs Fund, L.P. and does not share voting or dispositive power over shares held by such entity. Richard D. Helppie, one of our directors, is Chairman of the Board and Chief Executive Officer of Superior Consultant Holdings Corporation. Andrew J. Filipowski, one of our directors, is the President, Chief Executive Officer and Chairman of the Board of divine interVentures, inc. Appointment of Board Members. Messrs. McVicker, Garnett, Douglass, Helppie and Filipowski were appointed to our board of directors pursuant to rights held by our preferred stockholders. These rights terminate upon the closing of this offering. Investor Rights Agreement. In October 1999, we entered into a Second Amended and Restated Investor Rights Agreement with some of our stockholders, including some of our officers and directors, or their affiliated entities, under which they have registration rights with respect to their stock. See "Description of Capital Stock -- Registration Rights." CONSULTING AGREEMENTS In April 1998, we entered into a consulting agreement with Sand Hill Group LLC. Madhavan Rangaswami, one of our directors, is a member of Sand Hill Group LLC. Sand Hill Group LLC provides 16 hours per month of services to us through the end of 1999 in exchange for our sale of 250,000 shares of our common stock to each of Mr. Rangaswami and another member of Sand Hill Group LLC and our reimbursement of Sand Hill's out-of-pocket expenses. We retained a right to repurchase these shares, which right lapses ratably over six quarters after the issuance of the shares. In July 1999, we entered into a consulting agreement with Mr. Rangaswami. Under the agreement, Mr. Rangaswami agreed to provide us with consulting services for a period of three months in exchange for an option to purchase 95,325 shares of our common stock at an exercise price of $0.10, which vested at the end of the three month period. LOANS On July 10, 1999, we made a loan to Robert J. Zollars, our Chairman, President and Chief Executive Officer, in connection with his exercise of a stock option granted to him under the terms of his employment agreement. The loan is evidenced by a promissory note in the principal amount of $162,078.84, with interest compounded quarterly on the unpaid balance at a rate of 5.70% per year. On July 10, 1999, we made a loan to Robert J. Zollars in connection with his exercise of a stock option granted to him under the terms of his employment agreement. The loan is evidenced by a promissory note in the principal amount of $356,629.19, with interest compounded quarterly on the unpaid balance at a rate of 5.70% per year. 65 68 On September 7, 1999, we made a loan to Frederick J. Ruegsegger, our Chief Financial Officer, in connection with his exercise of a stock option granted to him under the terms of his offer letter. The loan is evidenced by a promissory note in the principal amount of $301,672.95, with interest compounded quarterly on the unpaid balance at a rate of 5.85% per year. On September 7, 1999, we made two loans to Daniel A. Eckert, our Executive Vice President of Sales, in connection with his exercise of a stock option granted to him under the terms of his offer letter. The loans are evidenced by promissory notes in the aggregate principal amount of $224,550, with interest compounded quarterly on the unpaid balance of each note at a rate of 5.85% per year. On October 4, 1999, we made a loan to Bhagwan D. Goel, our Executive Vice President of Products and Services, in connection with his exercise of a stock option granted to him under the terms of his offer letter. The loan is evidenced by a promissory note in the principal amount of $1,784,404.90, with interest compounded quarterly on the unpaid balance at a rate of 5.89% per year. On December 14, 1999, we made a loan to Robert W. Rene, our Executive Vice President of Strategy and Marketing, in connection with his exercise of a stock option granted to him under the terms of his offer letter. The loan is evidenced by a promissory note in the principal amount of $4,899,300.00, with interest compounded quarterly on the unpaid balance at a rate of 6.06% per year. On various dates from March 1997 through December 1997, Wayne D. McVicker, our co-founder, Senior Vice President of Research and Development and a director, made loans to us in an aggregate amount of $190,000. In April 1998, we issued a convertible note for $197,047.80 to Mr. McVicker in consideration of his agreement to cancel the outstanding promissory notes representing these loans. The convertible note paid interest at a rate of 8% per year. This note has been paid in full. On various dates from September 1996 through November 1997, Jeffrey H. Kleck, our co-founder and a Vice President, made loans to us in an aggregate amount of $195,000. In April 1998, we issued a convertible note for $206,670.95 to Dr. Kleck in consideration of his agreement to cancel the promissory notes representing these loans. The convertible note paid interest at a rate of 8% per year. The convertible note was converted into 60,000 shares of Series B preferred stock at a price per share of $0.50 and the remaining balance was paid in full. In August 1999, we paid $1.7 million cash and issued a promissory note to Erik Tivin, our Vice President of Auction Services, in the amount of $7.8 million as payment of the purchase price of our acquisition of GAR. The note is payable over a five year period. On October 1, 1999, we made a loan to Mr. Tivin in connection with his exercise of a stock option granted to him under the terms of his employment agreement. This loan is evidenced by a promissory note in the principal amount of $47,850.07, with interest compounded quarterly on the unpaid balance at a rate of 5.89% per year. COMMERCIAL TRANSACTIONS In October 1999, Richard D. Helppie, the Chairman and Chief Executive Officer of Superior Consultant Holdings Corporation, joined our board of directors as the representative of the holders of our Series E preferred stock. In addition, in October 1999 we entered into an agreement with Superior Consultant Company, Inc., a wholly owned subsidiary of Superior Consultant Holdings Corporation, providing for collaboration between us and Superior. Superior is a supplier of Digital Business Transformation(TM) services to large healthcare organizations, including Internet-related services, systems integration, outsourcing and consulting, which enable Superior clients to utilize digital technologies and process innovations to improve their businesses. Under the agreement, we 66 69 have agreed to market Superior's services to our users, and Superior has agreed to introduce our services to appropriate clients, based on their interests, and to incorporate our services into its Digital Business Transformation(TM) offerings. The agreement also provides for joint marketing activities. In consideration, we have agreed to make payments to Superior in an aggregate amount of up to approximately $2.0 million, as well as a percentage of specified Neoforma.com e-commerce transaction revenue and other potential fixed payments based on the success of our joint marketing activities. We have also agreed to utilize Superior's services on a preferred basis for systems integration, development, infrastructure, process improvement and consulting assistance, totaling at least $1.5 million of services from Superior, at a discount from Superior's standard fees. Our agreement with Superior expires in October 2002. In October 1999, we entered into an agreement with Dell Marketing, L.P., an affiliate of Dell Computer, under which we agreed to develop complementary marketing programs with Dell and to establish links between our respective internet websites. We agreed to use Dell as our exclusive supplier of desktops, portables, workstations, servers and storage devices unless its products did not meet our reasonable technical requirements. We also agreed to purchase at least $5.0 million of Dell products and $100,000 of data center consulting services. Our agreement with Dell expires in 2001, subject to renewal for additional one-year periods. In addition, Dell purchased approximately 4.4 million shares of our preferred stock in October 1999 at an average price per share of $5.68 and an aggregate purchase price of approximately $25 million. 67 70 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to beneficial ownership of our common stock as of September 30, 1999 and as adjusted to reflect the sale of the common stock in this offering by: - each stockholder known by us to be the beneficial owner of more than 5% of our common stock; - each of our directors; - each executive officer listed in the Summary Compensation Table; and - all executive officers and directors as a group. The percentage of outstanding shares beneficially owned before this offering in the following table is based on 50,794,833 shares of common stock outstanding as of September 30, 1999, assuming the following: - issuance of the shares of common stock issuable upon conversion of the 12,693,633 shares of our Series E and Series E-1 preferred stock that we issued in October 1999; - issuance of the shares of common stock issuable upon conversion of the 176,057 shares of our Series E preferred stock that we, in November 1999, agreed to issue and sell to Fisher Scientific International, Inc.; - issuance of 350,000 shares of common stock to the former shareholders of FDI Information Resources, Inc. in connection with our acquisition of substantially all of the assets of FDI in November 1999; and - conversion of all outstanding shares of preferred stock into 41,420,953 shares of common stock based upon an assumed initial public offering price of $9.00 per share. The percentage of outstanding shares beneficially owned after this offering in the following table is based on 57,794,833 shares of common stock outstanding after the completion of this offering. 68 71 Under the rules of the Securities and Exchange Commission, beneficial ownership includes voting or investment power with respect to securities and includes the shares issuable under stock options or warrants that are exercisable within 60 days of September 30, 1999. Shares issuable under stock options or warrants are deemed outstanding for computing the percentage held by the person holding options but are not outstanding for computing the percentage of any other person. Unless otherwise indicated, the address for each listed stockholder is: c/o Neoforma.com, Inc., 3255-7 Scott Boulevard, Santa Clara, California 95054. To our knowledge, except as indicated in the footnotes to this table and under applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock.
PERCENTAGE OF OUTSTANDING SHARES BENEFICIALLY OWNED NUMBER OF SHARES --------------------------------- NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING ------------------------ ------------------ --------------- -------------- EXECUTIVE OFFICERS AND DIRECTORS Robert J. Zollars(1)...................... 5,239,475 10.3% 9.1% Jeffrey H. Kleck.......................... 4,000,000 7.9% 6.9% Wayne D. McVicker......................... 4,000,000 7.9% 6.9% Stephen J. Pieraldi(2).................... 175,000 * * David Douglass(3)......................... 3,066,102 6.0% 5.3% Terence J. Garnett(4)..................... 2,241,182 4.4% 3.9% Madhavan Rangaswami(5).................... 997,057 2.0% 1.7% Richard D. Helppie(6)..................... 978,091 1.9% 1.7% Andrew J. Filipowski(7)................... 1,173,708 2.3% 2.0% All 15 executive officers and directors as a group(8).............................. 23,909,562 46.0% 40.6% OTHER 5% STOCKHOLDERS Dell USA L.P.(9).......................... 4,890,453 9.6% 8.5% Delphi Ventures(3)(10).................... 3,066,102 6.0% 5.3% Venrock Associates(11).................... 5,486,208 10.8% 9.5%
- ------------------------- * Represents beneficial ownership of less than 1%. (1) Includes 3,602,315 shares of common stock subject to a repurchase right that lapses at a rate of 900,578 shares in July 2000 and 75,048 shares per month thereafter. (2) Includes 113,021 shares of common stock issuable under an option held by Mr. Pieraldi that is presently exercisable in full. (3) Includes 59,915 and 2,906,187 shares of common stock held of record by Delphi BioInvestments IV, L.P. and Delphi Ventures IV, L.P. subject to repurchase rights that lapse over time. Also includes 67,170 shares of common stock held of record by individual partners of Delphi Ventures IV, L.P. Mr. Douglass, one of our directors, is a managing member of Delphi Management Partners IV, L.L.C., the sole general partner of both Delphi BioInvestments IV, L.P. and Delphi Ventures IV, L.P. Mr. Douglass disclaims beneficial ownership of the shares held by these entities and partners. (4) Represents 550,848 shares of common stock held by Terence J. Garnett and 1,690,334 shares of common stock held by Terence J. and Katrina A. Garnett, Trustees of the Garnett Family Trust UDT 4/2/97. 58,334 of these shares of common stock are subject to a repurchase right that lapses over time. This number does not include 2,309,802, 3,157,432 and 18,974 shares of common stock held by Venrock Associates, Venrock Associates II, L.P. and Venrock Entrepreneurs Fund. Mr. Garnett, one of our directors, is a consultant to Venrock Associates, 69 72 Venrock Associates II, L.P. and Venrock Entrepreneurs Fund, L.P. but does not share voting or dispositive power over the shares held by these entities. (5) Includes 58,334 shares of common stock that are subject to a repurchase right that lapses over time. (6) Represents 978,091 shares of common stock held by Superior Consultant Holdings Corporation. Mr. Helppie, one of our directors, is the Chairman, Chief Executive Officer and President of Superior. Mr. Helppie disclaims beneficial ownership of the shares held by Superior. (7) Represents 1,173,708 shares of common stock held by divine interVentures, Inc. Mr. Filipowski, one of our directors, is President, Chief Executive Officer and Chairman of the Board of divine interVentures, Inc. Mr. Filipowski disclaims beneficial ownership of the shares held by divine interVentures, Inc. (8) Includes 1,159,392 shares of common stock issuable under options held by directors and executive officers that are presently exercisable within 60 days of September 30, 1999. Also includes 4,764,163 outstanding shares that are subject to repurchase rights that lapse over time. Does not include 595,000 shares of our common stock issued to Bhagwan D. Goel, 700,000 shares of our common stock issued to Robert W. Rene and 225,000 shares of common stock issuable under options held by S. Wayne Kay, in each case issued or granted after September 30, 1999 and the 175,000 shares beneficially owned by Stephen J. Pieraldi who is not currently one of our executive officers. These shares are subject to a repurchase right that lapses over time. (9) Includes 59,915 and 2,906,187 shares of common stock held by Delphi BioInvestments IV, L.P. and Delphi Ventures IV, L.P. Both entities are limited partnerships for which Delphi Management Partners IV, L.L.C., is the sole general partner. The address of Dell USA L.P. Corporation is One Dell Way, Round Rock, TX 78682. (10) Both entities are limited partnerships managed by a group of individuals who serve as general partners of both partnerships. The address of Delphi Ventures is 3000 Sand Hill Road, Bldg. 1 #135, Menlo Park, CA 94025. (11) Represents 2,309,802, 3,157,432 and 18,974 shares of common stock held by Venrock Associates, Venrock Associates II, L.P. and Venrock Entrepreneurs Fund. The address of Venrock Associates is 2494 Sand Hill Road, Suite 200, Menlo Park, CA 94025. 70 73 DESCRIPTION OF CAPITAL STOCK Immediately following the closing of this offering, our authorized capital stock will consist of 200 million shares of common stock, $0.001 par value per share, and five million shares of preferred stock, $0.001 par value per share. As of September 30, 1999, assuming the following: - issuance of the shares of common stock issuable upon conversion of the 12,693,633 shares of our Series E and Series E-1 preferred stock that we issued in October 1999, - issuance of the shares of common stock issuable upon conversion of the 176,057 shares of our Series E preferred stock that we, in November 1999, agreed to issue and sell to Fisher Scientific International, Inc., - issuance of 350,000 shares of common stock to the former shareholder of FDI Information Resources, Inc. in connection with our acquisition of substantially all of the assets of FDI in November 1999, and - conversion of all outstanding shares of preferred stock into 41,420,953 shares of common stock, based upon an assumed initial offering price of $9.00 per share, there were outstanding 50,794,833 shares of common stock held of record by approximately 86 stockholders, options to purchase 5,112,965 shares of our common stock and warrants to purchase 858,147 shares of our common stock. The number of shares of common stock into which each share of our Series E and Series E-1 preferred stock will be converted upon completion of this offering may be adjusted under some circumstances as described in Note 9 of notes to consolidated financial statements. COMMON STOCK Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts as our board of directors may determine. Each holder of common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for in our amended and restated certificate of incorporation. As a result, commencing at our first annual meeting of stockholders, the holders of a majority of the shares voted can elect all of the directors then standing for election. Our common stock is not entitled to preemptive rights and is not subject to conversion or redemption. Upon our liquidation, dissolution or winding-up, the holders of our common stock are entitled to share ratably with holders of any participating preferred stock in all assets remaining after payment of all liabilities and the liquidation preferences of any outstanding preferred stock. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK Upon the closing of this offering, each outstanding share of preferred stock will be converted into shares of common stock. See Notes 8 and 9 of notes to consolidated financial statements for a description of our outstanding preferred stock. 71 74 Following this offering, our board of directors will be authorized, subject to limitations prescribed by Delaware law, without stockholder approval, to issue up to five million shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any of its qualifications, limitations or restrictions. The board of directors can also increase or decrease the number of shares of any series, but not below the number of shares of such series then outstanding, without any further vote or action by the stockholders. The board of directors may authorize the issuance of preferred stock with voting, conversion or other rights that are superior to the rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of Neoforma.com and may adversely affect the market price of the common stock and the voting and other rights of the holders of common stock. We have no current plan to issue any shares of preferred stock after the offering. WARRANTS As of September 30, 1999, we had issued warrants to purchase an aggregate of 858,147 shares of our common stock at a weighted average exercise price of $0.61. These warrants will remain outstanding after the completion of this offering and will represent warrants to purchase shares of our common stock. These warrants have expiration dates from 2003 to 2009. See Note 10 of notes to consolidated financial statements. REGISTRATION RIGHTS As a result of an investors' rights agreement between Neoforma.com and some of our stockholders, the holders of approximately 41,420,953 shares of common stock are entitled to rights with respect to the registration of these shares under the Securities Act, as described below. Demand Registration Rights. At any time beginning six months after the completion of this offering, the holders of at least 75% of the shares of common stock issuable upon conversion of our preferred stock can request that we register all or a portion of their shares. We will only be required to file two registration statements in response to their demand registration rights. We may postpone the filing of a registration statement for up to 90 days once in a 12 month period if we determine that the filing would be seriously detrimental to us or our stockholders. Piggyback Registration Rights. If we register any securities for public sale, the holders of the shares of common stock issuable upon conversion of our preferred stock will have the right to include their shares in the registration statement. However, this right does not apply to a registration relating to any of our employee benefit plans or a corporate reorganization. The managing underwriter of any underwritten offering will have the right to limit the number of shares registered by these holders to 15% of the total shares covered by the registration statement due to marketing reasons. Form S-3 Registration Rights. The holders of the shares of common stock issuable upon conversion of our preferred stock can request that we register their shares if we are eligible to file a registration statement on Form S-3 and if the aggregate price of the shares offered to the public is at least $1.0 million. The holders may only require us to file three registration statements on Form S-3 per calendar year. We will pay all expenses incurred in connection with the registrations described above, except for underwriters' and brokers' discounts and commissions, which will be paid by the selling stockholders. 72 75 The registration rights will expire with respect to a particular stockholder if it can sell all of its shares in a three month period under Rule 144 of the Securities Act. In any event, the registration rights described above will expire five years after this offering is completed. Holders of these registration rights have waived the exercise of these registration rights for 180 days following the date of this prospectus. ANTI-TAKEOVER PROVISIONS The provisions of Delaware law, our amended and restated certificate of incorporation and bylaws may have the effect of delaying, deferring or discouraging another person from acquiring control of our company. Delaware Law We will be subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. This section prevents some Delaware corporations from engaging, under some circumstances, in a business combination, which includes a merger or sale of more than 10% of the corporation's assets with any interested stockholder, or a stockholder who owns 15% or more of the corporation's outstanding voting stock, as well as affiliates and associates of stockholder, for three years following the date that stockholder became an interested stockholder unless: - the transaction is approved by the board of directors prior to the date the interested stockholder attained that status; - upon consummation of the transaction that resulted in the stockholder's becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or - on or subsequent to such date the business combination is approved by the board and authorized at an annual or special meeting of stockholders by at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. A Delaware corporation may opt out of this provision with an express provision in its original certificate of incorporation or an express provision in its certificate or incorporation or bylaws resulting from a stockholders' amendment approved by at least a majority of the outstanding voting shares. However, we have not opted out of this provision. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us. Charter and Bylaw Provisions Our amended and restated certificate of incorporation and bylaws provide that: - following the completion of this offering, no action shall be taken by stockholders except at an annual or special meeting of the stockholders called in accordance with our bylaws and that stockholders may not act by written consent; - following the completion of this offering, the approval of two-thirds of the stockholders shall be required to adopt, amend or repeal our bylaws; - stockholders may not call special meetings of the stockholders or fill vacancies on the board; - following the completion of this offering, our board of directors will be divided into three classes, each serving staggered three-year terms, which means that only one class of directors will be elected at each annual meeting of stockholders, with the other classes continuing for the remainder of their respective terms, and directors may only be removed for cause; and 73 76 - we will indemnify officers and directors against losses that they may incur in investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures. These provisions of our certificate of incorporation and bylaws may have the effect of delaying, deferring or discouraging another person from acquiring control of our company. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company. Its address is 40 Wall Street, 46th Floor, New York, NY 10005 and its telephone number is 1-718-921-8200. LISTING We have applied to list our common stock on The Nasdaq National Market under the trading symbol "NEOF." 74 77 SHARES ELIGIBLE FOR FUTURE SALE Before this offering, there has been no public market for our common stock. A significant public market for our common stock may not develop or be sustained after this offering. Future sales of substantial amounts of our common stock in the public market, or the possibility of these sales occurring, could adversely affect prevailing market prices for our common stock or our future ability to raise capital through an offering of equity securities. Upon completion of this offering, we will have 57,794,833 shares of common stock outstanding, assuming no exercise of options and warrants outstanding as of September 30, 1999, and the conversion of all outstanding shares of preferred stock. Of these shares, the 7,000,000 shares sold in this offering (8,050,000 if the underwriters' over-allotment option is exercised in full) and an additional 60,000 shares held by an existing stockholder will be freely tradable in the public market without restriction or registration under the Securities Act, unless the shares are held by our "affiliates", as that term is defined in Rule 144 under the Securities Act. The remaining 50,734,833 shares of common stock outstanding upon completion of this offering will be "restricted securities" as defined in Rule 144. We issued and sold these restricted securities in private transactions in reliance on exemptions from registration under the Securities Act. Restricted securities may be sold in the public market only if they are registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, as summarized below. Under the terms of "lock-up" agreements, all the executive officers, directors and stockholders of Neoforma.com, who collectively hold an aggregate of 45,289,155 of these restricted securities, have agreed not to offer, sell, contract to sell, grant any option to purchase or otherwise dispose of any of these shares for a period of 180 days from the date of this prospectus, subject to limited exceptions. However, Merrill Lynch, Pierce, Fenner & Smith Incorporated may, in its sole discretion, at any time without notice, release all or any portion of the shares subject to lock-up agreements. Taking into account the lock-up agreements, and assuming Merrill Lynch, Pierce, Fenner & Smith Incorporated does not release stockholders from these agreements, the following shares will be eligible for sale in the public market at the following times: - on the date of this prospectus, the 7,000,000 shares sold in the offering will be immediately available for sale in the public market; - 180 days after the date of this prospectus, approximately 34,830,623 shares will be eligible for sale under Rule 701 upon the expiration of our repurchase right with respect to those shares or under Rule 144, of which 28,173,146 will be subject to volume, manner of sale and other limitations under Rule 144; and - of the remaining shares, 15,904,210 will be eligible for sale under Rule 144 upon the expiration of various one-year holding periods. Following the expiration of the lock-up period, shares issued upon exercise of options we granted prior to the date of this prospectus will also be available for sale in the public market pursuant to Rule 701 under the Securities Act or Rule 144. Rule 701 permits resales of these shares beginning 90 days after the date of this prospectus. In general, under Rule 144, after expiration of the lock-up period, a person who has beneficially owned restricted securities for at least one year would be 75 78 entitled to sell, within any three-month period, a number of shares that does not exceed the greater of: - 1% of the then outstanding shares of our common stock, or - the average weekly trading volume of our common stock during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to manner of sale and notice requirements and the availability of current public information about us. Under Rule 144(k), a person who has not been our affiliate at any time during the three months before a sale and who has beneficially owned the shares proposed to be sold for at least two years can sell these shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. After the effective date of this offering, we intend to file a registration statement on Form S-8 to register shares of our common stock outstanding or reserved for issuance under our various stock plans. The registration statement will become effective automatically upon filing. Shares issued under the foregoing employee benefit plans, after the filing of a registration statement on Form S-8, may be sold in the open market, subject, in the case of some holders, to the Rule 144 limitations applicable to affiliates, the lock-up agreements and our repurchase rights held by us. We also intend to file a registration statement to register resales in the open market of shares issued upon exercise of options we granted prior to the close of this prospectus that are not otherwise eligible for resale under Rule 701 as described above. In addition, following this offering, the holders of 41,420,953 shares of outstanding common stock will, under some circumstances, have right to require us to register their shares for future sale. See "Description of Capital Stock -- Registration Rights." 76 79 UNDERWRITING We intend to offer our common stock through a number of underwriters. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co., Inc., FleetBoston Robertson Stephens Inc., Volpe Brown Whelan & Company, LLC and William Blair & Company, L.L.C. are acting as representatives of each of the underwriters named below. Subject to the terms and conditions set forth in a purchase agreement between us and the underwriters, we have agreed to sell to the underwriters, and each of the underwriters severally and not jointly has agreed to purchase from us, the number of shares of common stock set forth opposite its name below.
NUMBER OF SHARES UNDERWRITERS ---------- Merrill Lynch, Pierce, Fenner & Smith Incorporated................................... Bear, Stearns & Co., Inc. .................................. FleetBoston Robertson Stephens Inc. ........................ Volpe Brown Whelan & Company, LLC........................... William Blair & Company, L.L.C.............................. ---------- Total......................................... 7,000,000 ==========
In the purchase agreement, the several underwriters have agreed, subject to the terms and conditions set forth in that agreement, to purchase all of the shares of our common stock being sold pursuant to the agreement if any of the shares of common stock being sold pursuant to the agreement are purchased. In the event of a default by an underwriter, the purchase agreement provides that, in some circumstances, the purchase commitments of the nondefaulting underwriters may be increased or the purchase agreement may be terminated. We have agreed to indemnify the underwriters against some liabilities, including some liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities. The shares of common stock are being offered by the several underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of various legal matters by counsel for the underwriters and other conditions. The underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. COMMISSIONS AND DISCOUNTS The representatives have advised us that the underwriters propose initially to offer the shares of our common stock to the public at the initial public offering price set forth on the cover page of this prospectus, and to dealers at such price less a concession not in excess of $ per share of common stock. The underwriters may allow, and such dealers may re-allow, a discount not in excess of $ per share of common stock to other dealers. After the initial public offering, the public offering price, concession and discount may be changed. 77 80 The following table shows the per share and total public offering price, underwriting discount to be paid by us to the underwriters and the proceeds before expenses to us. This information is presented assuming either no exercise or full exercise by the underwriters of their over-allotment options.
PER SHARE WITHOUT OPTION WITH OPTION --------- -------------- ----------- Public offering price........................ $ $ $ Underwriting discount........................ $ $ $ Proceeds, before expenses, to Neoforma.com... $ $ $
The expenses of this offering, exclusive of the underwriting discount, are estimated at $1.4 million and are payable by us. OVER-ALLOTMENT OPTION We have granted an option to the underwriters, exercisable for 30 days after the date of this prospectus, to purchase up to an aggregate of an additional 1,050,000 shares of our common stock at the public offering price set forth on the cover of this prospectus, less the underwriting discount. The underwriters may exercise this option solely to cover over-allotments, if any, made on the sale of our common stock offered hereby. To the extent that the underwriters exercise this option, each underwriter will be obligated to purchase a number of additional shares of our common stock proportionate to such underwriter's initial amount reflected in the foregoing table. RESERVED SHARES At our request, the underwriters have reserved for sale, at the initial public offering price, up to 630,000 of the shares offered hereby to be sold to individuals and entities designated by us. The number of shares of common stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares which are not orally confirmed for purchase within one day of the pricing of the offering will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. NO SALES OF SIMILAR SECURITIES We, and our executive officers and directors and existing stockholders have agreed without the prior written consent of Merrill Lynch on behalf of the underwriters for a period of 180 days after the date of this prospectus, not to directly or indirectly: - offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, lend or otherwise dispose of or transfer any shares of our common stock or securities convertible into or exchangeable or exercisable for or repayable with our common stock, whether now owned or later acquired by the person executing the agreement or with respect to which the person executing the agreement later acquires the power of disposition, or file any registration statement under the Securities Act of 1933 relating to any shares of our common stock, or - enter into an swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of our common stock whether any such swap or transaction is to be settled by delivery of our common stock or other securities, in cash or otherwise; provided that we may at any time and from time to time grant options to purchase shares of our common stock under our existing stock plans and issue shares of our common stock upon the exercise of outstanding options, and our executive officers and directors and existing stockholders may make 78 81 limited transfers to immediate family and affiliated parties and may transfer shares purchased in this offering or in the open market after this offering. QUOTATION ON THE NASDAQ NATIONAL MARKET We expect our common stock to be approved for quotation on the Nasdaq National Market, subject to official notice of issuance, under the symbol "NEOF." Before this offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations between us and the representatives of the underwriters. The factors to be considered in determining the initial public offering price, in addition to prevailing market conditions, are the valuation multiples of publicly traded companies that the representatives believe to be comparable to us, some of our financial information, the history of, and the prospects for, our company and the industry in which we compete, and an assessment of our management, its past and present operations, the prospects for, and timing of, our future revenue and the present state of our development, and the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours. There can be no assurance that an active trading market will develop for our common stock or that our common stock will trade in the public market subsequent to the offering at or above the initial public offering price. The underwriters do not expect sales of our common stock to be made to any accounts over which they exercise discretionary authority to exceed 5% of the number of shares being offered hereby. PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS Until the distribution of our common stock is completed, rules of the Securities and Exchange Commission may limit the ability of the underwriters and some selling group members to bid for and purchase our common stock. As an exception to these rules, the representatives are permitted to engage in transactions that stabilize the price of our common stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of our common stock. If the underwriters create a short position in our common stock in connection with the offering, i.e., if they sell more shares of our common stock than are set forth on the cover page of this prospectus, the representatives may reduce that short position by purchasing our common stock in the open market. The representatives may also elect to reduce any short position by exercising all or part of the over-allotment options described above. The representatives may also impose a penalty bid on underwriters and selling group members. This means that if the representatives purchase shares of our common stock in the open market to reduce the underwriters' short position or to stabilize the price of our common stock, they may reclaim the amount of the selling concession from the underwriters and selling group members who sold those shares. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of our common stock to the extent that it discourages resales of our common stock. Neither our company nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters makes any representation that the representatives will engage in such transaction or that such transactions, once commenced, will not be discontinued without notice. 79 82 LEGAL MATTERS Fenwick & West LLP, Palo Alto, California, will pass upon the validity of the issuance of the shares of common stock offered by this prospectus for Neoforma.com. Shearman & Sterling, Menlo Park, California, will pass upon specified legal matters in connection with this offering for the underwriters. F&W Investments 1999, an investment partnership comprised of partners of Fenwick & West LLP, holds 35,212 shares of our common stock. EXPERTS The financial statements of Neoforma.com, Inc. from inception (March 6, 1996) to December 31, 1998 and for the nine months ended September 30, 1998 and 1999, General Asset Recovery LLC for the years ended December 31, 1997 and 1998, and FDI Information Resources, L.L.C. from inception (November 4, 1997) to December 31, 1998 included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission, a registration statement on Form S-1 under the Securities Act with respect to the common stock offered hereby. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. For further information with respect to Neoforma.com and our common stock, we refer you to the registration statement and the exhibits and schedules filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document referred to are not necessarily complete; we refer you to the copy of each contract or document filed as an exhibit to the registration statement. Each such statement is qualified in all respects by reference to that exhibit. Upon completion of the offering, we will be subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and will file reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information, as well as the registration statement, exhibits and schedules, may be inspected, without charge, or copied, at prescribed rates, at the public reference facility maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. In addition, the Commission maintains an Internet site that contains reports, proxy and information statements, and other information, regarding issuers that file electronically with the Commission. The address of the Commission's site is http://www.sec.gov. 80 83 NEOFORMA.COM, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- NEOFORMA.COM, INC. CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants.................. F-2 Consolidated Balance Sheets............................... F-3 Consolidated Statements of Operations..................... F-4 Consolidated Statements of Changes in Stockholders' Equity (Deficit).............................................. F-5 Consolidated Statements of Cash Flows..................... F-7 Notes to Consolidated Financial Statements................ F-8 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION Overview.................................................. F-28 Unaudited Pro Forma Condensed Combined Balance Sheets..... F-29 Unaudited Pro Forma Condensed Combined Statements of Operations............................................. F-30 Notes to the Unaudited Pro Forma Condensed Combined Financial Information.................................. F-32 GENERAL ASSET RECOVERY LLC Report of Independent Public Accountants.................. F-33 Balance Sheets............................................ F-34 Statements of Operations.................................. F-35 Statements of Members' Equity (Deficit)................... F-36 Statements of Cash Flows.................................. F-37 Notes to Financial Statements............................. F-38 FDI INFORMATION RESOURCES, LLC Report of Independent Public Accountants.................. F-41 Balance Sheets............................................ F-42 Statements of Operations.................................. F-43 Statements of Changes in Members' Equity (Deficit)........ F-44 Statements of Cash Flows.................................. F-45 Notes to Financial Statements............................. F-46
F-1 84 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Neoforma.com, Inc.: We have audited the accompanying consolidated balance sheets of Neoforma.com, Inc. (a Delaware corporation in the development stage) as of September 30, 1999, and December 31, 1998 and 1997, and the related statements of operations, changes in stockholders' deficit and cash flows for the nine months ended September 30, 1999 and 1998 and the three years in the period ended December 31, 1998 and for the period from inception (March 6, 1996) to September 30, 1999, and for the period from inception (March 6, 1996) to December 31, 1998. These financial statements are the responsibility of the Company'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 Neoforma.com, Inc. as of September 30, 1999, and December 31, 1998 and 1997, and the results of its operations and its cash flows for the nine months ended September 30, 1999 and 1998 and the three years in the period ended December 31, 1998 and for the period from inception (March 6, 1996) to September 30, 1999, and for the period from inception (March 6, 1996) to December 31, 1998 in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP San Jose, California November 19, 1999 F-2 85 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA DECEMBER 31, STOCKHOLDERS' EQUITY AT --------------- SEPTEMBER 30, SEPTEMBER 30, 1997 1998 1999 1999 (NOTE 8) ----- ------- ------------- ----------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 32 $ 812 $ 655 Accounts receivable....................................... -- -- 277 Prepaid expenses and other current assets................. 5 45 380 Deferred debt costs, current portion...................... -- 11 413 ----- ------- -------- Total current assets................................ 37 868 1,725 ----- ------- -------- PROPERTY AND EQUIPMENT, net................................. 12 731 3,735 INTANGIBLES................................................. -- -- 9,445 OTHER ASSETS................................................ 6 63 393 DEFERRED DEBT COSTS, less current portion................... -- -- 705 ----- ------- -------- Total assets........................................ $ 55 $ 1,662 $ 16,003 ===== ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Notes payable, current portion............................ $ -- $ 139 $ 3,560 Accounts payable.......................................... 22 285 4,226 Accrued payroll........................................... 13 141 935 Other accrued liabilities................................. 25 89 2,114 ----- ------- -------- Total current liabilities........................... 60 654 10,835 ----- ------- -------- NOTES PAYABLE, less current portion......................... 385 279 8,069 ----- ------- -------- COMMITMENTS (Note 6) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK: Series C- Authorized -- 5,110 shares at September 30, 1999 Issued and outstanding; none at December 31, 1997; 5,065 shares at December 31, 1998 and September 30, 1999 (none pro forma); par value -- $0.001; liquidation preference -- $3,900.................................. -- 3,884 3,884 $ -- ----- ------- -------- -------- Series D- Authorized -- 10,573 shares at September 30, 1999 Issued and outstanding: none at December 31, 1997; none at December 31, 1998; 10,196 shares at September 30, 1999 (none pro forma); par value $0.001; liquidation preference -- $12,032................................. -- -- 11,986 -- ----- ------- -------- -------- STOCKHOLDERS' EQUITY (DEFICIT): Series A-convertible preferred stock; Authorized -- 9,000 shares at September 30, 1999 Issued and outstanding -- none at December 31, 1997; 9,000 shares at December 31, 1998 and September 30, 1999 (none pro forma); par value -- $0.001; liquidation preference -- $2,250.................... -- 9 9 -- Series B-convertible preferred stock; Authorized -- 2,860 shares at September 30, 1999 Issued and outstanding -- none at December 31, 1997; 2,860 shares at December 31, 1998 and September 30, 1999 (none pro forma); par value -- $0.001; liquidation preference -- $1,430.................... -- 3 3 -- Common Stock $0.001 par value: Authorized -- 75,000 shares at September 30, 1999 Issued and outstanding -- 8,200 shares at December 31, 1997; 1,216 shares at December 31, 1998 and 9,024 shares at September 30, 1999 and 36,145 shares pro forma................................................. 8 1 9 36 Warrants.................................................. -- 7 3,611 3,611 Additional paid-in capital................................ 72 1,915 55,843 71,698 Notes receivable from stockholders........................ -- (10) (1,302) (1,302) Deferred compensation..................................... -- (47) (46,297) (46,297) Deficit accumulated during the development stage.......... (470) (5,033) (30,647) (30,647) ----- ------- -------- -------- Total stockholders' equity (deficit)................ (390) (3,155) (18,771) $ (2,901) ===== ======= ======== ======== Total liabilities and stockholders' equity (deficit)......................................... $ 55 $ 1,662 $ 16,003 ===== ======= ========
The accompanying notes are an integral part of these consolidated balance sheets. F-3 86 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS FROM INCEPTION ENDED (MARCH 6, 1996) THROUGH YEARS ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------- ------------------------- ------------------ DECEMBER 31, SEPTEMBER 30, 1996 1997 1998 1998 1999 1998 1999 ------ ------ ------- ------- -------- ------------ ------------- REVENUE: Transaction fees............. $ -- $ -- $ -- $ -- $ 451 $ -- $ 451 Website sponsorship fees and other...................... -- -- -- -- 13 -- 13 ------ ------ ------- ------- -------- ------- -------- Total revenue......... -- -- -- -- 464 -- 464 OPERATING EXPENSES: Operations................... -- -- 627 458 2,399 627 3,026 Product development.......... 31 179 1,491 801 4,321 1,701 6,022 Selling and marketing........ 111 153 1,409 761 5,096 1,673 6,769 General and administrative... 54 76 1,075 330 5,812 1,205 7,017 Amortization of intangibles................ -- -- -- -- 230 -- 230 Amortization of deferred compensation............... -- -- 5 -- 5,662 5 5,667 Cost of warrant issued to recruiter............... -- -- -- -- 2,364 -- 2,364 ------ ------ ------- ------- -------- ------- -------- Total operating expenses............ 196 408 4,607 2,350 25,884 5,211 31,095 ------ ------ ------- ------- -------- ------- -------- Loss from operations.......... (196) (408) (4,607) (2,350) (25,420) (5,211) (30,631) OTHER INCOME (EXPENSE): Interest income.............. -- -- 66 51 173 66 239 Interest expense............. -- (15) (22) (9) (337) (37) (374) Other income (expense)....... 142 7 -- -- (30) 149 119 ------ ------ ------- ------- -------- ------- -------- Net loss.............. $ (54) $ (416) $(4,563) $(2,308) $(25,614) $(5,033) $(30,647) ====== ====== ======= ======= ======== ======= ======== NET LOSS PER SHARE: Basic and diluted............ $(0.01) $(0.05) $ (1.65) $ (0.61) $ (14.20) ====== ====== ======= ======= ======== Weighted-average shares -- basic and diluted.................... 8,000 8,083 2,762 3,807 1,804 ====== ====== ======= ======= ======== PRO FORMA NET LOSS PER SHARE (unaudited): Basic and diluted............ $ (0.36) $ (0.94) ======= ======== Weighted-average shares -- basic and diluted.................... 12,848 27,225 ======= ========
The accompanying notes are an integral part of these consolidated financial statements F-4 87 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD FROM INCEPTION (MARCH 6, 1996) THROUGH SEPTEMBER 30, 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PREFERRED STOCK --------------------------------- SERIES A SERIES B COMMON STOCK ADDITIONAL NOTES RECEIVABLE --------------- --------------- --------------- PAID-IN FROM SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS CAPITAL STOCKHOLDERS ------ ------ ------ ------ ------ ------ -------- ---------- ---------------- BALANCE, MARCH 6, 1996 (inception)..................... -- $-- -- $-- -- $-- $ -- $ -- $ -- Common stock issued for cash of $20 and intellectual property valued at $10 at $0.00375 per share in March 1996........... -- -- -- -- 8,000 8 -- 22 -- Net loss........................ -- -- -- -- -- -- -- -- -- ----- --- ----- --- ------ --- ------ ------- ------- BALANCE, DECEMBER 31, 1996....... -- -- -- -- 8,000 8 -- 22 -- Common stock issued for cash at $0.25 per share in May 1997... -- -- -- -- 100 -- -- 25 -- Common stock issued for cash at $0.25 per share in October 1997.......................... -- -- -- -- 100 -- -- 25 -- Net loss........................ -- -- -- -- -- -- -- -- -- ----- --- ----- --- ------ --- ------ ------- ------- BALANCE, DECEMBER 31, 1997....... -- -- -- -- 8,200 8 -- 72 -- Common stock issued for cash at $0.25 per share in February 1998.......................... -- -- -- -- 800 1 -- 199 -- Common stock issued in exchange for consulting services valued at $0.25 per share in March 1998.......................... -- -- -- -- 500 -- 125 -- Conversion of founders stock to Series A preferred stock at $0.00375 per share in April 1998.......................... 8,000 8 -- -- (8,000) (8) -- -- -- Conversion of common stock to Series A preferred stock at $0.25 per share in April 1998.......................... 1,000 1 -- -- (1,000) (1) -- -- -- Preferred stock issued for cash at $0.50 per share in April and May 1998, net of issuance costs......................... -- -- 2,520 3 -- -- -- 1,252 -- Conversion of notes payable to Series B preferred stock at $0.50 per share in May 1998... -- -- 340 -- -- -- -- 170 -- Common stock issued for cash as a result of options exercised at $0.05 per share in May 1998.......................... -- -- -- -- 516 1 -- 25 -- Issuance of warrants to purchase common stock in November 1998.......................... -- -- -- -- -- -- 7 -- -- Common stock issued for cash as a result of options exercised at $0.10 per share in November 1998.......................... -- -- -- -- 200 -- -- 20 (10) Deferred compensation........... -- -- -- -- -- -- -- 52 -- Amortization of deferred compensation.................. -- -- -- -- -- -- -- -- -- Net loss........................ -- -- -- -- -- -- -- -- -- ----- --- ----- --- ------ --- ------ ------- ------- BALANCE, DECEMBER 31, 1998....... 9,000 9 2,860 3 1,216 1 7 1,915 (10) TOTAL DEFICIT ACCUMULATED STOCKHOLDERS' DEFERRED DURING THE EQUITY COMPENSATION DEVELOPMENT STAGE (DEFICIT) ------------ -------------------- ------------- BALANCE, MARCH 6, 1996 (inception)..................... $ -- $ -- $ -- Common stock issued for cash of $20 and intellectual property valued at $10 at $0.00375 per share in March 1996........... -- -- 30 Net loss........................ -- (54) (54) -------- -------- -------- BALANCE, DECEMBER 31, 1996....... -- (54) (24) Common stock issued for cash at $0.25 per share in May 1997... -- -- 25 Common stock issued for cash at $0.25 per share in October 1997.......................... -- -- 25 Net loss........................ -- (416) (416) -------- -------- -------- BALANCE, DECEMBER 31, 1997....... -- (470) (390) Common stock issued for cash at $0.25 per share in February 1998.......................... -- -- 200 Common stock issued in exchange for consulting services valued at $0.25 per share in March 1998.......................... -- -- 125 Conversion of founders stock to Series A preferred stock at $0.00375 per share in April 1998.......................... -- -- -- Conversion of common stock to Series A preferred stock at $0.25 per share in April 1998.......................... -- -- -- Preferred stock issued for cash at $0.50 per share in April and May 1998, net of issuance costs......................... -- -- 1,255 Conversion of notes payable to Series B preferred stock at $0.50 per share in May 1998... -- -- 170 Common stock issued for cash as a result of options exercised at $0.05 per share in May 1998.......................... -- -- 26 Issuance of warrants to purchase common stock in November 1998.......................... -- -- 7 Common stock issued for cash as a result of options exercised at $0.10 per share in November 1998.......................... -- -- 10 Deferred compensation........... (52) -- -- Amortization of deferred compensation.................. 5 -- 5 Net loss........................ -- (4,563) (4,563) -------- -------- -------- BALANCE, DECEMBER 31, 1998....... (47) (5,033) (3,155)
The accompanying notes are an integral part of these consolidated financial statements. F-5 88 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) FOR THE PERIOD FROM INCEPTION (MARCH 6, 1996) THROUGH SEPTEMBER 30, 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PREFERRED STOCK --------------------------------- SERIES A SERIES B COMMON STOCK ADDITIONAL NOTES RECEIVABLE --------------- --------------- --------------- PAID-IN FROM SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS CAPITAL STOCKHOLDERS ------ ------ ------ ------ ------ ------ -------- ---------- ---------------- BALANCE, DECEMBER 31, 1998....... 9,000 9 2,860 3 1,216 1 7 1,915 (10) Repayment of note receivable from shareholder...................... -- -- -- -- -- -- -- -- 10 Common stock issued as a result of options exercised at $0.10 to $0.50 per share............ -- -- -- -- 7,797 8 -- 1,365 (1,302) Valuation of stock options to consultants for services rendered...................... -- -- -- -- -- -- -- 644 -- Valuation of preferred stock warrants issued to lender in conjunction with debt in July 1999.......................... -- -- -- -- -- -- 640 -- -- Valuation of preferred stock warrants issued to lender in conjunction with debt in July 1999.......................... -- -- -- -- -- -- 600 -- -- Valuation of common stock issued to consultants in September 1999.......................... -- -- -- -- 11 -- -- 7 -- Valuation of warrants to purchase common stock issued to consultants at $0.10 per share in September 1999....... -- -- -- -- -- -- 2,364 -- -- Deferred compensation........... -- -- -- -- -- -- -- 51,912 -- Amortization of deferred compensation.................. -- -- -- -- -- -- -- -- -- Net loss........................ -- -- -- -- -- -- -- -- -- ----- --- ----- --- ------ --- ------ ------- ------- BALANCE, SEPTEMBER 30, 1999...... 9,000 $ 9 2,860 $ 3 9,024 $ 9 $3,611 $55,843 $(1,302) ===== === ===== === ====== === ====== ======= ======= TOTAL DEFICIT ACCUMULATED STOCKHOLDERS' DEFERRED DURING THE EQUITY COMPENSATION DEVELOPMENT STAGE (DEFICIT) ------------ -------------------- ------------- BALANCE, DECEMBER 31, 1998....... (47) (5,033) (3,155) Repayment of note receivable from shareholder...................... -- -- 10 Common stock issued as a result of options exercised at $0.10 to $0.50 per share............ -- -- 71 Valuation of stock options to consultants for services rendered...................... -- -- 644 Valuation of preferred stock warrants issued to lender in conjunction with debt in July 1999.......................... -- -- 640 Valuation of preferred stock warrants issued to lender in conjunction with debt in July 1999.......................... -- -- 600 Valuation of common stock issued to consultants in September 1999.......................... -- -- 7 Valuation of warrants to purchase common stock issued to consultants at $0.10 per share in September 1999....... -- -- 2,364 Deferred compensation........... (51,912) -- -- Amortization of deferred compensation.................. 5,662 -- 5,662 Net loss........................ -- (25,614) (25,614) -------- -------- -------- BALANCE, SEPTEMBER 30, 1999...... $(46,297) $(30,647) $(18,771) ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 89 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS FROM INCEPTION YEARS ENDED ENDED (MARCH 6, 1996) THROUGH DECEMBER 31, SEPTEMBER 30, ---------------------------- ----------------------- ------------------ DECEMBER 31, SEPTEMBER 30, 1996 1997 1998 1998 1999 1998 1999 ---- ----- ------- ------- -------- ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss.......................................... $(54) $(416) $(4,563) $(2,308) $(25,614) $(5,033) $(30,647) Adjustment to reconcile net loss to net cash used in operating activities: Common stock issued in connection with consulting services........................................ -- -- 125 125 7 125 132 Valuation of common stock options issued in connection with consulting services............. -- -- -- -- 644 -- 644 Depreciation and amortization of property and equipment....................................... 1 1 96 17 417 98 515 Amortization of intangibles....................... -- -- -- -- 230 -- 230 Amortization of deferred compensation............. -- -- 5 -- 5,662 5 5,667 Cost of warrant issued to recruiter............... -- -- -- -- 2,364 -- 2,364 Amortization of deferred debt costs............... -- -- 6 -- 133 6 139 Change in assets and liabilities, net of acquisitions: Accounts receivable, net........................ -- -- -- -- (277) -- (277) Prepaid expenses and other assets............... (44) 43 (97) (70) (650) (98) (748) Accounts payable................................ 10 12 263 164 3,866 285 4,151 Accrued liabilities and accrued payroll......... -- 38 192 248 2,794 230 3,024 ---- ----- ------- ------- -------- ------- -------- Net cash used in operating activities......... (87) (322) (3,973) (1,824) (10,424) (4,382) (14,806) ---- ----- ------- ------- -------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for the acquisition of General Asset Recovery LLC, net of cash acquired.............. -- -- -- -- (1,800) -- (1,800) Cash paid on note issued in connection with the acquisition of General Asset Recovery LLC....... -- -- -- -- (184) -- (184) Purchases of property and equipment............... (1) (13) (825) (681) (3,411) (839) (4,250) ---- ----- ------- ------- -------- ------- -------- Net cash used in investing activities......... (1) (13) (825) (681) (5,395) (839) (6,234) ---- ----- ------- ------- -------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of notes payable....... 75 358 418 -- 3,741 851 4,592 Repayments of notes payable....................... -- (48) (215) (215) (146) (263) (409) Proceeds from the issuance of Series B preferred stock, net of issuance costs.................... -- -- 1,255 1,255 -- 1,255 1,255 Proceeds from the issuance of Series C mandatorily redeemable convertible preferred stock, net of issuance costs.................................. -- -- 3,884 3,884 -- 3,884 3,884 Proceeds from the issuance of Series D mandatorily redeemable convertible preferred stock, net of issuance costs.................................. -- -- -- -- 11,986 -- 11,986 Repayments of notes receivable from stockholders.................................... -- -- -- -- 10 -- 10 Proceeds from the issuance of common stock, net of notes receivable issued to common stockholders.................................... 20 50 236 226 71 306 377 ---- ----- ------- ------- -------- ------- -------- Net cash provided by financing activities..... 95 360 5,578 5,150 15,662 6,033 21,695 ---- ----- ------- ------- -------- ------- -------- Net increase (decrease) in cash and cash equivalents................................. 7 25 780 2,645 (157) 812 655 CASH AND CASH EQUIVALENTS, beginning of period...... -- 7 32 32 812 -- -- ---- ----- ------- ------- -------- ------- -------- CASH AND CASH EQUIVALENTS, end of period............ $ 7 $ 32 $ 812 $ 2,677 $ 655 $ 812 $ 655 ==== ===== ======= ======= ======== ======= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Intellectual property acquired from founders in exchange for common stock....................... $ 10 $ -- $ -- $ -- $ -- $ 10 $ 10 ==== ===== ======= ======= ======== ======= ======== Cash paid during the period for interest.......... $ -- $ -- $ 14 $ -- $ 204 $ 14 $ 218 ==== ===== ======= ======= ======== ======= ======== SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Conversion of common stock into Series A preferred stock........................................... $ -- $ -- $ 280 $ 280 $ -- $ 280 $ 280 ==== ===== ======= ======= ======== ======= ======== Conversion of notes payable into Series B preferred stock................................. $ -- $ -- $ 170 $ 170 $ -- $ 170 $ 170 ==== ===== ======= ======= ======== ======= ======== Issuance of warrants to purchase common stock..... $ -- $ -- $ 7 $ -- $ 2,364 $ 7 $ 2,371 ==== ===== ======= ======= ======== ======= ======== Issuance of warrants to purchase mandatorily redeemable convertible preferred stock.......... $ -- $ -- $ -- $ -- $ 1,240 $ -- $ 1,240 ==== ===== ======= ======= ======== ======= ======== Issuance of note payable to related party in connection with acquisition of General Asset Recovery LLC.................................... $ -- $ -- $ -- $ -- $ 7,800 $ -- $ 7,800 ==== ===== ======= ======= ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements F-7 90 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND DEVELOPMENT STAGE RISKS: Neoforma, Inc. (the "Company"), was incorporated on March 4, 1996 in the state of California for the purpose of providing business-to-business e-commerce services for the medical products, supplies and equipment marketplace. On November 4, 1998, the Company re-incorporated in the state of Delaware. On September 14, 1999, the Company changed its name to Neoforma.com, Inc. All information for the year ended December 31, 1996 represents the period from inception (March 6, 1996) to December 31, 1996. From inception, the Company has been primarily engaged in organizational activities, including designing and developing its website, recruiting personnel, establishing office facilities, raising capital and developing a marketing plan. The Company began revenue generation activities in 1999 but no significant revenue has been generated as of September 30, 1999. Accordingly, the Company is classified as a development stage company. Successful completion of the Company's development program and, ultimately, the attainment of profitable operations is dependent upon future events, including obtaining adequate financing to fulfill its development activities, increasing its customer base, implementing and successfully executing its business and marketing strategy and hiring and retaining quality personnel. Negative developments in any of these conditions could have a material adverse effect on the Company's business, financial condition and results of operations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Neoforma.com, Inc. and its wholly owned subsidiary General Asset Recovery LLC. All significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION The Company categorizes its services into three primary service lines. These service lines are Shop, Auction and Plan. Shop revenue is derived from transaction fees paid by sellers of medical products on the Company's website and development fees from participating sellers to digitize the seller's product information for display on the Company's website. Auction revenue is derived from transaction fees paid by sellers of medical products on the Company's website and from consigned inventory sold at live auctions. In addition, Auction revenue includes product revenue related to the sale of medical equipment purchased by the Company for sale on the Company's website and at live auctions, and subscription fees for asset recovery services. Plan revenue is derived from sponsorship fees and software license fees for facilities planning services. F-8 91 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Transaction fee revenue represents the Company's percentage of the gross transaction fees at the time the buyer's order is confirmed or accepted by the seller. The gross transaction fees include fees paid or payable to sellers. The Company defers a portion of the transaction fee at the time of acceptance for potential returns. Development fee revenue is recognized as development services are performed. Sponsorship and subscription fee revenues are recognized ratably over the period of the service agreement. Product revenue represents the net revenue derived from deducting the direct costs of products sold from the gross sales amount. Product revenue is recognized when the product is shipped or delivered, depending on the shipping terms associated with each transaction. At the time of sale, the Company defers a portion of product revenue for potential returns. The Company did not have product revenue for any of the periods presented. CONCENTRATION OF CREDIT RISK Financial instruments that may subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. Cash is on deposit with one financial institution. Cash investments include high quality short-term money market instruments through a high credit quality financial institution. CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of cash in banks, investments in money market accounts and treasury bills and are stated at cost which approximates fair market value. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, and are depreciated on a straight-line basis over two to four years. Leasehold improvements are amortized, using the straight-line method, over the shorter of the lease term or the useful lives of the improvements. Repairs and maintenance costs are expensed as incurred. INTANGIBLES Intangibles consist of goodwill, which represents the amount of purchase price in excess of the fair value of the tangible net assets resulting from the acquisition of General Asset Recovery LLC (see Note 3). The goodwill is amortized on a straight-line basis over a period of seven years. Goodwill will be evaluated quarterly for impairment and written down to net-realizable value, if necessary. No impairment has been recorded to date. F-9 92 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IMPAIRMENT OF LONG-LIVED ASSETS The Company evaluates the recoverability of long-lived assets in accordance with Statement of Financial Accounting Standards("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. PRODUCT DEVELOPMENT COSTS Product development costs include expenses incurred by the Company to develop and enhance the Company's website. Product development costs are expensed as incurred. COST OF WARRANT ISSUED TO RECRUITER For the nine months ended September 30, 1999, the Company recorded $2.4 million of cost of warrant issued to recruiter related to the valuation of a warrant issued to an executive search firm in connection with services rendered in the search for the Company's Chief Executive Officer (See Note 10). STOCK BASED COMPENSATION PLAN In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation," which became effective for the Company's 1996 fiscal year. SFAS No. 123 allows companies which have stock-based compensation arrangements with employees to adopt a new fair-value basis of accounting for stock options and other equity instruments or to continue to apply the existing accounting rules under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," but with additional financial statement disclosure. The Company has elected to account for stock-based compensation expense under APB No. 25 and make the required pro forma disclosures for compensation expense (see Note 11). COMPREHENSIVE INCOME Effective January 1, 1998 the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. Through September 30, 1999 the Company has not had any transactions that are required to be reported in comprehensive income. SEGMENT INFORMATION The Company identifies its operating segments based on business activities, management responsibility and geographical location. During the years ended December 31, 1996, 1997 and 1998 and the nine months ended September 30, 1999, the Company operated in a single business segment providing e-commerce content to healthcare professionals in the medical product, supplies, and F-10 93 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) equipment industry. For the nine months ended September 30, 1999, the Company generated 97% of its revenues from transaction fees associated with live auction sales. Through September 30, 1999, foreign operations have not been significant in either revenue or investment in long-lived assets. BASIC AND DILUTED NET LOSS PER SHARE AND PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE Basic net loss per share on a historical basis is computed using the weighted-average number of shares of common stock outstanding. Diluted net loss per common share was the same as basic net loss per share for all periods presented since the effect of any potentially dilutive security is excluded, as they are anti-dilutive as a result of the Company's net losses. The total number of shares excluded from the diluted loss per share calculation relating to these securities was approximately none, 300,000, 18.0 million, 18.2 million and 33.1 million shares for the years ended December 31, 1996, 1997, and 1998 and for the nine months ended September 30, 1998 and 1999, respectively. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 98, convertible preferred stock and common stock issued or granted for nominal consideration prior to the anticipated effective date of the initial public offering must be included in the calculation of basic and diluted net loss per common share as if they had been outstanding for all periods presented. To date, the Company has not had any issuance or grants for nominal consideration. Pro forma basic and diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding for the period (excluding shares subject to repurchase) plus the weighted average number of common shares resulting from the automatic conversion of outstanding shares of convertible preferred stock, which will occur upon the closing of the planned initial public offering. F-11 94 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table presents the calculation of basic and diluted and pro forma basic and diluted net loss per share (in thousands, except per share amounts):
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------- ------------------ 1996 1997 1998 1998 1999 ------ ------ ------- ------- -------- Net loss.............................. $ (54) $ (416) $(4,563) $(2,308) $(25,614) ====== ====== ======= ======= ======== Basic and diluted: Weighted average shares of common stock outstanding................ 8,000 8,083 2,977 3,973 3,261 Less: Weighted average shares of common stock subject to repurchase....................... -- -- (215) (166) (1,457) Weighted average shares used in computing basic and diluted net loss per share................... 8,000 8,083 2,762 3,807 1,804 ====== ====== ======= ======= ======== Basic and diluted net loss per common share..................... $(0.01) $(0.05) $ (1.65) $ (0.61) $ (14.20) ====== ====== ======= ======= ======== Pro forma: Net loss......................... $(4,563) $(25,614) ======= ======== Shares used above..................... 2,762 1,804 Pro forma adjustment to reflect weighted average effect of assumed conversion of convertible preferred stock (unaudited)................... 10,086 25,421 ------- -------- Weighted average shares used in computing pro forma basic and diluted net loss per share (unaudited)......................... 12,848 27,225 ======= ======== Pro forma basic and diluted net loss per share (unaudited)............... $ (0.36) $ (0.94) ======= ========
RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal use." SOP No. 98-1 requires entities to capitalize certain costs related to internal-use software once certain criteria has been met. Neoforma.com adopted SOP No. 98-1 in fiscal 1999. The adoption of SOP No. 98-1 did not have a material impact on the Company's financial position or results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" SFAS No. 133 will be effective for Neoforma.com on January 1, 2000. SFAS No. 133 requires certain accounting and reporting standards for derivative financial instruments and hedging activities. Because the Company does not currently hold any derivative instruments and does F-12 95 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) not engage in hedging activities, management does not believe that the adoption of SFAS No. 133 will have a material impact on the Company's financial position or results of operations. 3. ACQUISITION: In August 1999, the Company acquired substantially all of the assets of General Asset Recovery LLC ("GAR"), a live auction house and asset management company focused on medical products. Accordingly, the operations of GAR have been included in the accompanying September 30, 1999 statement of operations from the date of acquisition. The acquisition was accounted for using the purchase method of accounting and accordingly, the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date. According to the terms of the agreement, a segment of GAR's operations which related to the auction of non-medical industrial products ("Industrial") was sold back to one of the original owners of GAR for nominal consideration. Accordingly, the revenue and direct costs associated with the Industrial operations eliminated in the pro forma tables presented below. The total purchase price of approximately $9.7 million consisted of $1.7 million in cash, a note payable of $7.8 million, the assumption of $100,000 of liabilities and acquisition-related expenses of $100,000. In the allocation of the purchase price, $25,000 was allocated to tangible assets and $9,675,000 was allocated to goodwill. The intangible assets will be amortized over an estimated life of seven years. The note payable is due over a five-year period and bears interest at 7% per annum. The unaudited pro forma results of operations of the Company and GAR for the year ended December 31, 1998 and the nine months ended September 30, 1999, assuming the acquisition took place at the beginning of each period, are as follows (in thousands, except per share amounts):
FOR THE YEAR FOR THE NINE ENDED MONTHS ENDED DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- Revenue.............................................. $ 1,514 $ 2,028 ======= ======== Net loss............................................. $(6,778) $(26,828) ======= ======== Basic and diluted net loss per share................. $ (2.45) $ (14.87) ======= ========
F-13 96 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. PROPERTY AND EQUIPMENT: As of December 31, 1997, 1998 and September 30, 1999, property and equipment consisted of the following (in thousands):
1997 1998 1999 ---- ---- ------ Computers and test equipment................................ $10 $580 $2,797 Software.................................................... 4 78 696 Furniture and fixtures...................................... -- 140 610 Leasehold improvements...................................... -- 41 147 --- ---- ------ 14 839 4,250 Less: Accumulated depreciation and amortization............. (2) (108) (515) --- ---- ------ Property and equipment, net................................. $12 $731 $3,735 === ==== ======
5. LOANS AND NOTES PAYABLE: In 1996 and 1997, certain stockholders exchanged cash for notes payable. The interest rate for the notes was 5.6%. These notes were convertible into Series B preferred stock. As of December 31, 1998, $170,000 of the $385,000 notes payable were converted and the remainder was paid in full. In June 1998, the Company entered into a $750,000 secured credit facility with a bank. This facility included a $225,000 term loan due December 1999 and an equipment loan facility providing for up to $525,000 of equipment loans. In July 1999, the Company converted $433,000 of outstanding equipment loans into a term loan due June 2000, which bears interest at the lender's prime rate (8.25% as of September 30, 1999). At September 30, 1999, there were borrowings of approximately $225,000 and $404,000 under the term loan and equipment loan, respectively. This facility is secured by substantially all of the Company's assets other than equipment. In consideration for this credit facility, the Company granted the bank a warrant to purchase 45,000 shares of Series C preferred stock at an exercise price of $0.77 per share. In July 1999, in consideration for the conversion of the equipment loan to a term loan and the release of the security interest in equipment, the Company granted the bank a warrant to purchase 10,000 shares of Series D preferred stock at an exercise price of $1.18 per share (see Note 10). In May 1999, the Company entered into a subordinated loan agreement (the "loan agreement") with a lender under which it can borrow up to $2.0 million. The loan agreement bears interest at 12.5% and expires in July 2002. At September 30, 1999 there were borrowings of approximately $1.9 million outstanding under the loan agreement. The loan agreement is collateralized by all of the assets of the Company. In addition, a warrant to purchase 228,813 shares of Series D preferred stock at an exercise price of $1.18 per share was issued in conjunction with the loan agreement (see Note 10). In July 1999, the Company entered into a $2.5 million loan/lease facility with a lender to finance computer hardware and software equipment. Hardware amounts bear interest at 9% per annum and are payable in 48 monthly installments consisting of interest-only payments for the first nine months and principal and interest payments for the remaining 39 months, with a balloon payment of the remaining principal payable at maturity. Software amounts bear interest at 8% per annum and are payable in 30 monthly installments consisting of interest-only for the first four months F-14 97 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) and principal and interest for the remaining 26 months, with a balloon payment of the remaining principal payable at maturity. The computer equipment purchased secures this facility. In connection with this facility, the Company issued the lender a warrant to purchase 137,711 shares of our Series D preferred stock at $1.18 per share (see Note 10). At September 30, 1999, the principal balance was 1.6 million. As part of the purchase price of GAR (see Note 3), the Company issued in August 1999 a promissory note payable to an owner of GAR in the amount of $7.8 million. The note bears interest at 7% per annum and is payable in 60 monthly installments of scheduled principal amounts plus interest. At September 30, 1999 the remaining principal balance was approximately $7.6 million. Future maturities of principal on the loans and notes payable as of September 30, 1999 are as follows (in thousands): 2000........................................... $ 3,560 2001........................................... 2,835 2002........................................... 2,706 2003........................................... 1,931 2004........................................... 596 ------- $11,628 =======
6. COMMITMENTS The Company leases its office facilities under an operating lease. Rent expense for the years ended December 31, 1996, 1997 and 1998 and for the nine months ended September 30, 1998 and 1999 was approximately $22,000, $40,000, $304,000, $81,000 and, $370,000, respectively. Future minimum obligations under the non-cancelable operating lease at September 30, 1999 are as follows (in thousands): 2000............................................ $1,132 2001............................................ 1,109 2002............................................ 1,150 2003............................................ 1,191 2004............................................ 885 Thereafter...................................... 847 ------ $6,314 ======
In May 1999, the Company entered into an agreement with a non-profit health services research organization (the "Organization"), which allows the Company to use content from the Organization's database of information about medical products and manufacturers and obtain a license to use elements of its classification system. Additionally, the agreement provides for joint marketing activities and collaboration in the creation of a database of product and vendor information. This agreement requires the Company to make revenue sharing payments to the Organization during the three-year term of the agreement and for two years following expiration or termination of the agreement with respect to revenue derived from the Company's Plan service. During the second and F-15 98 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) third years, the Company is required to pay a nonrefundable fee of $600,000 per year, in equal monthly installments, which shall be credited against any revenue sharing amounts payable. 7. LITIGATION On August 6, 1999, Fisher Scientific International, Inc. ("Fisher") filed a petition in the District Court of Montgomery County, Texas, against the Company and an individual that the Company had hired to serve as Executive Vice President of Sales. Fisher previously employed this individual and Fisher alleged, among other things, unfair competition and breach of a covenant not to compete. On November 11, 1999, the case was settled out of court. The terms of the settlement are such that the Company agreed to issue 176,057 shares of the Company Series E Preferred Stock at $5.68 per share to Fisher in exchange for cash and reimbursement of Fisher's legal fees. The Company recorded a liability of $650,000 representing estimated legal fees and the related expense is included in general and administrative expenses for the nine months ended September 30, 1999. As of September 30, 1999, no settlement costs have been paid. 8. STOCKHOLDERS' EQUITY On October 12, 1999 the Company amended and restated its articles of incorporation. The number of authorized shares of was increased to 200,000,000 and 40,747,048 shares of common stock and preferred stock, respectively. The preferred stock authorized is designated as 9,000,000, 2,860,000, 5,109,937, 10,572,886, 11,168,662, and 2,035,563 shares of Series A, B, C, D, E, and E-1 preferred stock, respectively (see Note 9). UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY In October 1999, the Company's board of directors authorized the filing of a registration statement with the Securities and Exchange Commission to register shares of its common stock in connection with the proposed initial public offering ("IPO"). If the IPO is consummated under the terms presently anticipated, all of the currently outstanding shares of preferred stock and the mandatorily redeemable convertible preferred stock will be converted into shares of common stock upon the closing of the IPO. The effect of this conversion has been reflected as unaudited pro forma stockholders' equity in the accompanying consolidated balance sheet as of September 30, 1999. COMMON STOCK As of September 30, 1999, the Company has reserved the following shares of common stock for future issuance as follows (in thousands): Conversion of Series A outstanding preferred stock.......... 9,000 Conversion of Series B outstanding preferred stock.......... 2,860 Conversion of Series C outstanding preferred stock.......... 5,065 Conversion of Series D outstanding preferred stock.......... 10,196 1997 Stock Option Plan...................................... 7,769 Conversion of warrants outstanding.......................... 858 ------ 35,748 ======
F-16 99 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During the year ended December 31, 1998, the Company amended an agreement to issue approximately 26,000 shares of common stock in exchange for services rendered. As of December 31, 1998 approximately 17,000 of the shares were due but had not been issued. In February 1999, approximately 13,000 of the shares were issued. Approximately 9,000 additional shares of common stock were due under the terms of the same agreement for the period ended September 30, 1999. As of September 30, 1999, such shares had not been issued; however, the related expense associated with the issued shares is included in the accompanying consolidated statements of operations. PREFERRED STOCK Preferred stock consists of 9,000,000 shares designated as Series A preferred stock ("Series A") and 2,860,000 shares designated as Series B preferred stock ("Series B"). The Series A preferred stock was issued in exchange for 9,000,000 shares of previously issued common stock. The Series B preferred stock was issued for cash at $0.50 per share. The rights and preferences of the outstanding Series A and B preferred stock are as follows: DIVIDENDS The holders of Series A and B preferred stock are entitled to receive non-cumulative dividends at $.02 and $.04 per share, respectively, or, if greater, an amount equal to that paid on any other outstanding shares of the Company, except that the shares of a given series of preferred stock shall not receive any greater dividend as a result of the Company's payment of a dividend on any such series of preferred stock. Such dividends shall be payable only when, as, and if declared by the board of directors. No dividends shall be payable on any common stock until dividends to Series A and Series B preferred stock have been paid or declared by the board of directors. As of September 30, 1999, no dividends had been declared. LIQUIDATION PREFERENCE In the event of any liquidation, dissolution or winding up of the Company, holders of Series A and B are entitled to receive (along with the liquidation preference available to Series C and D stockholders -- see Note 9), in preference to holders of common stock, the amount of $0.25 and $0.50 per share, respectively, plus all declared but unpaid dividends. Such amounts will be adjusted for any stock split, stock dividends and recapitalizations. If such assets of the Company are not available to sufficiently satisfy the full preferential amount of all series of preferred stock then the entire assets and funds of the Company shall be distributed among the holders of all series of the preferred stock in accordance with the aggregate preference payment to which they are entitled. After the payment or the setting aside of the payment set forth above, the remaining assets of the corporation shall be distributed on a pro-rata basis to the holders of the preferred stock, on an as-converted basis, and the holders of common stock until the holders of the Series A, B, C and D have received an additional $0.25, $0.50, $0.77 and $1.18 per share, respectively. After the distributions to the holders of preferred stock and redeemable preferred stock have been made the remaining assets of the corporation available for distribution to shareholders shall be distributed pro-rata among the holders of common stock. F-17 100 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) VOTING RIGHTS The holders of the Series A and B are entitled to a number of votes equal to a number of shares of common stock into which such preferred stock is convertible. CONVERSION Each share of Series A and B is convertible into one share of common stock at the option of the holder at any time after the date of issuance of such shares, and automatically converts at the consummation of the Company's sale of common stock in an underwritten public offering which results in net cash proceeds to the Company of at least $60,000,000 and an offering price to the public of a least $7.00 per share. The conversion rate is subject to adjustment for dilution, including but not limited to, stock splits, stocks dividends and stock combinations. 9. MANDATORILY REDEEMABLE PREFERRED STOCK: In August 1998, the Company completed an offering of 5,064,937 shares of Series C mandatorily redeemable preferred stock ("Series C") at $0.77 per share. Total proceeds of the offering amounted to approximately $3.9 million. On February 19, 1999 the Company completed an offering of 10,196,361 shares of Series D mandatorily redeemable preferred stock ("Series D") at $1.18 per share. Total proceeds of the offering amounted to approximately $12.0 million. On October 12, 1999 the Company completed an offering of 10,658,070 shares of Series E mandatorily redeemable preferred stock ("Series E") and 2,035,563 shares of Series E-1 mandatorily redeemable preferred stock ("Series E-1") at $5.68 per share. Included in the issuance of the Series E-1 is 275,000 shares issued in connection with a strategic alliance the Company entered into in October 1999. Thus, the net cash proceeds amounted to approximately $70.5 million. In addition, the Company agreed to issue 176,057 shares of the Company's Series E at $5.68 per share in settlement of a lawsuit in exchange for cash and reimbursement of legal fees (see Note 7). The rights and preferences of the outstanding Series C, D, E and E-1 are as follows: DIVIDENDS The holders of Series C, D, E and E-1 are entitled to receive non-cumulative dividends at $0.062, $0.0944, $0.4544, and $0.4544 per share annum, respectively, or, if greater, an amount equal to that paid on any other outstanding shares of the Company, except that the shares of a given series of preferred stock shall not receive any greater dividend as a result of the Company's payment of a dividend on any such series of preferred stock. Such dividends shall be payable only when, as, and if declared by the board of directors. As of September 30, 1999, no dividends had been declared. If the offering price to the public of the Company's Common Stock in the IPO is at least $7.00 per share but less than $10.00 per share, the Company will record a preferred stock dividend of up to approximately $22 million relating to the Series E and E-1 beneficial conversion rights that will be triggered on the effective date of the Company's IPO. If the public offering price is $10.00 per share or more, there will not be a preferred stock dividend charge. F-18 101 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) LIQUIDATION PREFERENCE In the event of any liquidation, dissolution or winding up of the Company, holders of Series C, D, E, and E-1 are entitled to receive (along with the liquidation preference available to Series A and B stockholders -- see Note 8) in preference to the amount of $0.77, $1.18, $5.68, and $5.68 per share, respectively, plus all declared but unpaid dividends. Such amounts will be adjusted for any stock split, stock dividends and recapitalizations. In the occurrence, or in the event the Company assets and funds are unable to sufficiently satisfy the full preferential amounts of all series of preferred stock, the Company will then distribute their entire assets and funds that are legally available among the holders of all series of preferred stock in accordance with the aggregate preference payment to which they are entitled. After the payment or the setting aside of the payment set forth above, the remaining assets and funds of the Company that are legally available shall be distributed, on a pro-rata basis to the holders of the preferred stock, on an as-converted basis, and the holders of common stock until the holders of the Series A, B, C, D, E, and E-1, have received an additional $0.25, $0.50, $0.77, $1.18, $5.68 and $5.68 per share, respectively. After the distributions to the holders of preferred stock and redeemable preferred stock have been made, the remaining assets of the corporation available for distribution to stockholders shall be distributed pro rata solely among the holders of common stock. VOTING RIGHTS The holders of the Series C, D, E and E-1 are entitled to the number of votes equal to a number of shares of common stock into which such redeemable preferred stock is convertible. CONVERSION Each share of Series C, D, E, and E-1 is convertible into one share of common stock at the option of the holder at any time after the date of issuance of such shares, and automatically converts at the consummation of the Company's sale of common stock in an underwritten public offering which results in net cash proceeds to the Company of at least $60,000,000 and an offering price to the public of at least $7.00 per share. The conversion rate is subject to adjustment for dilution, including, but not limited to, stock splits, stock dividends and stock combinations. The Series E and E-1 will be subject to the following adjustment: If the offering price to the public of the Company's common stock in the IPO is at least $7.00 per share but less than $10.00 per share, each share of Series E and E-1 will convert into the number of shares of common stock determined by (1) dividing the offering price to the public by $10.00 and multiplying the quotient obtained by the conversion price of the Series E and E-1 then in effect (the "Conversion Price") and (2) dividing $5.68 by the Conversion Price. The Series E-1 will be subject to the following additional adjustments: (1) If the Company achieves $11.75 million or more of combined revenue from its Shop and Plan operations for fiscal year 2000, as set forth in the financial plan provided to the investors by the F-19 102 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Company (the "Financial Plan"), then each share of Series E-1 will be converted into 0.7143 shares of common stock; and (2) If the Company achieves $5 million or less of combined revenue from its Shop and Plan operations for fiscal year 2000, as set forth in the Financial Plan, and a holder of Series E-1 shares is in compliance with the terms of its commercial agreement with the Company, then each share of Series E-1 will be converted into 1.6667 shares of common stock. MANDATORY REDEMPTION Upon the affirmative vote of the holders of the majority of the Series C, D, E, and E-1 the Company can be required to redeem all shares of Series C, D, E and E-1 outstanding as of the date of such demand, which date shall hereinafter be referred to as the "Redemption Date." The Redemption Price of the Series C, D, E and E-1 will be $0.77, $1.18, $5.68 and $5.68 per share, respectively, subject to adjustment for dilution. The stockholders cannot require redemption prior to seven years after the issuance of the Series C, D, E, and E-1. Beginning with the first year anniversary of the Redemption Date, the Company shall be required to redeem annually no more than that number of shares of Series C, D, E and E-1, equal to 25% of the Series C, D, E, and E-1, outstanding as of the Redemption Date. From and after the Redemption Date, all rights of the shares designated for redemption shall cease with respect to such shares. If the funds of the Company legally available for redemption of Series C, D, E and E-1 on any Redemption Date are insufficient to redeem the total number of shares of the Series C, D, E, and E-1 to be redeemed on such date, those funds which are legally available will be used to redeem the maximum number of such shares on a pro rata basis among the holders of Series C, D, E and E-1 based on each holder's share of the total redemption price. At any time thereafter when additional funds of the Company are legally available for the redemption of the shares of the Series C, D, E and E-1, such funds will immediately be set aside for the Redemption Date but which it has not redeemed. 10. WARRANTS: In June 1998, the Company issued a warrant to purchase 45,000 shares of Series C at an exercise price of $0.77 per share in conjunction with a loan agreement. The fair value of the warrant at the date of issuance was determined to be approximately $7,000 and was estimated using the Black-Scholes valuation model with the following assumptions: risk-free rate of 5.6%; expected life of one year; and expected volatility of 70%. This amount is being recognized as additional interest expense over the expected life of the loan agreement. In May 1999, the Company issued a warrant to purchase 228,813 shares of Series D at $1.18 per share in connection with a loan agreement. The warrant is exercisable immediately and expires the later of May 12, 2006 or three years from the effective date of an initial public offering. The fair value of the warrant at the date of issuance was determined to be approximately $640,000 and was estimated using the Black-Scholes valuation model with the following assumptions: risk-free interest rate of 5.0%; expected life of one year; and expected volatility of 70%. This amount will be recognized as additional interest expense over the expected life of the loan agreement. F-20 103 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In July 1999, the Company issued a warrant to purchase 10,000 shares of Series D at an exercise price of $1.18 per share in conjunction with a loan agreement. The fair value of the warrant at the date of issuance was determined to approximately $40,000 and was estimated using the Black-Scholes valuation model with the following assumptions: risk-free rate of 5.3%; expected life of one year; and expected volatility of 70%. This amount will be recognized as additional interest expense over the expected life of the loan agreement. In July 1999, the Company issued a warrant to purchase 137,711 shares of Series D at $1.18 per share in connection with an equipment lease line. The warrant is exercisable immediately and expires the later of July 7, 2006 or three years from the effective date of an initial public offering. The fair value of the warrant at the date of issuance was determined to be approximately $559,000 and was estimated using the Black-Scholes valuation model with the following assumptions: risk-free interest rate of 5.3%; expected life of one year; and expected volatility of 70%. This amount will be recognized as additional interest expense over the expected life of the lease line. In September 1999, the Company issued to a retained executive search firm a warrant to purchase 436,623 shares of the Company's common stock at an exercise price of $0.10 per share. The warrant is exercisable immediately and expires on September 9, 2009. The fair value of the warrant was determined to be approximately $2.4 million and was estimated using the Black-Scholes valuation model with the following assumptions: risk-free interest rate of 5.5%; expected life of four months; and expected volatility of 70%. This expense is included in cost of warrant issued to recruiter for the nine months ended September 30, 1999. As of September 30, 1999, none of the warrants mentioned above had been exercised. 11. STOCK OPTIONS: 1997 STOCK PLAN The Company, under the 1997 Stock Plan (the "Plan"), reserved approximately 14.7 million shares of common stock. The stock is reserved for the employees, directors, and consultants. The term of each option will be stated in the option agreement and is not to exceed 10 years after the grant date. If the optionee owns stock representing more than 10% of the voting power the term of the option will not exceed 5 years after the grant date. Option pricing shall be no less than 85% of the fair market value per share on the date of the grant. If the optionee owns stock representing more than 10% of the voting power the option price shall not be less than 110% of the fair market value per share on the date of the grant. If the stock option is an incentive stock option, then the price for the stock cannot be less than 100% of the fair market value per share on the date of the grant. Any option granted shall be exercisable at such times and under such conditions as determined by the board of directors. However, for most options, 25% of the shares subject to the option shall vest 12 months after the vesting commencement date, and 1/48 of the shares shall vest each month thereafter. Options under the Plan are exercisable immediately, subject to repurchase rights held by the Company, which lapse over the vesting period as determined. F-21 104 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's right of repurchase will lapse at a rate determined by the board of directors. However, for most options the Company's right to repurchase will lapse at a rate of 25% of the shares after the first 12 months and 1/48 of the shares, per month, after the vesting commencement date. Activity under the Plan was as follows (in thousands, except per share amounts):
OUTSTANDING OPTIONS ------------------------ SHARES WEIGHTED- AVAILABLE AVERAGE FOR GRANT NUMBER EXERCISE PRICE --------- ------ -------------- BALANCE, JANUARY 24, 1997..................... 1,000 -- $ -- Granted under the Plan........................ (300) 300 $0.05 ------- ------ ----- BALANCE, DECEMBER 31, 1997.................... 700 300 $0.05 Authorized.................................. 1,000 -- $ -- Granted..................................... (1,458) 1,458 $0.08 Exercised................................... -- (716) $0.06 Canceled.................................... 30 (30) $0.10 ------- ------ ----- BALANCE, DECEMBER 31, 1998.................... 272 1,012 $0.09 Authorized.................................. 12,656 -- $ -- Granted under the Plan...................... (10,912) 10,912 $0.20 Granted outside of the Plan(a).............. -- 1,637 $0.10 Exercised................................... -- (7,808) $0.20 Canceled.................................... 640 (640) $0.10 ------- ------ ----- BALANCE, SEPTEMBER 30, 1999................... 2,656 5,113 $0.20 ======= ====== =====
- ------------------------- (a) In July 1999, the Company granted on option to purchase approximately 1,637,000 shares of common stock to the Company's Chief Executive Officer. Such options were issued outside of the Plan. The Company accounts for the Plan under the provisions of APB No. 25. Had compensation expense for the stock option plans been determined consistent with SFAS No. 123, net losses would have increased to the following pro forma amounts (in thousands, except per share amounts):
NINE YEAR ENDED MONTHS DECEMBER 31, ENDED ----------------- SEPTEMBER 30, 1997 1998 1999 ------ ------- ------------- Net loss as reported........................... $ (416) $(4,563) $(25,614) ====== ======= ======== Net loss pro forma............................. $ (424) $(4,597) $(36,041) ====== ======= ======== Net loss per share as reported................. $(0.05) $ (1.65) $ (14.20) ====== ======= ======== Net loss per share pro forma................... $(0.05) $ (1.66) $ (19.98) ====== ======= ========
The weighted-average fair value of options granted during the years ended December 31, 1997 and 1998 and the nine months ended September 30, 1999 was $0.03, $0.07, and $4.26, respectively. F-22 105 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model using the following assumptions: risk-free interest rates ranging from 4.22 to 5.99 percent; expected dividend yields of zero percent for all four periods; an average expected life of 3.5 years; and expected volatility of 0.001% for all periods except the nine months ended September 30, 1999, for which a volatility factor of 70% was used. The following table summarizes the stock options outstanding and exercisable as of September 30, 1999 (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ----------------------------------------------- -------------------- WEIGHTED- WEIGHTED- WEIGHTED- RANGE OF AVERAGE AVERAGE AVERAGE EXERCISE REMAINING EXERCISE EXERCISE PRICE NUMBER YEARS PRICE NUMBER PRICE - -------- ------ --------- --------- ------ --------- $0.05 193 8.7 $0.05 193 $0.05 $0.10 3,566 9.5 $0.10 3,566 $0.10 $0.50 1,354 9.9 $0.50 1,354 $0.50 ----- --- ----- ----- ----- 5,113 9.6 $0.20 5,113 $0.20 ===== === ===== ===== =====
During October 1999 the board of directors approved a change in the Plan providing for the exercise of options prior to an employee's vesting date. At September 30, 1999, 5,421,178 shares previously issued under the Plan were subject to repurchase at a weighted-average exercise price of $0.21 per share. At September 30, 1999, 183,609 outstanding options were vested and exercisable. DEFERRED COMPENSATION In connection with the grant of certain stock options to employees during fiscal 1998 and for the nine months ended September 30, 1999, the Company recorded deferred compensation of approximately $52 million, representing the difference between the estimated fair value of the common stock for accounting purposes and the option exercise price of these options at the date of grant. Such amount is presented as a reduction of stockholders' equity and amortized over the vesting period of the applicable options using an accelerated method of amortization. Under the accelerated method, each vested tranche of options is accounted for as a separate option grant awarded for past services. Accordingly, the compensation expense is recognized over the period during which the services will be provided; however, the method results in a front-loading of the compensation expense. Based on the above assumptions, the weighted-average fair values per share of options granted were $0.29 and $4.60 for the year ended December 31, 1998 and for the nine months ended September 30, 1999, respectively. The Company recorded amortization of deferred compensation of $5.7 million during the nine months ended September 30, 1999. 12. INCOME TAXES: Effective January 1, 1998, the Company accounts for income taxes pursuant to the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the F-23 106 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined using the current applicable enacted tax rate and provisions of the enacted tax law. Due to the Company's loss position, there was no provision for income taxes for the year ended December 31, 1998 and nine months ended September 30, 1999. At inception, the Company elected S-Corporation status. As of January 1, 1998, the Company elected C-Corporation status for Federal and state purposes. As a result, the Company is not entitled to any tax benefits associated with the period prior to C-Corporation election. At September 30, 1999, the Company had cumulative net operating loss carry forwards of approximately $19.0 million for Federal and state income tax purposes, expiring in the years ended 2018 and 2006, respectively. At September 30, 1999, the Company had cumulative research and development credit carry forwards of approximately $116,000 and $126,000 for Federal and state income tax purposes, respectively. These credits are subject to expiration through various periods through 2018. The Tax Reform Act of 1986 contains provisions which may limit the net operating loss and credit carryforwards to be used in any given year upon the occurrence of certain events, including a significant change in ownership. The estimated tax effects of significant temporary differences and carryforwards that give rise to deferred income tax assets are as follows (in thousands):
FOR THE NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- Temporary differences................................ $ 943 $ 943 Net operating loss carryforwards..................... 1,845 8,337 Research and development tax credit carryforwards.... 102 242 ------- ------- 2,890 9,522 Valuation allowance.................................. (2,890) (9,522) ------- ------- $ -- $ -- ======= =======
Due to uncertainty surrounding the realization of the deferred tax attributes in future years, the Company has recorded a valuation allowance against its net deferred tax assets. The provision for income taxes at the Company's effective tax rate differed from the benefit from income taxes at the statutory rate due mainly to the increase in valuation allowance and no benefit of the operating losses was recognized. F-24 107 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The provision for income taxes differs from the expected tax benefit amount computed by applying the statutory federal income tax rate of 35% to loss before taxes is as follows:
FOR THE NINE FOR THE YEAR MONTHS ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- Federal statutory rate............................... 35.0% 35.0% State taxes, net of federal benefit.................. 5.8 5.8 Change in valuation allowance........................ (40.8) (40.8) ----- ----- 0.0% 0.0% ===== =====
13. RELATED PARTY TRANSACTIONS: During 1996 and 1997, the Company borrowed a total of $433,000 from certain stockholders and officers. During 1997, $48,000 of the loans from these individuals was repaid in cash. At December 31, 1997, $385,000 of the loans from these individuals is included in notes payable. During 1998, $170,000 of the notes payable were converted to 340,000 shares of Series B and the remaining $215,000 was repaid in cash. 14. SUBSEQUENT EVENTS (UNAUDITED): COMMITMENTS In October 1999, the Company entered into a three-year agreement with a consulting firm (the "Consultant"), which is a stockholder as a result of the Series E financing, in which the Consultant agreed to introduce the Company's services to appropriate clients, based on their interests, and to incorporate the Company's services into certain of its service offerings. The agreement also provides for joint marketing activities. In consideration, the Company has agreed to make payments to the Consultant in an aggregate amount of up to approximately $2.0 million, as well as a percentage of specified Neoforma.com e-commerce transaction revenue and other payments. The Company has also agreed to utilize the Consultant's services on a preferred basis for systems integration, development, infrastructure, process improvement and consulting assistance, totaling at least $1.5 million of services from the Consultant, at a discount from the Consultant's standard fees. In October 1999, the Company entered into an agreement with a hardware vendor, which is a stockholder as a result of the Series E financing, pursuant to which the Company agreed to develop complementary marketing programs with the vendor and establish hyperlinks between their respective internet websites. The Company agreed to use the vendor as its exclusive supplier of certain hardware products and agreed to purchase at least $5.0 million of the vendor's products and $100,000 of consulting services on a mutually agreed upon schedule. As of September 30, 1999, the Company had approximately $256,000 of payables due to this stockholder. F-25 108 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ACQUISITIONS In November 1999, the Company completed an asset purchase agreement with FDI Information Resources, LLC in exchange for 350,000 shares of the Company's common stock. Under the terms of the agreement, the Company acquired the rights to software and customer contracts. The acquisition will be accounted for using the purchase method of accounting and accordingly, the purchase price will be allocated to the intangible assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date. The total purchase price of approximately $3.3 million, including estimated acquisition-related expenses of $125,000 and estimated assumed liabilities of $50,000, will be allocated to intangible assets according to their respective fair market values. In the initial allocation of the purchase price, approximately $600,000, $240,000, and $2,485,000 was allocated to acquired software, assembled workforce and trade names, and goodwill type assets, respectively. The intangible assets will be amortized over an estimate useful life of three years. LOANS AND NOTES PAYABLE In October 1999, the Company borrowed approximately $37,000 and $275,000 under the software and hardware provisions of the loan/lease agreement dated July 1999 (see Note 5). 1999 EQUITY INCENTIVE PLAN In November 1999, the board of directors approved the 1999 Equity Incentive Plan ("the 1999 Plan") to replace the 1997 Stock Plan. The Company has reserved approximately 5,000,000 shares of common stock for issuance under the 1999 Plan, and the 1999 Plan stipulates that the amount authorized will automatically be increased each year by shares equal to 5% of the total outstanding shares as of December 31 of the preceding year. Incentive stock options may only be granted to employees under the 1999 plan, and they must be granted at an option price no less than 100% of the fair market value of the common stock on the date of grant. If the optionee owns stock representing more than 10% of the outstanding voting stock, incentive stock options must be granted at an option price no less than 110% of the fair market value of the common stock on the date of grant. Nonqualified stock options may be granted to employees, officers, directors, consultants, independent contractors or advisors to the Company, and must be granted at an option price no less than 85% of the fair market value of the common stock on the date of grant. All options granted under the 1999 Plan carry a maximum term of 10 years from the date of grant, and shall be exercisable at such times and under such conditions as determined by the board of directors at the date of grant. However, for most options, 1/4 of the shares subject to the option shall vest 12 months after the vesting commencement date, and 1/48 of the shares subject to the option shall vest each month thereafter. F-26 109 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1999 EMPLOYEE STOCK PURCHASE PLAN In November 1999, the board of directors approved the 1999 Employee Stock Purchase Plan (the "ESPP") to become effective on the first day on which price quotations are available for the Company's common stock on the NASDAQ National Market. The Company has reserved 750,000 shares of common stock for issuance under the ESPP, and the terms of the ESPP stipulate that that amount will automatically be increased each year by shares equal to 1% of the total outstanding shares of common stock as of December 31 of the preceding year. Subject to certain eligibility requirements, employees may elect to withhold up to a maximum of 15% of their cash compensation for participation in the ESPP. Each offering period under the ESPP will be two years in duration and will consist of four six-month purchase periods. The first offering period is expected to commence on the first day on which price quotations are available for the Company's common stock on the NASDAQ National Market with subsequent purchasing periods commencing on February 1 and August 1 each year. The purchase price for common stock purchased under this plan will be 85% of the lesser of the fair market value of our common stock on the first day of the applicable offering period or the last day of the purchase period. F-27 110 NEOFORMA.COM, INC. UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION On August 6, 1999, Neoforma.com, Inc. ("Neoforma.com") completed the acquisition of General Asset Recovery LLC ("GAR"). The acquisition of GAR has been accounted for as a purchase. Accordingly, the results of operations of GAR have been included in the historical consolidated statement of operations of Neoforma.com commencing on the date of acquisition. In November 1999, Neoforma.com acquired certain assets and operations of FDI Information Resources, LLC ("FDI"). The acquisition of FDI will be accounted for as a purchase. The accompanying pro forma condensed combined statements of operations of Neoforma.com for the twelve months ended December 31, 1998 and for the nine months ended September 30, 1999 assume that the acquisitions of GAR and FDI took place as of the beginning of each of these periods. The statements combine Neoforma.com's, GAR's and FDI's statements of operations for the twelve months ended December 31, 1998 and for the nine months ended September 30, 1999, respectively, as if the acquisitions took place at the beginning of each period. The pro forma condensed combined balance sheet as of September 30, 1999 combines Neoforma.com's September 30, 1999 balance sheet with FDI's September 30, 1999 balance sheet. The unaudited pro forma condensed combined information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have actually occurred if the acquisition had been consummated as of the date indicated, nor is it necessarily indicative of future operating results or financial position. The pro forma adjustments are based on the information available at the time of the printing of this prospectus. The historical financial statements of Neoforma.com, GAR and FDI are included elsewhere in this prospectus and the unaudited pro forma condensed combined information presented herein should be read in conjunction with those financial statements and related notes. F-28 111 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEETS SEPTEMBER 30, 1999 (IN THOUSANDS)
PRO FORMA PRO FORMA NEOFORMA.COM FDI ADJUSTMENTS COMBINED ------------- ------------- ----------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents.............. $ 655 $ 53 $ (53)(C) $ 655 Accounts receivable.................... 277 4 (4)(C) 277 Prepaid expenses and other current assets.............................. 380 6 (6)(C) 380 Deferred debt costs, current portion... 413 -- -- 413 ------- ---- ------ ------- Total current assets................ 1,725 63 (63) 1,725 PROPERTY AND EQUIPMENT, net.............. 3,735 12 (12)(C) 3,735 OTHER ASSETS............................. 393 18 (18)(C) 393 DEFERRED DEBT COSTS, less current portion................................ 705 -- -- 705 GOODWILL................................. 9,445 -- 3,325(D) 12,770 ------- ---- ------ ------- Total assets........................ $16,003 $ 93 $3,232 $19,328 ======= ==== ====== ======= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Notes payable, current portion......... $ 3,560 $ 6 $ (6)(C) $ 3,560 Accounts payable....................... 4,226 307 (307)(C) 4,226 Deferred revenue and other accrued liabilities......................... 3,049 74 (24)(C) 3,224 125(B) ------- ---- ------ ------- Total current liabilities........... 10,835 387 (212) 11,010 NOTES PAYABLE, less current portion...... 8,069 236 (236)(C) 8,069 SERIES C AND D MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK............ 15,870 -- -- 15,870 Members' contributions................... -- 10 (10) -- STOCKHOLDERS' EQUITY (DEFICIT).............................. (18,771) (540) 540(C) (15,621) 3,150(B) ------- ---- ------ ------- Total liabilities and stockholders' equity (deficit).................. $16,003 $ 93 $3,232 $19,328 ======= ==== ====== =======
F-29 112 NEOFORMA.COM, INC. (A DEVELOPMENT STAGE COMPANY) UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ELIMINATION OF INDUSTRIAL PRODUCTS PRO FORMA PRO FORMA NEOFORMA.COM GAR FDI OPERATIONS ADJUSTMENTS COMBINED ------------ ------ ----- -------------- ----------- --------- REVENUE...................... $ -- $2,986 $ 47 $(1,472) $ -- $ 1,561 COST OF SALES................ -- 1,273 18 (754) -- 537 ------- ------ ----- -------- ------- ------- -- 1,713 29 (718) -- 1,024 ------- ------ ----- -------- ------- ------- OPERATING EXPENSES: Operations................. 627 -- -- -- -- 627 Product development........ 1,491 -- -- -- -- 1,491 Selling and marketing...... 1,409 345 260 (45) -- 1,969 General and administrative........... 1,075 1,756 110 (264) -- 2,677 Amortization of intangibles.............. -- -- -- -- 2,494(A) 2,494 Amortization of deferred compensation............. 5 -- -- -- -- 5 ------- ------ ----- -------- ------- ------- Total operating expenses.............. 4,607 2,101 370 (309) 2,494 9,263 ------- ------ ----- -------- ------- ------- Loss from operations..... (4,607) (388) (341) (409) (2,494) (8,239) OTHER INCOME (EXPENSE), net........................ 44 (32) (19) -- -- (7) ------- ------ ----- -------- ------- ------- Loss from operations....... $(4,563) $ (420) $(360) $ (409) $(2,494) $(8,246) ------- ------ ----- -------- ------- ------- NET LOSS PER SHARE: Basic and diluted.......... $ (2.65) ======= Weighted average shares -- basic and diluted........ 3,112 =======
F-30 113 NEOFORMA.COM, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ELIMINATION OF INDUSTRIAL PRODUCTS PRO FORMA PRO FORMA NEOFORMA.COM GAR FDI OPERATIONS ADJUSTMENTS COMBINED ------------ ------- ------- -------------- ----------- --------- REVENUE.................... $ 464 $ 2,164 $ 196 $ (600) $ -- $ 2,224 COST OF SALES.............. -- 1,189 17 (489) -- 717 -------- ------- ------- ------- -------- -------- 464 975 179 (111) -- 1,507 -------- ------- ------- ------- -------- -------- OPERATING EXPENSES: Operations............... 2,399 -- -- -- -- 2,399 Product development...... 4,321 -- -- -- -- 4,321 Selling and marketing.... 5,096 446 182 (85) -- 5,639 General and administrative......... 5,162 809 137 (143) -- 5,965 Amortization of intangible............. 230 -- -- -- 1,661(A) 1,891 Amortization of deferred compensation........... 5,662 -- -- -- -- 5,662 Non-recurring charges.... 3,014 -- -- -- -- 3,014 -------- ------- ------- ------- -------- -------- Total operating expenses............ 25,884 1,255 319 (228) 1,661 28,891 -------- ------- ------- ------- -------- -------- Income (loss) from operations.......... (25,420) (280) (140) 117 (1,661) (27,384) OTHER INCOME (EXPENSES), net...................... (194) (11) (16) -- -- (221) -------- ------- ------- ------- -------- -------- Net income (loss)...... $(25,614) $ (291) $ (156) $ 117 $ (1,661) $(27,605) ======== ======= ======= ======= ======== ======== NET LOSS PER SHARE: Basic and diluted........ $ (12.82) ======== Weighted-average shares-- basic and diluted...... 2,154 ========
F-31 114 NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The total purchase price of the FDI acquisition has been allocated to acquired assets based on estimates of their fair values. The purchase price of approximately $3.3 million has been assigned to the intangible assets acquired as follows: Assembled work force and customer list.................... $ 240,000 Software.................................................. 600,000 Goodwill.................................................. 2,485,000 ---------- $3,325,000 Less: Liabilities Assumed................................. (50,000) $3,275,000 ==========
The adjustments to the unaudited pro forma condensed combined statements of operations for the year ended December 31, 1998 and for the nine months ended September 30, 1999 assume the acquisition occurred as of January 1, 1998 and January 1, 1999, respectively, and are as follows: (A) To reflect the amortization of approximately $13.0 million of estimated goodwill and other intangibles resulting from the acquisitions. The intangible assets will be amortized over three to seven years. The adjustments to the unaudited pro forma condensed combined balance sheet as of September 30, 1999 are as follows: (B) To reflect the purchase price paid as follows: issuance of the Company's common stock valued at approximately $3.2 million, the assumption of $50,000 of liabilities, and acquisition-related expenses of approximately $125,000. (C) To adjust asset values to fair value at the acquisition date. (D) To reflect goodwill and other intangibles of approximately $3.3 million resulting from the acquisition of FDI. The Industrial Products operations of GAR was sold to an owner of GAR ("Owner") prior to its acquisition. Accordingly the revenue and direct expenses (consisting of only the salary of the Owner and certain employees) are eliminated in the accompanying pro forma statements of operations. F-32 115 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Members of General Asset Recovery LLC: We have audited the accompanying balance sheets of GENERAL ASSET RECOVERY, LLC (an Illinois limited liability company) as of December 31, 1997 and 1998, and the related statements of operations, members' equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company'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 General Asset Recovery LLC as of December 31, 1997 and 1998, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Chicago, Illinois October 1, 1999 F-33 116 GENERAL ASSET RECOVERY LLC BALANCE SHEETS ASSETS
DECEMBER 31, --------------------- JUNE 30, 1997 1998 1999 --------- -------- ----------- (UNAUDITED) CURRENT ASSETS: Cash................................................ $ 29,712 $ 24,805 $ 88,146 Accounts receivable............................... 78,523 49,288 718,314 Prepaid expenses.................................. -- 2,587 -- --------- -------- ---------- Total current assets......................... 108,235 76,680 806,460 --------- -------- ---------- PROPERTY AND EQUIPMENT, NET......................... 30,479 60,188 83,665 --------- -------- ---------- OTHER ASSETS: Employee advances................................. -- -- 26,674 --------- -------- ---------- Deposits.......................................... 17,310 21,223 21,223 --------- -------- ---------- Total assets................................. $ 156,024 $158,091 $ 938,022 ========= ======== ========== LIABILITIES AND MEMBERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Line of credit.................................... $ 374,540 $147,500 $ 125,000 Accounts payable.................................. 68,749 67,445 1,208,885 Accrued expenses.................................. 164,156 36,771 38,695 --------- -------- ---------- Total current liabilities.................... 607,445 251,716 1,372,580 COMMITMENTS AND CONTINGENCIES (NOTE 7) MEMBERS' EQUITY (DEFICIT): Total members' (deficit)..................... (451,421) (93,625) (434,558) --------- -------- ---------- Total liabilities and members' (deficit)..... $ 156,024 $158,091 $ 938,022 ========= ======== ==========
The accompanying notes are an integral part of these balance sheets. F-34 117 GENERAL ASSET RECOVERY LLC STATEMENTS OF OPERATIONS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------ ------------------------- 1997 1998 1998 1999 ---------- ---------- ---------- ----------- (UNAUDITED) REVENUE............................... $2,404,654 $2,986,099 $1,667,908 $1,675,852 COST OF SALES......................... 1,349,462 1,273,333 696,072 885,714 ---------- ---------- ---------- ---------- 1,055,192 1,712,766 971,836 790,138 OPERATING EXPENSES: Selling and marketing............... 296,885 344,365 239,806 363,053 General and administrative.......... 1,059,130 1,756,355 720,551 700,140 ---------- ---------- ---------- ---------- Total operating expenses.... 1,356,015 2,100,720 960,357 1,063,193 ---------- ---------- ---------- ---------- Operating income (loss)..... (300,823) (387,954) 11,479 (273,055) ---------- ---------- ---------- ---------- OTHER INCOME (EXPENSE): Other income........................ 2,357 13,425 13,425 -- Rental income....................... 210,047 134,150 57,172 -- Interest expense, net............... (35,326) (47,768) (6,073) (11,287) ---------- ---------- ---------- ---------- Total other income (expense)................ 177,078 99,807 64,524 (11,287) ---------- ---------- ---------- ---------- Net income (loss)........... $ (123,745) $ (288,147) $ 76,003 $ (284,342) ========== ========== ========== ==========
The accompanying notes are an integral part of these statements. F-35 118 GENERAL ASSET RECOVERY LLC STATEMENTS OF MEMBERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998 AND THE SIX MONTHS ENDED JUNE 30, 1999
TOTAL MEMBERS' EQUITY (DEFICIT) ----------------- BALANCE, December 31, 1996.................................. $(218,525) Net loss.................................................. (123,745) Member distributions...................................... (109,151) --------- BALANCE, December 31, 1997.................................. (451,421) --------- Net loss.................................................. (288,147) Member distributions...................................... (37,612) Member contributed capital................................ 683,555 --------- BALANCE, December 31, 1998.................................. (93,625) --------- Net loss.................................................. (284,342) Member distributions...................................... (56,591) --------- BALANCE, June 30, 1999 (unaudited).......................... $(434,558) =========
The accompanying notes are an integral part of these statements. F-36 119 GENERAL ASSET RECOVERY, LLC STATEMENTS OF CASH FLOWS
YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, --------------------- ---------------------- 1997 1998 1998 1999 --------- --------- --------- ---------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income(loss)............................... $(123,745) $(288,147) $ 76,003 $ (284,342) Adjustments to reconcile net income(loss) to net cash provided by (used in) operating activities Depreciation and amortization........... 2,458 27,814 3,294 11,560 Changes in operating assets and liabilities.......................... Accounts receivable.................. 123,380 29,235 46,645 (669,026) Prepaid expenses..................... -- (2,587) 2,587 Other assets......................... -- (3,913) (19,175) (26,674) Accounts payable..................... 35,914 (1,304) 26,318 1,141,440 Accrued expenses..................... 118,671 (127,385) (163,156) 1,924 --------- --------- --------- ---------- Net cash provided by (used in) operating activities......... 156,678 (366,287) (30,071) 177,469 --------- --------- --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment........... (32,937) (57,523) (148) (35,037) --------- --------- --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Contributed capital.......................... -- 683,555 -- -- Dividends.................................... (109,151) (37,612) (16,500) (56,591) Net borrowings (repayments) under line-of-credit agreement.................. (10,460) (227,040) 17,007 (22,500) --------- --------- --------- ---------- Net cash provided by (used in) financing activities......... (119,611) 418,903 507 (79,091) --------- --------- --------- ---------- Net increase (decrease) in cash and cash equivalents......... 4,130 (4,907) (29,712) 63,341 CASH AND CASH EQUIVALENTS, beginning of year... 25,582 29,712 29,712 24,805 --------- --------- --------- ---------- CASH AND CASH EQUIVALENTS, end of year......... $ 29,712 $ 24,805 $ -- $ 88,146 ========= ========= ========= ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest.................... $ 35,326 $ 32,767 $ 11,287 $ 21,074 ========= ========= ========= ========== SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Assumption of debt by majority member........ $ -- $ 683,555 $ -- $ -- ========= ========= ========= ==========
The accompanying notes are an integral part of these statements. F-37 120 GENERAL ASSET RECOVERY LLC NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS General Asset Recovery LLC (the "Company") is in the business of conducting live auctions and appraisals of medical equipment. 2. SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies of the Company are as follows: REVENUE RECOGNITION Auction revenue is recognized when the equipment is sold which is represented by an auction commission received from the buyer and seller. Auction commissions represent a percentage of the final price at auction sales. Buyers pay an additional percentage of the final price as a buyer's premium. The Company does not provide any guarantee with respect to the authenticity of property offered for sale at auction. Each item is sold on an "as-is" basis with guarantee only of title. Upon completion of a final appraisal or inventory report, the Company recognizes appraisal and inventory revenue. Typically a final payment is due upon delivery of the report. MANAGEMENT'S USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK The Company may extend trade credit in connection with its auction sales which are held throughout the United States. The Company evaluates each customer's creditworthiness on a case-by-case basis; generally, the customers who receive trade credit are professional dealers who have regularly purchased property at the Company's auctions or whose reputation within the industry is known and respected by the Company. In situations where trade credit is extended, the purchaser does not take possession of the property before payment is made by the purchaser to the Company, and the Company is liable to the consignor for the net sales proceeds (final auction price less commission to the Company). The Company pays the consignor generally not later than the 10th day after the sale, and when trade credit is extended, the Company assumes all risk of loss associated with the trade credit, and the responsibility of collection of the trade credit amount from the purchaser. Losses to date under these situations have not been material. INVENTORY The majority of the warehouse inventory is on consignment from the seller. For purchased inventory, the Company periodically reviews the age and turnover of its inventory to determine whether any inventory has become obsolete or has declined in value and incurs a charge to operations for known and anticipated inventory obsolescence. Inventories are stated at the lower of cost or market. Cost is determined by specific identification. F-38 121 GENERAL ASSET RECOVERY LLC NOTES TO FINANCIAL STATEMENTS (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is recognized using both accelerated and straight-line methods. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in results of operations for the period. The cost of repairs and maintenance is charged to operations as incurred. 3. RECEIVABLES Receivables represent advance payments, or loans, to the consignor prior to the auction sale, collateralized by the items received and held by the Company for the auction sale and the proceeds from such sale. Such advances generally are not outstanding for more than one month from the date of the note. 4. PROPERTY AND EQUIPMENT, NET As of December 31, 1998, property and equipment consisted of the following:
ESTIMATED USEFUL AMOUNT LIFE ------- ----------- Computer equipment........................................ $11,074 5 - 7 years Furniture and fixtures.................................... 79,387 5 - 7 years Less accumulated depreciation............................. (30,273) ------- Net property and equipment.............................. $60,188 =======
Depreciation expense for the years ended December 31, 1997 and 1998 was approximately $3,000 and $28,000, respectively. 5. LEASES The Company conducts its business on premises leased under leases that expire through the year 2004. Future minimum lease payments under noncancellable leases in effect at December 31, 1998, are set forth below: 1999.................................................. $ 83,309 2000.................................................. 50,198 2001.................................................. 45,060 2002.................................................. 45,828 2003.................................................. 46,786 2004.................................................. 7,826 -------- Total future minimum lease payments................. $279,007 ========
Rent expense was approximately $97,000 and $111,000 for the years ended December 31, 1997 and 1998, respectively. 6. LINE OF CREDIT As of December 31, 1998, the Company had a line of credit agreement with a bank that allowed for maximum borrowings of $400,000. Interest was at the bank's prime rate plus 0.5%. Borrowings F-39 122 GENERAL ASSET RECOVERY LLC NOTES TO FINANCIAL STATEMENTS (CONTINUED) were collateralized by all assets of the Company. At December 31, 1998, borrowings outstanding on the line of credit were $147,500 with a final payment due July 30, 1999. The Company paid off and terminated the entire line of credit on July 30, 1999. 7. COMMITMENTS AND CONTINGENCIES From time to time, the Company is subject to occasional lawsuits, investigations and claims arising out of the normal conduct of business. Management does not believe the outcome of any pending claims will have a material adverse effect on the Company's financial position or results of operations. 8. AGREEMENTS In March 1997, the Company entered into an agreement with a hospital to sell the hospital's surplus assets. The hospital engaged the Company to be its exclusive agent for a five-year period for the purpose of selling the surplus assets. In the event that an item does not sell within thirty days of the possession by the Company, the Company will return such items to the hospital. The gross sales, less a fee to the Company, are required to be disbursed to the hospital within five days of the end of the month of the sale. In December 1998, the Company entered into a one-year services agreement with a hospital organization to market and promote the Company's services to members and affiliates of the hospital organization. The Company is required to pay a marketing fee equal to a percentage of the total net proceeds, as defined, received from the current month's sale of the assets. During 1999, various auction agreements have been signed with hospitals in the organization. The agreements appoint the Company as the exclusive independent agent for periods up to three years for the purpose of selling the assets privately or at public auction. The Company must move the assets, catalog the assets, advertise the auction by publication and mailing of circulars and auction the assets for cash, "as is" and "where is", among other obligations. The net proceeds are required to be paid within 10 days of the auction sale. The Company receives a percentage of the net proceeds as a commission. In June 1999, a hospital appointed the Company as its exclusive agent for the purposes of selling auction assets. The Company receives a percentage of the net proceeds, less expenses and any buyers premium as a commission. The Company must, among other obligations, advertise the auction sale by publication and mailing of circulars, sell the assets for cash, keep accurate records of the auction sale and provide the records to the hospital within ten days of the sale and provide adequate personnel to supervise the removal of the assets sold. 9. INCOME TAXES The Company has elected to include its income and expenses with those of its members for federal income tax purposes. Accordingly, the statements of operations for the years ended December 31, 1997 and 1998 do not include a provision for federal income taxes. 10. SUBSEQUENT EVENT In August 1999, Neoforma.com, Inc. acquired the Company. The acquisition will be accounted for using the purchase method of accounting on Neoforma.com, Inc.'s financial statements. F-40 123 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Neoforma.com and FDI Information Resources, L.L.C.: We have audited the accompanying balance sheets of FDI Information Resources, L.L.C. (an Arizona limited liability company) (the Company) as of December 31, 1998 and 1997, and the related statements of operations, changes in members' equity (deficit) and cash flows for the year ended December 31, 1998 and for the period from inception (November 4, 1997) to December 31, 1997. These financial statements are the responsibility of the Company'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 audits 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 as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the year ended December 31, 1998 and for the period from inception (November 4, 1997) to December 31, 1997, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Phoenix, Arizona, November 18, 1999. F-41 124 FDI INFORMATION RESOURCES, L.L.C. BALANCE SHEETS
DECEMBER 31, -------------------- SEPTEMBER 30, 1997 1998 1999 -------- -------- ------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash.............................................. $ 59,934 $ 37,512 $ 53,330 Accounts receivable............................... -- 32,282 4,312 Related party receivable, net..................... 16,421 -- -- Prepaid expenses and other assets................. 96 5,570 5,500 -------- -------- --------- Total current assets...................... 76,451 75,364 63,142 PROPERTY AND EQUIPMENT, net......................... 4,803 10,592 11,860 SOFTWARE DEVELOPMENT COSTS, net..................... 47,222 30,555 18,063 -------- -------- --------- $128,476 $116,511 $ 93,065 ======== ======== ========= LIABILITIES AND MEMBERS' DEFICIT CURRENT LIABILITIES: Accounts payable.................................. $ 22,578 $ 8,004 $ 3,480 Related party payable, net........................ -- 141,765 302,803 Deferred revenue and other accrued liabilities.... 8,198 98,211 74,012 Current portion of notes payable to related parties........................................ -- 3,448 6,293 -------- -------- --------- Total current liabilities................. 30,776 251,428 386,588 -------- -------- --------- NOTES PAYABLE TO RELATED PARTIES, net of current portion........................................... 120,000 239,052 236,207 -------- -------- --------- MEMBERS' EQUITY (DEFICIT): Members' contributions............................ 2,000 10,000 10,000 Accumulated deficit............................... (24,300) (383,969) (539,730) -------- -------- --------- Total members' equity (deficit)........... (22,300) (373,969) (529,730) -------- -------- --------- $128,476 $116,511 $ 93,065 ======== ======== =========
The accompanying notes are an integral part of these balance sheets. F-42 125 FDI INFORMATION RESOURCES, L.L.C. STATEMENTS OF OPERATIONS
INCEPTION (NOVEMBER 14, NINE MONTHS ENDED 1997) TO YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, --------------------- 1997 1998 1998 1999 ------------- ------------ --------- --------- (UNAUDITED) REVENUE: Software license and other revenue ($46,675 and $6,458 in 1997 and 1998, respectively, is related party revenue)............................. $ 46,675 $ 46,557 $ 42,595 $ 196,268 COST OF PRODUCTS SOLD..................... 2,884 18,040 13,635 16,630 -------- --------- --------- --------- Gross Margin.................... 43,791 28,517 28,960 179,638 -------- --------- --------- --------- OPERATING EXPENSES: Salaries................................ 45,212 280,562 222,035 202,767 Marketing............................... 2,532 53,245 41,017 29,801 General and administrative.............. 19,602 35,705 27,889 86,661 -------- --------- --------- --------- Total operating expenses........ 67,346 369,512 290,941 319,229 -------- --------- --------- --------- LOSS FROM OPERATIONS...................... (23,555) (340,995) (261,981) (139,591) -------- --------- --------- --------- OTHER INCOME (EXPENSE) Interest income......................... 5 561 546 -- Interest expense and other.............. (750) (19,235) (12,908) (16,170) -------- --------- --------- --------- Total other income (expense).... (745) (18,674) (12,362) (16,170) -------- --------- --------- --------- NET LOSS.................................. $(24,300) $(359,669) $(274,343) $(155,761) ======== ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-43 126 FDI INFORMATION RESOURCES, L.L.C. STATEMENTS OF CHANGES IN MEMBERS' EQUITY (DEFICIT)
MEMBERS' ACCUMULATED CONTRIBUTIONS DEFICIT TOTAL ------------- ----------- --------- BALANCE, inception (November 14, 1997)............... $ -- $ -- $ -- Members' investment.................................. 2,000 -- 2,000 Net loss........................................... -- (24,300) (24,300) ------- --------- --------- BALANCE, December 31, 1997........................... 2,000 (24,300) (22,300) Members' investment................................ 8,000 -- 8,000 Net loss........................................... -- (359,669) (359,669) ------- --------- --------- BALANCE, December 31, 1998........................... 10,000 (383,969) (373,969) Net loss (unaudited)............................... -- (155,761) (155,761) ------- --------- --------- BALANCE, September 30, 1999 (unaudited).............. $10,000 $(539,730) $(529,730) ======= ========= =========
The accompanying notes are an integral part of these financial statements. F-44 127 FDI INFORMATION RESOURCES, L.L.C. STATEMENTS OF CASH FLOWS
INCEPTION (NOVEMBER 14, NINE MONTHS ENDED 1997) TO YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, --------------------- 1997 1998 1998 1999 ------------- ------------ --------- --------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................. $(24,300) $(359,669) $(274,343) $(155,761) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........ 3,031 20,088 14,748 14,805 Changes in assets and liabilities: Accounts receivable................ -- (32,282) (22,610) 27,970 Related party receivable/payable, net............................. (16,421) 158,186 125,570 161,038 Prepaid expenses and other assets.......................... (96) (5,474) (6,022) 70 Accounts payable................... 22,578 (14,574) (14,679) (4,524) Deferred revenue and other accrued liabilities..................... 8,198 90,013 22,255 (24,199) -------- --------- --------- --------- Net cash provided by (used in) operating activities......... (7,010) (143,712) (155,081) 19,399 -------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment..... (5,056) (9,210) (11,076) (3,581) Payments for capitalized software....... (50,000) -- -- -- -------- --------- --------- --------- Net cash used in investing activities................... (55,056) (9,210) (11,076) (3,581) -------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes payable to related parties................... 125,000 122,500 122,500 -- Payments on note payable to related parties.............................. (5,000) -- -- -- Proceeds from member contributions...... 2,000 8,000 8,000 -- -------- --------- --------- --------- Net cash provided by financing activities................... 122,000 130,500 130,500 -- -------- --------- --------- --------- Net increase (decrease) in cash......................... 59,934 (22,422) (35,657) 15,818 CASH, beginning of period................. -- 59,934 59,934 37,512 -------- --------- --------- --------- CASH, end of period....................... $ 59,934 $ 37,512 $ 24,277 $ 53,330 ======== ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-45 128 FDI INFORMATION RESOURCES, L.L.C. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (1) FORMATION OF THE COMPANY AND NATURE OF THE OPERATIONS: FDI Information Resources, L.L.C. (the Company), an Arizona limited liability company formed on November 4, 1997, operates under an operating agreement between its various members. The Company is in the business of developing and licensing equipment planning software. In addition, the Company supports its products with product installation, training and system support. RELATED BUSINESS ENTITIES The Company is related to other business entities through common ownership or control. Specifically, the Company is related to Facilities Development, Inc. (FDI). FDI is a medical equipment planning and consulting firm. All related party revenue represents sales of the Company's products to FDI. These financial statements do not include any other related business entities that are under common ownership or in which the members have a direct or indirect controlling financial interest. The financial effects of control for two or more business enterprises by common ownership are more appropriately reflected in combined financial statements presented in accordance with generally accepted accounting principles applicable. OPERATING AGREEMENT The Managers, as defined in the operating agreement, shall direct, manage, and control the business with full and complete authority, power and discretion to make any and all decisions to accomplish the business and objectives of the Company. Only a Manager shall have the authority to act for or bind the Company. The Company's members have made capital contributions of $10,000, and the ownership is divided 37.5%, 37.5% and 25% amongst its three members. Distributions shall be made to the members at such times and in such amounts as determined by the Managers in the Managers' sole discretion. Upon dissolution or liquidation of the Company, each member will solely look to the assets of the Company for return of capital contributions without any recourse against the Company. The Company shall continue until such time of dissolution. Dissolution will occur upon one of the following: the written consent of a majority in interest of the members, the sale of all or substantially all of the Company's assets, or the occurrence of an event of withdrawal of the last remaining member. EXPENSE ALLOCATIONS The majority of the Company's expenses are paid through its related business entities. Such expenses are allocated to the Company either through a specific identification of expenses, or on a percentage basis. Expenses incurred in this manner are reflected as related party receivable (payable), net in the accompanying balance sheets. F-46 129 FDI INFORMATION RESOURCES, L.L.C. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: UNAUDITED INTERIM FINANCIAL DATA The unaudited interim financial statements as of and for the nine months ended September 30, 1999 and for the nine months ended 1998 have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial information set forth therein, in accordance with generally accepted accounting principles. Operating results for the nine months ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, and are depreciated on a straight-line basis over three to five years. IMPAIRMENT OF LONG-LIVED ASSETS The Company evaluates the recoverability of long-lived assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Under SFAS No. 121, long-lived assets and certain identifiable intangible assets, including goodwill, are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss is recognized if the sum of the expected long-term undiscounted cash flows is less than the carrying amount of the long-lived assets being evaluated. SOFTWARE DEVELOPMENT COSTS In accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, the Company capitalizes software development costs by project commencing when technological feasibility is established and concluding when the product is ready for commercial release. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future gross product revenues, estimated economic product lives and changes in software and hardware technology. Software development costs are amortized on a straight-line basis over three years or the expected life of the product, whichever is less. The Company periodically evaluates the net realizable value of capitalized software development costs based on factors such as budgeted sales, product development cycles and F-47 130 FDI INFORMATION RESOURCES, L.L.C. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 management's market emphasis. Research and development costs are charged to expense when incurred. INCOME TAXES The Company, with the consent of its members, is a limited liability company, which qualifies for tax treatment as a partnership for federal and state income tax purposes. As a result, the Company's results of operations are included in the income tax returns of its members. Therefore, the accompanying financial statements do not include any provision for income taxes. REVENUE RECOGNITION The Company recognizes revenues in accordance with the provisions of Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4, Deferral of the Effective Date of Certain Provisions of SOP 97-2. Under SOP 97-2, the Company recognizes revenue for software sales upon shipment of the product, provided collection of the resulting receivable is deemed probable and any remaining obligations under the license agreements are insignificant. Revenue from service contracts, instruction and user training and post-contract customer support is recognized ratably over the period of the related contract. Deferred revenue represents the Company's obligation to perform under existing contracts. For contracts with multiple obligations (e.g., deliverable and undeliverable products, maintenance and other services), the Company allocates revenue to each component of the contract based on vendor specific objective evidence of its fair value, which is specific to the Company or for products not being sold separately, the price established by management. The Company recognizes revenue allocated to undelivered products when the criteria for product revenue set forth above are met. (3) PROPERTY AND EQUIPMENT: Property and equipment consisted of the following at December 31:
1997 1998 ------ ------- Computers and equipment..................................... $5,056 $14,266 Less: accumulated depreciation.............................. (253) (3,674) ------ ------- $4,803 $10,592 ====== =======
Depreciation expense was approximately $253 and $3,421 for the period from November 4, 1997 to December 31, 1997 and the year ended December 31, 1998, respectively. F-48 131 FDI INFORMATION RESOURCES, L.L.C. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (4) SOFTWARE DEVELOPMENT COSTS: Software development costs consisted of the following at December 31:
1997 1998 ------- -------- Capitalized software costs.................................. $50,000 50,000 Less: accumulated amortization.............................. (2,778) (19,445) ------- -------- $47,222 $ 30,555 ======= ========
The Company's policy is to amortize capitalized software costs by the greater of (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining estimated economic life of the product including the period being reported on. It is reasonably possible that those estimates of anticipated future gross revenues, the remaining estimated economic life of the product, or both will be reduced significantly in the near term. As a result, the carrying amount of the capitalized software costs may be reduced materially in the near term. Amortization of capitalized software development costs are included in costs of products sold and was approximately $2,778 and $16,667 for the period from November 4, 1997 to December 31, 1997 and the year ended December 31, 1998, respectively. The Company did not capitalize any software development costs during the year ended December 31, 1998. (5) NOTES PAYABLE TO RELATED PARTIES: Notes payable to related parties consisted of the following at:
DECEMBER 31, -------------------- SEPTEMBER 30, 1997 1998 1999 -------- -------- ------------- (UNAUDITED) Various notes payable totaling $197,500 payable to a member of the Company. Eight annual installments of $23,198, including interest at 10%, are due, beginning on December 31, 1999. ................................ $ 75,000 197,500 $197,500 Note payable to FDI in the amount of $45,000. Interest at 10% is payable annually on November 1. Principal is due on November 1, 2002. ............................... 45,000 45,000 45,000 -------- -------- -------- 120,000 242,500 242,500 Less: current portion.............................. -- (3,448) (6,293) -------- -------- -------- $120,000 $239,052 $236,207 ======== ======== ========
Maturities of long term debt are as follows at December 31:
YEAR ENDING ----------- 1999........................................................ $ 3,448 2000........................................................ 3,793 2001........................................................ 4,172 2002........................................................ 49,590 Thereafter.................................................. 181,497 -------- $242,500 ========
F-49 132 FDI INFORMATION RESOURCES, L.L.C. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (6) SUBSEQUENT EVENT: On November 18, 1999, the Company sold substantially all its assets to Neoforma.com in exchange for 350,000 shares of Neoforma.com's common stock and $75,000 in cash for transaction-related expenses. Under the terms of the agreement, Neoforma.com acquired the rights to the software and customer contracts of the Company. F-50 133 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Through and including , 2000 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 7,000,000 SHARES [NEOFORMA.COM LOGO] COMMON STOCK --------------------- PROSPECTUS --------------------- MERRILL LYNCH & CO. BEAR, STEARNS & CO. INC. ROBERTSON STEPHENS VOLPE BROWN WHELAN & COMPANY WILLIAM BLAIR & COMPANY , 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 134 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses to be paid by Neoforma.com in connection with the sale of the shares of common stock being registered hereby. All amounts are estimates except for the SEC registration fee, the NASD filing fee and the Nasdaq National Market filing fee. SEC registration fee........................................ $ 22,379 NASD filing fee............................................. 8,550 Nasdaq National Market initial filing fee................... 5,000 Printing and engraving...................................... 400,000 Legal fees and expenses of the Registrant................... 500,000 Accounting fees and expenses................................ 350,000 Blue sky fees and expenses.................................. 5,000 Transfer agent and registrar fees and expenses.............. 15,000 Miscellaneous............................................... 94,071 ---------- Total............................................. $1,400,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers under certain circumstances and subject to certain limitations. The terms of Section 145 of the Delaware General Corporation Law are sufficiently broad to permit indemnification under certain circumstances for liabilities, including reimbursement of expenses incurred, arising under the Securities Act of 1933. As permitted by the Delaware General Corporation Law, the Registrant's amended and restated certificate of incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for breach of fiduciary duty as a directory, except for liability: - for any breach of the director's duty of loyalty to the Registrant or its stockholders; - for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; - under Section 174 of the Delaware General Corporation Law regarding unlawful dividends and stock purchases; or - for any transaction from which the director derived an improper personal benefit. As permitted by the Delaware General Corporation Law, the Registrant's amended and restated bylaws provide that: - the Registrant is required to indemnify its directors and officers to the fullest extent permitted by the Delaware General Corporation Law, subject to certain very limited exceptions; - the Registrant is required to advance expenses, as incurred, to its directors and officers in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to certain very limited exceptions; and - the rights conferred in the bylaws are not exclusive. II-1 135 In addition, the Registrant intends to enter into indemnity agreements with each of our current directors and officers. These agreements provide for the indemnification of officers and directors for all expenses and liabilities incurred in connection with any action or proceeding brought against them by reason of the fact that they are or were agents of the Registrant. The Registrant intends to obtain directors' and officers' insurance to cover its directors, officers and some of its employees for certain liabilities, including public securities matters. The Underwriting Agreement filed as Exhibit 1.01 to this Registration Statement provides for indemnification by the underwriters of the Registrant and its directors and officers for certain liabilities under the Securities Act of 1933, or otherwise. Reference is made to the following documents filed as exhibits to the Registration Statement regarding relevant indemnification provisions described above and elsewhere herein.
EXHIBIT DOCUMENT NUMBER ---------------- ------ Underwriting Agreement...................................... 1.01 Registrant's Amended and Restated Certificate of Incorporation............................................... 3.02 Registrant's Amended and Restated Bylaws.................... 3.04 Form of Indemnity Agreement................................. 10.01
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. In the three years prior to the effective date of this Registration Statement, we have issued and sold the following unregistered securities: (1) In May 1996, the Registrant sold 8,000,000 shares of Common Stock to two founders of the Registrant for $0.00375 per share. (2) In April 1998, the Registrant issued 9,000,000 shares of its Series A preferred stock in exchange for 9,000,000 shares of previously issued common stock. (3) In April 1998, the Registrant sold 2,860,000 shares of its Series B preferred stock for approximately $0.50 per share. (4) In June 1998, the Registrant sold 5,064,937 shares of its Series C Preferred Stock for approximately $0.77 per share. (5) In February 1999, the Registrant sold 10,196,361 shares of its Series D Preferred Stock for approximately $1.18 per share. (6) In October 1999, the Registrant sold 12,418,633 shares of its Series E and Series E-1 preferred stock for $5.68 per share and issued 275,000 shares of its Series E-1 preferred stock in consideration for certain obligations in connection with a strategic alliance. (7) In November 1999, the Registrant agreed to issue and sell 176,057 shares of its Series E preferred stock for $5.68 per share. (8) In November 1999, the Registrant issued 350,000 shares of common stock to the former shareholders of FDI Information Resources, Inc. in connection with our acquisition of substantially all of the assets of FDI. (9) As of September 30, 1999, the Registrant had issued an aggregate of 12,660,161 shares of Common Stock pursuant to exercises of stock options and stock purchase rights granted under the Registrant's 1997 Stock Plan at prices ranging from $0.05 to $0.50 per share. II-2 136 (10) In October 1999, the Registrant issued a warrant to purchase 436,623 shares of Common Stock at a price of $0.10 per share to an executive search firm in connection with recruitment services. (11) In June 1998, the Registrant issued a warrant to purchase 45,000 shares of Series C Preferred Stock at a price of $0.77 per share to Silicon Valley Bank in connection with a financing transaction. (12) In May 1999, the Registrant issued a warrant to purchase 228,814 shares of Series D Preferred Stock at a price of $1.18 per share to Comdisco, Inc. in connection with a financing transaction. (13) In July 1999, the Registrant issued a warrant to purchase 10,000 shares of Series D Preferred Stock at a price of $1.18 per share to Silicon Valley Bank in connection with a financing transaction. (14) In July 1999, the Registrant issued a warrant to purchase 137,711 shares of Series D Preferred Stock at a price of $1.18 per share to Comdisco, Inc. in connection with a financing transaction. All sales of common stock made pursuant to the exercise of stock options were made in reliance on Rule 701 of the Securities Act or on Section 4(2) of the Securities Act. All other sales were made in reliance on Section 4(2) of the Securities Act and/or Regulation D promulgated under the Securities Act. These sales were made without general solicitation or advertising. Each purchaser was a sophisticated investor with access to all relevant information necessary to evaluate the investment and represented to the Registrant that the shares were being acquired for investment. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following exhibits are filed herewith:
NUMBER EXHIBIT TITLE ------ ------------- 1.01* Form of Underwriting Agreement. 2.01** Securities Purchase Agreement By and Among Neoforma GAR, Inc. and Neoforma, Inc. and General Asset Recovery, LLC, Erik Tivin and Fred Tivin dated as of July 16, 1999. Certain schedules have been omitted and will be furnished to the Commission upon request. 2.02** Agreement for Purchase of Assets, dated November 18, 1999, by and among the Registrant, FDI Information Resources, Inc. and FDI Information, LLC. Certain schedules have been omitted and will be furnished to the Commission upon request. 3.01** Amended and Restated Certificate of Incorporation of the Registrant, as amended through October 12, 1999. 3.02** Form of Second Amended and Restated Certificate of Incorporation of the Registrant to be effective upon the closing of the offering made pursuant to this Registration Statement. 3.03** Restated Bylaws of the Registrant, as adopted on November 12, 1999. 4.01** Form of Specimen Certificate for Registrant's common stock. 4.02** Second Amended and Restated Investors' Rights Agreement, as amended in November 1999. 4.03** Warrant to Purchase Common Stock of Registrant issued to Heidrick & Struggles.
II-3 137
NUMBER EXHIBIT TITLE ------ ------------- 4.04** QuickStart Warrant to Purchase Series C Preferred Stock of Registrant dated June 25, 1998 issued to Silicon Valley Bank, as amended on March 5, 1999. 4.05** Warrant Agreement to Purchase Series D Preferred Stock of Registrant dated as of May 12, 1999 issued to Comdisco, Inc. 4.06** QuickStart Warrant to Purchase Series D Preferred Stock of Registrant dated July 20, 1999 issued to Silicon Valley Bank. 4.07** Warrant to Purchase Series D Preferred Stock of Registrant dated as of July 7, 1999 issued to Comdisco, Inc. 5.01 Opinion of Fenwick & West LLP regarding legality of the securities being registered. 10.01** Form of Indemnity Agreement between the Registrant and its directors and officers. 10.02** Neoforma, Inc. 1997 Stock Plan, as amended. 10.03 Neoforma.com, Inc. 1999 Equity Incentive Plan. 10.04 Neoforma.com, Inc. 1999 Employee Stock Purchase Plan. 10.05+** Development and License Agreement dated May 14, 1999 between ECRI and the Registrant. 10.06+** Distribution and Services Agreement dated October 1, 1999 between Superior Consultant Company, Inc. and the Registrant. 10.07+** Strategic Alliance Agreement dated October 11, 1999 between Dell Marketing L.P. and the Registrant. 10.08** Consulting Agreement dated July 1, 1999 between Madhavan Rangaswami and the Registrant. 10.09 Employment Agreement dated July 1, 1999 between Robert J. Zollars and the Registrant. 10.10** Employment Agreement dated August 1999 between Erik Tivin and the Registrant. 10.11** Offer Letter dated September 17, 1999 with Bhagwan D. Goel. 10.12** Offer Letter dated December 19, 1998 with Robert Flury, as amended on January 5, 1999. 10.13** Offer Letter dated June 29, 1999 with Frederick Ruegsegger. 10.14** Consulting Agreement dated August 1999 between Fred Tivin and the Registrant. 10.15** Promissory Note for $7,800,000 dated August 1999 payable to Erik Tivin. 10.16** Quickstart Loan and Security Agreement dated June 25, 1998 between Silicon Valley Bank and the Registrant, as amended on July 20, 1999. 10.17** Subordinated Loan and Security Agreement dated May 12, 1999 between Comdisco, Inc. and the Registrant. 10.18** Subordinated Promissory Note for $2,000,000 dated May 27, 1999 payable to Comdisco, Inc. 10.19** Loan and Security Agreement dated as of July 7, 1999 between Comdisco, Inc. and the Registrant. 10.20** Hardware Secured Promissory Note for $1,032,001.98 dated September 3, 1999 payable to Comdisco, Inc. 10.21** Softcost Secured Promissory Note for $240,363.61 dated September 3, 1999 payable to Comdisco, Inc. 10.22** Lease Agreement dated July 30, 1998 between the Registrant and John Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77 (John Arrillaga Survivor's Trust) as amended, and Richard T. Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77 (Richard T. Peery Separate Property Trust) as amended.
II-4 138
NUMBER EXHIBIT TITLE ------ ------------- 10.23** Amendment No. 1 dated March 1, 1999 to Lease Agreement dated July 30, 1998 between the Registrant and John Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77 (John Arrillaga Survivor's Trust) as amended, and Richard T. Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77 (Richard T. Peery Separate Property Trust) as amended. 10.24** Lease Agreement dated March 1, 1999 between the Registrant and John Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77 (John Arrillaga Survivor's Trust) as amended, and Richard T. Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77 (Richard T. Peery Separate Property Trust) as amended. 10.25** Lease Agreement dated August 16, 1999 between the Registrant and John Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77 (John Arrillaga Survivor's Trust) as amended, and Richard T. Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77 (Richard T. Peery Separate Property Trust) as amended. 10.26+** Co-Branding Agreement, dated as of November 19, 1999, by and between the Registrant and VerticalNet, Inc. 10.27** Offer Letter dated July 28, 1999 with Daniel A. Eckert. 10.28 Industrial Building Lease, dated as of October 1999, by and between the Registrant and Centerpoint Properties Trust. 10.29* Offer Letter dated December , 1999 with Robert W. Rene. 10.30* Offer Letter dated December 11, 1999 with S. Wayne Kay. 21.01** Subsidiary of the Registrant. 23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01). 23.02 Consent of Arthur Andersen LLP, independent public accountants. 24.01** Power of Attorney (included on signature page). 27.01** Financial Data Schedule.
- ------------------------- * To be supplied by amendment. ** Previously filed. + Confidential treatment has been requested for portions of this exhibit. Other financial statement schedules are omitted because the information called for is not required or is shown either in the financial statements or the notes thereto. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 14 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such II-5 139 indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 140 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Clara, State of California, on the 23rd day of December, 1999. NEOFORMA.COM, INC. By: /s/ ROBERT J. ZOLLARS* ------------------------------------ ROBERT J. ZOLLARS Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment to Registration Statement has been signed by the following persons in the capacities and on the date indicated.
NAME TITLE DATE ---- ----- ---- /s/ ROBERT J. ZOLLARS* President, Chief December 23, 1999 - ----------------------------------------------------- Executive Officer, ROBERT J. ZOLLARS Chairman of the Board and Director /s/ FREDERICK J. RUEGSEGGER Chief Financial December 23, 1999 - ----------------------------------------------------- Officer FREDERICK J. RUEGSEGGER /s/ DAVID DOUGLASS* Director December 23, 1999 - ----------------------------------------------------- DAVID DOUGLASS /s/ TERENCE GARNETT* Director December 23, 1999 - ----------------------------------------------------- TERENCE GARNETT /s/ RICHARD D. HELPPIE* Director December 23, 1999 - ----------------------------------------------------- RICHARD D. HELPPIE /s/ WAYNE D. MCVICKER* Director December 23, 1999 - ----------------------------------------------------- WAYNE D. MCVICKER /s/ ANDREW J. FILIPOWSKI* Director December 23, 1999 - ----------------------------------------------------- ANDREW J. FILIPOWSKI /s/ MADHAVAN RANGASWAMI* Director December 23, 1999 - ----------------------------------------------------- MADHAVAN RANGASWAMI *By: /s/ FREDERICK J. RUEGSEGGER ----------------------------------------------- Attorney-in-Fact
II-7 141 EXHIBIT INDEX
NUMBER EXHIBIT TITLE ------ ------------- 1.01* Form of Underwriting Agreement. 2.01** Securities Purchase Agreement by and among Neoforma GAR, Inc. and Neoforma, Inc. and General Asset Recovery, LLC, Erik Tivin and Fred Tivin dated as of July 16, 1999. Certain schedules have been omitted and will be furnished to the Commission upon request. 2.02** Agreement for Purchase of Assets, dated November 18, 1999, by and among the Registrant, FDI Information Resources, Inc and FDI Information, LLC. Certain schedules have been omitted and will be furnished to the Commission upon request. 3.01** Amended and Restated Certificate of Incorporation of the Registrant, as amended through October 12, 1999. 3.02** Form of Second Amended and Restated Certificate of Incorporation of the Registrant to be effective upon the closing of the offering made pursuant to this Registration Statement. 3.03** Restated Bylaws of the Registrant, as adopted on November 12, 1999. 4.01** Form of Specimen Certificate for Registrant's common stock. 4.02** Second Amended and Restated Investors' Rights Agreement, as amended in November 1999. 4.03** Warrant to Purchase Common Stock of Registrant issued to Heidrick & Struggles. 4.04** QuickStart Warrant to Purchase Series C Preferred Stock of Registrant dated June 25, 1998 issued to Silicon Valley Bank, as amended on March 5, 1999. 4.05** Warrant Agreement to Purchase Series D Preferred Stock of Registrant dated as of May 12, 1999 issued to Comdisco, Inc. 4.06** QuickStart Warrant to Purchase Series D Preferred Stock of Registrant dated July 20, 1999 issued to Silicon Valley Bank. 4.07** Warrant to Purchase Series D Preferred Stock of Registrant dated as of July 7, 1999 issued to Comdisco, Inc. 5.01 Opinion of Fenwick & West LLP regarding legality of the securities being registered. 10.01** Form of Indemnity Agreement between the Registrant and its directors and officers. 10.02** Neoforma, Inc. 1997 Stock Plan, as amended. 10.03 Neoforma.com, Inc. 1999 Equity Incentive Plan. 10.04 Neoforma.com, Inc. 1999 Employee Stock Purchase Plan. 10.05+** Development and License Agreement dated May 14, 1999 between ECRI and the Registrant. 10.06+** Distribution and Services Agreement dated October 1, 1999 between Superior Consultant Company, Inc. and the Registrant. 10.07+** Strategic Alliance Agreement dated October 11, 1999 between Dell Marketing L.P. and the Registrant. 10.08** Consulting Agreement dated July 1, 1999 between Madhavan Rangaswami and the Registrant. 10.09 Employment Agreement dated July 1, 1999 between Robert J. Zollars and the Registrant. 10.10** Employment Agreement dated August 1999 between Erik Tivin and the Registrant. 10.11** Offer Letter dated September 17, 1999 with Bhagwan D. Goel. 10.12** Offer Letter dated December 19, 1998 with Robert Flury, as amended on January 5, 1999. 10.13** Offer Letter dated June 29, 1999 with Frederick Ruegsegger. 10.14** Consulting Agreement dated August 1999 between Fred Tivin and the Registrant.
142
NUMBER EXHIBIT TITLE ------ ------------- 10.15** Promissory Note for $7,800,000 dated August 1999 payable to Erik Tivin. 10.16** Quickstart Loan and Security Agreement dated June 25, 1998 between Silicon Valley Bank and the Registrant, as amended on July 20, 1999. 10.17** Subordinated Loan and Security Agreement dated May 12, 1999 between Comdisco, Inc. and the Registrant. 10.18** Subordinated Promissory Note for $2,000,000 dated May 27, 1999 payable to Comdisco, Inc. 10.19** Loan and Security Agreement dated as of July 7, 1999 between Comdisco, Inc. and the Registrant. 10.20** Hardware Secured Promissory Note for $1,032,001.98 dated September 3, 1999 payable to Comdisco, Inc. 10.21** Softcost Secured Promissory Note for $240,363.61 dated September 3, 1999 payable to Comdisco, Inc. 10.22** Lease Agreement dated July 30, 1998 between the Registrant and John Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77 (John Arrillaga Survivor's Trust) as amended, and Richard T. Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77 (Richard T. Peery Separate Property Trust) as amended. 10.23** Amendment No. 1 dated March 1, 1999 to Lease Agreement dated July 30, 1998 between the Registrant and John Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77 (John Arrillaga Survivor's Trust) as amended, and Richard T. Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77 (Richard T. Peery Separate Property Trust) as amended. 10.24** Lease Agreement dated March 1, 1999 between the Registrant and John Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77 (John Arrillaga Survivor's Trust) as amended, and Richard T. Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77 (Richard T. Peery Separate Property Trust) as amended. 10.25** Lease Agreement dated August 16, 1999 between the Registrant and John Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77 (John Arrillaga Survivor's Trust) as amended, and Richard T. Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77 (Richard T. Peery Separate Property Trust) as amended. 10.26+** Co-Branding Agreement, dated as of November 19, 1999, by and between the Registrant and VerticalNet, Inc. 10.27** Offer Letter dated July 28, 1999 with Daniel A. Eckert. 10.28 Industrial Building Lease, dated as of October 1999, by and between the Registrant and Centerpoint Properties Trust. 10.29* Offer Letter dated December , 1999 with Robert W. Rene. 10.30* Offer Letter dated December 11, 1999 with S. Wayne Kay. 21.01** Subsidiary of the Registrant. 23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01). 23.02 Consent of Arthur Andersen LLP, independent public accountants. 24.01** Power of Attorney (included on signature page). 27.01** Financial Data Schedule.
- ------------------------- * To be supplied by amendment. ** Previously filed. + Confidential treatment has been requested for portions of this exhibit. EX-5.01 2 EXHIBIT 5.01 1 EXHIBIT 5.01 December 22, 1999 Neoforma.com, Inc. 3255-7 Scott Boulevard Santa Clara, California 95054 Ladies and Gentlemen: At your request, we have examined the Registration Statement on Form S-1 (File Number 333-89077) (the "REGISTRATION STATEMENT") filed by you with the Securities and Exchange Commission (the "COMMISSION") on or about October 15, 1999, as subsequently amended, in connection with the registration under the Securities Act of 1933, as amended, of an aggregate of 8,050,000 shares of your Common Stock (the "STOCK). In rendering this opinion, we have examined the following: (1) the Registration Statement, together with the Exhibits filed as a part thereof; (2) the Prospectus prepared in connection with the Registration Statement; (3) the minutes of meetings and actions by written consent of the stockholders and Board of Directors that are contained in your minute books that are in our possession; (4) the stock records that you have provided to us (consisting of a list of stockholders and a list of option and warrant holders respecting your capital and of any rights to purchase capital stock that was prepared by you and dated as of September 30, 1999 verifying the number of such issued and outstanding securities); and (5) a Management Certificate addressed to us and dated of even date herewith executed by the Company containing certain factual and other representations. In our examination of documents for purposes of this opinion, we have assumed, and express no opinion as to, the genuineness of all signatures on original documents, the authenticity and completeness of all documents submitted to us as originals, the conformity to originals and completeness of all documents submitted to us as copies, the legal capacity of all natural persons executing the same and the lack of any undisclosed termination, modification, waiver or amendment to any documents reviewed by us. 2 Neoforma.com, Inc. December 22, 1999 Page 2 As to matters of fact relevant to this opinion, we have relied solely upon our examination of the documents referred to above and have assumed the current accuracy and completeness of the information obtained from public officials and records referred to above. We have made no independent investigation or other attempt to verify the accuracy of any of such information or to determine the existence or non-existence of any other factual matters; however, we are not aware of any facts that would cause us to believe that the opinion expressed herein is not accurate. We are admitted to practice law in the State of California, and we express no opinion herein with respect to the application or effect of the laws of any jurisdiction other than the existing laws of the United States of America and the State of California. In connection with our opinion expressed below, we have assumed that, at or prior to the time of the delivery of any shares of Stock, the Registration Statement will have been declared effective under the Securities Act of 1933, as amended, that the registration will apply to such shares of Stock and will not have been modified or rescinded and that there will not have occurred any change in law affecting the validity or enforceability of such shares of Stock. Based upon the foregoing, it is our opinion that the up to 8,050,000 shares of Stock to be issued and sold by you, when issued and sold in accordance with the manner referred to in the relevant Prospectus associated with the Registration Statement, will be validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to all references to us, if any, in the Registration Statement, the Prospectus constituting a part thereof and any amendments thereto. This opinion speaks only as of its date and we assume no obligation to update this opinion should circumstances change after the date hereof. Very truly yours, FENWICK & WEST LLP By: /s/ David K. Michaels ---------------------- David K. Michaels EX-10.03 3 EXHIBIT 10.03 1 EXHIBIT 10.03 NEOFORMA.COM, INC. 1999 EQUITY INCENTIVE PLAN As Adopted November 12, 1999 1. PURPOSE. The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, its Parent and Subsidiaries, by offering them an opportunity to participate in the Company's future performance through awards of Options, Restricted Stock and Stock Bonuses. Capitalized terms not defined in the text are defined in Section 23. 2. SHARES SUBJECT TO THE PLAN. 2.1 Number of Shares Available. Subject to Sections 2.2 and 18, the total number of Shares reserved and available for grant and issuance pursuant to this Plan will be 5,000,000 Shares plus Shares that are subject to: (a) issuance upon exercise of an Option but cease to be subject to such Option for any reason other than exercise of such Option; (b) an Award granted hereunder but are forfeited or are repurchased by the Company at the original issue price; and (c) an Award that otherwise terminates without Shares being issued. In addition, any authorized shares not issued or subject to outstanding grants under the Neoforma, Inc.'s 1997 Stock Option Plan (the "PRIOR PLAN") on the Effective Date (as defined below) and any shares issued under the Prior Plan that are forfeited or repurchased by the Company or that are issuable upon exercise of options granted pursuant to the Prior Plan that expire or become unexercisable for any reason without having been exercised in full, will no longer be available for grant and issuance under the Prior Plan, but will be available for grant and issuance under this Plan. In addition, on each January 1, the aggregate number of Shares reserved and available for grant and issuance pursuant to this Plan will be increased automatically such that the total number of Shares reserved under the Plan after such automatic increase shall equal 5% of the total outstanding shares of the Company as of the immediately preceding December 31, provided that no more than 25,000,000 shares shall be issued as ISOs (as defined in Section 5 below). At all times the Company shall reserve and keep available a sufficient number of Shares as shall be required to satisfy the requirements of all outstanding Options granted under this Plan and all other outstanding but unvested Awards granted under this Plan. 2.2 Adjustment of Shares. In the event that the number of outstanding shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under this Plan, (b) the Exercise Prices of and number of Shares subject to outstanding Options, and (c) the number of Shares subject to other outstanding Awards will be proportionately adjusted, subject to any required action by the Board or the stockholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such fraction of a Share or will be rounded up to the nearest whole Share, as determined by the Committee. 3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be granted only to employees (including officers and directors who are also employees) of the Company or of a Parent or Subsidiary of the Company. All other Awards may be granted to employees, officers, directors, consultants, independent contractors and advisors of the Company or any Parent or Subsidiary of the Company; provided such consultants, contractors and advisors render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. No person will be eligible to receive more than 4,000,000 Shares in any calendar year under this Plan pursuant to the grant of Awards hereunder, other than new employees of the Company or of a Parent or Subsidiary of the Company (including new employees who are also officers and directors of the Company or any Parent or Subsidiary of the Company), who are eligible to receive up to a maximum of 4,500,000 Shares in the calendar year in which they commence their employment. A person may be granted more than one Award under this Plan. 2 Neoforma.Com, Inc. 1999 Equity Incentive Plan 4. ADMINISTRATION. 4.1 Committee Authority. This Plan will be administered by the Committee or by the Board acting as the Committee. Except for automatic grants to Outside Directors pursuant to Section 9 hereof, and subject to the general purposes, terms and conditions of this Plan, and to the direction of the Board, the Committee will have full power to implement and carry out this Plan. Except for automatic grants to Outside Directors pursuant to Section 9 hereof, the Committee will have the authority to: (a) construe and interpret this Plan, any Award Agreement and any other agreement or document executed pursuant to this Plan; (b) prescribe, amend and rescind rules and regulations relating to this Plan or any Award; (c) select persons to receive Awards; (d) determine the form and terms of Awards; (e) determine the number of Shares or other consideration subject to Awards; (f) determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or any other incentive or compensation plan of the Company or any Parent or Subsidiary of the Company; (g) grant waivers of Plan or Award conditions; (h) determine the vesting, exercisability and payment of Awards; (i) correct any defect, supply any omission or reconcile any inconsistency in this Plan, any Award or any Award Agreement; (j) determine whether an Award has been earned; and (k) make all other determinations necessary or advisable for the administration of this Plan. 4.2 Committee Discretion. Except for automatic grants to Outside Directors pursuant to Section 9 hereof, any determination made by the Committee with respect to any Award will be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of this Plan or Award, at any later time, and such determination will be final and binding on the Company and on all persons having an interest in any Award under this Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under this Plan to Participants who are not Insiders of the Company. 5. OPTIONS. The Committee may grant Options to eligible persons and will determine whether such Options will be Incentive Stock Options within the meaning of the Code ("ISO") or Nonqualified Stock Options ("NQSOS"), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following: 5.1 Form of Option Grant. Each Option granted under this Plan will be evidenced by an Award Agreement which will expressly identify the Option as an ISO or an NQSO ("STOCK OPTION AGREEMENT"), and, except as otherwise required by the terms of Section 9 hereof, will be in such form and contain such 2 3 Neoforma.Com, Inc. 1999 Equity Incentive Plan provisions (which need not be the same for each Participant) as the Committee may from time to time approve, and which will comply with and be subject to the terms and conditions of this Plan. 5.2 Date of Grant. The date of grant of an Option will be the date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option. 5.3 Exercise Period. Options may be exercisable within the times or upon the events determined by the Committee as set forth in the Stock Option Agreement governing such Option; provided, however, that no Option will be exercisable after the expiration of ten (10) years from the date the Option is granted; and provided further that no ISO granted to a person who directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary of the Company ("TEN PERCENT STOCKHOLDER") will be exercisable after the expiration of five (5) years from the date the ISO is granted. The Committee also may provide for Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines. 5.4 Exercise Price. The Exercise Price of an Option will be determined by the Committee when the Option is granted and may be not less than 85% of the Fair Market Value of the Shares on the date of grant; provided that: (i) the Exercise Price of an ISO will be not less than 100% of the Fair Market Value of the Shares on the date of grant; and (ii) the Exercise Price of any ISO granted to a Ten Percent Stockholder will not be less than 110% of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased may be made in accordance with Section 8 of this Plan. 5.5 Method of Exercise. Options may be exercised only by delivery to the Company of a written stock option exercise agreement (the "EXERCISE AGREEMENT") in a form approved by the Committee (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares purchased under such Exercise Agreement, if any, and such representations and agreements regarding Participant's investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price for the number of Shares being purchased. 5.6 Termination. Notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of an Option will always be subject to the following: (a) If the Participant is Terminated for any reason except death or Disability, then the Participant may exercise such Participant's Options only to the extent that such Options would have been exercisable upon the Termination Date no later than three (3) months after the Termination Date (or such shorter or longer time period not exceeding five (5) years as may be determined by the Committee, with any exercise beyond three (3) months after the Termination Date deemed to be an NQSO), but in any event, no later than the expiration date of the Options. (b) If the Participant is Terminated because of Participant's death or Disability (or the Participant dies within three (3) months after a Termination other than for Cause or because of Participant's Disability), then Participant's Options may be exercised only to the extent that such Options would have been exercisable by Participant on the Termination Date and must be exercised by Participant (or Participant's legal representative or authorized assignee) no later than twelve (12) months after the Termination Date (or such shorter or longer time period not exceeding five (5) years as may be determined by the Committee, with any such exercise beyond (a) three (3) months after the Termination Date when the Termination is for any reason other than 3 4 Neoforma.Com, Inc. 1999 Equity Incentive Plan the Participant's death or Disability, or (b) twelve (12) months after the Termination Date when the Termination is for Participant's death or Disability, deemed to be an NQSO), but in any event no later than the expiration date of the Options. (c) Notwithstanding the provisions in paragraph 5.6(a) above, if a Participant is terminated for Cause, neither the Participant, the Participant's estate nor such other person who may then hold the Option shall be entitled to exercise any Option with respect to any Shares whatsoever, after termination of service, whether or not after termination of service the Participant may receive payment from the Company or Subsidiary for vacation pay, for services rendered prior to termination, for services rendered for the day on which termination occurs, for salary in lieu of notice, or for any other benefits. In making such determination, the Board shall give the Participant an opportunity to present to the Board evidence on his behalf. For the purpose of this paragraph, termination of service shall be deemed to occur on the date when the Company dispatches notice or advice to the Participant that his service is terminated. 5.7 Limitations on Exercise. The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent Participant from exercising the Option for the full number of Shares for which it is then exercisable. 5.8 Limitations on ISO. The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISO are exercisable for the first time by a Participant during any calendar year (under this Plan or under any other incentive stock option plan of the Company, Parent or Subsidiary of the Company) will not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISO are exercisable for the first time by a Participant during any calendar year exceeds $100,000, then the Options for the first $100,000 worth of Shares to become exercisable in such calendar year will be ISO and the Options for the amount in excess of $100,000 that become exercisable in that calendar year will be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date of this Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISO, such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment. 5.9 Modification, Extension or Renewal. The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of a Participant, impair any of such Participant's rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants affected by a written notice to them; provided, however, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 5.4 of this Plan for Options granted on the date the action is taken to reduce the Exercise Price. 5.10 No Disqualification. Notwithstanding any other provision in this Plan, no term of this Plan relating to ISO will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code. 6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company to sell to an eligible person Shares that are subject to restrictions. The Committee will determine to whom an offer will be made, the number of Shares the person may purchase, the price to be paid (the "PURCHASE PRICE"), the restrictions to which the Shares will be subject, and all other terms and conditions of the Restricted Stock Award, subject to the following: 4 5 Neoforma.Com, Inc. 1999 Equity Incentive Plan 6.1 Form of Restricted Stock Award. All purchases under a Restricted Stock Award made pursuant to this Plan will be evidenced by an Award Agreement ("RESTRICTED STOCK PURCHASE AGREEMENT") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. The offer of Restricted Stock will be accepted by the Participant's execution and delivery of the Restricted Stock Purchase Agreement and full payment for the Shares to the Company within thirty (30) days from the date the Restricted Stock Purchase Agreement is delivered to the person. If such person does not execute and deliver the Restricted Stock Purchase Agreement along with full payment for the Shares to the Company within thirty (30) days, then the offer will terminate, unless otherwise determined by the Committee. 6.2 Purchase Price. The Purchase Price of Shares sold pursuant to a Restricted Stock Award will be determined by the Committee on the date the Restricted Stock Award is granted, except in the case of a sale to a Ten Percent Stockholder, in which case the Purchase Price will be 100% of the Fair Market Value. Payment of the Purchase Price may be made in accordance with Section 8 of this Plan. 6.3 Terms of Restricted Stock Awards. Restricted Stock Awards shall be subject to such restrictions as the Committee may impose. These restrictions may be based upon completion of a specified number of years of service with the Company or upon completion of the performance goals as set out in advance in the Participant's individual Restricted Stock Purchase Agreement. Restricted Stock Awards may vary from Participant to Participant and between groups of Participants. Prior to the grant of a Restricted Stock Award, the Committee shall: (a) determine the nature, length and starting date of any Performance Period for the Restricted Stock Award; (b) select from among the Performance Factors to be used to measure performance goals, if any; and (c) determine the number of Shares that may be awarded to the Participant. Prior to the payment of any Restricted Stock Award, the Committee shall determine the extent to which such Restricted Stock Award has been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Restricted Stock Awards that are subject to different Performance Periods and having different performance goals and other criteria. 6.4 Termination During Performance Period. If a Participant is Terminated during a Performance Period for any reason, then such Participant will be entitled to payment (whether in Shares, cash or otherwise) with respect to the Restricted Stock Award only to the extent earned as of the date of Termination in accordance with the Restricted Stock Purchase Agreement, unless the Committee will determine otherwise. 7. STOCK BONUSES. 7.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares (which may consist of Restricted Stock) for services rendered to the Company or any Parent or Subsidiary of the Company. A Stock Bonus may be awarded for past services already rendered to the Company, or any Parent or Subsidiary of the Company pursuant to an Award Agreement (the "STOCK BONUS AGREEMENT") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. A Stock Bonus may be awarded upon satisfaction of such performance goals as are set out in advance in the Participant's individual Award Agreement (the "PERFORMANCE STOCK BONUS AGREEMENT") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. Stock Bonuses may vary from Participant to Participant and between groups of Participants, and may be based upon the achievement of the Company, Parent or Subsidiary and/or individual performance factors or upon such other criteria as the Committee may determine. 7.2 Terms of Stock Bonuses. The Committee will determine the number of Shares to be awarded to the Participant. If the Stock Bonus is being earned upon the satisfaction of performance goals pursuant to a Performance Stock Bonus Agreement, then the Committee will: (a) determine the nature, length and starting date of any Performance Period for each Stock Bonus; (b) select from among the Performance Factors to be used to measure the performance, if any; and (c) determine the number of Shares that may be awarded to the Participant. 5 6 Neoforma.Com, Inc. 1999 Equity Incentive Plan Prior to the payment of any Stock Bonus, the Committee shall determine the extent to which such Stock Bonuses have been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Bonuses that are subject to different Performance Periods and different performance goals and other criteria. The number of Shares may be fixed or may vary in accordance with such performance goals and criteria as may be determined by the Committee. The Committee may adjust the performance goals applicable to the Stock Bonuses to take into account changes in law and accounting or tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships. 7.3 Form of Payment. The earned portion of a Stock Bonus may be paid currently or on a deferred basis with such interest or dividend equivalent, if any, as the Committee may determine. Payment may be made in the form of cash or whole Shares or a combination thereof, either in a lump sum payment or in installments, all as the Committee will determine. 8. PAYMENT FOR SHARE PURCHASES. 8.1 Payment. Payment for Shares purchased pursuant to this Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and where permitted by law: (a) by cancellation of indebtedness of the Company to the Participant; (b) by surrender of shares that either: (1) have been owned by Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares); or (2) were obtained by Participant in the public market; (c) by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; provided, however, that Participants who are not employees or directors of the Company will not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares; (d) by waiver of compensation due or accrued to the Participant for services rendered; (e) with respect only to purchases upon exercise of an Option, and provided that a public market for the Company's stock exists: (1) through a "same day sale" commitment from the Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD DEALER") whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (2) through a "margin" commitment from the Participant and a NASD Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or 6 7 Neoforma.Com, Inc. 1999 Equity Incentive Plan (f) by any combination of the foregoing. 8.2 Loan Guarantees. The Committee may help the Participant pay for Shares purchased under this Plan by authorizing a guarantee by the Company of a third-party loan to the Participant. 9. AUTOMATIC GRANTS TO OUTSIDE DIRECTORS. 9.1 Types of Options and Shares. Options granted under this Plan and subject to this Section 9 shall be NQSOs. 9.2 Eligibility. Options subject to this Section 9 shall be granted only to Outside Directors. 9.3 Initial Grant. Each Outside Director who first becomes a member of the Board on or after the Effective Date will automatically be granted an Option for 100,000 Shares (an "INITIAL GRANT") on the date such Optionee first becomes a member of the Board, unless such Outside Director received a grant of Options before the Effective Date. Each Optionee who became a member of the Board prior to the Effective Date will receive an Initial Grant immediately following the Effective Date. 9.4 Succeeding Grants. Immediately following each Annual Meeting of stockholders, each Outside Director will automatically be granted an Option for 25,000 Shares (a "SUCCEEDING GRANT"), provided the Outside Director is a member of the Board on such date and has served continuously as a member of the Board for a period of at least one year since the date of such Outside Director's Initial Grant. 9.5 Vesting. The date an Outside Director receives an Initial Grant or a Succeeding Grant is referred to in this Plan as the "START DATE" for such Option. (a) Initial Grants. Each Initial Grant will vest as to 33.3% of the Shares on the first anniversary of the Start Date for such Initial Grant, and as to 2.78% of the Shares on each subsequent monthly anniversary of the Start Date until all of the Shares are fully vested, so long as the Outside Director continuously remains a director or a consultant of the Company. (b) Succeeding Grants. Each Succeeding Grant will vest as to 8.33% of the Shares on each subsequent monthly anniversary of the Start Date until all of the Shares are fully vested, so long as the Outside Director continuously remains a director or a consultant of the Company. Notwithstanding any provision to the contrary, in the event of a corporate transaction described in Section 18.1, the vesting of all options granted to Outside Directors pursuant to this Section 9 will accelerate and such options will become exercisable in full prior to the consummation of such event at such times and on such conditions as the Committee determines, and must be exercised, if at all, within three months of the consummation of said event. Any options not exercised within such three-month period shall expire. 9.6 Exercise Price. The exercise price of an Option pursuant to an Initial Grant shall be the Fair Market Value of the Shares, at the time that the Option is granted. 10. WITHHOLDING TAXES. 10.1 Withholding Generally. Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for 7 8 Neoforma.Com, Inc. 1999 Equity Incentive Plan such Shares. Whenever, under this Plan, payments in satisfaction of Awards are to be made in cash, such payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements. 10.2 Stock Withholding. When, under applicable tax laws, a Participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may in its sole discretion allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares withheld for this purpose will be made in accordance with the requirements established by the Committee and be in writing in a form acceptable to the Committee. 11. TRANSFERABILITY. 11.1 Except as otherwise provided in this Section 11, Awards granted under this Plan, and any interest therein, will not be transferable or assignable by Participant, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution or as determined by the Committee and set forth in the Award Agreement with respect to Awards that are not ISOs. 11.2 All Awards other than NQSO's. All Awards other than NQSO's shall be exercisable: (i) during the Participant's lifetime, only by (A) the Participant, or (B) the Participant's guardian or legal representative; and (ii) after Participant's death, by the legal representative of the Participant's heirs or legatees. 11.3 NQSOs. Unless otherwise restricted by the Committee, an NQSO shall be exercisable: (i) during the Participant's lifetime only by (A) the Participant, (B) the Participant's guardian or legal representative, (C) a Family Member of the Participant who has acquired the NQSO by "permitted transfer;" and (ii) after Participant's death, by the legal representative of the Participant's heirs or legatees. "Permitted transfer" means, as authorized by this Plan and the Committee in an NQSO, any transfer effected by the Participant during the Participant's lifetime of an interest in such NQSO but only such transfers which are by gift or domestic relations order. A permitted transfer does not include any transfer for value and neither of the following are transfers for value: (a) a transfer of under a domestic relations order in settlement of marital property rights or (b) a transfer to an entity in which more than fifty percent of the voting interests are owned by Family Members or the Participant in exchange for an interest in that entity. 12. PRIVILEGES OF STOCK OWNERSHIP; RESTRICTIONS ON SHARES.. 12.1 Voting and Dividends. No Participant will have any of the rights of a stockholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant will be a stockholder and have all the rights of a stockholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided, that if such Shares are Restricted Stock, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company will be subject to the same restrictions as the Restricted Stock; provided, further, that the Participant will have no right to retain such stock dividends or stock distributions with respect to Shares that are repurchased at the Participant's Purchase Price or Exercise Price pursuant to Section 12. 12.2 Financial Statements. The Company will provide financial statements to each Participant prior to such Participant's purchase of Shares under this Plan, and to each Participant annually during the period such Participant has Awards outstanding; provided, however, the Company will not be required to provide such financial statements to Participants whose services in connection with the Company assure them access to equivalent information. 8 9 Neoforma.Com, Inc. 1999 Equity Incentive Plan 12.3 Restrictions on Shares. At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) in the Award Agreement a right to repurchase a portion of or all Unvested Shares held by a Participant following such Participant's Termination at any time within ninety (90) days after the later of Participant's Termination Date and the date Participant purchases Shares under this Plan, for cash and/or cancellation of purchase money indebtedness, at the Participant's Exercise Price or Purchase Price, as the case may be. 13. CERTIFICATES. All certificates for Shares or other securities delivered under this Plan will be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted. 14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a Participant's Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of Participant's obligation to the Company under the promissory note; provided, however, that the Committee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company will have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participant's Shares or other collateral. In connection with any pledge of the Shares, Participant will be required to execute and deliver a written pledge agreement in such form as the Committee will from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a pro rata basis as the promissory note is paid. 15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy from a Participant an Award previously granted with payment in cash, Shares (including Restricted Stock) or other consideration, based on such terms and conditions as the Committee and the Participant may agree. 16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to: (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable; and/or (b) completion of any registration or other qualification of such Shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so. 17. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent or Subsidiary of the Company or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Participant's employment or other relationship at any time, with or without cause. 9 10 Neoforma.Com, Inc. 1999 Equity Incentive Plan 18. CORPORATE TRANSACTIONS. 18.1 Assumption or Replacement of Awards by Successor. Except for automatic grants to Outside Directors pursuant to Section 9 hereof, in the event of (a) a dissolution or liquidation of the Company, (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings and the Awards granted under this Plan are assumed, converted or replaced by the successor corporation, which assumption will be binding on all Participants), (c) a merger in which the Company is the surviving corporation but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company, (d) the sale of substantially all of the assets of the Company, or (e) the acquisition, sale, or transfer of more than 50% of the outstanding shares of the Company by tender offer or similar transaction, any or all outstanding Awards may be assumed, converted or replaced by the successor corporation (if any), which assumption, conversion or replacement will be binding on all Participants. In the alternative, the successor corporation may substitute equivalent Awards or provide substantially similar consideration to Participants as was provided to stockholders (after taking into account the existing provisions of the Awards). The successor corporation may also issue, in place of outstanding Shares of the Company held by the Participants, substantially similar shares or other property subject to repurchase restrictions no less favorable to the Participant. In the event such successor corporation (if any) refuses to assume or substitute Awards, as provided above, pursuant to a transaction described in this Subsection 18.1, such Awards will expire on such transaction at such time and on such conditions as the Committee will determine. Notwithstanding anything in this Plan to the contrary, the Committee may, in its sole discretion, provide that the vesting of any or all Awards granted pursuant to this Plan will accelerate upon a transaction described in this Section 18. If the Committee exercises such discretion with respect to Options, such Options will become exercisable in full prior to the consummation of such event at such time and on such conditions as the Committee determines, and if such Options are not exercised prior to the consummation of the corporate transaction, they shall terminate at such time as determined by the Committee. 18.2 Other Treatment of Awards. Subject to any greater rights granted to Participants under the foregoing provisions of this Section 18, in the event of the occurrence of any transaction described in Section 18.1, any outstanding Awards will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation, or sale of assets. 18.3 Assumption of Awards by the Company. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either; (a) granting an Award under this Plan in substitution of such other company's award; or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged (except that the exercise price and the number and nature of Shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price. 19. ADOPTION AND STOCKHOLDER APPROVAL. This Plan will become effective on the date on which the registration statement filed by the Company with the SEC under the Securities Act registering the initial public offering of the Company's Common Stock is declared effective by the SEC (the "EFFECTIVE DATE"). This Plan shall be approved by the stockholders of the Company (excluding Shares issued pursuant to this Plan), consistent with applicable laws, within twelve (12) months before or after the date this Plan is adopted by the 10 11 Neoforma.Com, Inc. 1999 Equity Incentive Plan Board. Upon the Effective Date, the Committee may grant Awards pursuant to this Plan; provided, however, that: (a) no Option may be exercised prior to initial stockholder approval of this Plan; (b) no Option granted pursuant to an increase in the number of Shares subject to this Plan approved by the Board will be exercised prior to the time such increase has been approved by the stockholders of the Company; (c) in the event that initial stockholder approval is not obtained within the time period provided herein, all Awards granted hereunder shall be cancelled, any Shares issued pursuant to any Awards shall be cancelled and any purchase of Shares issued hereunder shall be rescinded; and (d) in the event that stockholder approval of such increase is not obtained within the time period provided herein, all Awards granted pursuant to such increase will be cancelled, any Shares issued pursuant to any Award granted pursuant to such increase will be cancelled, and any purchase of Shares pursuant to such increase will be rescinded. 20. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided herein, this Plan will terminate ten (10) years from the date this Plan is adopted by the Board or, if earlier, the date of stockholder approval. This Plan and all agreements thereunder shall be governed by and construed in accordance with the laws of the State of California. 21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate or amend this Plan in any respect, including without limitation amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan; provided, however, that the Board will not, without the approval of the stockholders of the Company, amend this Plan in any manner that requires such stockholder approval. 22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the Board, the submission of this Plan to the stockholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options and bonuses otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 23. DEFINITIONS. As used in this Plan, the following terms will have the following meanings: "AWARD" means any award under this Plan, including any Option, Restricted Stock or Stock Bonus. "AWARD AGREEMENT" means, with respect to each Award, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award. "BOARD" means the Board of Directors of the Company. "CAUSE" means the commission of an act of theft, embezzlement, fraud, dishonesty or a breach of fiduciary duty to the Company or a Parent or Subsidiary of the Company. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMITTEE" means the Compensation Committee of the Board. "COMPANY" means Neoforma.com, Inc. or any successor corporation. "DISABILITY" means a disability, whether temporary or permanent, partial or total, as determined by the Committee. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. 11 12 Neoforma.Com, Inc. 1999 Equity Incentive Plan "EXERCISE PRICE" means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option. "FAIR MARKET VALUE" means, as of any date, the value of a share of the Company's Common Stock determined as follows: (a) if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the date of determination as reported in The Wall Street Journal; (b) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal; (c) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall Street Journal; (d) in the case of an Award made on the Effective Date, the price per share at which shares of the Company's Common Stock are initially offered for sale to the public by the Company's underwriters in the initial public offering of the Company's Common Stock pursuant to a registration statement filed with the SEC under the Securities Act; or (e) if none of the foregoing is applicable, by the Committee in good faith. "FAMILY MEMBER" includes any of the following: (a) child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of the Participant, including any such person with such relationship to the Participant by adoption; (b) any person (other than a tenant or employee) sharing the Participant's household; (c) a trust in which the persons in (a) and (b) have more than fifty percent of the beneficial interest; (d) a foundation in which the persons in (a) and (b) or the Participant control the management of assets; or (e) any other entity in which the persons in (a) and (b) or the Participant own more than fifty percent of the voting interest. "INSIDER" means an officer or director of the Company or any other person whose transactions in the Company's Common Stock are subject to Section 16 of the Exchange Act. "OPTION" means an award of an option to purchase Shares pursuant to Section 5. "OUTSIDE DIRECTOR" means a member of the Board who is not an employee of the Company or any Parent, Subsidiary or Affiliate of the Company. 12 13 Neoforma.Com, Inc. 1999 Equity Incentive Plan "PARENT" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "PARTICIPANT" means a person who receives an Award under this Plan. "PERFORMANCE FACTORS" means the factors selected by the Committee from among the following measures to determine whether the performance goals established by the Committee and applicable to Awards have been satisfied: (a) Net revenue and/or net revenue growth; (b) Earnings before income taxes and amortization and/or earnings before income taxes and amortization growth; (c) Operating income and/or operating income growth; (d) Net income and/or net income growth; (e) Earnings per share and/or earnings per share growth; (f) Total stockholder return and/or total stockholder return growth; (g) Return on equity; (h) Operating cash flow return on income; (i) Adjusted operating cash flow return on income; (j) Economic value added; and (k) Individual confidential business objectives. "PERFORMANCE PERIOD" means the period of service determined by the Committee, not to exceed five years, during which years of service or performance is to be measured for Restricted Stock Awards or Stock Bonuses. "PLAN" means this Neoforma.com, Inc. 1999 Equity Incentive Plan, as amended from time to time. "RESTRICTED STOCK AWARD" means an award of Shares pursuant to Section 6. "SEC" means the Securities and Exchange Commission. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SHARES" means shares of the Company's Common Stock reserved for issuance under this Plan, as adjusted pursuant to Sections 2 and 18, and any successor security. "STOCK BONUS" means an award of Shares, or cash in lieu of Shares, pursuant to Section 7. "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the 13 14 Neoforma.Com, Inc. 1999 Equity Incentive Plan unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "TERMINATION" or "TERMINATED" means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide services as an employee, officer, director, consultant, independent contractor, or advisor to the Company or a Parent or Subsidiary of the Company. An employee will not be deemed to have ceased to provide services in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Committee, provided, that such leave is for a period of not more than 90 days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute or unless provided otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated to employees in writing. In the case of any employee on an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of the Award while on leave from the employ of the Company or a Subsidiary as it may deem appropriate, except that in no event may an Option be exercised after the expiration of the term set forth in the Option agreement. The Committee will have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the "TERMINATION DATE"). "UNVESTED SHARES" means "Unvested Shares" as defined in the Award Agreement. "VESTED SHARES" means "Vested Shares" as defined in the Award Agreement. 14 EX-10.04 4 EXHIBIT 10.04 1 EXHIBIT 10.04 NEOFORMA.COM, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN As Adopted November 12, 1999 1. ESTABLISHMENT OF PLAN. Neoforma.com, Inc. (the "COMPANY") proposes to grant options for purchase of the Company's Common Stock to eligible employees of the Company and its Participating Subsidiaries (as hereinafter defined) pursuant to this Employee Stock Purchase Plan (this "PLAN"). For purposes of this Plan, "PARENT CORPORATION" and "Subsidiary" shall have the same meanings as "parent corporation" and "subsidiary corporation" in Sections 424(e) and 424(f), respectively, of the Internal Revenue Code of 1986, as amended (the "CODE"). "PARTICIPATING SUBSIDIARIES" are Parent Corporations or Subsidiaries that the Board of Directors of the Company (the "BOARD") designates from time to time as corporations that shall participate in this Plan. The Company intends this Plan to qualify as an "employee stock purchase plan" under Section 423 of the Code (including any amendments to or replacements of such Section), and this Plan shall be so construed. Any term not expressly defined in this Plan but defined for purposes of Section 423 of the Code shall have the same definition herein. A total of 750,000 shares of the Company's Common Stock is reserved for issuance under this Plan. In addition, on each January 1, the aggregate number of shares reserved and available for grant and issuance pursuant to this Plan will be increased automatically such that the total number of shares reserved under the Plan after such automatic increase shall equal 1% of the total outstanding shares of the Company as of the immediately preceding December 31; provided, that the Board or the Committee may in its sole discretion reduce the amount of the increase in any particular year; and, provided further, that the aggregate number of shares issued over the term of this Plan shall not exceed 7,000,000 shares. Such number shall be subject to adjustments effected in accordance with Section 14 of this Plan. 2. PURPOSE. The purpose of this Plan is to provide eligible employees of the Company and Participating Subsidiaries with a convenient means of acquiring an equity interest in the Company through payroll deductions, to enhance such employees' sense of participation in the affairs of the Company and Participating Subsidiaries, and to provide an incentive for continued employment. 3. ADMINISTRATION. This Plan shall be administered by the Compensation Committee of the Board (the "COMMITTEE"). Subject to the provisions of this Plan and the limitations of Section 423 of the Code or any successor provision in the Code, all questions of interpretation or application of this Plan shall be determined by the Committee and its decisions shall be final and binding upon all participants. Members of the Committee shall receive no compensation for their services in connection with the administration of this Plan, other than standard fees as established from time to time by the Board for services rendered by Board members serving on Board committees. All expenses incurred in connection with the administration of this Plan shall be paid by the Company. 4. ELIGIBILITY. Any employee of the Company or the Participating Subsidiaries is eligible to participate in an Offering Period (as hereinafter defined) under this Plan except the following: (a) employees who are not employed by the Company or a Participating Subsidiary (10) days before the beginning of such Offering Period, except that employees who are employed on the Effective Date of the Registration Statement filed by the Company with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as amended (the "SECURITIES ACT") registering the initial public offering of the Company's Common Stock shall be eligible to participate in the first Offering Period under the Plan; (b) employees who are customarily employed for twenty (20) hours or less per week; (c) employees who are customarily employed for five (5) months or less in a calendar year; 2 Neoforma.com, Inc. 1999 Employee Stock Purchase Plan (d) employees who, together with any other person whose stock would be attributed to such employee pursuant to Section 424(d) of the Code, own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Participating Subsidiaries or who, as a result of being granted an option under this Plan with respect to such Offering Period, would own stock or hold options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or any of its Participating Subsidiaries; and (e) individuals who provide services to the Company or any of its Participating Subsidiaries as independent contractors who are reclassified as common law employees for any reason except for federal income and employment tax purposes. 5. OFFERING DATES. The offering periods of this Plan (each, an "OFFERING PERIOD") shall be of twenty-four (24) months duration commencing on February 1 and August 1 of each year and ending on January 31 and July 31 of each year; provided, however, that notwithstanding the foregoing, the first such Offering Period shall commence on the first business day on which price quotations for the Company's Common Stock are available on the Nasdaq National Market (the "FIRST OFFERING DATE") and shall end on January 31, 2002. Except for the first Offering Period, each Offering Period shall consist of four (4) six month purchase periods (individually, a "PURCHASE PERIOD") during which payroll deductions of the participants are accumulated under this Plan. The first Offering Period shall consist of no more than five and no fewer than three Purchase Periods, any of which may be greater or less than six months as determined by the Committee. The first business day of each Offering Period is referred to as the "OFFERING DATE". The last business day of each Purchase Period is referred to as the "PURCHASE DATE". The Committee shall have the power to change the duration of Offering Periods with respect to offerings without stockholder approval if such change is announced at least fifteen (15) days prior to the scheduled beginning of the first Offering Period to be affected. 6. PARTICIPATION IN THIS PLAN. Eligible employees may become participants in an Offering Period under this Plan on the first Offering Date after satisfying the eligibility requirements by delivering a subscription agreement to the Company not later than five (5) days before such Offering Date. Notwithstanding the foregoing, the Committee may set a later time for filing the subscription agreement authorizing payroll deductions for all eligible employees with respect to a given Offering Period. An eligible employee who does not deliver a subscription agreement to the Company by such date after becoming eligible to participate in such Offering Period shall not participate in that Offering Period or any subsequent Offering Period unless such employee enrolls in this Plan by filing a subscription agreement with the Company not later than five (5) days preceding a subsequent Offering Date. Once an employee becomes a participant in an Offering Period, such employee will automatically participate in the Offering Period commencing immediately following the last day of the prior Offering Period unless the employee withdraws or is deemed to withdraw from this Plan or terminates further participation in the Offering Period as set forth in Section 11 below. Such participant is not required to file any additional subscription agreement in order to continue participation in this Plan. 7. GRANT OF OPTION ON ENROLLMENT. Enrollment by an eligible employee in this Plan with respect to an Offering Period will constitute the grant (as of the Offering Date) by the Company to such employee of an option to purchase on the Purchase Date up to that number of shares of Common Stock of the Company determined by dividing (a) the amount accumulated in such employee's payroll deduction account during such Purchase Period by (b) the lower of (i) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Offering Date (but in no event less than the par value of a share of the Company's Common Stock), or (ii) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Purchase Date (but in no event less than the par value of a share of the Company's Common Stock), provided, however, that the number of shares of the Company's Common Stock subject to any option granted pursuant to this Plan shall not exceed the lesser of (x) the maximum number of shares set by the Committee pursuant to Section 10(c) below with respect to the applicable Purchase Date, or (y) the maximum number of shares which may be purchased pursuant to Section 10(b) below with respect to the applicable Purchase Date. The fair market value of a share of the Company's Common Stock shall be determined as provided in Section 8 below. 2 3 Neoforma.com, Inc. 1999 Employee Stock Purchase Plan 8. PURCHASE PRICE. The purchase price per share at which a share of Common Stock will be sold in any Offering Period shall be eighty-five percent (85%) of the lesser of: (a) The fair market value on the Offering Date; or (b) The fair market value on the Purchase Date. For purposes of this Plan, the term "FAIR MARKET VALUE" means, as of any date, the value of a share of the Company's Common Stock determined as follows: (a) if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the date of determination as reported in The Wall Street Journal; (b) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal; (c) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported in The Wall Street Journal; or (d) if none of the foregoing is applicable, by the Board in good faith, which in the case of the First Offering Date will be the price per share at which shares of the Company's Common Stock are initially offered for sale to the public by the Company's underwriters in the initial public offering of the Company's Common Stock pursuant to a registration statement filed with the SEC under the Securities Act. 9. PAYMENT OF PURCHASE PRICE; CHANGES IN PAYROLL DEDUCTIONS; ISSUANCE OF SHARES. (a) The purchase price of the shares is accumulated by regular payroll deductions made during each Offering Period. The deductions are made as a percentage of the participant's compensation in one percent (1%) increments not less than 1%, nor greater than 15% or such lower limit set by the Committee. Compensation shall mean all W-2 cash compensation, including, but not limited to, base salary, wages, commissions, overtime, shift premiums and bonuses, plus draws against commissions, provided, however, that for purposes of determining a participant's compensation, any election by such participant to reduce his or her regular cash remuneration under Sections 125 or 401(k) of the Code shall be treated as if the participant did not make such election. Payroll deductions shall commence on the first payday of the Offering Period and shall continue to the end of the Offering Period unless sooner altered or terminated as provided in this Plan. (b) A participant may increase or decrease the rate of payroll deductions during an Offering Period by filing with the Company a new authorization for payroll deductions, in which case the new rate shall become effective for the next payroll period commencing more than fifteen (15) days after the Company's receipt of the authorization and shall continue for the remainder of the Offering Period unless changed as described below. Such change in the rate of payroll deductions may be made at any time during an Offering Period, but not more than one (1) change may be made effective during any Purchase Period. A participant may increase or decrease the rate of payroll deductions for any subsequent Offering Period by filing with the Company a new authorization for payroll deductions not later than fifteen (15) days before the beginning of such Offering Period. (c) A participant may reduce his or her payroll deduction percentage to zero during an Offering Period by filing with the Company a request for cessation of payroll deductions. Such reduction shall be effective beginning with the next payroll period commencing more than fifteen (15) days after the Company's receipt of the request and no further payroll deductions will be made for the duration of the Offering Period. Payroll deductions credited to the participant's account prior to the effective date of the request shall be used to purchase shares of Common Stock of the Company in accordance with Section (e) below. A participant may not resume making payroll deductions during the Offering Period in which he or she reduced his or her payroll deductions to zero. 3 4 Neoforma.com, Inc. 1999 Employee Stock Purchase Plan (d) All payroll deductions made for a participant are credited to his or her account under this Plan and are deposited with the general funds of the Company. No interest accrues on the payroll deductions. All payroll deductions received or held by the Company may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. (e) On each Purchase Date, so long as this Plan remains in effect and provided that the participant has not submitted a signed and completed withdrawal form before that date which notifies the Company that the participant wishes to withdraw from that Offering Period under this Plan and have all payroll deductions accumulated in the account maintained on behalf of the participant as of that date returned to the participant, the Company shall apply the funds then in the participant's account to the purchase of whole shares of Common Stock reserved under the option granted to such participant with respect to the Offering Period to the extent that such option is exercisable on the Purchase Date. The purchase price per share shall be as specified in Section 8 of this Plan. Any cash remaining in a participant's account after such purchase of shares shall be refunded to such participant in cash, without interest; provided, however that any amount remaining in such participant's account on a Purchase Date which is less than the amount necessary to purchase a full share of Common Stock of the Company shall be carried forward, without interest, into the next Purchase Period or Offering Period, as the case may be. In the event that this Plan has been oversubscribed, all funds not used to purchase shares on the Purchase Date shall be returned to the participant, without interest. No Common Stock shall be purchased on a Purchase Date on behalf of any employee whose participation in this Plan has terminated prior to such Purchase Date. (f) As promptly as practicable after the Purchase Date, the Company shall issue shares for the participant's benefit representing the shares purchased upon exercise of his or her option. (g) During a participant's lifetime, his or her option to purchase shares hereunder is exercisable only by him or her. The participant will have no interest or voting right in shares covered by his or her option until such option has been exercised. 10. LIMITATIONS ON SHARES TO BE PURCHASED. (a) No participant shall be entitled to purchase stock under this Plan at a rate which, when aggregated with his or her rights to purchase stock under all other employee stock purchase plans of the Company or any Subsidiary, exceeds $25,000 in fair market value, determined as of the Offering Date (or such other limit as may be imposed by the Code) for each calendar year in which the employee participates in this Plan. The Company shall automatically suspend the payroll deductions of any participant as necessary to enforce such limit provided that when the Company automatically resumes such payroll deductions, the Company must apply the rate in effect immediately prior to such suspension. (b) No more than two hundred percent (200%) of the number of shares determined by using eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Offering Date as the denominator may be purchased by a participant on any single Purchase Date. (c) No participant shall be entitled to purchase more than the Maximum Share Amount (as defined below) on any single Purchase Date. Not less than thirty (30) days prior to the commencement of any Offering Period, the Committee may, in its sole discretion, set a maximum number of shares which may be purchased by any employee at any single Purchase Date (hereinafter the "MAXIMUM SHARE AMOUNT"). Until otherwise determined by the Committee, there shall be no Maximum Share Amount. In no event shall the Maximum Share Amount exceed the amounts permitted under Section 10(b) above. If a new Maximum Share Amount is set, then all participants must be notified of such Maximum Share Amount prior to the commencement of the next Offering Period. The Maximum Share Amount shall continue to apply with respect to all succeeding Purchase Dates and Offering Periods unless revised by the Committee as set forth above. 4 5 Neoforma.com, Inc. 1999 Employee Stock Purchase Plan (d) If the number of shares to be purchased on a Purchase Date by all employees participating in this Plan exceeds the number of shares then available for issuance under this Plan, then the Company will make a pro rata allocation of the remaining shares in as uniform a manner as shall be reasonably practicable and as the Committee shall determine to be equitable. In such event, the Company shall give written notice of such reduction of the number of shares to be purchased under a participant's option to each participant affected. (e) Any payroll deductions accumulated in a participant's account which are not used to purchase stock due to the limitations in this Section 10 shall be returned to the participant as soon as practicable after the end of the applicable Purchase Period, without interest. 11. WITHDRAWAL. (a) Each participant may withdraw from an Offering Period under this Plan by signing and delivering to the Company a written notice to that effect on a form provided for such purpose. Such withdrawal may be elected at any time at least fifteen (15) days prior to the end of an Offering Period. (b) Upon withdrawal from this Plan, the accumulated payroll deductions shall be returned to the withdrawn participant, without interest, and his or her interest in this Plan shall terminate. In the event a participant voluntarily elects to withdraw from this Plan, he or she may not resume his or her participation in this Plan during the same Offering Period, but he or she may participate in any Offering Period under this Plan which commences on a date subsequent to such withdrawal by filing a new authorization for payroll deductions in the same manner as set forth in Section 6 above for initial participation in this Plan. (c) If the Fair Market Value on the first day of the current Offering Period in which a participant is enrolled is higher than the Fair Market Value on the first day of any subsequent Offering Period, the Company will automatically enroll such participant in the subsequent Offering Period. Any funds accumulated in a participant's account prior to the first day of such subsequent Offering Period will be applied to the purchase of shares on the Purchase Date immediately prior to the first day of such subsequent Offering Period, if any. 12. TERMINATION OF EMPLOYMENT. Termination of a participant's employment for any reason, including retirement, death or the failure of a participant to remain an eligible employee of the Company or of a Participating Subsidiary, immediately terminates his or her participation in this Plan. In such event, the payroll deductions credited to the participant's account will be returned to him or her or, in the case of his or her death, to his or her legal representative, without interest. For purposes of this Section 12, an employee will not be deemed to have terminated employment or failed to remain in the continuous employ of the Company or of a Participating Subsidiary in the case of sick leave, military leave, or any other leave of absence approved by the Board; provided that such leave is for a period of not more than ninety (90) days or reemployment upon the expiration of such leave is guaranteed by contract or statute. 13. RETURN OF PAYROLL DEDUCTIONS. In the event a participant's interest in this Plan is terminated by withdrawal, termination of employment or otherwise, or in the event this Plan is terminated by the Board, the Company shall deliver to the participant all payroll deductions credited to such participant's account. No interest shall accrue on the payroll deductions of a participant in this Plan. 14. CAPITAL CHANGES. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each option under this Plan which has not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under this Plan but have not yet been placed under option (collectively, the "RESERVES"), as well as the price per share of Common Stock covered by each option under this Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued and outstanding shares of Common Stock of the Company resulting from a stock split or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of issued and outstanding shares of Common Stock effected without receipt of any consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Committee, whose 5 6 Neoforma.com, Inc. 1999 Employee Stock Purchase Plan determination shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. In the event of the proposed dissolution or liquidation of the Company, the Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. The Committee may, in the exercise of its sole discretion in such instances, declare that this Plan shall terminate as of a date fixed by the Committee and give each participant the right to purchase shares under this Plan prior to such termination. In the event of (i) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the stockholders of the Company or their relative stock holdings and the options under this Plan are assumed, converted or replaced by the successor corporation, which assumption will be binding on all participants), (ii) a merger in which the Company is the surviving corporation but after which the stockholders of the Company immediately prior to such merger (other than any stockholder that merges, or which owns or controls another corporation that merges, with the Company in such merger) cease to own their shares or other equity interest in the Company, (iii) the sale of all or substantially all of the assets of the Company or (iv) the acquisition, sale, or transfer of more than 50% of the outstanding shares of the Company by tender offer or similar transaction, the Plan will continue with regard to Offering Periods that commenced prior to the closing of the proposed transaction and shares will be purchased based on the Fair Market Value of the surviving corporation's stock on each Purchase Date, unless otherwise provided by the Committee consistent with pooling of interests accounting treatment. The Committee may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, or in the event of the Company being consolidated with or merged into any other corporation. 15. NONASSIGNABILITY. Neither payroll deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under this Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 22 below) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be void and without effect. 16. REPORTS. Individual accounts will be maintained for each participant in this Plan. Each participant shall receive promptly after the end of each Purchase Period a report of his or her account setting forth the total payroll deductions accumulated, the number of shares purchased, the per share price thereof and the remaining cash balance, if any, carried forward to the next Purchase Period or Offering Period, as the case may be. 17. NOTICE OF DISPOSITION. Each participant shall notify the Company in writing if the participant disposes of any of the shares purchased in any Offering Period pursuant to this Plan if such disposition occurs within two (2) years from the Offering Date or within one (1) year from the Purchase Date on which such shares were purchased (the "NOTICE PERIOD"). The Company may, at any time during the Notice Period, place a legend or legends on any certificate representing shares acquired pursuant to this Plan requesting the Company's transfer agent to notify the Company of any transfer of the shares. The obligation of the participant to provide such notice shall continue notwithstanding the placement of any such legend on the certificates. 18. NO RIGHTS TO CONTINUED EMPLOYMENT. Neither this Plan nor the grant of any option hereunder shall confer any right on any employee to remain in the employ of the Company or any Participating Subsidiary, or restrict the right of the Company or any Participating Subsidiary to terminate such employee's employment. 19. EQUAL RIGHTS AND PRIVILEGES. All eligible employees shall have equal rights and privileges with respect to this Plan so that this Plan qualifies as an "employee stock purchase plan" within the meaning of Section 6 7 Neoforma.com, Inc. 1999 Employee Stock Purchase Plan 423 or any successor provision of the Code and the related regulations. Any provision of this Plan which is inconsistent with Section 423 or any successor provision of the Code shall, without further act or amendment by the Company, the Committee or the Board, be reformed to comply with the requirements of Section 423. This Section 19 shall take precedence over all other provisions in this Plan. 20. NOTICES. All notices or other communications by a participant to the Company under or in connection with this Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. TERM; STOCKHOLDER APPROVAL. After this Plan is adopted by the Board, this Plan will become effective on the First Offering Date (as defined above). This Plan shall be approved by the stockholders of the Company, in any manner permitted by applicable corporate law, within twelve (12) months before or after the date this Plan is adopted by the Board. No purchase of shares pursuant to this Plan shall occur prior to such stockholder approval. This Plan shall continue until the earlier to occur of (a) termination of this Plan by the Board (which termination may be effected by the Board at any time), (b) issuance of all of the shares of Common Stock reserved for issuance under this Plan, or (c) ten (10) years from the adoption of this Plan by the Board. 22. DESIGNATION OF BENEFICIARY. (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under this Plan in the event of such participant's death subsequent to the end of an Purchase Period but prior to delivery to him of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under this Plan in the event of such participant's death prior to a Purchase Date. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under this Plan who is living at the time of such participant's death, the Company shall deliver such shares or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 23. CONDITIONS UPON ISSUANCE OF SHARES; LIMITATION ON SALE OF SHARES. Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange or automated quotation system upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. 24. APPLICABLE LAW. The Plan shall be governed by the substantive laws (excluding the conflict of laws rules) of the State of California. 25. AMENDMENT OR TERMINATION OF THIS PLAN. The Board may at any time amend, terminate or extend the term of this Plan, except that any such termination cannot affect options previously granted under this Plan, nor may any amendment make any change in an option previously granted which would adversely affect the right of any participant, nor may any amendment be made without approval of the stockholders of the Company obtained in accordance with Section 21 above within twelve (12) months of the adoption of such amendment (or earlier if required by Section 21) if such amendment would: (a) increase the number of shares that may be issued under this Plan; or 7 8 Neoforma.com, Inc. 1999 Employee Stock Purchase Plan (b) change the designation of the employees (or class of employees) eligible for participation in this Plan. Notwithstanding the foregoing, the Board may make such amendments to the Plan as the Board determines to be advisable, if the continuation of the Plan or any Offering Period would result in financial accounting treatment for the Plan that is different from the financial accounting treatment in effect on the date this Plan is adopted by the Board. 8 EX-10.09 5 EXHIBIT 10.09 1 EXHIBIT 10.09 NEOFORMA, INCORPORATED EMPLOYMENT AGREEMENT This Employment Agreement is entered into as of July 1, 1999 (the "Effective Date"), by and between Neoforma, Incorporated, a Delaware corporation (the "Company"), and Robert J. Zollars (the "Executive"). WHEREAS, the Company desires to employ the Executive as of the Effective Date and the Executive desires to accept employment with the Company an the terms and conditions set forth below; NOW, THEREFORE, in consideration of the foregoing recital and the respective covenants and agreements of the parties contained in this document, the Company and the Executive agree as follows: 1. Employment and Duties. During the Employment Period (as defined in paragraph 2 below), the Executive will serve as President and Chief Executive Officer of the Company. The duties and responsibilities of the Executive shall include the duties and responsibilities for the Executive's corporate offices and positions as set forth in the Company's bylaws from time to time in effect and such other duties and responsibilities as the board of directors of the Company (the "Board of Directors") may from time to time reasonably assign to the Executive, in all cases to be consistent with the Executive's corporate offices and positions. The Executive shall perform faithfully the executive duties assigned to him to the best of his ability. At the next meeting of the Board of Directors, the Executive will be nominated to serve as a Director, and if so elected will be nominated as Chairman of the Board of Directors of the Company, and, if elected, the Executive shall serve in such capacity without additional compensation. 2. Employment Period. (a) Basic Rule. The employment period shall begin July 1, 1999 and shall continue thereafter (the "Employment Period") unless terminated pursuant to the provisions of this Agreement. (b) Termination. The Company may terminate the Executive's employment by giving the Executive notice in writing. If the Company terminates the Executive's employment for any reason other than Cause or Disability, both as defined below, or if the Executive terminates his employment for Good Reason, as defined below, the provisions of paragraphs 13(a)(i), 13(b) and 13(c) shall apply. The Executive may terminate his employment by giving the Company 30 days' advance written notice. If the Executive terminates his employment other than for Good Reason, the provisions of paragraph 13(b)(ii) shall apply. Upon termination of the Executive's employment with the Company, the Executive's rights under any applicable benefit plans shall be determined under the provisions of those plans. Any waiver of notice shall be valid only if it is made in writing and expressly refers to the applicable notice requirement of this subparagraph 2(b). 2 (c) Death. The Executive's employment shall terminate in the event of his death. In that event, any portion of the Option (as defined in paragraph 6(a) below) that was scheduled to vest within one (1) year of the Executive's death shall become vested as of the date of death and the Company's right of repurchase shall lapse as to those shares. The Company shall have no obligation to pay or provide any other compensation or benefits under this Agreement on account of the Executive's death, or for periods following the Executive's death, provided that the Company's obligations under paragraphs 13(a)(i) and 13(c) shall not be interrupted as a result of the Executive's death. The Executive's rights under the benefit plans of the Company in the event of the Executive's death shall be determined under the provisions of those plans. (d) Cause. The Company may terminate the Executive's employment for cause by giving the Executive notice in writing. For all purposes under this Agreement, "Cause" shall mean (A) fraud, misappropriation embezzlement or material misconduct on the part of the Executive, (B) the Executive's willful failure to substantially perform his duties for the Company when, and to the extent, requested by the Board, or its lawfully departed representative, to do so and failure to correct same within five (5) business days after notice from the Board or its lawfully designated representative requesting the Executive to do so, or (C) the Executive's willful breach of any material provision of this Agreement, or other agreements between the Executive and the Company and such breach continues for a period of five (5) business days after notice from the Board or its lawfully designated representative of such breach. (e) Disability. The Company may terminate the Executive's employment for Disability by giving the Executive notice in writing. For all purposes under this Agreement, "Disability" shall mean that the Executive, at the time notice is given, has been unable to substantially perform his duties under this Agreement for a period of not less than six (6) consecutive months as the result of his incapacity due to physical or mental illness. In that event, any portion of the Option (as defined in paragraph 6(a) below) that was scheduled to vest within one (1) year of the Executive's termination due to Disability shall become vested as of the date of such termination and the Company's right of repurchase shall lapse as to those shares. If the Executive resumes the performance of substantially all of his duties hereunder before the termination of his employment under this subparagraph (e) becomes effective, the notice of termination and the accelerated Option vesting shall automatically be deemed to have been revoked. No compensation or benefits will be paid or provided to the Executive under this Agreement on account of termination for Disability, or for periods following the date when such a termination of employment is effective. The Executive's rights under the benefit plans of the Company shall be determined under the provisions of those plans. (f) Good Reason. Employment with the Company may be regarded as having been constructively terminated by the Company, and the Executive may therefore terminate his employment for Good Reason and thereupon become entitled to the benefits of paragraphs 13(a)(i), 13(b) and 13(c) below, if he resigns his employment within six (6) months of the occurrence of any one or more of the following events: (i) without the Executive's express written consent, the assignment to the Executive of any duties or the reduction of the Executive's duties, either of which is substantially inconsistent with Executive's position or responsibilities with the Company in effect immediately prior to such assignment; -2- 3 (ii) a reduction by the Company in the Base Salary of the Executive as in effect immediately prior to such reduction; (iii) a material reduction by the Company in the kind of level of employee benefits, including the Bonus to which the Executive is entitled immediately prior to such reduction, with the result that the Executive's overall benefits package is significantly reduced, unless similar reductions are made to the overall benefits package of all other senior executives of the Company; (iv) the relocation of the Executive to a facility or a location more than 50 miles from the Company's present location, without the Executive's express written consent; or (v) any material breach by the Company of any material provision of this Agreement. 3. Place of Employment. The Executive's services shall be performed at the Company's principal executive offices in Santa Clara, California. The parties acknowledge, however, that the Executive may be required to travel in connection with the performance of his duties hereunder. 4. Base Salary. For all services to be rendered by the Executive pursuant to this Agreement, the Company agrees to pay the Executive during the Employment Period a base salary (the "Base Salary") at an annual rate of not less than $500,000. The Base Salary shall be paid in periodic installments in accordance with the Company's regular payroll practices. The Company agrees to review the Base Salary at least annually as of the payroll payment date nearest each anniversary of the Effective Date (beginning in 2000) and to make such increases therein as the Board of Directors may approve. 5. Bonus. The Executive shall be entitled to a guaranteed bonus payment of $250,000 on December 31, 1999, provided that he is an employee of the Company on such date. An additional guaranteed bonus payment of $250,000 will be paid to the Executive on June 30, 2000, provided that he is an employee of the Company on such date, and provided further that such bonus shall offset any bonus otherwise earned during the Company's 2000 fiscal year as defined below. Beginning with the Company's 2000 fiscal year and for each fiscal year thereafter during the Employment Period, the Executive will be eligible to receive an annual bonus (the "Bonus") of at least $500,000 for such fiscal year based upon certain financial criteria to be specified by the Board of Directors including revenue and profitability targets and/or other organizational milestones. Any Bonus payable hereunder shall be payable annually in accordance with the Company's normal practices and policies. Furthermore, if the Executive, after making a good faith effort to receive payment, is not paid the $338,000 bonus to which he is entitled by Cardinal Health, Inc. by September 30, 1999, the Executive is entitled to be reimbursed, by the Company, the amount he is not paid, will assign any legal claim he may have to that payment and agrees to cooperate fully with the Company should the Company pursue the legal claim. 6. Stock and Stock Option. (a) Stock and Stock Option. As of the Effective Date, the Company shall issue the Executive (with no right to repurchase) 1,601,029 shares of the Company's common stock (the -3- 4 "Bonus Shares"), which represents 4% of the Company's fully diluted outstanding common stock immediately following such stock grant (including common shares and assumed conversion into common stock of all series of preferred shares, warrants, options (including the option described in the following sentence) and shares available for option grants). The Executive shall pay a per share price for the Bonus Shares equal to $0.10 per share. Further, the Company shall grant the Executive an option (the "Option") to purchase 3,602,315 shares of the Company's common stock, which represents 9% of the Company's fully diluted outstanding common stock immediately following the grant of the Option and of the Bonus Shares (but including all other common shares and assumed conversion into common stock of all series of preferred shares, warrants, options and shares available for other option grants). The per share exercise price for the shares subject to the Option (the "Option Shares") shall be $.10 per share. At the Executive's election, the form of payment for both the Bonus Shares and the Option Shares may be in separate promissory notes signed by the Executive. Any such promissory note shall be secured by the Bonus Shares. Any such note and associated security agreement shall be made in the form specified by the Company, and shall bear interest at the then Applicable Federal Rate determined under the Internal Revenue Code. The principal and interest on such notes shall be fully due and payable upon the earlier of four (4) years from their effective date, two (2) years after the initial public offering of the Company's common stock, three (3) months after the Executive's termination of employment, or upon the sale of the shares purchased with the note. The Option Shares shall vest as described in paragraph 6(b) below and shall be subject to such other terms and conditions as are described in paragraph 6(b) and (c) below. The issuance of the Bonus Shares and Option Shares are each subject to the Executive's execution of the Shareholder Agreement that exists by and among certain of the Company's shareholders, as it may be amended from time to time. (b) Vesting. The Option Shares shall vest in equal monthly installments on the last day of each month over the 48-month period that begins July 1, 1999 and ends June 30, 2003, provided that the Executive remains an employee of the Company on each such vesting date. In addition, in the event of a Change in Control (as defined below), the unvested portion of the Option shall immediately accelerate as to all shares so that the Company's right to repurchase such shares shall lapse as of the Change of Control (as defined below). If there is a Change of Control (as defined below) that results in constructive termination of the Executive for Good Reason within twelve (12) months of the Change of Control (as defined below), then the balance of the Loan (as defined in paragraph 8) will be forgiven. For purposes of this Agreement the term "Change of Control" shall mean the occurrence of any of the following events subsequent to the equity financing described in paragraph 13(d) below: (i) Any "Person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes the "beneficial owner" (as defined in Rule l3d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing forty percent (40%) or more of the total voting power represented by the Company's then outstanding voting securities; provided, however, that a Change in Control shall be deemed to occur in the event any one individual becomes the "beneficial owner" (as defined in Rule l3d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the voting power represented by the Company's then outstanding voting securities; or -4- 5 (ii) A change in the composition of the Board of Directors of the Company occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or (iii) A merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least seventy percent (70%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (c) Option Provisions. The Option shall be granted under the July 1, 1999 Stock Option Plan (the "Stock Plan") and, except as expressly provided otherwise in this paragraph 6, shall be subject to the terms and conditions of the Stock Plan and form of option agreement; provided, however, that the Company's Board of Directors may, in its discretion, grant the Option and/or any additional option(s), if any, outside of the Stock Plan, and any such Options shall include such other terms as the Board of Directors may specify that are not inconsistent with the terms hereof. The Option will expire on the first to occur of: (i) in the event the Executive's employment terminates by reason of the Executive's death or by the Company as a result of the Executive's Disability, twelve (12) months from the date of such termination; (ii) in the event the Executive terminates his employment for Good Reason, or in the event the Company terminates the Executive's employment other than for Cause, twelve (12) months from the date of such termination; (iii) in the event the Executive resigns (other than for Good Reason) or is terminated by the Company for Cause, ninety (90) days after the date of such resignation or termination; or (iv) ten (10) years from the date of grant of each such Option. 7. Expenses. The Executive shall be entitled to prompt reimbursement by the Company for all reasonable ordinary and necessary travel, entertainment, and other expenses incurred by the Executive during the Employment Period (in accordance with the policies and procedures established by the Company for its senior executive officers) in the performance of his duties and responsibilities under this Agreement; provided, that the Executive shall properly account for such expenses in accordance with Company policies and procedures. 8. Real Estate Assistance. The Company will provide the Executive with a moving assistance loan (the "Loan") of up to $2,500,000 to assist the Executive in moving into a home similar in lifestyle to that in which he presently resides. The Loan will be forgiven in equal monthly installments on the last day of each month from the date of closing on such home through June 30, 2003, provided that the Executive remains in his position through each such date. The loan will be interest free. To the extent required by the Internal Revenue Code, the Executive will have taxable -5- 6 income for imputed interest and the amount of any loan forgiveness. At the Company's election, this Loan will be secured by stock and/or the real estate itself, and is subject to the Executive executing a promissory note and security agreement satisfactory to the Company. 9. Relocation Expenses. The Company will provide the Executive with a full relocation package to cover all closing costs on the sale of his home plus all acquisition costs on the purchase of his now home. The Company will also provide packing and unpacking of household goods, relocation of household goods, two house-hunting trips, plus temporary living expenses for up to three months. The Company will also provide a gross-up on relocation expenses that are not deductible for tax purposes. In the event the Executive prefers not to relocate, the Company will provide an apartment or condominium plus a leased car for two (2) years or until a permanent move is completed. Additionally, the Company will provide up to $300,000 to the Executive to compensate for any financial loss realized in the sale of his present home as measured against the $1,200,000 cost of building that home. Furthermore, any relocation expense reimbursement up to $100,000 owed by the Executive to Cardinal Health, Incorporated and required to be repaid will be reimbursed to the Executive by the Company. 10. Other Benefits. During the Employment Period, the Executive shall be entitled to participate in employee benefit plans or programs of the Company, if any, to the extent that his position, tenure, salary, age, health and other qualifications make him eligible to participate, subject to the rules and regulations applicable thereto. 11. Vacations and Holidays. The Executive shall be entitled to four (4) weeks paid vacation and Company holidays in accordance with the Company's policies in effect from time to time for its senior executive officers. 12. Other Activities. The Executive shall devote substantially all of his working time and efforts during the Company's normal business hours to the business and affairs of the Company and its subsidiaries and to the diligent and faithful performance of the duties and responsibilities duly assigned to him pursuant to this Agreement, except for vacations, holidays and sickness. However, the Executive may devote a reasonable amount of his time to civic, community, or charitable activities and, with the prior written approval of the Board of Directors, to serve as a director of other corporations and to other types of business or public activities not expressly mentioned in this paragraph. The Company agrees that the Executive may continue serving as a director of Epitope, Incorporated and Act Medical, Incorporated consistent with this provision. 13. Termination Benefits. In the event the Executive's employment terminates prior to the end of the Employment Period, then the Executive shall be entitled to receive severance and other benefits as follows: (a) Severance. (i) Involuntary Termination. If the Company terminates the Executive's employment other than for Disability or Cause, or if the Executive terminates his employment for Good Reason, then, in lieu of any severance benefits to which the Executive may otherwise be entitled -6- 7 under any Company severance plan or program, the Executive shall be entitled to payment equivalent to one (1) year of his Base Salary, Bonus and benefits to be paid according to normal payroll practices. In addition, the Company's right to repurchase as to all outstanding stock held by the Executive will lapse and the forgiveness of the Loan will be treated as if the Executive had been employed for twelve (12) additional months after the termination of employment. (ii) Other Termination. In the event the Executive's employment terminates for any reason other than as described in paragraph 13(a)(i) above, including by reason of the Executive's death, Disability or resignation other than for Good Reason, then the Executive shall be entitled to receive severance and any other benefits only as may then be established under the Company's existing severance and benefit plans and policies at the time of such termination. (iii) Limitation on Payments. In the event that the severance and other benefits (including, without limitation, accelerated vesting of stock options) provided for in this Agreement or otherwise payable to the Executive (i) constitute "parachute payments" within the meaning of Section 280G of the Code, and (ii) would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then Executive's benefits under this Agreement shall be reduced to the extent necessary in order to avoid such benefits being subject to the Excise Tax. Unless the Company and the Executive otherwise agree in writing, any determination required under this Section shall be made in writing by the Company's independent public accountants (the "Accountants"), whose determination shall be conclusive and binding upon the Executive and the Company for all purposes. For purposes of making the calculations required by this Section, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Section 280G and 4999 of the Code. The Company and the Executive shall furnish to the Accountants such information and documents as the Accounts may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section. (b) Options. In the event the Executive's employment is terminated by the Company as described in paragraph 13(a)(i) above, then the Executives unvested portion of the Option and any additional options granted to the Executive will be accelerated and the Company's right to repurchase will lapse as if the Executive had worked for one (1) additional year from the date of such termination. If such termination occurs during the first year of this Agreement, the Executive is entitled to accelerate the vesting of the first twenty-four (24) months of the stock options granted to him under this Agreement, that is, the Company's right to repurchase will lapse as if the Executive had been employed for twenty-four (24) months from the Effective Date. (c) Bonuses. In the event the Executive's employment is terminated by the Company as described in paragraph 13(a)(i) above, then the Executive shall be entitled to receive an amount equivalent to one (1) year's Bonus as described in paragraph 5. In the event the Executive's employment terminates for any other reason (other than Cause) during any fiscal year of the Company ending during the Employment Period, then the Executive (or his estate) shall be entitled to payment of a portion of the Bonus determined, after the end of such fiscal year, by multiplying the amount of the Bonus which would have become payable to the Executive had he remained employed until the -7- 8 end of such fiscal year, by a fraction, the numerator of which will be the number of days in which he was employed by the Company (or any of its subsidiaries) in such fiscal year, and the denominator of which shall be the number of days in such fiscal year. To the extent all or any portion of the Bonus is payable to the Executive pursuant to the preceding sentence, such amount shall be paid in accordance with paragraph 5. In the event the Company terminates the Executive's employment for Cause, then the Executive shall not be entitled to any Bonus for the fiscal year in which such termination occurs. 14. Proprietary Information. During the Employment Period and thereafter, the Executive shall not, without the prior written consent of the Board of Directors, disclose or use for any purpose (except in the course of his employment under this Agreement and in furtherance of the business of the Company or any of its affiliates or subsidiaries) any confidential information or proprietary data of the Company. As an express condition of the Executive's employment with the Company, the Executive agrees to execute confidentiality agreements as requested by the Company, including but not limited to the Company's Employment, Confidential Information and Invention Assignment Agreement which is attached hereto as Exhibit A and incorporated herein by reference. 15. Non-Solicit. The Executive covenants and agrees with the Company that during his employment with the Company and for a period expiring one (1) year after the date of termination of such employment, he will not solicit any of the Company's then-current employees to terminate their employment with the Company or to become employed by any firm, company or other business enterprise with which the Executive may then be connected. 16. Right to Advice of Counsel. The Executive acknowledges that he has consulted with counsel and is fully aware of his rights and obligations under this Agreement. Furthermore, the Company agrees to reimburse the Executive for all reasonable costs for an attorney to review this Agreement. 17. Successors. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption agreement prior to the effectiveness of any such succession shall entitle the Executive to the benefits described in paragraphs 13(a)(i), 13(b) and 13(c) of this Agreement, subject to the terms and conditions therein. 18. Arbitration. As an express condition of the Executive's employment with the Company, the Executive agrees to arbitrate any and all disputes or controversies arising out of this Agreement pursuant to the Arbitration Agreement, which is attached hereto as Exhibit B and incorporated herein by reference. 19. Absence of Conflict. The Executive represents and warrants that his employment by the Company as described herein shall not conflict with and will not be constrained by any prior employment or consulting agreement or relationship and that he is not aware of any claims, pending or threatened, against him in relation to any such prior agreement or relationship. -8- 9 20. Assignment. This Agreement and all rights under this Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective personal or legal representatives, executors, administrators, heirs, distributees, devisees, legatees, successors and assigns. This Agreement is personal in nature, and neither of the parties to this Agreement shall, without the written consent of the other, assign or transfer this Agreement or any right or obligation under this Agreement to any other person or entity; except that the Company may assign this Agreement to any of its affiliates or wholly-owned subsidiaries, provided, that such assignment will not relieve the Company of its obligations hereunder. If the Executive should die while any amounts are still payable to the Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 21. Notices. For purposes of this Agreement, notices and other communications provided for in this Agreement shall be in writing and shall be delivered personally or sent by United States certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Robert J. Zollars 4542 Sixpenny Circle Dublin, Ohio 43016 If to the Company: Neoforma, Incorporated 3255-7 Scott Blvd. Santa Clara, CA 95054 Attention: General Counsel or to such other address or the attention of such other person as the recipient party has previously furnished to the other party in writing in accordance with this paragraph. Such notices or other communications shall be effective upon delivery or, if earlier, three days after they have been mailed as provided above. 22. Integration. This Agreement and the Exhibits hereto and any other agreements referred to herein represent the entire agreement and understanding between the parties as to the subject matter hereof and supersede all prior or contemporaneous agreements whether written or oral. No waiver, alteration, or modification of any of the provisions of this Agreement shall be binding unless in writing and signed by duly authorized representatives of the parties hereto. If there is any inconsistency between this Agreement and any other agreement referred to herein, then the terms of this Agreement will govern. 23. Waiver. Failure or delay on the part of either party hereto to enforce any right, power, or privilege hereunder shall not be deemed to constitute a waiver thereof. Additionally, a waiver by either party or a breach of any promise hereof by the other party shall not operate as or be construed to constitute a waiver of any subsequent breach by such other party. 24. Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any -9- 10 jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 25. Taxes. All payments made pursuant to this Agreement shall be subject to withholding of applicable income and employment taxes. 26. Indemnity. The Company will indemnify and provide a defense to the Executive to the full extent permitted by law with respect to any claims arising out of the performance of his duties under this Agreement. In addition, the company will also indemnify and provide a defense to the Executive should Cardinal Health, Incorporated or any of its affiliates bring any claim against the Executive in connection with his acceptance of this Agreement or the performance of his duties thereunder. 27. Headings. The headings of the paragraphs contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of any provision of this Agreement. 28. Applicable Law. This Agreement shall be governed by and construed in accordance with the internal substantive laws of the State of California. 29. Counterparts. This Agreement may be executed in one or more counterparts, none of which need contain the signature of more then one party hereto, and each of which shall be deemed to be an original, and all of which together shall constitute a single agreement. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. NEOFORMA, INCORPORATED /s/ JEFF KLECK ------------------------------------------- Jeff Kleck, President and CEO EXECUTIVE: /s/ ROBERT J. ZOLLARS ------------------------------------------- Robert J. Zollars EXHIBIT A - Employment, Confidential Information and Invention Assignment Agreement EXHIBIT B - Arbitration Agreement -10- 11 EXHIBIT A NEOFORMA, INCORPORATED EMPLOYMENT, CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT As a condition of my employment with Neoforma, Incorporated, its subsidiaries, affiliates, successors or assigns (together the "Company"), and in consideration of my employment with the Company and my receipt of the compensation now and hereafter paid to me by Company, I agree to the following: 1. CONFIDENTIAL INFORMATION. (a) COMPANY INFORMATION. I agree at all times during the term of my employment and thereafter, to hold in strictest confidence, and not to use, except for the benefit of the Company, or to disclose to any person, firm or corporation without written authorization of the Board of Directors of the Company, any Confidential Information of the Company. I understand that "Confidential Information" means any Company proprietary information, technical data, trade secret or know-how, including, but not limited to, research, product plans, products, services, customer lists and customers (including, but not limited to, customers of the Company on whom I called or with whom I became acquainted during the term of my employment), markets, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, hardware configuration information, marketing, finances or other business information disclosed to me by the Company either directly or indirectly in writing, orally or by drawings or observation of parts or equipment. I further understand that Confidential Information does not include any of the foregoing items which has been made publicly known and made generally available through no wrongful act of mine or of others who were under confidentiality obligations as to the item or items involved or improvements or new versions thereof. (b) FORMER EMPLOYER INFORMATION. I agree that I will not, during my employment with the Company, improperly use or disclose any proprietary information or trade secrets of any former or concurrent employer or other person or entity and that I will not bring onto the premises of the Company any unpublished document or proprietary information belonging to any such employer, person or entity unless consented to in writing by such employer, person or entity. (c) THIRD PARTY INFORMATION. I recognize that the Company has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on the Company's part to maintain the confidentiality of such information and to use it only for certain limited purposes. I agree to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm or corporation or to use it except as 12 necessary in carrying out my work for the Company consistent with the Company's agreement with such third party. 2. INVENTIONS. (a) INVENTIONS RETAINED AND LICENSED. I have attached hereto, as Exhibit A(1), a list describing all inventions, original works of authorship, developments, improvements, and trade secrets which were made by me prior to my employment with the Company (collectively referred to as "Prior Inventions"), which belong to me, which relate to the Company's proposed business, products or research and development, and which are not assigned to the Company hereunder; or, if no such list is attached, I represent that there are no such Prior Inventions. If in the course of my employment with the Company, I incorporate into a Company product, process or machine a Prior Invention owned by me or in which I have an interest, the Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license to make, have made, modify, use and sell such Prior Invention as part of or in connection with such product, process or machine. (b) ASSIGNMENT OF INVENTIONS. I agree that I will promptly make full written disclosure to the Company, will hold in trust for the sole right and benefit of the Company, and hereby assign to the Company, or its designee, all my right, title, and interest in and to any and all inventions, original works of authorship, developments, concepts, improvements, designs, discoveries, ideas, trademarks or trade secrets, whether or not patentable or registrable under copyright or similar laws, which I may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of time I am in the employ of the Company (collectively referred to as "Inventions"), except as provided in Section 3(f) below. I further acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of and during the period of my employment with the Company and which are protectible by copyright are "works made for hire," as that term is defined in the United States Copyright Act. I understand and agree that the decision whether or not to commercialize or market any invention developed by me solely or jointly with others is within the Company's sole discretion and for the Company's sole benefit and that no royalty will be due to me as a result of the Company's efforts to commercialize or market any such invention. (c) INVENTIONS ASSIGNED TO THE UNITED STATES. I agree to assign to the United States government all my right, title, and interest in and to any and all Inventions whenever such full title is required to be in the United States by a contract between the Company and the United States or any of its agencies. (d) MAINTENANCE OF RECORDS. I agree to keep and maintain adequate and current written records of all Inventions made by me (solely or jointly with others) during the term of my employment with the Company. The records will be in the form of notes, sketches, drawings, and any other format that may be specified by the Company. The records will be available to and remain the sole property of the Company at all times. -2- 13 (e) PATENT AND COPYRIGHT REGISTRATIONS. I agree to assist the Company, or its designee, at the Company's expense, in every proper way to secure the Company's rights in the Inventions and any copyrights, patents, mask work rights or other intellectual property rights relating thereto in any and all countries, including the disclosure to the Company of all pertinent information and data with respect thereto, the execution of all applications, specifications, oaths, assignments and all other instruments which the Company shall deem necessary in order to apply for and obtain such rights and in order to assign and convey to the Company, its successors, assigns, and nominees the sole and exclusive rights, title and interest in and to such Inventions, and any copyrights, patents, mask work rights or other intellectual property rights relating thereto. I further agree that my obligation to execute or cause to be executed, when it is in my power to do so, any such instrument or papers shall continue after the termination of this Agreement. If the Company is unable because of my mental or physical incapacity or for any other reason to secure my signature to apply for or to pursue any application for any United States or foreign patents or copyright registrations covering Inventions or original works of authorship assigned to the Company as above, then I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, to act for and in my behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of letters patent or copyright registrations thereon with the same legal force and effect as if executed by me. (f) EXCEPTION TO ASSIGNMENTS. I understand that the provisions of this Agreement requiring assignment of Inventions to the Company do not apply to any invention which qualifies fully under the provisions of California Labor Code Section 2870 (attached hereto as Exhibit A(2)). I will advise the Company promptly in writing of any inventions that I believe meet the criteria in California Labor Code Section 2870 and not otherwise disclosed on Exhibit A(1). 3. CONFLICTING EMPLOYMENT. I agree that, during the term of my employment with the Company, I will not engage in any other employment, occupation, consulting or other business activity directly related to the business in which the Company is now involved or becomes involved during the term of my employment, nor will I engage in any other activities that conflict with my obligations to the Company. 4. RETURNING COMPANY DOCUMENTS. I agree that, at the time of leaving the employ of the Company, I will deliver to the Company (and will not keep in my possession, recreate or deliver to anyone else) any and all devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings blueprints, sketches, materials, equipment, other documents or property, or reproductions of any aforementioned items developed by me pursuant to my employment with the Company or otherwise belonging to the Company, its successors or assigns, including, without limitation, those records maintained pursuant to paragraph 3(d). In the event of the termination of my employment, I agree to sign and deliver the "Termination Certification" attached hereto as Exhibit A(3). -3- 14 5. NOTIFICATION OF NEW EMPLOYER. In the event that I leave the employ of the Company, I hereby grant consent to notification by the Company to my new employer about my rights and obligations under this Agreement. 6. SOLICITATION OF EMPLOYEES. I agree that for a period of twelve (12) months immediately following the termination of my relationship with the Company for any reason, whether with or without cause, I shall not either directly or indirectly solicit, induce, recruit or encourage any of the Company's employees to leave their employment, or take away such employees, or attempt to solicit, induce, recruit, encourage or take away employees of the Company, either for myself or for any other person or entity. 7. CONFLICT OF INTEREST GUIDELINES. I agree to diligently adhere to the Conflict of Interest Guidelines attached as Exhibit A(4) hereto. 8. REPRESENTATIONS. I agree to execute any proper oath or verify any proper document required to carry out the terms of this Agreement. I represent that my performance of all the terms of this Agreement will not breach any agreement to keep in confidence proprietary information acquired by me in confidence or in trust prior to my employment by the Company. have not entered into, and I agree I will not enter into, any oral or written agreement in conflict herewith. 9. GENERAL PROVISIONS. (a) GOVERNING LAW; CONSENT TO PERSONAL JURISDICTION. This Agreement will be governed by the laws of the State of California. I hereby expressly consent to the personal jurisdiction of the state and federal courts located in California for any lawsuit filed there against me by the Company arising from or relating to this Agreement. (b) ENTIRE AGREEMENT. This Agreement and an Employment Agreement and an Arbitration Agreement between the parties, both dated this date, set forth the entire agreement and understanding between the Company and me relating to the subject matter herein and supersedes all prior discussions between us. No modification of or amendment to these Agreements, nor any waiver of any rights under these agreements, will be effective unless in writing signed by the party to be charged. Any subsequent change or changes in my duties, salary or compensation will not affect the validity or scope of this Agreement. (c) SEVERABILITY. If one or more of the provisions in this Agreement are deemed void by law, then the remaining provisions will continue in full force and effect. (d) SUCCESSORS AND ASSIGNS. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors, and its assigns. -4- 15 10. I acknowledge and agree to each of the following items: (a) I am executing this Agreement voluntarily and without any duress or undue influence by the Company or anyone else; and (b) I have carefully read this Agreement and the Rules. I have asked any questions needed for me to understand the terms, consequences and binding effect of this Agreement and fully understand them; and (c) I sought the advice of an attorney of my choice if I wanted to before signing this Agreement. Date: 6/24/99 /s/ ROBERT J. ZOLLARS ---------------------- ------------------------------------ Robert J. Zollars [SIGNATURE ILLEGIBLE] - --------------------------- Witness -5- 16 EXHIBIT A(1) LIST OF PRIOR INVENTIONS AND ORIGINAL WORKS OF AUTHORSHIP
TITLE DATE IDENTIFYING NUMBER OR BRIEF DESCRIPTION ----- ---- ---------------------------------------
[ X ] No inventions or improvements [ ] Additional Sheets Attached Signature of Employee: /s/ ROBERT J. ZOLLARS ---------------------------- Print Name of Employee: Robert J. Zollars ---------------------------- Date: 6/24/99 --------- -6- 17 EXHIBIT A(2) CALIFORNIA LABOR CODE SECTION 2870 INVENTION ON OWN TIME - EXEMPTION FROM AGREEMENT "(a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; or (2) Result from any work performed by the employee for the employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable." -7- 18 EXHIBIT A(3) NEOFORMA, INCORPORATED TERMINATION CERTIFICATION This is to certify that I do not have in my possession, nor have I failed to return, any devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, other documents or property, or reproductions of any aforementioned items belonging to Neoforma, Incorporated, its subsidiaries, affiliates, successors or assigns (together, the "Company"). I further certify that I have complied with all the terms of the Company's Employment, Confidential Information and Invention Assignment and the Arbitration Agreement signed by me, including the reporting of any inventions and original works of authorship (as defined therein), conceived or made by me (solely or jointly with others) covered by that agreement. I further agree that, in compliance with the Employment, Confidential Information and Invention Assignment, and the Arbitration Agreement, I will preserve as confidential all trade secrets, confidential knowledge, data or other proprietary information relating to products, processes, know-how, designs, formulas, developmental or experimental work, computer programs, data bases, other original works of authorship, customer lists, business plans, financial information or other subject matter pertaining to any business of the Company or any of its employees, clients, consultants or licensees. I further agree that for twelve (12) months from this date, I will not hire any employees of the Company and I will not solicit, induce, recruit or encourage any of the Company's employees to leave their employment. Date: ------------------ -------------------------------- Robert J. Zollars -8- 19 EXHIBIT A(4) NEOFORMA, INCORPORATED CONFLICT OF INTEREST GUIDELINES It is the policy of Neoforma, Incorporated to conduct its affairs in strict compliance with the letter and spirit of the law and to adhere to the highest principles of business ethics. Accordingly, all officers, employees and independent contractors must avoid activities which are in conflict, or give the appearance of being in conflict, with these principles and with the interests of the Company. The following are potentially compromising situations which must be avoided. Any exceptions must be reported to the President and written approval for continuation must be obtained. 1. Revealing confidential information to outsiders or misusing confidential information. Unauthorized divulging of information is a violation of this policy whether or not for personal gain and whether or not harm to the Company is intended. (The Employment, Confidential Information, and Invention Assignment Agreement as well as the Arbitration Agreement elaborate on this principle and are binding agreements.) 2. Accepting or offering substantial gifts, excessive entertainment, favors or payments which may be deemed to constitute undue influence or otherwise be improper or embarrassing to the Company. 3. Participating in civic or professional organizations that might involve divulging confidential information of the Company. 4. Initiating or approving personnel actions affecting reward or punishment of employees or applicants where there is a family relationship or is or appears to be a personal or social involvement. 5. Initiating or approving any form of personal or social harassment of employees. 6. Investing or holding outside directorship in suppliers, customers, or competing companies, including financial speculations, where such investment or directorship might influence in any manner a decision or course of action of the Company. 7. Borrowing from or lending to employees, customers or suppliers. 8. Acquiring real estate of interest to the Company. 9. Improperly using or disclosing to the Company any proprietary information or trade secrets of any former or concurrent employer or other person or entity with whom obligations of confidentiality exist. -9- 20 10. Unlawfully discussing prices, costs, customers, sales or markets with competing companies or their employees. 11. Making any unlawful agreement with distributors with respect to prices. 12. Improperly using or authorizing the use of any inventions which are the subject of patent claims of any other person or entity. 13. Engaging in any conduct which is not in the best interest of the Company. Each officer, employee and independent contractor must take every necessary action to ensure compliance with these guidelines and to bring problem areas to the attention of higher management for review. Violations of this conflict of interest policy may result in discharge without warning. -10- 21 EXHIBIT B NEOFORMA, INCORPORATED ARBITRATION AGREEMENT Arbitration. In consideration of your employment with NEOFORMA, INCORPORATED (the "Company"), its promise to arbitrate all employment-related disputes and your receipt of the compensation, pay raises and other benefits paid to you by the Company, at present and in the future, you agree that any and all controversies, claims, or disputes with anyone (including the Company and any employee, officer, director, shareholder or benefit plan of the Company in their capacity as such or otherwise) arising out of, relating to, or resulting from your employment with the Company or the termination of your employment with the Company, including any breach of this Agreement, shall be subject to binding arbitration under the Arbitration Rules set forth in California Code of Civil Procedure Section 1280 through 1294.2, including section 1283.05 (the "Rules"), the AAA's National Rules for the Resolution of Employment Disputes and pursuant to California law. Disputes which you agree to arbitrate, and thereby agree to waive any right to a trial by jury, include any statutory claims under state or federal law, including, but not limited to, claims under Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act of 1990, the Age Discrimination in Employment Act of 1967, the Older Workers Benefit Protection Act, the California Fair Employment and Housing Act, the California Labor Code, claims of harassment, discrimination or wrongful termination and any statutory claims. You further understand that this Agreement to arbitrate also applies to any disputes that the Company may have with you. Procedure. You agree that any arbitration will be administered by the American Arbitration Association ("AAA") and that the arbitrator will be selected in a manner consistent with its National Rules for the Resolution of Employment Disputes. You agree that the arbitrator shall have the power to decide any motions brought by any party to the arbitration, including motions for summary judgment and/or adjudication and motions to dismiss and demurrers, prior to any arbitration hearing. You also agree that the arbitrator shall have the power to award any remedies, including attorneys, fees and costs, available under applicable law. You understand the Company will pay for any administrative or hearing fees charged by the arbitrator or AAA except that you shall pay the first $200.00 of any filing fees associated with any arbitration you initiate. You agree that the arbitrator shall administer and conduct any arbitration in a manner consistent with the Rules and that to the extent that the AAA's National Rules for the Resolution of Employment Disputes conflict with the Rules, the Rules shall take precedence. Remedy. Except as provided by the Rules, arbitration shall be the sole, exclusive and final remedy for any dispute between you and the Company. Accordingly, except as provided for by the Rules, neither you nor the Company will be permitted to pursue court action regarding claims that are subject to arbitration. Notwithstanding the above, the arbitrator will not have the authority to disregard or refuse to enforce any lawful Company policy, and the arbitrator shall not order or 22 require the Company to adopt a policy not otherwise required by law which the Company has not adopted. Availability of Injunctive Relief. In addition to the right under the Rules to petition the court for provisional relief, you agree that any party may also petition the court for injunctive relief where either party alleges or claims a violation of the Employment, Confidential Information, Invention Assignment Agreement between you and the Company or any other agreement regarding trade secrets, confidential information, nonsolicitation or Labor Code Section 2870. In the event either party seeks injunctive relief, the prevailing party shall be entitled to recover reasonable costs and attorneys fees. Administrative Relief. You understand that this Agreement does not prohibit you from pursuing an administrative claim with a local, state or federal administrative body such as the Department of Fair Employment and Housing, the Equal Employment Opportunity Commission or the workers' compensation board. This Agreement does, however, preclude you from pursuing court action regarding any such claim. Voluntary Nature of Agreement. You acknowledge and agree that you are executing this Agreement voluntarily and without any duress or undue influence by the Company or anyone else. You further acknowledge and agree that you have carefully read this Agreement and that you have asked any questions needed for you to understand the terms, consequences and binding effect of this Agreement and fully understand it, including that you are waiving your right to a jury trial. Finally, you agree that you have been provided an opportunity to seek the advice of an attorney of your choice before signing this Agreement. /s/ ROBERT J. ZOLLARS ----------------------------------- Robert J. Zollars 6/24/99 ----------------------------------- Date 2 23 FIRST AMENDMENT TO NEOFORMA, INCORPORATED EMPLOYMENT AGREEMENT OF ROBERT J. ZOLLARS This First Amendment (the "AMENDMENT") to the Neoforma, Incorporated Employment Agreement by and between Neoforma, Inc. and Robert J. Zollars dated July 1, 1999 (the "AGREEMENT") is made and entered into as of December ___, 1999 by and among Neoforma.com, Inc., a Delaware corporation (the "COMPANY"), formerly known as Neoforma, Inc., and Robert J. Zollars (the "EXECUTIVE") (collectively, the Company and the Executive, the "PARTIES"). Each capitalized term herein not otherwise defined shall have the meaning ascribed to it in the Agreement. W I T N E S S E T H: WHEREAS, the Parties have determined that certain provisions of the Agreement should be amended to precisely reflect the original agreement of Parties; and WHEREAS, the Parties have agreed that certain provisions of the Agreement should be amended to reflect certain recent approvals and/or amended policies adopted by the board of directors of the Company: NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS: 1. The number of Bonus Shares, "1,601,029 shares" in the first sentence of Section 6(a) of the Agreement is deleted and is replaced by "1,637,160 shares". 2. The sixth (6th) sentence of Section 6(a) of the Agreement is deleted in its entirety and is replaced with the following: Any such promissory note for the purchase of the Bonus Shares shall be secured by the Bonus Shares, and any such promissory note for the purchase of the Option Shares shall be secured by the Option Shares. 3. The last sentence of Section 6(a) of the Agreement is deleted in its entirety and is replaced with the following: The issuance of the Bonus Shares and Option Shares are each subject to the Executive's execution of the Amended and Restated Right of First Refusal and Co-Sale Agreement dated February 19, 1999 by and among certain of the Company's shareholders, as it may be amended from time to time. 4. The first (1st) sentence of Section 6(b) of the Agreement is deleted in its entirety and is replaced with the following: (b) Vesting. One fourth (1/4) of the Option Shares shall vest upon the one (1) year anniversary of July 1, 1999 and one forty-eighth (1/48) of the Option Shares shall vest at the end of each full month following such anniversary, provided that the Executive remains an employee of the Company on each such vesting date. 24 5. The part of the fourth sentence of Section 6(b) of the Agreement that precedes Section 6(b)(i) is deleted in its entirety and is replaced with the following: For purposes of this Agreement, "Change of Control" shall mean the occurrence of any of the following events: 6. Survival. Except as modified hereby, all other provisions of the Agreement shall remain in full force and effect and without amendment. 7. Governing Law; Severability. This Amendment will be governed by and construed in accordance with the internal laws of the State of California, excluding that body of law relating to conflicts of law. Should one or more of the provisions of this Amendment be determined by a court of law to be illegal or unenforceable, the other provisions nevertheless will remain effective and will be enforceable. 8. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same amendment. [The remainder of this page has intentionally been left blank] 25 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. COMPANY: EXECUTIVE: NEOFORMA.COM, INC. (f.k.a. Neoforma, Inc.) By: ------------------------------------- ------------------------------------- Fred J. Ruegsegger Robert J. Zollars Its: Chief Financial Officer and Secretary [SIGNATURE PAGE TO FIRST AMENDMENT TO NEOFORMA, INCORPORATED EMPLOYMENT AGREEMENT OF ROBERT J. ZOLLARS] EX-10.28 6 EXHIBIT 10.28 1 EXHIBIT 10.28 INDUSTRIAL BUILDING LEASE LANDLORD: CENTERPOINT PROPERTIES TRUST, a Maryland real estate investment trust TENANT: NEOFORMA.COM, INC. a Delaware corporation Property Address: 1601 Estes Avenue Elk Grove Village, Illinois 2 TABLE OF CONTENTS ARTICLE I Lease Terms ......................................................... 1 Section 1.1. Definitions ......................................... 1 Section 1.2. Significance of Definitions ......................... 2 Section 1.3. Enumeration of Exhibits ............................. 2 ARTICLE II Premises ............................................................ 2 Section 2.1. Lease ............................................... 2 ARTICLE III Term ................................................................ 2 Section 3.1. Term ................................................ 2 ARTICLE IV Condition of Demised Premises ....................................... 3 Section 4.1. Condition of Premises ............................... 3 ARTICLE V Rent ................................................................ 3 Section 5.1. Base Rent ........................................... 3 Section 5.2. Base Rent Adjustment ................................ 3 Section 5.3. Interest and Late Charges on Late Payments .......... 5 ARTICLE VI Utilities ........................................................... 6 Section 6.1. Utilities ........................................... 6 ARTICLE VII Use ................................................................. 6 Section 7.1. Use ................................................. 6 Section 7.2. Prohibited Uses ..................................... 6 ARTICLE VIII Maintenance, Repair and Replacements of Premises .................... 6 Section 8.1. Maintenance ......................................... 6 Section 8.2. Governmental Requirements ........................... 7 Section 8.3. Tenant's Responsibilities ........................... 7 ARTICLE IX Tenant's Insurance .................................................. 7 Section 9.1. Coverage Required ................................... 7 Section 9.2. Policies ............................................ 9 Section 9.3. Subrogation ......................................... 9 Section 9.4. Miscellaneous Insurance Provisions .................. 9 i 3 ARTICLE X Damage or Destruction ............................................... 10 Section 10.1. Total Damage ........................................ 10 Section 10.2. Partial Damage ...................................... 11 ARTICLE XI Liens ............................................................... 11 Section 11.1. Lien Claims ......................................... 11 Section 11.2. Landlord's Right to Cure ............................ 11 ARTICLE XII Tenant Alterations .................................................. 12 Section 12.1. Alterations ......................................... 12 Section 12.2. Ownership of Alterations ............................ 12 Section 12.3. Signs ............................................... 12 Section 12.4. Tenant Indemnity .................................... 13 Section 12.5. Environmental Impact ................................ 13 ARTICLE XIII Condemnation ........................................................ 13 Section 13.1. Taking: Lease to Terminate ......................... 13 Section 13.2. Taking: Lease to Continue .......................... 13 ARTICLE XIV Assignment -- Subletting by Tenant .................................. 13 Section 14.1. No Assignment, Subletting or Other Transfer ......... 13 Section 14.2. Operation of Law .................................... 14 Section 14.3. Excess Rental ....................................... 14 Section 14.4. Merger or Consolidation ............................. 14 Section 14.5. Unpermitted Transaction ............................. 14 ARTICLE XV Annual Statements ................................................... 15 Section 15.1. Annual Statements ..................................... 15 ARTICLE XVI Indemnity for Litigation ............................................ 15 Section 16.1. Indemnity for Litigation ............................ 15 ARTICLE XVII Estoppel Certificates ............................................... 15 Section 17.1. Estoppel Certificate ................................ 15 ARTICLE XVIII Inspection of Premises .............................................. 15 Section 18.1. Inspections ......................................... 15 Section 18.2. Signs ............................................... 15 ARTICLE XIX Fixtures ............................................................ 16 Section 19.1. Building Fixtures ................................... 16 ii 4 Section 19.2. Tenant's Equipment .................................. 16 Section 19.3. Removal of Tenant's Equipment ....................... 16 ARTICLE XX Default 16 Section 20.1. Events of Default ................................... 16 Section 20.2. Waivers ............................................. 17 Section 20.3. Bankruptcy .......................................... 18 ARTICLE XXI Landlord's Performance of Tenant's Covenants ........................ 19 Section 21.1. ....................................................... 19 ARTICLE XXII Exercise of Remedies ................................................ 19 Section 22.1. Cumulative Remedies ................................... 19 Section 22.2. No Waiver ............................................. 19 Section 22.3. Equitable Relief ...................................... 20 ARTICLE XXIII Subordination to Mortgages .......................................... 20 Section 23.1. Subordination ....................................... 20 Section 23.2. Mortgage Protection ................................. 20 ARTICLE XXIV Indemnity and Waiver ................................................ 20 Section 24.1. Indemnity ........................................... 20 Section 24.2. Waiver of Claims .................................... 21 ARTICLE XXV Surrender ........................................................... 22 Section 25.1. Condition ........................................... 22 Section 25.2. Removal of Tenant's Equipment ....................... 22 Section 25.3. Holdover ............................................ 22 ARTICLE XXVI Covenant of Quiet Enjoyment ......................................... 22 Section 26.1. Covenant of Quiet Enjoyment ......................... 22 ARTICLE XXVII No Recording ........................................................ 23 Section 27.1. No Recording ........................................ 23 ARTICLE XXVIII Notices ............................................................. 23 Section 28.1. Notices ............................................. 23 ARTICLE XXIX Covenants Run with Land ............................................. 23 Section 29.1. Covenants ........................................... 23 Section 29.2. Release of Landlord ................................. 23 iii 5 ARTICLE XXX Environmental Matters ............................................... 24 Section 30.1. Defined Terms ....................................... 24 Section 30.2. Tenant's Covenants with Respect to Environmental Matters ............................... 25 Section 30.3. Conduct of Tenant ................................... 26 Section 30.4. Exacerbation ........................................ 27 Section 30.5. Rights of Inspection ................................ 27 Section 30.6. Copies of Notices ................................... 27 Section 30.7. Tests and Reports ................................... 27 Section 30.8. Indemnification ..................................... 28 Section 30.9. Tenant Acknowledgments with respect to Environmental Matters ............................... 29 Section 30.10. No Liability of Landlord ............................ 29 ARTICLE XXXI Security Deposit .................................................... 30 Section 31.1. Security Deposit .................................... 30 ARTICLE XXXII Miscellaneous ....................................................... 30 Section 32.1. Captions ............................................ 30 Section 32.2. Severability ........................................ 30 Section 32.3. Applicable Law ...................................... 30 Section 32.4. Amendments in Writing ............................... 30 Section 32.5. Relationship of Parties ............................. 30 Section 32.6. Brokerage ........................................... 31 Section 32.7. No Accord and Satisfaction .......................... 31 Section 32.8. Joint Effort ........................................ 31 Section 32.9. Waiver of Jury Trial ................................ 31 Section 32.10. Time ................................................ 31 Section 32.11. Landlord's Consent .................................. 31 Section 32.12. No Partnership ...................................... 31 Section 32.13. Landlord's Liability ................................ 31 Section 32.14. Landlord Rights ..................................... 31 Section 32.15. Entire Agreement .................................... 32 Section 32.16. Rent Absolute ....................................... 32 Section 32.17. Tenant Authority .................................... 32 iv 6 Property Address: 1601 Estes Avenue Elk Grove Village, Illinois INDUSTRIAL BUILDING LEASE THIS LEASE is made as of this 15 day of November, 1999 between CENTERPOINT PROPERTIES TRUST, a Maryland real estate investment trust ("Landlord"), and NEOFORMA.COM, INC., a Delaware corporation ("Tenant"). 1 ARTICLE LEASE TERMS SECTION 1.1. SECTION DEFINITIONS. In addition to the other terms, which are elsewhere defined in this Lease, the following terms and phrases, whenever used in this Lease shall have the meanings set forth in this Section 1.1, and only such meanings, unless such meanings are expressly contradicted, limited or expanded elsewhere herein. A. BASE RENT SCHEDULE:
ANNUAL MONTHLY PERIOD BASE RENT BASE RENT ------ --------- --------- November 15, 1999-November 30, 2000 $462,072.00 $38,506.00 December 1, 2000-November 30, 2001 $471,313.44 $39,276.12 December 1, 2001-November 30, 2002 $480,739.70 $40,061.64
B. SECURITY DEPOSIT: $38,506.00 C. TENANT'S PROPORTION: 80.32% D. INITIAL TERM: The initial three (3) full year term, commencing as of the Commencement Date. E. COMMENCEMENT DATE: November 15, 1999 F. TERMINATION DATE: November 30, 2001 G. TERM: The Initial Term as same may be extended or sooner terminated. H. USE: Warehousing and distribution of equipment and supplies related to the medical or aircraft industry. I. LANDLORD'S MAILING ADDRESS: 1808 Swift Road Oak Brook, Illinois 60690 Attn: Michael M. Mullen J. TENANT'S MAILING ADDRESS: 3255-7 Scott Boulevard Santa Clara, California 95054 K. LANDLORD'S BROKER: Colliers Bennet & Kahnweiler 7 L. TENANT'S BROKER: None SECTION 1.2. SIGNIFICANCE OF DEFINITIONS. Each reference in this Lease to any of the Definitions contained in Section 1.1 of this Article shall be deemed and construed to incorporate all of the terms provided under each such Definition. SECTION 1.3. ENUMERATION OF EXHIBITS. The exhibits in this Section and attached to this Lease are incorporated in this Lease by this reference and are to be construed as a part of this Lease. EXHIBIT "A" - Premises EXHIBIT "B" - Legal Description EXHIBIT "C" - Form of Estoppel Certificate ARTICLE II PREMISES SECTION 2.1. LEASE. Landlord, for and in consideration of the rents herein reserved and of the covenants and agreements herein contained on the part of Tenant to be kept, observed and performed, does by these presents, lease to Tenant, and Tenant hereby leases from Landlord, the demised premises ("Premises"), being depicted in the plan attached hereto as EXHIBIT "A" in the building located at 1601 Estes Avenue, Elk Grove Village, Illinois ("Building"), and legally described on EXHIBIT "B" attached hereto and by this reference incorporated herein ("Land") (the Land and Building are sometimes collectively referred to as the "Project"), subject to covenants, conditions, agreements, easements, encumbrances and restrictions of record as of the date hereof affecting the Land and the Building ("Restrictions"). ARTICLE III TERM SECTION 3.1. TERM. The Initial Term of this Lease shall commence on the Commencement Date and shall end on the Termination Date, unless sooner terminated as hereinafter set forth. If the Commencement Date is a day other than the first (1st) day of a calendar month, the Initial Term shall expire thirty six (36) full calendar months after the first (1st) day of the first (1st) full calendar month after the Commencement Date and shall, accordingly, include the period between the Commencement Date and the end of the calendar month in which the Commencement Date occurs, with Rent (as hereinafter defined) for such partial month to be calculated pro rata on a daily basis. If the Landlord shall be unable to give possession of the Premises on the Commencement Date for any reason the Rent reserved and covenanted to be paid herein shall not commence until the Premises are available for occupancy by Tenant. No such failure to give possession on the Commencement Date of the Term hereof shall subject Landlord to any liability for failure to give possession nor shall same affect the validity of this Lease or the obligation of the Tenant hereunder, nor shall the same be construed to extend the Term. At the option of Landlord to be exercised within thirty (30) days of the delayed delivery of possession to Tenant, the Lease shall be amended so that the Term shall be extended by the period of time possession is delayed. Notwithstanding the foregoing, in the event the Premises are not delivered to Tenant by January 1, 2000, Tenant shall have the right to terminate this Lease upon notice to Landlord delivered on or before January 10, 2000. 8 ARTICLE IV CONDITION OF DEMISED PREMISES SECTION 4.1. CONDITION OF PREMISES. Tenant agrees to accept the Premises in an absolutely "as-is" condition, and Tenant acknowledges that Landlord, its agents, attorneys, representatives and employees have not and do not make any representations or warranties, express or implied, to Tenant regarding the Premises or the Project, including, but not limited to: (i) the zoning of the Premises or the Project; (ii) the condition of any underground, above ground or surface improvements; (iii) the size, area, use or type of the Premises or the fitness of the Premises for any intended or particular use; (iv) the nature of the soil on and underlying the Premises or the Project or its suitability for development or any other use thereof; (v) any financial information pertaining to the operation of the Premises or the Project; (vi) the status of any requirements or obligations imposed, implied or to be undertaken by the owner or developer of the Premises or the Project pursuant to any zoning, subdivision, development laws or agreements with any governmental entities; (vii) the presence or absence of any toxic wastes, hazardous materials or structural defects in, on or under the Premises or the Project or any improvements thereon; or (viii) the presence or absence of any rights of any governmental authority, or of owners of property in the vicinity of the Premises or the Project, to obtain reimbursement, recapture or special assessments from any owner of the Premises or the Project for all or a portion of the cost of any utilities, roads or other improvements heretofore or hereafter located on or in the vicinity of the Premises or the Project, any and all such representations and warranties, express or implied, being hereby expressly waived by Tenant and disclaimed by Landlord. Tenant waives any claim that may exist for patent and/or latent defects or for mutual or unilateral mistake of fact. No promise of Landlord to alter, remodel, decorate, clean or improve the Premises or any portion thereof and no representation respecting the condition of the Premises or any portion thereof have been made by Landlord to Tenant. Notwithstanding the foregoing, Landlord agrees that the HVAC, mechanical, electrical and plumbing systems will be in working order on the Commencement Date. Landlord further agrees to clean the warehouse floor and to paint all walls in the warehouse (including the columns), office and restrooms in the Premises (collectively, "Work"), provided Tenant shall pay all costs incurred by Landlord in connection with the Work. Landlord shall provide Tenant with estimates for the cost of the Work and Tenant shall pay the amount set forth in such estimate to Landlord within five (5) days after delivery of such estimates. In the event the actual cost of the Work exceeds the estimates, Tenant will pay such excess to Landlord within five (5) days after notice from Landlord. ARTICLE V RENT SECTION 5.1. BASE RENT. In consideration of the leasing aforesaid, Tenant agrees to pay Landlord, without offset or deduction, base rent for the Initial Term ("Base Rent"), payable monthly in advance in the amount of the Monthly Base Rent set forth in the Base Rent Schedule commencing on the Commencement Date and continuing on the first (1st) day of each month thereafter for the balance of the Term of this Lease, and in addition thereto, shall pay such charges as are herein described as "Additional Rent". The term "Rent" when used in this Lease shall include all Base Rent payable under this Section 5.1., as well as the charges herein described as Additional Rent. All Rent payable hereunder shall be payable to Landlord at 135 S. LaSalle Street, Dept. 2023, Chicago, Illinois 60674-2023, or as Landlord may otherwise from time to time designate in writing. SECTION 5.2. BASE RENT ADJUSTMENT. In addition to the Base Rent payable by Tenant hereunder, Tenant shall pay to Landlord, as Additional Rent, the Rent Adjustment described in this Section 5.2 without set off or deduction. A. For the purposes of this Lease: 9 (1) The term "Calendar Year" shall mean each calendar year or a portion thereof during the Term. (2) The term "Expenses" shall mean and include all expenses paid or incurred by Landlord or its beneficiaries for managing, owning, maintaining, operating, insuring, replacing and repairing the Project, the Land, appurtenances and personal property used in conjunction therewith. Expenses shall not include (i) depreciation charges, (ii) interest and principal payments on mortgages, (iii) ground rental payments, (iv) real estate brokerage and leasing commissions, (v) legal fees for the negotiation or enforcement of leases, (vi) Taxes, (vii) cost of repair from a casualty or taking, and (viii) cost of altering the space of other tenants. Notwithstanding the foregoing, the cost of any Capital Item (defined below) shall be amortized at the Lease Interest Rate (as hereinafter defined) over the useful economic life of the replacement and Expenses shall include, on an annual basis, that portion of said amortized cost which relates to the portion of the Term (including any renewal term) remaining hereunder commencing on the date of the replacement and ending on the Termination Date (including any renewal term). "Capital Items" as used herein shall mean any replacement to the Premises, the Building or the Project the cost of which is deemed to be a capital expenditure in accordance with generally accepted accounting principles. If the Building is not fully occupied during all or a portion of any Calendar Year, then Landlord may elect to make an appropriate adjustment of the Expenses which vary due to occupancy for such Calendar Year employing sound accounting and management principles, to determine the amount of Expenses that would have been paid or incurred by Landlord had the Building been fully occupied and the amount so determined shall be the amount of Expenses attributable to such Calendar Year. (3) The term "Rent Adjustments" shall mean all amounts owed by Tenant as Additional Rent on account of Expenses or Taxes, or both. (4) The term "Rent Adjustment Deposit" shall mean an amount equal to Landlord's estimate of Rent Adjustments due for any Calendar Year made from time to time during the Term. (5) The term "Taxes" shall mean real estate taxes, assessments, sewer rents, rates and charges, transit taxes, taxes based upon the receipt of rent, and any other federal, state or local governmental charge, general, special, ordinary or extraordinary, which accrue during the Term and are levied or assessed or become a lien against the Project or any portion thereof in any Calendar Year during the Term and any tax in substitution of any of the foregoing; provided, however, in determining the income of Landlord with respect to any such substituted tax, only the income derived from the Building shall be included. Taxes shall not include any franchise, capital, stock, transfer, inheritance or income (other than rental income) tax imposed on Landlord. In case of special taxes or assessments which may be payable in installments, only the amount of each installment and interest paid thereon paid during a Calendar Year shall be included in Taxes for that Calendar Year. Taxes shall also include any personal property taxes (attributable to the year in which paid) imposed upon the furniture, fixtures, machinery, equipment, apparatus, systems and appurtenances of Landlord to the extent used in connection with the operation of the Building. Taxes also include Landlord's reasonable costs and expenses (including reasonable attorney's fees) in contesting or attempting to reduce any taxes assessed during the Term and any extension or renewal thereof. Taxes shall be reduced by any recovery or refund received of Taxes previously paid by the Landlord, provided such refund relates to taxes paid during the Term of this Lease. B. Tenant shall pay to the Landlord as Additional Rent Tenant's Proportion of the amount by which Expenses and 10 Taxes attributable to each Calendar Year of the Term exceed the amount of Expenses and Taxes attributable to calendar year 1999. The amount of Taxes attributable to a Calendar Year shall be the amount assessed for any such Calendar Year, even though the assessment for such Taxes may be payable in a different Calendar Year. C. As soon as reasonably feasible after the expiration of each Calendar Year, Landlord will furnish Tenant a statement ("Adjustment Statement") showing the following: (1) Expenses and Taxes for Calendar Year last ended and the amount of Expenses and Taxes payable by Tenant for such Calendar Year; (2) The amount of Rent Adjustments due Landlord for the Calendar Year last ended, less credits for Rent Adjustment Deposits paid, if any; and (3) The Rent Adjustment Deposit due in the current Calendar Year. D. Within thirty (30) days after Tenant's receipt of each Adjustment Statement, Tenant shall pay to Landlord: (1) The amount of Rent Adjustment shown on said statement to be due Landlord for the Calendar Year last ended; plus (2) The amount, which when added to the Rent Adjustment Deposit theretofore paid in the current Calendar Year would provide that Landlord has then received such portion of the Rent Adjustment Deposit as would have theretofore been paid to Landlord had Tenant paid one twelfth (1/12) of the Rent Adjustment Deposit, for the current Calendar Year, to Landlord monthly on the first (1st) day of each month of such Calendar Year. Commencing on the first (1st) day of the first (1st) month after Tenant's receipt of each Adjustment Statement, and on the first day of each month thereafter until Tenant receives a more current Adjustment Statement, Tenant shall pay to Landlord one twelfth (1/12) of the Rent Adjustment Deposit shown on said statement. During the last complete Calendar Year, Landlord may include in the Rent Adjustment Deposit its estimate of the Rent Adjustment which may not be finally determined until after the expiration of the Term. The Tenant's obligation to pay the Rent Adjustment and Landlord's obligation to refund any excess Rent Adjustment Deposits shall survive the Term. E. Tenant's payment of the Rent Adjustment Deposit for each Calendar Year shall be credited against the Rent Adjustments for such Calendar Year. All Rent Adjustment Deposits may be co-mingled and no interest shall be paid to Tenant thereon. If the Rent Adjustment Deposit paid by Tenant for any Calendar Year exceeds the Rent Adjustments for such Calendar Year, then Landlord shall give a credit to Tenant in an amount equal to such excess against the Rent Adjustments due for the next succeeding Calendar Year, except that if any such excess relates to the last Calendar Year of the Term, then, provided that Tenant is not in default for the nonpayment of Rent due hereunder, Landlord shall refund such excess to Tenant. F. Tenant or its representative shall have the right to examine Landlord's books and records with respect to the items in the Adjustment Statement during normal business hours at any time within thirty (30) days following the furnishing by Landlord to Tenant of such Adjustment Statement. Unless Tenant shall take written exception to any item within thirty (30) days after the furnishing of the foregoing statement, such statement shall be considered as final and accepted by Tenant. Any amount due to Landlord as shown on any such statement, whether or not written exception is taken thereto, shall be paid 11 by Tenant within thirty (30) days after Landlord shall have submitted the statement, without prejudice to any such written exception. G. If the Commencement Date is on any day other than the first (1st) day of January or if the Termination Date is on any day other than the last day of December, then any Rent Adjustments due Landlord shall be prorated. SECTION 5.3. INTEREST AND LATE CHARGES ON LATE PAYMENTS . Rent not paid within five (5) days of the date when due shall bear interest from the date when the same is payable under the terms of this Lease until the same shall be paid at an annual rate of interest equal to the rate of interest announced from time to time by the First National Bank of Chicago as its Corporate Base Rate, plus three percent (3%), unless a lesser rate shall then be the maximum rate permissible by law, in which event said lesser rate shall be charged ("Lease Interest Rate"). The term "Corporate Base Rate" means that rate of interest announced by The First National Bank of Chicago ("First") from time to time as its "Corporate Base Rate" of interest, changing automatically and simultaneously with each change in the Corporate Base Rate made by First from time to time. Any publication issued or published by First from time to time or a certificate signed by an officer of First stating its Corporate Base Rate as of a date shall be conclusive evidence of the Corporate Base Rate on that date. Tenant further acknowledges that its late payment of any Rent will cause Landlord to incur certain costs and expenses not contemplated under this Lease, the exact amount of which is extremely difficult or impracticable to fix. Such costs and expenses will include, without limitation, loss of use of money, administrative and collection costs and processing and accounting expenses. Therefore, if any installment of monthly Base Rent is not received by Landlord within five (5) days of the date when due or any other sum due hereunder is not paid when due, Tenant shall immediately pay to Landlord a late charge equal to three percent (3%) of the unpaid amount. Such late charge is in addition to any interest due pursuant to the first (1st) sentence of this Section 5.3. Landlord and Tenant agree that this late charge represents a reasonable estimate of costs and expenses incurred by Landlord from, and is fair compensation to Landlord for, its loss suffered, by such non-payment by Tenant. Acceptance of the late charge shall not constitute a waiver of Tenant's default with respect to such non-payment by Tenant or prevent Landlord from exercising any other rights and remedies available to Landlord under this Lease. Failure to pay the late charge shall constitute a default under this Lease. ARTICLE VI UTILITIES SECTION 6.1. UTILITIES. Tenant shall pay, directly to the appropriate supplier, all costs of natural gas, electricity, heat, light, power, sewer service, telephone, water, refuse disposal and other utilities and services supplied to the Premises. Landlord shall, at Landlord's sole cost and expense, separately meter the Premises. If, however, at any time, any services or utilities are jointly metered, Landlord shall make a reasonable determination of Tenant's Proportionate share thereof and Tenant shall pay its proportionate share, as Additional Rent hereunder, within fifteen (15) days after receipt of Landlord's written statement. Landlord shall not in any way be liable or responsible to Tenant for any cost or damage or expense which Tenant may sustain or incur if either the quality or character of such service is changed or is no longer available or suitable for Tenant's requirements unless that quality or character of such service is altered as a result of the negligence or willful misconduct of Landlord. ARTICLE VII USE SECTION 7.1. USE. The Premises shall be used for the Use only, and for no other purpose. SECTION 7.2. PROHIBITED USES. Tenant shall not permit the Premises, or any portion thereof, to be used in such manner which impairs Landlord's right, title or interest in the Premises or any portion thereof, or in such manner 12 which gives rise to a claim or claims of adverse possession or of a dedication of the Premises, or any portion thereof, for public use. Tenant shall not use or occupy the Premises or permit the Premises to be used or occupied contrary to any statute, rule, order, ordinance, requirement, regulation or restrictive covenant applicable thereto or in any manner which would violate any certificate of occupancy affecting the same or which would render the insurance thereon void or the insurance risk more hazardous, or which would cause structural injury to the Building or cause the value or usefulness of the Premises or any part thereof to materially diminish or which would constitute a public or private nuisance or waste, and Tenant agrees that it will, promptly upon discovery of any such use, immediately notify Landlord and take all necessary steps to compel the discontinuance of such use. 1.4. ARTICLE VIII MAINTENANCE, REPAIR AND REPLACEMENTS OF PREMISES SECTION 8.1 MAINTENANCE. A. TENANT'S MAINTENANCE. Subject to Landlord's obligations set forth in Section 8.1.B below, Tenant agrees, at Tenant's sole cost and expense, to take good care of the Premises and keep same and all parts thereof, together with any and all alterations and additions thereto, in good order, condition and repair, suffering no waste or injury. Tenant shall, at its sole cost and expense, promptly make all necessary repairs and replacements, ordinary as well as extraordinary, foreseen as well as unforeseen, in and to any equipment now or hereafter located in the Premises, including without limitation, water, sewer, gas, HVAC and electricity connections, pipes, mains and all other fixtures, machinery, apparatus, equipment, overhead cranes and appurtenances now or hereafter belonging to, connected with or used in conjunction with the Premises. All such repairs and replacements shall be of first class quality and sufficient for the proper maintenance and operation of the Premises. Tenant shall keep and maintain the Premises safe, secure and clean, specifically including, but not by way of limitation, removal of waste and refuse matter. Tenant shall not permit anything to be done upon the Premises (and shall perform all maintenance and repairs thereto so as not) to invalidate, in whole or in part, or prevent the procurement of any insurance policies which may, at any time, be required under the provisions of this Lease. Tenant shall not obstruct or permit the obstruction of any parking area, adjoining street or sidewalk. B. LANDLORD'S MAINTENANCE. Subject to the provisions of Articles X and XIII hereof, Landlord shall keep, maintain, repair and replace the roof and structural members of the Building and the parking lot, sidewalks and appurtenances thereto, including, as necessary, snow and ice removal and the cost thereof shall be deemed an Expense. In addition to the foregoing, to the extent that any component of the Building (other than structural components) requires replacement and if such replacement constitutes a capital expenditure under generally accepted accounting principals, then Landlord shall, at its cost, replace the item in question and the cost thereof shall be included in Expenses in the manner set forth in Section 5.2(A)(2) hereof. SECTION 8.2. GOVERNMENTAL REQUIREMENTS. Tenant at its own cost and expense also shall promptly comply with any and all governmental requirement to or affecting the Premises or any part thereof, irrespective of the nature of the work required to be done, extraordinary as well as ordinary, whether or not the same involve or require any structural changes or additions in or to the Improvements to the extent such changes or additions be required on account of any particular use to which the Premises or any part thereof are being put. Included in the obligations set forth above, but not in limitation thereof, Tenant, at its own cost and expense, shall promptly comply with OSHA regulations relating to overhead cranes (CFR 1910-179(j)(2) and 184(d), CFR 1910-179(j)(3), CFR 1910-179(e)(1) through (4) and CFR 1910-179(b)(5)). SECTION 8.3. TENANT'S RESPONSIBILITIES . Landlord shall not be required to furnish any services or facilities whatsoever to the Premises. Except as set forth in Section 8.1.B. above, Tenant hereby assumes full and sole responsibility for condition, operation, repair, alteration, improvement, replacement, maintenance and management 13 of the Premises. Landlord shall not be responsible for any loss or damage to the person or property of Tenant, any guests or invitees, any persons using or working on the Premises, or any persons claiming by, through or under, or any agents, employees, heirs, legal representatives, successors or assigns of, any of the foregoing except to the extent the same arise out of the negligent act or wilful misconduct of Landlord. ARTICLE IX TENANT'S INSURANCE SECTION 9.1. COVERAGE REQUIRED. Tenant shall procure and maintain, or cause to be maintained, at all times during the term of this Lease, at Tenant's sole cost and expense, and until each and every obligation of Tenant contained in the Lease has been fully performed, the types of insurance specified below, with insurance companies authorized to do business in the State of Illinois covering all operations under this Lease, whether performed by Tenant or by Contractors. For purposes of this Article IX, "Contractors" shall mean Tenant and contractors and subcontractors and materialmen of any tier providing services, material, labor, operation or maintenance on, about or adjacent to the Premises, whether or not in privity with Tenant. A. IN GENERAL. Upon execution of the Lease, Tenant shall procure and maintain the following kinds and amounts of insurance: (i) WORKER'S COMPENSATION AND OCCUPATIONAL DISEASE INSURANCE. Worker's Compensation and Occupational Disease Insurance, in statutory amounts, covering all employees who provide a service under this Lease. Employer's liability coverage with limits of not less than $100,000 each accident or illness shall be included. (ii) COMMERCIAL LIABILITY INSURANCE (PRIMARY AND UMBRELLA). Commercial Liability Insurance or equivalent with limits of not less than $5,000,000 per occurrence, combined single limit, for bodily injury, personal injury, and property damage liability. Products/completed operation, independent contractors, broad form property damage and contractual liability (with no limitation) coverages are to be included. Landlord is to be named as additional insureds, on a primary, non-contributory basis for any liability, arising directly or indirectly from this Lease. (iii) AUTOMOBILE LIABILITY INSURANCE. When any motor vehicles are used in connection with this Lease, Tenant shall provide Automobile Liability Insurance with limits of not less than $2,000,000 per occurrence combined single limit, for bodily and property damage. Landlord is to be named as additional insureds on a primary non-contributory basis. (iv) CONTENTS INSURANCE. Insurance against fire, sprinkler leakage, vandalism, and the extended coverage perils for the full insurable value of all contents of Tenant within the Premises, and of all office furniture, trade fixtures, office equipment, merchandise and all other items of Tenant's property on the Premises and business interruption insurance. B. CONSTRUCTION. During any construction performed by or on behalf of Tenant, Tenant shall procure and maintain, or cause to be maintained, the following kinds and amounts of insurance: (i) WORKER'S COMPENSATION AND OCCUPATIONAL DISEASE INSURANCE. Worker's Compensation and Occupational Disease Insurance, in statutory amounts, covering all employees who are to provide a service under this construction. Employer's liability coverage with limits of not less than $500,000 for each accident or illness shall be included. (ii) COMMERCIAL LIABILITY INSURANCE (PRIMARY AND UMBRELLA). Commercial Liability Insurance or equivalent with limits of not less than $5,000,000 per occurrence, combined 14 single limit, for bodily injury, personal injury, and property liability. Products/completed operations, explosion, collapse, underground, independent contractors, broad form property damage and contractual liability coverages are to be included. Landlord is to be named as additional insureds on a primary non-contributory basis for any liability arising directly or indirectly from the Lease. (iii) AUTOMOBILE LIABILITY INSURANCE (PRIMARY AND UMBRELLA). When any motor vehicles are used in connection with work to be performed, Tenant or contractor shall provide Automobile Liability Insurance with limits of not less than $5,000,000 per occurrence combined single limit, for bodily injury and property damage. Landlord is to be named as an additional insured on a primary non-contributory basis. (iv) ALL RISK BUILDERS RISK INSURANCE. Tenant or Contractor shall provide All Risk Blanket Builder's Risk Insurance to cover the materials, supplies, equipment, machinery and fixtures that are or will be part of the Project. Coverage extensions shall include the following: right to partial occupancy, material stored off-site and in-transit, boiler and machinery, earthquake, flood (including surface water backup), collapse, water damage, debris removal, faulty workmanship or materials, testing, mechanical-electrical breakdown and failure, deletion of freezing and temperature exclusions, business interruption, extra expense, loss of revenue, loss of rents and loss of use of property, as applicable, Landlord shall be named as loss payee. (v) PROFESSIONAL LIABILITY. When any architects, engineers, or consulting firms perform work in connection with this Lease, Professional Liability Insurance shall be maintained with limits of $1,000,000. The policy shall have an extended reporting period of two (2) years. When policies are renewed or replaced, the policy retroactive date must coincide with, or precede, start of work. SECTION 9.2. POLICIES. All insurance policies shall be written with insurance companies and shall be in form satisfactory to Landlord. All insurance policies shall name Landlord as an additional insured and loss payee as their respective interests may appear and shall provide that they may not be terminated or modified without thirty (30) days' advance written notice to Landlord. All policies shall also contain an endorsement that Landlord, although named as additional insured, shall nevertheless be entitled to recover for damages caused by the negligence of Tenant. The minimum limits of insurance specified in this Section shall in no way limit or diminish Tenant's liability under this Lease. Tenant shall furnish to Landlord, not less than five (5) days prior to the Commencement Date for the insurance required in Section 9.1.A. above and not less than fifteen (15) days prior to the date any additional insurance is first required to be carried by Tenant, and thereafter at least fifteen (15) days prior to the expiration of each such policy, true and correct photocopies of all insurance policies required under this Section, together with any amendments and endorsements to such policies, certificates of insurance, and such other evidence of coverages as Landlord may reasonably request, and evidence of payment of all premiums and other expenses owed in connection therewith. Upon Tenant's default in obtaining or delivering the policy for any such insurance or Tenant's failure to pay the charges therefor, Landlord may, at its option, on or after the tenth (10th) day after written notice thereof is given to Tenant, procure or pay the charges for any such policy or policies and the total cost and expense (including attorneys' fees) thereof shall be immediately paid by Tenant to Landlord as Additional Rent upon receipt of a bill therefor. SECTION 9.3. SUBROGATION. Landlord and Tenant agree to have all fire and extended coverage and material damage insurance which may be carried by either of them endorsed with a clause providing that any release from liability of or waiver of claim for recovery from the other party or any of the parties named in Section 9.2 above entered into in writing by the insured thereunder prior to any loss or damage shall not affect the validity of said policy or the right of the insured to recover thereunder, and providing further that the insurer waives all rights of subrogation which such insurer might have against the other party or any of the parties named in Section 9.2 above. 15 Without limiting any release or waiver of liability or recovery contained in any other Section of this Lease but rather in confirmation and furtherance thereof, Landlord and any beneficiaries of Landlord waive all claims for recovery from Tenant, and Tenant waives all claims for recovery from Landlord, any beneficiaries of Landlord and the managing agent for the Project and their respective agents, partners and employees, for any loss or damage to any of its property insured under valid and collectible insurance policies to the extent of any recovery collectible under such insurance policies. Notwithstanding the foregoing or anything contained in this Lease to the contrary, any release or any waiver of claims shall not be operative, nor shall the foregoing endorsements be required, in any case where the effect of such release or waiver is to invalidate insurance coverage or invalidate the right of the insured to recover thereunder or increase the cost thereof (provided that in the case of increased cost the other party shall have the right, within ten (10) days following written notice, to pay such increased cost, thereby keeping such release or waiver in full force and effect). 1.4. 1.5. SECTION MISCELLANEOUS INSURANCE PROVISIONS . Landlord and Tenant further agree as follows: 1.6. A. Tenant expressly understands and agrees that any insurance coverages and limits furnished by the Tenant or Contractors shall in no way limit the Tenant's liabilities and responsibilities specified under the Lease, or contracts executed relating to the Project, or by law. SECTION 9.4. MISCELLANEOUS INSURANCE PROVISIONS. Landlord and Tenant further agree as follows: A. Tenant expressly understands and agrees that any insurance coverages and limits furnished by the Tenant or Contractors shall in no way limit the Tenant's liabilities and responsibilities specified under the Lease, or contracts executed relating to the Project, or by law. B. The failure of Landlord to obtain such evidence from Tenant or Contractors before permitting Tenant or Contractors to commence work shall not be deemed to be a waiver by Landlord, and Tenant or contractors shall remain under continuing obligation to maintain the insurance coverage. C. Any and all deductibles on referenced insurance coverages shall be borne by Tenant and Contractors. D. Tenant expressly understands and agrees that any insurance maintained by Landlord shall apply in excess of and not contribute with insurance provided by the Tenant or Contractor under the Lease. E. If Tenant or any Contractors desire additional coverage, higher limits of liability, or other modifications for their own protection, Tenant and such Contractors shall be responsible for the acquisition and cost of such additional protection. F. Tenant agrees, and shall cause each Contractor in connection with the Project to agree, that all insurers shall waive their rights of subrogation against Landlord. G. Tenant and Contractors shall not violate or permit to be violated any of the conditions or provisions of any of the insurance policies, and Tenant and Contractors shall so perform and satisfy or cause to be performed and satisfied the requirements of the companies writing such policies so that at all times companies of good standing, satisfactory to Landlord shall be willing to write and continue such insurance. H. Landlord shall not be limited in the proof of any damages which Landlord may claim against Tenant and Contractors arising out of or by reason of Tenant's and Contractor's failure to provide and keep in force insurance, as aforesaid, to the amount of the insurance premium or premiums not paid or incurred by Tenant and Contractors and which would have been payable under such insurance, but Landlord shall also be entitled to recover as damages for such breach the uninsured amount of any loss, to the extent of any deficiency in the insurance required by the provisions of this Lease, and damages, costs and expenses of suit suffered or incurred by reason of damage to, or destruction of, the Project or the Premises occurring during any period when Tenant or Contractors shall have failed or neglected to provide insurance as aforesaid. 16 I. The insurance required by this Lease, at the option of Tenant or Contractors, may be effected by blanket or umbrella policies issued to Tenant or Contractors covering the Premises and other properties owned or leased by Tenant or Contractors, provided that the policies otherwise comply with the provisions of this Lease and allocate to the Premises the specified coverage, without possibility of reduction or coinsurance by reason of, or damage to, any other premises covered therein. J. All insurance companies shall have a Best rating of not less than A/VII, or an equivalent rating in the event Best ceases to exist or provide a rating. K. Tenant and Contractors shall provide and keep in force such other insurance in such amounts as may from time to time be reasonably required by Landlord or a holder of a Mortgage (defined in Section 23.1 hereof) against such other insurable hazards as at the time are commonly insured against in the case of prudent owners of properties similar to the Project and the Premises, and in that connection Landlord may require changes in the forms, types and amounts of insurance required pursuant to this Section or add to, modify or delete other requirements; and in any event, if under applicable law, rule, regulation or ordinance of any governmental authority, state or federal, having jurisdiction in the Premises, liability may be imposed upon Landlord on account of the use or operation of the Premises or the Project or other improvements, insurance within limits reasonably satisfactory to Landlord shall be maintained by Tenant and Contractors against any such liability. L. The required insurance to be carried shall not be limited by any limitations expressed in the indemnification language herein or any limitation placed on the indemnity therein given as a matter of law. 17 ARTICLE X DAMAGE OR DESTRUCTION SECTION 10.1. TOTAL DAMAGE. In the event that (a) the Premises are made untenantable by fire or other casualty and Landlord shall decide not to restore or repair same, or (b) the Building is so damaged by fire or other casualty that Landlord shall decide to demolish or not rebuild the same, then, in any of such events, Landlord shall have the right to terminate this Lease by notice to Tenant given within ninety (90) days after the date of such fire or other casualty and the Rent shall be apportioned on a per diem basis and paid to the date of such fire or other casualty. In the event the Premises are made untenantable by fire or other casualty and Landlord shall decide to rebuild and restore the same, this Lease shall not terminate and Landlord shall repair and restore the Premises promptly after receipt of the insurance proceeds. Landlord shall commence the repair, restoration or rebuilding thereof and shall complete such restoration, repair or rebuilding within one hundred eighty (180) days after the receipt of such proceeds, subject to extension due to delay because of changes, deletions, or additions in construction requested by Tenant, acts of Tenant, strikes, lockouts, casualties, acts of God, war, fuel or energy shortages, material or labor shortages, governmental regulation or control, severe weather conditions or other causes beyond the control of Landlord ("Extension Events"). In the event of any such casualty all insurance proceeds shall be payable to Landlord. In no event shall Landlord be required to repair or replace (i) any alterations or improvements made by Tenant which are not related to the Improvements, (ii) any of Tenant's Equipment, (iii) or any other fixtures, furnishing and personal property of Tenant. Tenant agrees that Tenant shall deposit with Landlord prior to the commencement of such restoration an amount equal to Tenant's Proportion of any deductible amounts carried by Landlord under its insurance policies, provided Tenant's Proportion of any such deductible amount shall not exceed $5,000.00. Landlord's obligation to repair, restore or rebuild the Premises shall be limited to restoring the Premises to substantially the condition in which the same existed prior to the casualty. Rent and all other charges payable by Tenant hereunder shall abate during the period of such repair, restoration or rebuilding to the extent that the Improvements are not tenantable because of any damage or destruction. In the event the casualty causes fifty percent (50%) or more of the Premises to be untenantable during the last twelve (12) months of the Term, Tenant may terminate this Lease as of the date of such casualty by providing notice to Landlord within thirty (30) days after occurrence of the fire or other casualty causing the damage, in which event, all insurance proceeds shall be paid to the Landlord. SECTION 10.2. PARTIAL DAMAGE. In the event the Premises are partially damaged by fire or other casualty but are not made wholly untenantable, then Landlord shall, except during the last year of the Term hereof, proceed with all due diligence to repair and restore the Premises, subject, however, to (i) reasonable delays for insurance adjustments, and (ii) delays caused by forced beyond Landlord's control. In such event, Rent shall abate in proportion to the non-useability of the Premises during the period while repairs are in progress unless such partial damages are due to the fault or neglect of Tenant. If the partial damage is the result of the fault or neglect of Tenant, Rent shall not abate during said period. If the Premises are made partially untenantable as aforesaid during the last year of the Term hereof, Landlord or Tenant shall have the right to terminate this Lease as of the date of fire or other casualty upon thirty (30) days' prior notice to the other party, in which event, Rent shall be apportioned on a per diem basis and paid to the date of such fire or other casualty. 18 ARTICLE XI LIENS SECTION 11.1. LIEN CLAIMS. Tenant shall not do any act which shall in any way encumber the title of Landlord in and to the Premises or the Building, nor shall any interest or estate of Landlord in the Premises or the Building be in any way subject to any claim by way of lien or encumbrance, whether by operation of law or by virtue of any express or implied contract by Tenant, and any claim to or lien upon the Premises or the Building arising from any act or omission of Tenant shall accrue only against the leasehold estate of Tenant and shall in all respects be subject and subordinate to the paramount title and rights of Landlord in and to the Premises or the Building. Tenant will not permit the Premises or the Building to become subject to any mechanics', laborers' or materialmen's lien on account of labor or material furnished to Tenant or claimed to have been furnished to Tenant in connection with work of any character performed or claimed to have been performed on the Premises by or at the direction of sufferance of Tenant; provided, however that Tenant shall have the right to contest in good faith and with reasonable diligence, the validity of any such lien or claimed lien if Tenant shall first give to Landlord cash or other security acceptable to Landlord (which may include a bond in favor of Landlord from an agent acceptable to Landlord) in an amount equal to one hundred twenty percent (120%) of the amount of the lien or claimed lien which, together with interest earned thereon, shall be held by Landlord as security to insure payment thereof and to prevent any sale, foreclosure or forfeiture of the Premises by reason of non-payment thereof. The amount so deposited with Landlord shall be held by Landlord in an account established at a federally insured banking institution until satisfactory removal of said lien or claim of lien. On any final determination of the lien or claim for lien, Tenant will immediately pay any judgment rendered, with all proper costs and charges, and will, at its own expense, have the lien released and any judgment satisfied. Should Tenant fail to diligently contest and pursue such lien contest, Landlord may, at its option, use the sums so deposited to discharge any such lien upon the renewal of such lien or encumbrance Landlord shall pay all such sums remaining on deposit to Tenant. SECTION 11.2. LANDLORD'S RIGHT TO CURE. If Tenant shall fail to contest the validity of any lien or claimed lien or fail to give security to Landlord to insure payment thereof, or shall fail to prosecute such contest with diligence, or shall fail to have the same released and satisfy any judgment rendered thereon, then Landlord may, at its election (but shall not be so required) remove or discharge such lien or claim for lien (with the right, in its discretion, to settle or compromise the same), and any amounts advanced by Landlord, including reasonable attorneys' fees, for such purposes shall be so much additional rent due from Tenant to Landlord at the next rent date after any such payment, with interest thereon at the Lease Interest Rate from the date so advanced. 19 ARTICLE XII TENANT ALTERATIONS SECTION 12.1. ALTERATIONS. Tenant shall not at any time during the Term of this Lease make any openings in the roof or exterior walls of the Building or make any Tenant alteration, addition or improvement to the Premises or any portion thereof (collectively "Alterations") without in each instance, the prior written consent of Landlord; which consent shall not be unreasonably withheld, provided, however, upon notice to, but without the consent of Landlord, Tenant shall have the right to make any Alterations where same are non-structural, do not require openings on the roof or exterior walls of the Building, do not affect any Building system, and do not exceed TWENTY FIVE THOUSAND AND NO/100 ($25,000.00) DOLLARS in the aggregate in any twelve (12) month period. No Alteration to the Premises for which Landlord's consent is required shall be commenced by Tenant until Tenant has furnished Landlord with a satisfactory certificate or certificates from an insurance company acceptable to Landlord in accordance with Article IX hereof, protecting Landlord against public liability and property damage to any person or property, on or off the Premises, arising out of and during the making of such Alterations. Any Alteration by Tenant hereunder shall be done in a good and workmanlike manner in compliance with any applicable governmental law, statute, ordinance or regulation. Upon completion of any Alteration by Tenant hereunder, Tenant shall furnish Landlord with a copy of the "as built" plans covering such construction. Tenant, at its sole cost and expense, will make all Alterations on the Premises which may be necessary by the act or neglect of any other person or corporation (public or private), except Landlord, its agents, employees or contractors. Before commencing any Alterations for which Landlord's approval is required hereunder: (a) plans and specifications therefor, prepared by a licensed architect, shall be submitted to and approved by Landlord (such approval shall not be unreasonably withheld or delayed); (b) Tenant shall furnish to Landlord an estimate of the cost of the proposed work, certified by the architect who prepared such plans and specifications; (c) all contracts for any proposed work shall be submitted to and approved by Landlord; and (d) Tenant shall either furnish to Landlord a bond in form and substance satisfactory to Landlord, or such other security reasonably satisfactory to Landlord to insure payment for the completion of all work free and clear of liens. Before commencing any Alteration, Tenant shall provide Landlord with a written certification that the Alteration does not have any environmental impact on the Premises. Prior to the commencement of any construction activity for which Landlord's consent shall be required, certificates of such insurance coverages shall be provided to Landlord and renewal certificates shall be delivered to Landlord prior to the expiration date of the respective policies. SECTION 12.2. OWNERSHIP OF ALTERATIONS. All Alterations (except Tenant's Equipment, as defined in Section 19.2 hereof), put in at the expense of Tenant shall become the property of Landlord and shall remain upon and be surrendered with the Premises as a part thereof at the termination of this Lease, or at Landlord's option, provided Landlord shall have advised Tenant in writing at the time of its consent to said Alteration is sought that same must be removed and restored to its original condition. SECTION 12.3. SIGNS. Tenant shall not place any signs on any part of the Building or Land without the prior written consent of Landlord. Notwithstanding any of the immediately foregoing provisions of this Section 12.3, upon notice to and with the consent of Landlord, which consent shall not be unreasonably withheld, Tenant may place a monument sign adjacent to the Premises, provided that (i) the installation and dimensions of said sign is in strict accordance with applicable law, ordinances and Restrictions; (ii) Tenant continually maintains said sign in a first-class manner and (iii) Tenant, at Tenant's sole cost and expense, removes said sign at the expiration of the Term and restores the area in which said sign is placed to its condition prior to the installation of said sign. SECTION 12.4. TENANT INDEMNITY. Tenant hereby agrees to indemnify and hold the Landlord, its beneficiaries, shareholders, partners or members and their respective agents and employees harmless from any and all liabilities of every kind and description which may arise out of or be connected in any way with said Alterations. Any mechanic's lien filed against the Premises for work claimed to have been furnished to Tenant shall be discharged of record by Tenant within ten (10) days after Tenant receives notice thereof, at Tenant's expense. Upon completing any Alterations, Tenant shall furnish Landlord with contractors' affidavits and full and final waivers of lien and 20 receipted bills covering all labor and materials expended and used. All Alterations shall comply with all insurance requirements and with all ordinances and regulations of any pertinent governmental authority. All alterations and additions shall be constructed in a good and workmanlike manner and only good grades of materials shall be used. SECTION 12.5 ENVIRONMENTAL IMPACT. Notwithstanding any other term, covenant or condition contained in this Lease, in the event that any Alteration has any material, adverse environmental impact on the Premises, Landlord may deny the Tenant the right to proceed in Landlord's sole and absolute discretion. ARTICLE XIII CONDEMNATION SECTION 13.1 TAKING: LEASE TO TERMINATE. If a portion of the Building or the Premises shall be lawfully taken or condemned for any public or quasi-public use or purpose, or conveyed under threat of such condemnation and as a result thereof the Premises cannot be used for the same purpose and with the same utility as before such taking or conveyance, the Term of this Lease shall end upon, and not before, the date of the taking of possession by the condemning authority, and without apportionment of the award. Tenant hereby assigns to Landlord, Tenant's interest in such award, if any. Current Rent shall be apportioned as of the date of such termination. If any part of the Building shall be so taken or condemned, or if the grade of any street or alley adjacent to the Building is changed by any competent authority and such taking or change of grade makes it necessary or desirable to demolish, substantially remodel, or restore the Building, the Landlord shall have the right to cancel this Lease upon not less than ninety (90) days' prior notice to the date of cancellation designed in the notice. SECTION 13.2 TAKING: LEASE TO CONTINUE. In the event only a part of the Premises shall be taken as a result of the exercise of the power of eminent domain or condemned for a public or quasi-public use or purpose by any competent authority or sold to the condemning authority under threat of condemnation, and as a result thereof the balance of the Premises can be used for the same purpose as before such taking, sale or condemnation, this Lease shall not terminate and Landlord, at its sole cost and expense up to the amount of any condemnation award, shall, to the extent practical, promptly repair and restore the Premises, subject to extension due to delay because of changes, deletion or additions, acts of Tenant, strikes, lockouts, casualties, acts of God, war, fuel or energy shortages, material or labor shortages, governmental regulation or control, severe weather conditions or other causes beyond the actual control of Landlord and Landlord's receipt of insurance proceeds. Any award paid as a consequence of such taking, sale or condemnation, shall be paid to Landlord. Any sums not so disbursed shall be retained by Landlord. In the event of a taking of land only, this Lease shall not terminate and Landlord shall not be obligated to repair or restore the Premises. SECTION 13.3 TENANT'S AWARD. To the extent permitted by law and subject to the rights of any lender with respect to the Premises, Tenant shall be allowed to pursue a claim against the condemning authority (hereinafter referred to as the "Tenant's Claim") that shall be independent of and wholly separate from any action, suit or proceeding relating to any award to Landlord for reimbursement of relocation expenses or for Tenant's Equipment and personal property, provided: (i) Tenant's Claim shall in no way limit, affect, alter or diminish in any kind or way whatsoever Landlord's award as a result of such taking, sale or condemnation; (ii) Tenant's Claim shall in no event include any claim for any interest in real property, it being expressly understood and agreed that all sums paid with respect to the real property interests taken, sold or condemned shall be the sole property of Landlord; and (iii) Tenant's Claim shall in no event be joined with Landlord's proceeding or argued or heard concurrently therewith and if the tribunal hearing Tenant's Claim orders such joinder, Tenant agrees to voluntarily dismiss Tenant's Claim without prejudice until such time as Landlord has received its award for such taking, sale or condemnation. 21 ARTICLE XIV ASSIGNMENT -- SUBLETTING BY TENANT SECTION 14.1 NO ASSIGNMENT, SUBLETTING OR OTHER TRANSFER. Tenant shall not assign this Lease or any interest hereunder, nor shall Tenant sublet or permit the use or occupancy of the Premises or any part thereof by anyone other than Tenant, without the express prior written consent of Landlord which consent shall not be unreasonably withheld or delayed. No assignment or subletting shall relieve Tenant of its obligations hereunder, and Tenant shall continue to be liable as a principal and not as a guarantor or surety, to the same extent as though no assignment or sublease had been made, unless specifically provided to the contrary in Landlord's consent. Consent by Landlord pursuant to this Article shall not be deemed, construed or held to be consent to any additional assignment or subletting, but each successive act shall require similar consent of Landlord. Landlord shall be reimbursed by Tenant for any costs or expenses incurred pursuant to any request by Tenant for consent to any such assignment or subletting. In the consideration of the granting or denying of consent, Landlord may, at its option, take into consideration: (i) the business reputation and credit worthiness of the proposed subtenant or assignee; (ii) any required alteration of the Premises; (iii) the intended use of the Premises by the proposed subtenant or assignee; and (iv) any other factors which Landlord shall deem relevant. Notwithstanding the foregoing, Landlord hereby consents to a sublease of all or a portion of the Premises to AAR Aircraft and Engine Group, Inc. provided the form and content of any sublease document are acceptable to Landlord. SECTION 14.2 OPERATION OF LAW. Tenant shall not allow or permit any transfer of this Lease, or any interest hereunder, by operation of law, or convey, mortgage, pledge or encumber this Lease or any interest hereunder. SECTION 14.3 EXCESS RENTAL. If Tenant shall, with Landlord's prior consent as herein required, sublet the Premises, an amount equal to one hundred percent (100%) of the rental in excess of the base rent and any additional rent herein provided to be paid shall be for benefit of Landlord and shall be paid to Landlord promptly when due under any such subletting as additional rent due hereunder. SECTION 14.4 MERGER OR CONSOLIDATION. If Tenant is a corporation whose stock is not publicly traded, any transaction or series of transactions (including, without limitation, any dissolution, merger, consolidation or other reorganization of Tenant, or any issuance, sale, gift, transfer or redemption of any capital stock of Tenant, whether voluntary, involuntary or by operation of law, or any combination of any of the foregoing transactions) resulting in the transfer of control of Tenant, other than by reason of death, shall be deemed to be a voluntary assignment of this Lease by Tenant subject to the provisions of this Section 14. If Tenant is a partnership, any transaction or series of transactions (including without limitation any withdrawal or admittance of a partner or a change in any partner's interest in Tenant, whether voluntary, involuntary or by operation of law, or any combination of any of the foregoing transactions) resulting in the transfer of control of Tenant, other than by reason of death, shall be deemed to be a voluntary assignment of this Lease by Tenant subject to the provisions of this assignment of this Lease by Tenant subject to the provisions of this Section 14. If Tenant is a corporation, a change or series of changes in ownership of stock which would result in direct or indirect change in ownership by the stockholders or an affiliated group of stockholders of less than fifty percent (50%) of the outstanding stock as of the date of the execution and delivery of this Lease shall not be considered a change of control. Notwithstanding the immediately foregoing, Tenant may, upon notice to, but without Landlord's consent, assign this Lease to any corporation resulting from a merger or consolidation of Tenant, provided that the total assets and the total net worth of such assignee after such consolidation or merger shall be in excess of the greater of (i) the net worth of Tenant immediately prior to such consolidation or merger, or (ii) the net worth of Tenant as of the date hereof, determined by generally accepted accounting principles and provided that Tenant is not at such time in default hereunder, and provided further that such successor shall execute an instrument in writing, acceptable to Landlord in its reasonable discretion, fully assuming all of the obligations and liabilities imposed upon Tenant hereunder and deliver the same to Landlord. Tenant shall provide in its notice to Landlord such information as may be reasonably required by Landlord to 22 determine that the requirements of this Section 14.4 have been satisfied. As used in this Section 14.4, the term "control" means possession of the power to vote not less than a majority interest of any class of voting securities and partnership or limited liability company interests or to direct or cause the direction (directly or indirectly) of the management or policies of a corporation, or partnership or limited liability company through the ownership of voting securities, partnership interests or limited liability company interests, respectively. SECTION 14.5. UNPERMITTED TRANSACTION. Any assignment, subletting, use, occupancy, transfer or encumbrance of this Lease or the Premises without Landlord's prior written consent shall be of no effect and shall, at the option of Landlord, constitute a default under this Lease. ARTICLE XV ANNUAL STATEMENTS SECTION 15.1. ANNUAL STATEMENTS. Tenant agrees to furnish Landlord annually, within ninety (90) days of the end of such fiscal year with a copy of its annual audited statements, together with applicable footnotes and any other financial information reasonably requested by Landlord (hereinafter collectively referred to as, the "Financial Information") and agrees that Landlord may deliver such Financial Information to any mortgagee, prospective mortgagee or prospective purchaser of the Premises on a confidential basis. ARTICLE XVI INDEMNITY FOR LITIGATION SECTION 16.1. TENANT'S INDEMNITY FOR LITIGATION. Tenant agrees to pay, and to indemnify and defend Landlord against, all costs and expenses (including reasonable attorney's fees) incurred by or imposed upon Landlord by or in connection with any litigation to which Landlord becomes or is made a party without fault on its part, whether commenced by or against Tenant, or any other person or entity or that may be incurred by Landlord in enforcing any of the covenants and agreements of this Lease with or without the institution of any action or proceeding relating to the Premises or this Lease, or in obtaining possession of the Premises after an Event of Default hereunder or upon expiration or earlier termination of this Lease. The foregoing notwithstanding, Tenant's responsibility under this Section 16.1 to pay Landlord's costs and expenses (including reasonable attorneys' fees) shall not extend to such costs and expenses incurred in defending an action brought by Tenant to enforce the terms of this Lease in which there is a court determination that Landlord failed to perform its obligations under this Lease. The provisions of this Section 16.1 shall survive the expiration or earlier termination of this Lease. SECTION 16.2. LANDLORD'S INDEMNITY FOR LITIGATION. Landlord agrees to pay, and to indemnify and defend Tenant against all costs and expenses (including reasonable attorney's fees) incurred by or imposed upon Tenant by or in connection with any litigation by Tenant to enforce Landlord's obligations under this Lease in which Tenant is the prevailing party. ARTICLE XVII ESTOPPEL CERTIFICATES SECTION 17.1. ESTOPPEL CERTIFICATE. Tenant agrees that on the Commencement Date and at any time and from time to time thereafter, upon not less than ten (10) business days' prior written request by Landlord, it will execute, acknowledge and deliver to Landlord, or Landlord's mortgagee to the extent factually accurate, a statement in writing in the form of EXHIBIT "C" attached hereto and by this reference incorporated herein; provided, however, that Tenant agrees to certify to any prospective purchaser or mortgagee any other reasonable information specifically requested by such prospective purchaser or mortgagee. 23 ARTICLE XVIII INSPECTIONS SECTION 18.1 INSPECTIONS. Tenant agrees to permit Landlord and any authorized representatives of Landlord, to enter the Premises at all reasonable times on reasonable advance notice, except in the case of emergency, for the purpose of inspecting the same. Any such inspections shall be solely for Landlord's purposes and may not be relied upon by Tenant or any other person. SECTION 18.2 SIGNS. Tenant agrees to permit Landlord and any authorized representative of Landlord to enter the Premises at all reasonable times during business hours on reasonable advance notice to exhibit the same for the purpose of sale, mortgage or lease, and during the final twelve month period of the Term hereof or any extension thereof, Landlord may display on the Premises customary "For Sale" or "For Rent" signs. ARTICLE XIX FIXTURES SECTION 19.1 BUILDING FIXTURES. All improvements and all plumbing, heating, lighting, electrical and air conditioning fixtures and equipment, and other articles of personal property used in the operation of the Premises (as distinguished from operations incident to the business of Tenant), whether or not attached or affixed to the Premises ("Building Fixtures"), shall be and remain a part of the Premises and shall constitute the property of Landlord. SECTION 19.2 TENANT'S EQUIPMENT. All of Tenant's trade fixtures and all personal property, fixtures, apparatus, machinery and equipment now or hereafter located upon the Premises, other than Building Fixtures, as shall be and remain the personal property of Tenant, and the same are herein referred to as "Tenant's Equipment." SECTION 19.3 REMOVAL OF TENANT'S EQUIPMENT. Tenant's Equipment may be removed from time to time by Tenant; provided, however, that if such removal shall injure or damage the Premises, Tenant shall repair the damage and place the Premises in the same condition as it would have been if such Tenant's Equipment had not been installed. ARTICLE XX DEFAULT SECTION 20.1 EVENTS OF DEFAULT. Tenant agrees that any one or more of the following events shall be considered "Events of Default" as said term is used herein: (a) If an order, judgment or decree shall be entered by any court adjudicating Tenant a bankrupt or insolvent, or approving a petition seeking reorganization of Tenant or appointing a receiver, trustee or liquidator of Tenant, or of all or a substantial part of its assets, and such order, judgment or decree shall continue unstayed and in effect for any period of sixty (60) days; or (b) Tenant shall file an answer admitting the material allegations of a petition filed against Tenant in any bankruptcy, reorganization or insolvency proceeding or under any laws relating to the relief of debtors, readjustment or indebtedness, reorganization, arrangements, composition or extension; or (c) Tenant shall make any assignment for the benefit of creditors or shall apply for or consent to the appointment of a receiver, trustee or liquidator of Tenant, or any of the assets of Tenant; or 24 (d) Tenant shall file a voluntary petition in bankruptcy, or shall admit in writing its inability to pay its debts as they come due, or shall file a petition or an answer seeking reorganization or arrangement with creditors or take advantage of any insolvency law; or (e) A decree or order appointing a receiver of the property of Tenant shall be made and such decree or order shall not have been vacated within sixty (60) days from the date of entry or granting thereof; or (f) Tenant shall abandon the Premises during the Term hereof; or (g) Tenant shall default in making any payment of Rent or other payment required to be made by Tenant hereunder when due as herein provided, and such default continues for five (5) days after written notice from Landlord; provided, however, that if Tenant defaults more than two (2) times in any such payment in any consecutive twelve (12) month period or four (4) times over the Term of the Lease, then no written notice of any subsequent default from Landlord shall be required; or (h) Tenant shall be in default in the performance of or compliance with any of the agreements, terms, covenants or conditions in this Lease other than those referred to in the foregoing subparagraphs (a) through (g) of this Section for a period of twenty (20) days after notice from Landlord to Tenant specifying the items in default, or in the case of a default which cannot, with due diligence, be cured within said twenty (20)-day period, Tenant fails to proceed within said twenty (20) day-period to cure the same and thereafter to prosecute the curing of such default with due diligence (it being intended in connection with a default not susceptible of being cured with due diligence within said twenty (20)-day period that the time of Tenant within which to cure the same shall be extended for such period as may be necessary to complete the same with all due diligence). Upon the occurrence of any one or more of such Events of Default, Landlord may at its election terminate this Lease or terminate Tenant's right to possession only, without terminating this Lease. Upon termination of this Lease or of Tenant's right to possession, Tenant shall immediately surrender possession and vacate the Premises, and deliver possession thereof to Landlord, and Landlord or Landlord's agents may immediately or any time thereafter without notice, re-enter the Premises and remove all persons and all or any property therefrom, either by any suitable action or proceeding at law or equity, without being liable in indictment, prosecution or damages, therefor, and repossess and enjoy the Premises, together with the right to receive all income of, and from, the Premises. Upon termination of this Lease, Landlord shall be entitled to recover as liquidated damages, because the parties hereto recognize that as of the date hereof actual damages are not ascertainable and are of imprecise calculation and not as a penalty, all Rent and other sums due and payable by Tenant through the date of termination plus (i) an amount equal to sixty percent (60%) of the Rent and other sums provided herein to be paid by Tenant for the residue of the Term, and (ii) the costs of performing any other covenants to be performed by Tenant. If Landlord elects to terminate Tenant's right to possession only, without terminating this Lease, Landlord may, at Landlord's option, enter into the Premises, remove Tenant's signs and other evidences of tenancy, and take and hold possession thereof as hereinabove provided, without such entry and possession terminating this Lease or releasing Tenant, in whole or in part, from Tenant's obligations to pay the Rent hereunder for the full Term or from any other obligations of Tenant under this Lease. Landlord shall use commercially reasonably efforts to relet all or any part of the Premises for such rent and upon terms as are commercially reasonable (including the right to relet the Premises for a term greater or lesser than that remaining of the Term of premises and the right to relet the Premises as a part of a larger area, the right to change the character or use made of the Premises and the right to grant concessions of free rent). For the purpose of such reletting, Landlord may decorate or make any repairs, changes, alterations, or additions in or to the Premises that may be necessary or desirable. If Landlord is unable to relet the Premises after using such commercially reasonably efforts to do so, Landlord shall have the right to 25 terminate this Lease, in which event, Tenant shall pay to Landlord liquidated damages (because the parties hereto recognize that as of the date hereof actual damages are not ascertainable and are of imprecise calculation and not as a penalty) equal to sixty percent (60%) of the Rent, and other sums provided herein to be paid by Tenant for the remainder of the Term. If the Premises are relet and sufficient sums shall not be realized from such reletting after payment of all expenses of such decorations, repairs, changes, alterations, additions and the expenses of repossession and such reletting, and the collection of the Rent herein provided and other payments required to be made by Tenant under the provisions of this Lease for the remainder of the Term of this Lease then, in such event, Tenant shall pay to Landlord on demand any such deficiency and Tenant agrees that Landlord may file suit to recover any sums falling due under the terms of this Section from time to time, and all costs and expenses of Landlord, including attorneys' fees, incurred in connection with any such suit shall be paid by Tenant. SECTION 20.2 WAIVERS. Tenant hereby expressly waives, so far as permitted by law, the service of any notice of intention to re-enter provided for in any statute, and except as is herein otherwise provided. Tenant for and on behalf of itself and all persons claiming through or under Tenant, also waives any and all rights of redemption or re-entry or repossession in case Tenant shall be dispossessed by a judgment or by warrant of any court or judge or in case of re-entry or repossession by Landlord or in case of any expiration or termination of this Lease. The terms "enter," "re-enter," "entry" or "re-entry" as used in this Lease are not restricted to their technical legal meanings. SECTION 20.3 BANKRUPTCY. If Landlord shall not be permitted to terminate this Lease, as provided in this Article XX because of the provisions of the United States Code relating to Bankruptcy, as amended (the "Bankruptcy Code"), then Tenant as a debtor-in-possession or any trustee for Tenant agrees promptly, within no more than sixty (60) days after the filing of the bankruptcy petition, to assume or reject this Lease. In such event, Tenant or any trustee for Tenant may only assume this Lease if: (a) it cures or provides adequate assurances that the trustee will promptly cure any default hereunder; (b) compensates or provides adequate assurance that Tenant will promptly compensate Landlord of any actual pecuniary loss to Landlord resulting from Tenant's default; and (c) provides adequate assurance of performance during the fully stated term hereof of all of the terms, covenants, and provisions of this Lease to be performed by Tenant. In no event after the assumption of this Lease shall any then-existing default remain uncured for a period in excess of the earlier of ten (10) days or the time period set forth herein. Adequate assurance of performance of this Lease, as set forth hereinabove, shall include, without limitation, adequate assurance (i) of the source of rent reserved hereunder; and (ii) that the assumption of this Lease will not breach any provision hereunder. If Tenant assumes this Lease and proposes to assign the same pursuant to the provisions of the Bankruptcy Code to any person or entity who shall have made a bona fide offer to accept an assignment of this Lease on terms acceptable to Tenant, then notice of such proposed assignment, setting forth: (i) the name and address of such person; (ii) all of the terms and conditions of such offer; and (iii) the adequate assurance to be provided Landlord to assure such person's future performance under the Lease, including, without limitation, the assurance referred to in Section 365(b)(3) of the Bankruptcy Code, shall be given to Landlord by the Tenant no later than twenty (20) days after receipt by the Tenant but in any event no later than ten (10) days prior to the date that the Tenant shall make application to a court of competent jurisdiction for authority and approval to enter into such assignment and assumption, and Landlord shall thereupon have the prior right and option, to be exercised by notice to the Tenant given at any time prior to the effective date of such proposed assignment, to accept an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bona fide offer made by such person, less any brokerage commissions which may be payable out of the consideration to be paid by such person for the assignment of this Lease. If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code any and all monies or other considerations payable or otherwise to be delivered to Landlord, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the estate of the Tenant within the meaning of the Bankruptcy Code. Any and all monies or other considerations constituting the Landlord's property 26 under the preceding sentence not paid or delivered to the Landlord shall be held in trust for the benefit of Landlord and shall be promptly paid to the Landlord. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be conclusively deemed without further act or deed to have assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall upon demand execute and deliver to Landlord an instrument confirming such assumption. Any such assignee shall be permitted to use the Leased Premises only for the Use. Nothing contained in this Section shall, in any way, constitute a waiver of the provisions of Article XIV of this Lease relating to alienation. Tenant shall not, by virtue of this Section, have any further rights relating to assignment other than those granted in the Bankruptcy Code. Notwithstanding anything in this Lease to the contrary, all amounts payable by Tenant to or on behalf of Landlord under this Lease, whether or not expressly denominated as rent, shall constitute rent for the purpose of Section 501(b)(6) or any successive section of the Bankruptcy Code. ARTICLE XXI LANDLORD'S PERFORMANCE OF TENANT'S COVENANTS SECTION 21.1. LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS. In the event Tenant shall fail to maintain any insurance required to be paid by it under the terms hereof, or in an Emergency Situation or upon occurrence of an Event of Default, Landlord may (but shall not be obligated so to do), and without waiving or releasing Tenant from any obligation of Tenant hereunder, make any payment or perform any other act which Tenant is obligated to make or perform under this Lease in such manner and to such extent as Landlord may deem desirable; and in so doing Landlord shall also have the right to enter upon the Premises for any purpose reasonably necessary in connection therewith and to pay or incur any other necessary and incidental costs and expenses, including reasonable attorneys' fees. All sums so paid and all liabilities so incurred by Landlord, together with interest thereon at the rate per annum which is the lesser of (i) the Lease Interest Rate or (ii) the highest rate permitted by law shall be deemed Additional Rent hereunder and shall be payable to Landlord upon demand as Additional Rent. Landlord shall use reasonable efforts to give prior notice (which may be oral) of its performance, if reasonably feasible under the circumstances. The performance of any such obligation by Landlord shall not constitute a waiver of Tenant's default in failing to perform the same. Inaction of Landlord shall never be considered as a waiver of any right accruing to it pursuant to this Lease. Landlord, in making any payment hereby authorized: (a) relating to Taxes, may do so according to any bill, statement or estimate, without inquiry into the validity of any tax, assessment, sale, forfeiture, tax lien or title or claim thereof; (b) for the discharge, compromise or settlement of any lien, may do so without inquiry as to the validity or amount of any claim for lien which may be asserted; or (c) in connection with the completion of construction of improvements to the Premises or the repair, maintenance or the payment of operating costs thereof, may do so in such amounts and to such persons as Landlord reasonably may deem appropriate. Nothing contained herein shall be construed to require Landlord to advance monies for any purpose. Landlord shall not in any event be liable for inconvenience, annoyance, disturbance, loss of business or other damage of Tenant or any other occupant of the Premises or any part thereof, by reason of making repairs or the performance of any work on the Premises or on account of bringing materials, supplies and equipment into or through the Premises during the course thereof and the obligations of Tenant under this Lease shall not thereby be affected in any manner. In doing so, however, Landlord shall use reasonable efforts not to interfere with the normal operation of the Premises. The term "EMERGENCY SITUATION" shall mean a situation which has caused or is likely to cause bodily injury to persons, contamination of or physical damage to the Premises or adjoining property or economic liability or criminal jeopardy to Landlord. 27 ARTICLE XXII EXERCISE OF REMEDIES SECTION 22.1. CUMULATIVE REMEDIES. No remedy contained herein or otherwise conferred upon or reserved to Landlord, shall be considered exclusive of any other remedy, but the same shall be cumulative and shall be in addition to every other remedy given herein, now or hereafter existing at law or in equity or by statute, and every power and remedy given by this Lease to Landlord may be exercised from time to time and as often as occasion may arise or as may be deemed expedient. No delay or omission of Landlord to exercise any right or power arising from any default shall impair any such right or power or shall be construed to be a waiver of any such default or an acquiescence therein. SECTION 22.2. NO WAIVER. No waiver of any breach of any of the covenants of this Lease shall be construed, taken or held to be a waiver of any other breach, or a waiver, acquiescence in or consent to any further or succeeding breach of the same covenant. The acceptance by Landlord of any payment of Rent or other sums payable hereunder after the termination by Landlord of this Lease or of Tenant's right to possession hereunder shall not, in the absence of agreement in writing to the contrary by Landlord, be deemed to restore this Lease or Tenant's right to possession hereunder, as the case may be, but shall be construed as a payment on account and not in satisfaction of damages due from Tenant to Landlord. Receipt of Rent by Landlord, with knowledge of any breach of this Lease by Tenant or of any default by Tenant in the observance or performance of any of the conditions or covenants of this Lease, shall not be deemed to be a waiver of any provision of this Lease. SECTION 22.3. EQUITABLE RELIEF. In the event of any breach or threatened breach by either party of any of the agreements, terms, covenants or conditions contained in this Lease, the other party shall be entitled to enjoin such breach or threatened breach and shall have the right to invoke any right and remedy allowed at law or in equity or by statute or otherwise as though re-entry, summary proceedings, and other remedies were not provided for in this Lease. ARTICLE XXIII SUBORDINATION TO MORTGAGES SECTION 23.1. SUBORDINATION. Landlord may execute and deliver a mortgage or trust deed in the nature of a mortgage (both sometimes referred to as "Mortgage") against the Premises or any portion thereof. This Lease and the rights of Tenant hereunder, shall automatically, and without the requirement of the execution of any further documents, be and are hereby made expressly subject and subordinate at all times to the lien of any Mortgage now or hereafter encumbering any portion of the Project, and to all advances made or hereafter to be made upon the security thereof; provided, however, the holder of said Mortgage agrees in writing not to disturb the rights of Tenant under this Lease so long as Tenant is not in default hereunder. Notwithstanding the foregoing, Tenant agrees to execute and deliver such instruments subordinating this Lease to the lien of any such Mortgage as may be requested in writing by Landlord from time to time. Notwithstanding anything to the contrary contained herein, any mortgagee under a Mortgage may, by notice in writing to the Tenant, subordinate its Mortgage to this Lease. SECTION 23.2. MORTGAGE PROTECTION. Tenant agrees to give the holder of any Mortgage, by registered or certified mail, a copy of any notice of default served upon the Landlord by Tenant, provided that prior to such notice Tenant has received notice (by way of service on Tenant of a copy of an assignment of rents and leases, or otherwise) of the address of such mortgagee and containing a request therefor. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then said mortgagee shall have an additional thirty (30) days after receipt of notice thereof within which to cure such default or, if such default cannot be cured within that time, then such additional time as may be necessary, if, within such thirty (30) days, any mortgagee has commenced and is diligently pursuing the remedies necessary to cure such default (including but not limited to commencement of foreclosure proceedings, if necessary to effect such cure). Such period of time shall be 28 extended by any period within which such mortgagee is prevented from commencing or pursuing such foreclosure proceedings by reason of Landlord's bankruptcy. Until the time allowed as aforesaid for said mortgagee to cure such defaults has expired without cure, Tenant shall have no right to, and shall not, terminate this Lease on account of default. This Lease may not be modified or amended so as to reduce the Rent or shorten the Term, or so as to adversely affect in any other respect to any material extent the rights of the Landlord, nor shall this Lease be cancelled or surrendered, without the prior written consent, in each instance, of the mortgagee. ARTICLE XXIV INDEMNITY AND WAIVER SECTION 24.1. INDEMNITY. Tenant shall not do or permit any act or thing to be done or omit to do any act or thing upon the Premises which may subject Landlord to any liability or responsibility for injury, damage to persons or property, or to any liability by reason of any violation of applicable laws and shall exercise such control over the Premises so as to fully protect Landlord against any such liability. Tenant shall defend, indemnify and save Landlord, and any official, agent, beneficiary, contractor, director, employee, lessor, mortgagee, officer, parent, partner, shareholder and trustee of Landlord (each an "INDEMNIFIED PARTY") and each of their representatives, successors and assigns harmless from and against any and all liabilities, suits, judgments, settlements, obligations, fines, damages, penalties, claims, costs, charges and expenses, including, without limitation, engineers', architects' and attorneys' fees, court costs and disbursements, which may be imposed upon or incurred by or asserted against any Indemnified Party by reason of any of the following occurring during or after (but attributable to a period of time falling within) the Term: A. any demolition or razing or construction of any improvements or any other work or thing done in, on or about the Premises or any part thereof by Tenant or any member of the Tenant Group (defined below), including any claim that such work constitutes "public works"; B. any use, nonuse, possession, occupation, alteration, repair, condition, operation, maintenance or management of the Premises or any part thereof or of any tunnel, creek, ditch, detention area, sidewalk, curb or vault adjacent thereto by Tenant or any member of the Tenant Group; C. any act or failure to act on the part of Tenant or any member of the Tenant Group; D. any accident, injury (including death) or damage to any person or property occurring in, on or about the Premises or any part thereof or in, on or about any tunnel, creek, ditch, detention area, sidewalk, curb or vault adjacent thereto as a result of the act or neglect of Tenant or any member of the Tenant Group; E. any failure to perform or comply with any of the covenants, agreements, terms or conditions in this Lease on Tenant's part to be performed or complied with (other than the payment of money); F. any lien or claim which may be alleged to have arisen against or on the Premises, or any lien or claim which may be alleged to have arisen out of this Lease and created or permitted to be created by Tenant or any member of the Tenant Group against any assets of Landlord, or any liability which may be asserted against Landlord with respect thereto; G. any failure on the part of Tenant to keep, observe and perform any of the terms, covenants, agreements, provisions, conditions or limitations contained in the contracts and agreements affecting the Premises on Tenant's part to be kept, observed or performed; and H. any contest permitted pursuant to the provisions of this Lease. 29 No agreement or covenant of Tenant in this Section 24.1 shall be deemed to exempt Landlord from, and Tenant's obligations under this Section 24.1 shall not include liability or damages for injury to persons or damage to property caused by or resulting from the negligence of Landlord, its agents or employees, in the operation or maintenance of the Project or from the breach by Landlord of its obligations under this Lease. The obligations of Tenant under this Section 24.1 shall not be affected in any way by the absence in any case of covering insurance or by the failure or refusal of any insurance carrier to perform any obligation on its part under insurance policies affecting the Premises or any part thereof. SECTION 24.2. WAIVER OF CLAIMS. Tenant waives all claims it may have against Landlord and Landlord's agents for damage or injury to person or property sustained by Tenant or any persons claiming through Tenant or by any occupant of the Premises, or by any other person, resulting from any part of the Premises becoming out of repair, or resulting from any accident on or about the Premises or resulting directly or indirectly from any act or neglect of any person, excluding the negligence of Landlord, its agents, contractors and employees. This Section 24.2. shall include, but not by way of limitation, damage caused by water, snow, frost, steam, excessive heat or cold, sewage, gas, odors or noise, or caused by bursting or leaking pipes or plumbing fixtures, and shall apply equally whether any such damage results from the act or neglect of Tenant or of any other person, excluding the negligence of Landlord, and whether such damage be caused or result from anything or circumstance above mentioned or referred to, or to any other thing or circumstance whether of a like nature or of a wholly different nature. All Tenant's Equipment and other personal property belonging to Tenant or any occupant of the Premises that is in or on any part of the Premises shall be there at the risk of Tenant or of such other person only, and Landlord shall not be liable for any damage thereto or for the theft or misappropriation thereof. ARTICLE XXV SURRENDER SECTION 25.1. CONDITION. Upon the termination of this Lease whether by forfeiture, lapse of time or otherwise, or upon the termination of Tenant's right to possession of the Premises, Tenant will at once surrender and deliver up the Premises to Landlord, broom clean, in good order, condition and repair, reasonable wear and tear excepted. "Broom clean" means free from all debris, dirt, rubbish, personal property of Tenant, oil, grease, tire tracks or other substances, inside and outside of the Improvements and on the grounds comprising the Premises. Any damage caused by removal of Tenant from the Premises, including any damages caused by removal of Tenant's Equipment as defined above, shall be repaired and paid for by Tenant prior to the expiration of the Term. All Alterations temporary or permanent, excluding Tenant's Equipment, in or upon the Premises placed there by Tenant, shall become Landlord's property and shall remain upon the Premises upon such termination of this Lease by lapse of time or otherwise, without compensation or allowance or credit to Tenant, unless Landlord requests their removal at the time Tenant has requested Landlord's consent to the installation of such Alteration. If Landlord so requests removal of said additions, hardware, Alterations or improvements and Tenant does not make such removal by the termination of this Lease, or within ten (10) days after such request, whichever is later, Landlord may remove the same and deliver the same to any other place of business of Tenant or warehouse same, and Tenant shall pay the cost of such removal, delivery and warehousing to Landlord on demand. SECTION 25.2. REMOVAL OF TENANT'S EQUIPMENT. Upon the termination of this Lease by lapse of time, or otherwise, Tenant may remove Tenant's Equipment provided, however, that Tenant shall repair any injury or damage to the Premises which may result from such removal. If Tenant does not remove Tenant's Equipment from the Premises prior to the end of the Term, however ended, Landlord may, at its option, remove the same and deliver the same to any other place of business of Tenant or warehouse the same, and Tenant shall pay the cost of such removal (including the repair of any injury or damage to the Premises resulting from such removal), delivery and warehousing to Landlord on demand, or Landlord may treat tenant's equipment as having been conveyed to Landlord with this Lease as a Bill of Sale, without further payment or credit by Landlord to Tenant. 30 SECTION 25.3. HOLDOVER. If Tenant retains possession of the Premises or any part thereof after the termination of the Term, by lapse of time and otherwise, then Tenant shall pay to Landlord monthly rent, at one hundred fifty percent (150%) of the rate payable for the month immediately preceding said holding over (including increases for additional rent which Landlord may reasonably estimate), computed on a per-month basis, for each month or part thereof (without reduction for any such partial month) that Tenant thus remains in possession, and in addition thereto, Tenant shall pay Landlord all damages, consequential as well as direct, sustained by reason of Tenant's retention of possession. Alternatively, in the event such holdover continues for a period in excess of thirty (30) days, at the election of Landlord expressed in a written notice to Tenant and not otherwise, such retention of possession shall constitute a renewal of this Lease for one (1) year, at a rental equal to one hundred twenty percent (120%) of the Rent during the previous year. The provisions of this paragraph do not exclude the Landlord's rights of re-entry or any other right hereunder. Any such extension or renewal shall be subject to all other terms and conditions herein contained. 1.4. ARTICLE XXVI COVENANT OF QUIET ENJOYMENT SECTION 26.1. COVENANT OF QUIET ENJOYMENT. Landlord covenants that Tenant, on paying the Rent and all other charges payable by Tenant hereunder, and on keeping, observing and performing all the other terms, covenants, conditions, provisions and agreements herein contained on the part of Tenant to be kept, observed and performed, all of which obligations of Tenant are independent of Landlord's obligations hereunder, shall, during the Term, peaceably and quietly have, hold and enjoy the Premises subject to the terms, covenants, conditions, provisions and agreement hereof free from hindrance by Landlord or any person claiming by, through or under Landlord. ARTICLE XXVII NO RECORDING SECTION 27.1. NO RECORDING. This Lease shall not be recorded. ARTICLE XXVIII NOTICES SECTION 28.1. NOTICES. All notices, consents, approvals to or demands upon or by Landlord or Tenant desired or required to be given under the provisions hereof, shall be in writing. Any notices or demands from Landlord to Tenant shall be deemed to have been duly and sufficiently given if a copy thereof has been personally served, forwarded by expedited messenger or recognized overnight courier service with evidence of delivery or mailed by United States registered or certified mail in an envelope properly stamped and addressed to Tenant at Tenant's Mailing Address, or at such other address as Tenant may theretofore have furnished by written notice to Landlord. Any notices or demands from Tenant to Landlord shall be deemed to have been duly and sufficiently given if forwarded by expedited messenger or recognized overnight courier service with evidence of delivery or mailed by United States registered or certified mail in an envelope properly stamped and addressed to Landlord at Landlord's Mailing Address, with a copy to Mark S. Richmond, Katz Randall & Weinberg, 333 West Wacker Drive, Suite 1800, Chicago, Illinois 60606, or at such other address as Landlord may theretofore have furnished by written notice to Tenant. The effective date of such notice shall be the date of actual delivery, except that if delivery is refused, the effective date of notice shall be the date delivery is refused. 31 ARTICLE XXIX COVENANTS RUN WITH LAND SECTION 29.1. COVENANTS. All of the covenants, agreements, conditions and undertakings in this Lease contained shall extend and inure to and be binding upon the heirs, executors, administrators, successors and assigns of the respective parties hereto, the same as if they were in every case specifically named, and shall be construed as covenants running with the Land, and wherever in this Lease reference is made to either of the parties hereto, it shall be held to include and apply to, wherever applicable, the heirs, executors, administrators, successors and assigns of such party. Nothing herein contained shall be construed to grant or confer upon any person or persons, firm, corporation or governmental authority, other than the parties hereto, their heirs, executors, administrators, successors and assigns, any right, claim or privilege by virtue of any covenant, agreement, condition or undertaking in this Lease contained. SECTION 29.2. RELEASE OF LANDLORD. The term "Landlord", as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners at the time in question of title to the Premises, and in the event of any transfer or transfers of the title, Landlord herein named (and in the case of any subsequent transfers or conveyances, the then grantor) shall be automatically freed and relieved, from and after the date of such transfer or conveyance, of all personal liability as respects the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed; provided that any funds in the hands of such Landlord or the then grantor at the time of such transfer, in which Tenant has an interest, shall be turned over to the grantee. ARTICLE XXX ENVIRONMENTAL MATTERS SECTION 30.1. DEFINED TERMS. A. "HAZARDOUS MATERIAL" shall include but shall not be limited to any substance, material, or waste that is regulated by any federal, state, or local governmental authority because of toxic, flammable, explosive, corrosive, reactive, radioactive or other properties that may be hazardous to human health or the environment, including without limitation asbestos and asbestos-containing materials, radon, petroleum and petroleum products, urea formaldehyde foam insulation, methane, lead-based paint, polychlorinated biphenyl compounds, hydrocarbons or like substances and their additives or constituents, pesticides, agricultural chemicals, and any other special, toxic, or hazardous substances, materials, or wastes of any kind, including without limitation those now or hereafter defined, determined, or identified as "hazardous substances," "hazardous materials," "toxic substances," or "hazardous wastes" in any Environmental Law. B. "ENVIRONMENTAL LAW" shall mean any federal, state, or local law, statute, ordinance, code, rule, regulation, policy, common law, license, authorization, decision, order, or injunction which pertains to health, safety, any Hazardous Material, or the environment (including but not limited to ground, air, water, or noise pollution or contamination, and underground or aboveground tanks) and shall include, without limitation, the Resource Conservation and Recovery Act, 42 U.S.C. 86901 et seq., as amended by the Hazardous and Solid Waste Amendments of 1984; the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. 89601 et seq., as amended by the Superfund Amendments and Reauthorization Act of 1986; the Hazardous Materials Transportation Act, 49 U.S.C. 81801 et seq.; the Federal Water Pollution Control Act, 33 U.S.C. 81251 et seq.; the Clean Air Act, 42 U.S.C. 87401 et seq.; the Toxic Substances Control Act, 15 U.S.C. 82601 et seq.; the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq.; the Illinois Environmental Protection Act, 415 ILCS 4/1 et seq.; the Municipal Code of the City of Chicago; the Rivers and Harbors Act, (33 U.S.C. 8401 et seq.); the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. 11001 et seq. ("EPCRA"), 32 the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. 136 to 136y; the Oil Pollution Act of 1990, 33 U.S.C. 2701 et seq.; and the Occupational Safety and Health Act, 29 U.S.C. 651 et seq.; and any other federal, state, or local environmental requirements, together with all rules, regulations, orders, and decrees now or hereafter promulgated under any of the foregoing, as any of the foregoing now exist or may be changed or amended or come into effect in the future. C. "ENVIRONMENTAL CLAIM" shall mean and include any demand, notice of violation, inquiry, cause of action, proceeding, or suit for damages (including reasonable attorneys', consultants', and experts' fees, costs or expenses), losses, injuries to person or property, damages to natural resources, fines, penalties, interest, cost recovery, compensation, or contribution resulting from or in any way arising in connection with any Hazardous Material or any Environmental Law. D. "PRE-EXISTING CONDITION" shall mean the presence of any Hazardous Material on the Premises, to the extent such Hazardous Material was not introduced onto the Premises after the Commencement Date. E. "ENVIRONMENTAL CONDITION" shall mean (i) the presence on the Premises of one or more underground storage tanks or (ii) the existence of any Hazardous Material on the Premises, other than a Pre-Existing Condition, (a) in violation of or requiring cleanup under any Environmental Law or the provisions of this Article XXX, or (b) in concentrations or at levels exceeding applicable federal, state, or local standards for soil, groundwater, or waste on residential properties, either of which subjects Landlord to liability for any Environmental Claim or which must be remediated to prevent Landlord from incurring loss of any kind. F. "ENVIRONMENTAL REMEDIATION" shall mean any investigation, cleanup, removal, containment, remediation, or other action relating to an Environmental Condition (i) required pursuant to any Environmental Law, or (ii) necessary to prevent Landlord from incurring, or relieve Landlord from, loss of any kind as a result of an Environmental Claim. G. "REMEDIATING PARTY" shall mean the party which has elected (or is deemed to have elected) to perform any Environmental Remediation. H. "TENANT GROUP" shall mean any or all of Tenant's agents, employees, representatives, contractors, workmen, mechanics, suppliers, customers, guests, licensees, invitees, sublessees, assignees and all of their respective successors and assigns or any party claiming by, through or under any of them. I. "PERMITTED MATERIALS" shall mean Hazardous Materials in de minimis amounts customarily used, stored or generated in the ordinary course of Tenant's business. SECTION 30.2. TENANT'S COVENANTS WITH RESPECT TO ENVIRONMENTAL MATTERS. During the Term, Tenant, at its sole cost and expense, shall: A. comply with all Environmental Laws relating to the use and operation of the Premises; B. keep the Premises free of any Hazardous Material except for the Permitted Materials; 33 C. not exacerbate a Pre-Existing Condition; D. upon the discovery of an Environmental Condition: (i) promptly, but not later than three (3) business days after the discovery of the Environmental Condition, notify Landlord of the Environmental Condition; E. upon the discovery of an Environmental Condition caused by Tenant or any member of the Tenant Group: (i) furnish a letter of credit, personal guaranty, escrow of funds, or other security reasonably acceptable to Landlord to secure performance of Environmental Remediation and to assure Landlord that all necessary funds are readily available to Landlord to pay the costs and expenses of Environmental Remediation; (ii) prior to commencement of any Environmental Remediation, submit a proposed scope of work for the Environmental Remediation, together with a timetable and a cost estimate, to Landlord for review and approval; (iii) after obtaining Landlord's approval, diligently perform the approved Environmental Remediation; (iv) submit to Landlord in a timely manner for Landlord's review and comment the documentation and information required by Sections 30.6 and 30.7 of this Lease relating to each phase of the Environmental Remediation; (v) comply with applicable release reporting requirements and provide Landlord with any information necessary for Landlord to comply with Environmental Law; and (vi) obtain a so-called "no further action letter" or other acknowledgment from the federal, state, or local governmental agency with jurisdiction over the Environmental Condition that the Premises have been fully remediated without reliance on institutional controls (including but not limited to deed restrictions) or engineered barriers; F. not install or operate any above or below ground tank, sump, pit, pond, lagoon, or other storage or treatment vessel or device on the Premises without first obtaining Landlord's prior written consent; G. not handle, use, generate, treat, dispose of, or permit the use, handling, generation, treatment, storage, or disposal of any Hazardous Material except for the Permitted Materials in, on, under, around, or above the Premises at any time during the Term; H. not use any above-ground tank (including barrels and drums), of any size within or without the Premises, except (i) in compliance with all Environmental Laws, and (ii) if secondary containment approved by Landlord is provided. Empty tanks, barrels and drums shall be presumed to have one (1) inch of product remaining when declared empty. SECTION 30.3. CONDUCT OF TENANT. If Tenant, with the prior written authorization of Landlord, which authorization may be granted or denied by Landlord in its sole and absolute discretion, generates, uses, transports, stores, treats, or disposes of any Hazardous Material in, on or around the Project: 34 A. Tenant shall, at its own cost and expense, comply with all Environmental Laws relating to any Hazardous Material used, stored, generated or disposed of in, on or around the Project; B. Tenant shall (i) not dispose of any Hazardous Material in dumpsters or trash containers or at any other location at the Premises; (ii) not discharge any Hazardous Material into drains or sewers; (iii) not cause or allow the release, discharge, emission, or run-off of any Hazardous Material to air, surface waters, the land, or ground water, whether directly or indirectly; (iv) at Tenant's own cost and expense, arrange for the lawful transportation and off-site disposal of all Hazardous Materials generated by Tenant: (v) provide secondary containment around all Hazardous Material storage containers, storage facilities, and above-ground storage tanks; (vi) conduct all necessary environmental inspections, including but not limited to asbestos inspections prior to any renovation or demolition as required by 40 CFR Part 61, and provide copies of all reports associated with such inspections to Landlord; (vii) comply with all reporting requirements under any federal, state, or local ordinance, statute, or regulation, including but not limited to toxics inventory reporting under EPCRA, the provisions of 40 CFR Part 61, or various regulations controlling the emissions of volatile organic compounds, and Tenant shall provide copies of all such reports and notifications to Landlord; and (viii) use only highly skilled people acceptable to Landlord to address all environmental issues associated with the Premises, and ensure that such people and all employees of the Tenant shall receive all training or certification required under any federal, state, or local legal requirement specifically mentioned or alluded to in Section 30.1 of this Lease; C. Tenant shall promptly provide Landlord with copies of all communications, permits, or agreements with any governmental authority or agency (federal, state, or local) or any private entity relating in any way to the violation or alleged violation of any Environmental Laws or to any violation of Tenant's obligations under subparagraph (B) above; D. Landlord and Landlord's agents and employees shall have the right to enter the Premises and/or conduct appropriate tests for the purpose of ascertaining that Tenant complies with all applicable laws, rules or permits relating in any way to the presence of any Hazardous Materials on the Premises; and E. Upon the written request of Landlord no more frequently than once every year, or on any other occasion in the event that Landlord has reason to believe an environmental problem exists at the Premises, Tenant shall provide Landlord the results of appropriate tests of air, water, and soil to demonstrate (i) that Tenant is in compliance with all applicable laws, rules or permits relating in any way to the presence of any Hazardous Material on the Premises and (ii) the lack of any releases, discharges, or emissions. If the presence, release, threat of release, or placement of any Hazardous Material on or in the Premises occurs or is caused in whole or in part by Tenant or any member of the Tenant Group during the Term of this Lease, or the generation, transportation, storage, treatment, or disposal of any Hazardous Material at the Premises occurs or is caused in whole or in part by Tenant or any member of the Tenant Group during the Term of this Lease, and such gives rise to liability (including, but not limited to, a response action, remedial action, or removal action) under any Environmental Law or common law theory, including but not limited to nuisance, strict liability, negligence and trespass, Tenant shall promptly take any and all action necessary to clean up the Premises and mitigate exposure to liability arising from the Hazardous Material, whether or not required by law. SECTION 30.4. EXACERBATION. If Tenant exacerbates a Pre-Existing Condition (as a result of Tenant's investigative or remedial activities or otherwise) during the Lease Term, the provisions of this Article XXX shall apply to such exacerbation of the Pre-Existing Condition as if it were an Environmental Condition, and Tenant shall perform Environmental Remediation as to such exacerbation. Tenant shall be responsible for all fines and penalties caused by Tenant or to the extent exacerbated by Tenant at any time during the Lease Term. 35 SECTION 30.5. RIGHTS OF INSPECTION. Landlord and their respective agents and representatives shall have a right of entry and access to the Premises at any time in Landlord's discretion for the purposes of (i) inspecting the documentation relating to Hazardous Materials or environmental matters maintained by Tenant or occupant of the Premises; (ii) ascertaining the nature of the activities being conducted on the Premises and investigating whether Tenant is in compliance with its obligations under Article XXX of this Lease; and (iii) determining the type, kind, and quantity of all products, materials, and substances brought onto the Premises, or made or produced thereon. Landlord and its agents and representatives shall have the right to take samples in quantities sufficient for analysis of all products, materials, and substances present on the Premises including, but not limited to, samples, products, materials, or substances brought onto or made or produced on the Premises by Tenant or occupant of the Premises or their respective agents, employees, contractors or invitees and shall also have the right to conduct other tests and studies as may be reasonably determined by Landlord to be appropriate in order to investigate whether Tenant is in compliance with its obligations under Article XXX. SECTION 30.6. COPIES OF NOTICES. During the term of this Lease, Tenant and Landlord shall each provide the other promptly with copies of all summons, citations, directives, information inquiries or requests, notices of potential responsibility, notices of violation or deficiency, orders or decrees, Environmental Claims, complaints, investigations, judgments, letters, notices of environmental liens or response actions in progress, and other communications, written or oral, actual or threatened, received in the case of Tenant, by Tenant or occupant of the Premises, or in the case of Landlord, by Landlord, from the United States Environmental Protection Agency, Occupational Safety and Health Administration, Illinois Environmental Protection Agency, Illinois Office of the State Fire Marshall, Chicago Department of the Environment, or other federal, state, or local agency or authority, or any other entity or individual (including both governmental and non-governmental entities and individuals), concerning (a) any actual or alleged release of any Hazardous Material on, to, or from the Premises; (b) the imposition of any lien on the Premises relating to any Hazardous Material; (c) any actual or alleged violation of or responsibility under Environmental Laws; or (d) any actual or alleged liability under any theory of common law tort or toxic tort, including without limitation, negligence, trespass, nuisance, strict liability, or ultrahazardous activity. SECTION 30.7. TESTS AND REPORTS. A. Upon written request by Landlord, Tenant shall provide Landlord, at Tenant's expense, with (i) copies of all environmental reports and tests prepared or obtained by or for Tenant or occupant of the Premises; (ii) copies of transportation and disposal contracts (and related manifests, schedules, reports, and other information) entered into or obtained by Tenant with respect to any Hazardous Material; (iii) copies of any permits issued to Tenant under Environmental Laws with respect to the Premises; (iv) prior to filing, copies of any and all reports, notifications, and other filings to be made by Tenant or occupant of the Premises to any federal, state, or local environmental authorities or agencies, and after filing, copies of such filings; and (v) any other relevant documents and information with respect to environmental matters relating to the Premises in Tenant's possession or available to Tenant. Tenant shall be obligated to provide such documentation only to the extent that the documentation is within Tenant's possession or control. B. In addition, if Landlord ever reasonably believes that Tenant has breached the terms of this Article XXX, or if any Environmental Claim is made or threatened, or if a default shall have occurred under the Lease, or at Landlord's discretion, one (1) time per Lease Year, Landlord shall have the right, but not the duty, to enter upon the Premises and conduct an environmental assessment of the Premises, including but not limited to a visual site inspection, review of records pertaining to the site, and interviews of Tenant's representatives or others concerning the site use and history and other matters. The investigation may also include reasonable subsurface or other invasive investigation of the Premises, including but not limited to soil borings and sampling of site soil and ground or surface water for laboratory analysis, as may be recommended by the Landlord's consultant (discussed below) as part of its inspection of the Premises or based upon such other reasonable evidence of Environmental Conditions warranting such subsurface or other invasive investigation. Landlord shall have the right, but not the duty, to retain any independent 36 professional consultant to conduct any such environmental assessment; provided, however, that Landlord agrees to limit, in the absence of an Environmental Claim or default under this Article XXX, the number of such environmental assessments to one (1) per Lease Year for the Lease Term. Tenant will cooperate with the Landlord's consultant and will supply to the consultant, promptly upon request, any information reasonably requested by Landlord to facilitate the completion of the environmental assessment. Landlord and its designees are hereby granted access to the Premises at any time or times, upon reasonable notice (which may be written or oral) to perform such environmental assessment. In exercising its right, Landlord shall use its reasonable efforts to minimize disruption of operations at the Premises. Any costs associated with performance of the environmental assessment, including but not limited to the consultant fees and restoration of any property damaged by such environmental assessment, shall be paid by Landlord unless such investigation discloses an Environmental Condition caused by Tenant or any member of the Tenant Group, in which case Tenant shall pay such costs. C. In the event of an Environmental Condition caused by Tenant or any member of the Tenant Group, Tenant shall pay costs incurred by Landlord (including consultants' fees, costs and expenses) to review and comment on all reports and other documentation and information required by Sections 30.5 and 30.6, and to monitor the performance of any Environmental Remediation performed by Tenant. SECTION 30.8. INDEMNIFICATION. Tenant shall reimburse, defend with counsel chosen by Landlord, indemnify, and hold Landlord and any other Indemnified Party free and harmless from and against any and all Environmental Claims, response costs, losses, liabilities, damages, costs, and expenses, including without limitation loss of rental income, loss due to business interruption, and reasonable attorneys' and consultants' fees, costs and expenses arising out of or in any way connected with any or all of the following: A. any Hazardous Material (other than a Pre-Existing Condition) which, at any time during the Term, is or was actually or allegedly generated, stored, treated, released, disposed of, or otherwise located on or at the Premises as a result of the act or omission of Tenant or any member of the Tenant Group (regardless of the location at which such Hazardous Material is now or may in the future be located or disposed of), including, but not limited to any and all (i) liabilities under any common law theory of tort, nuisance, strict liability, ultrahazardous activity, negligence, or otherwise based upon, resulting from or in connection with any Hazardous Material; (ii) obligations to take response, cleanup, or corrective action pursuant to any Environmental Laws; and (iii) the costs and expenses of investigation or remediation in connection with the decontamination, removal, transportation, incineration, or disposal of any of the foregoing; and B. any actual or alleged illness, disability, injury, or death of any person, in any manner arising out of or allegedly arising out of exposure to any Hazardous Material or other substances or conditions present at the Premises as a result of the act or omission of Tenant or any member of the Tenant Group (including, but not limited to, ownership, operation, and disposal of any equipment which generates, creates, or uses electromagnetic files, x-rays, other forms of radiation and radioactive materials), regardless of when any such illness, disability, injury, or death shall have occurred or been incurred or manifested itself; and C. any actual or alleged failure of Tenant or any member of the Tenant Group at any time and from time to time to comply with all applicable Environmental Laws or any permit issued thereunder; D. any failure by Tenant to comply with any obligation under this Article XXX relating to an Environmental Condition for which Tenant is Remediating Party; E. Tenant's failure to provide any information, make any submission, and take any step required by any relevant governmental authorities; 37 F. the imposition of any lien for damages caused by, or the recovery of any costs for, the remediation or cleanup of any Hazardous Material as a result of events that took place during the Term of this Lease as a result of the act or omission of Tenant or any member of the Tenant Group; G. costs of removal of any and all Hazardous Materials from all or any portion of the Premises, which Hazardous Materials came to be present at the Premises during the Term of this Lease as a result of the act or omission of Tenant or any member of the Tenant Group; H. costs incurred to comply, in connection with all or any portion of the Premises, with all governmental requirements with respect to any Hazardous Material on, in, under or affecting the Premises, which Hazardous Material came to be present at the Premises during the Term of this Lease as a result of the act or omission of Tenant or any member of the Tenant Group; I. any spills, charges, leaks, escapes, releases, dumping, transportation, storage, treatment, or disposal of any Hazardous Material which occur during the Term of this Lease, but only to the extent that such Hazardous Material originated from or were or are located on the Premises and are caused by Tenant or any member of the Tenant Group. In the event Environmental Claims or other assertion of liability shall be made against any Indemnified Party for which the Indemnified Party is entitled to indemnity hereunder, the procedure set forth in Section 24.1 shall apply. The obligations of Tenant under this Section 30.8 shall survive any termination or expiration of this Lease. SECTION 30.9. TENANT ACKNOWLEDGMENTS WITH RESPECT TO ENVIRONMENTAL MATTERS. Tenant acknowledges that the Premises are being leased in their present "as is" condition. Tenant further acknowledges that Landlord has made no representation whatsoever regarding any Hazardous Material on or about the Premises. SECTION 30.10. NO LIABILITY OF LANDLORD. A. Landlord shall not have any liability to Tenant or any of its employees, agents, shareholders, officers or directors, or any other persons as a result of any Hazardous Material now or hereafter located on the Premises. B. Tenant hereby waives and releases Landlord from all Environmental Claims arising from or relating to Pre-Existing Conditions. 38 ARTICLE XXXI SECURITY DEPOSIT SECTION 31.1. SECURITY DEPOSIT. Tenant agrees to deposit with Landlord, upon the execution of this Lease, the Security Deposit as security for the full and faithful performance by Tenant of each and every term, provision, covenant and condition of this Lease. If Tenant defaults beyond any applicable grace and/or cure period in respect to any of the terms, provisions, covenants and conditions of this Lease including, but not limited to, payment of all rental and other sums required to be paid by Tenant hereunder, Landlord may use, apply or retain the whole or any part of the Security Deposit for the payment of such rent in default, for any sum which Landlord may expend or be required to expend by reason of Tenant's default including, without limitation, any damages or deficiency in the reletting of the Premises, whether such damages or deficiency shall have accrued before or after re-entry by Landlord. If any of the Security Deposit shall be so used, applied or retained by Landlord at any time or from time to time, Tenant shall promptly, in each such instance, within five (5) business days of written demand therefor by Landlord, pay to Landlord such additional sums as may be necessary to restore the Security Deposit to the original amount set forth in the first Section of this Lease. If Tenant shall fully and faithfully comply with all the terms, provisions, covenants and conditions of this Lease, the Security Deposit, or the balance thereof, shall be returned to Tenant after the following: (a) the time fixed as the expiration of the Term of this Lease; (b) the removal of Tenant from the Premises; (c) the surrender of the Premises by Tenant to Landlord in accordance with this Lease; and (d) final determination of all amounts payable by Tenant hereunder and payment of same. Except as otherwise required by law, Tenant shall not be entitled to any interest on the aforesaid Security Deposit. In the absence of evidence satisfactory to Landlord of an assignment of the right to receive the Security Deposit or the remaining balance thereof, Landlord may return the security deposit to the original Tenant, regardless of one or more assignments of this Lease. ARTICLE XXXII MISCELLANEOUS SECTION 32.1. CAPTIONS. The captions of this Lease are for convenience only and are not to be construed as part of this Lease and shall not be construed as defining or limiting in any way the scope or intent of the provisions hereof. SECTION 32.2. SEVERABILITY. If any covenant, agreement or condition of this Lease or the application thereof to any person, firm or corporation or to any circumstances, shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such covenant, agreement or condition to persons, firms or corporations or to circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby. Each covenant, agreement or condition of this Lease shall be valid and enforceable to the fullest extent permitted by law. SECTION 32.3. APPLICABLE LAW. This Lease shall be construed and enforced in accordance with the laws of the state where the Premises are located. SECTION 32.4 AMENDMENTS IN WRITING. None of the covenants, terms or conditions of this Lease, to be kept and performed by either party, shall in any manner be altered, waived, modified, changed or abandoned, except by a written instrument, duly signed, acknowledged and delivered by the other party. SECTION 32.5 RELATIONSHIP OF PARTIES. Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership, or of joint venture by the parties hereto, it being understood and agreed that no provision contained in this Lease nor any acts of the parties hereto shall be deemed to create any relationship other than the relationship of Landlord and Tenant. 39 SECTION 32.6 BROKERAGE. Landlord and Tenant each warrant to the other that it has no dealings with any real estate broker or agent in connection with this lease other than Landlord's Broker and Tenant's Broker, and each party covenants to pay, hold harmless and indemnify the other party from and against any and all cost, expense or liability for any compensation, commissions and charges claimed by any other broker or other agent with respect to this Lease or the negotiation thereof arising out of any acts of the indemnifying party. SECTION 32.7 NO ACCORD AND SATISFACTION. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated and additional rent shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy in this Lease provided. SECTION 32.8 JOINT EFFORT. The preparation of this Lease has been a joint effort of the parties hereto and the resulting documents shall not, solely as a matter of judicial construction, be construed more severely against one of the parties than the other. SECTION 32.9 WAIVER OF JURY TRIAL. Tenant hereby waives a jury trial in action brought by Landlord hereunder. If Landlord commences any proceeding for nonpayment of rent or any other sum due to be paid by Tenant under this Lease, Tenant hereby agrees that Tenant will not impose any counterclaim of any nature or description in any such proceeding, provided however, that such agreement of Tenant shall not be construed as a waiver of the right of Tenant to assert such claim in a separate action or actions brought by Tenant. SECTION 32.10 TIME. Time is of the essence of this Lease, and all provisions herein relating thereto shall be strictly construed. SECTION 32.11 LANDLORD'S CONSENT. Landlord's granting of any consent under this Lease, or Landlord's failure to object to any action taken by Tenant without Landlord's consent required under this Lease, shall not be deemed a waiver by Landlord of its rights to require such consent for any further similar act by Tenant. No waiver by Landlord of any other breach of the covenants of this Lease shall be construed, taken or held to be a waiver of any other breach or to be a waiver, acquiescence in or consent to any further or succeeding breach of the same covenant. None of the Tenant's covenants under this Lease, and no breach thereof, shall be waived, altered or modified except by a written instrument executed by Landlord. SECTION 32.12 NO PARTNERSHIP. Landlord is not, and shall not be deemed to be, in any way or for any purpose, the partner, employer, principal, master or agent of or with Tenant. SECTION 32.13 LANDLORD'S LIABILITY. Notwithstanding anything to the contrary herein contained, there shall be absolutely no personal liability asserted or enforceable against Landlord or on any persons, firms or entities who constitute Landlord with respect to any of the terms, covenants, conditions and provisions of this Lease, and Tenant shall, subject to the rights of any mortgagee, look solely to the interest of Landlord, its successors and assigns in the Project for the satisfaction of each and every remedy of Tenant in the event of default by Landlord hereunder; such exculpation of personal liability is absolute and without any exception whatsoever. If the entity constituting Landlord is a partnership, Tenant agrees that the deficit capital account of any such partner shall not be deemed an asset or property of said partnership. SECTION 32.14 LANDLORD RIGHTS. This Lease does not grant any rights to light or air over or about the Premises. Landlord specifically excepts and reserves to itself the use of any roofs, the exterior and structural components of the Building, all rights to the land and improvements below the improved floor level of the Building, to the improvements and air rights above the Building and to the improvements and air rights located outside the demising walls of the building and to such areas within the Building required for installation of utility lines and other 40 installations and to such portions of the Premises necessary to access, maintain and repair same, and no rights with respect thereto are conferred upon Tenant. SECTION 32.15. ENTIRE AGREEMENT. It is understood and agreed that all understandings and agreements heretofore had between the parties hereto are merged in this Lease, the exhibits annexed hereto and the instruments and documents referred to herein, which alone fully and completely express their agreements, and that no party hereto is relying upon any statement or representation, not embodied in this Lease, made by the other. Each party expressly acknowledges that, except as expressly provided in this Lease the other party and the agents and representatives of the other party have not made, and the other party is not liable for or bound in any manner by, any express or implied warranties, guaranties, promises, statements, inducements, representations or information pertaining to the transactions contemplated hereby. SECTION 32.16. RENT ABSOLUTE. Except as otherwise expressly provided herein, this Lease shall be deemed and construed to be a "net lease" and Tenant agrees to pay all costs and expenses of every kind and nature whatsoever, ordinary and extraordinary, arising out of or in connection with the ownership, maintenance, repair, replacement, use and occupancy of the Premises during the Term of this Lease, which, except for the execution and delivery hereof, would otherwise have been payable by Landlord. SECTION 32.17. TENANT AUTHORITY. Simultaneously with the execution and delivery of this Lease by Tenant, Tenant shall deliver to Landlord: A. Certified resolutions of its board of directors of Tenant executing this Lease on behalf of Tenant authorizing the execution and delivery of this Lease. B. A certificate of incumbency executed by the secretary of any corporate partner of Tenant executing this Lease on behalf of Tenant identifying by name, office and facsimile signature the officers of Tenant. C. A current certificate of good standing issued by the Secretary of State of the state of incorporation of Tenant and the State of Illinois. ARTICLE XXXIII PARKING SECTION 33.1. PARKING. Landlord agrees that the parking area adjacent to the Building shall contain five (5) parking spaces which may be utilized by Tenant, its employees, agents and invitees, and Landlord agrees, upon prior request of Tenant, to designate the five (5) spaces immediately adjacent to the Premises as "Reserved" for Tenant's exclusive use provided, however, Landlord shall have no obligation to enforce the exclusive nature of such parking spaces with respect to third parties. ARTICLE XXXIV RENEWAL OPTIONS SECTION 34.1. RENEWAL OPTION. Tenant shall have the option ("Renewal Option") to renew the Initial Term for all of the Premises as of the expiration date of the Initial Term, for one (1) additional period of two (2) years (each of said renewals is a "Renewal Term") upon the following terms and conditions: A. Tenant gives Landlord written notice of its exercise of the Renewal Option at least nine (9) months prior to the expiration of the Term. 41 B. Tenant is not in default under this Lease either on the date Tenant delivers the notice required under subparagraph A. above or at any time thereafter prior to the commencement of the Renewal Term so exercised. C. Landlord shall be provided with evidence satisfactory to it of Tenant's compliance with the terms and conditions of Article XXX hereof. D. All of the terms and provisions of this Lease (except this Article XXXIV) shall be applicable to the Renewal Term, except that Rent for the Renewal Term shall be determined as follows: Base Rent for each Renewal Term shall be determined upon expiration of the Initial Term and shall be equal to the greater of: (i) one hundred two percent (102%) of the Base Rent for the last year of the the Initial Term and First Renewal Term, as applicable, or (ii) Landlord's determination of the Fair Value (as hereinafter defined). For purposes of this Lease, "Fair Value" shall mean Landlord's determination, utilizing its reasonable judgment, of an annual amount per rentable square foot for each year of the applicable Renewal Term for which Fair Value is being determined beginning with the first (1st) day of the subject period that a willing, creditworthy, new non-equity tenant leasing comparable space to Tenant's would pay and a willing, comparable landlord of an industrial building comparable to the Building in the Chicago metropolitan area ("Market") would accept at arm's length, giving appropriate consideration to annual rental rate per rentable square foot, rental escalations, length of lease term, size and location of the premises being leased, and other generally applicable terms and conditions prevailing for comparable space in comparable buildings located in the Market. In the event Tenant notifies Landlord within ten (10) days after receipt of notice of Landlord's determination of Fair Value that Tenant disagrees with Landlord's determination, then, at the option of Landlord or Tenant, Landlord and Tenant shall institute an appraisal procedure to determine the Fair Value by jointly nominating and appointing, within ten (10) days after receipt of notice from the other party, one appraiser who shall make a determination of the Fair Value of the Premises. If Landlord and Tenant fail to jointly agree on the nomination and appointment of one appraiser within said ten (10) day period, each party shall then each nominate and appoint one appraiser within fifteen (15) days after the end of the initial ten (10) day period and give notice of such appointment to the other party. Upon the appointment of the two appraisers as aforesaid, the two appraisers so appointed shall jointly make a determination of the Fair Value of the Premises. If either party fails to appoint an appraiser within said fifteen (15) day period, the appraiser appointed by the other party shall make the determination of the Fair Value. If the two appraisers are unable to agree upon a determination of the Fair Value of the Premises within fifteen (15) days after the appointment of the second appraiser, the two appraisers shall jointly nominate and appoint a third appraiser within fifteen (15) days after the expiration of said fifteen (15) day period and give written notice of such appointment to both parties. In the event the two appraisers fail to appoint such third appraiser within said fifteen (15) day period, either party may thereafter apply to the United States District Court for the Northern District of Illinois for the appointment of such third appraiser. The third appraiser shall make a determination of the Fair Value. In the event the three appraisers are unable to agree upon a determination of the Fair Value of the Premises within fifteen (15) days after the appointment of the third appraiser, then the Fair Value shall be an amount equal to the average of the three values contained in the respective written appraisals submitted by the appraisers. The appraisers shall make their determination in writing and give notice thereof to both parties. Each appraiser shall afford both parties a hearing and the right to submit evidence, with the privilege of cross-examination in connection with its determination of the Fair Value. In the event any appraiser appointed as aforesaid shall die or become unable or unwilling to act before completion of the appraisal, such appraiser's successor shall be appointed in the same manner as provided above. Any appraiser appointed hereunder shall (x) be independent of both parties (and of all persons and entities with interest in either party); (y) have not less than five (5) years' experience in the appraisal of real property; and (z) hold the professional designation M.A.I., or if the M.A.I. ceases to exist, a comparable designation from an equivalent professional appraiser organization. All appraisal fees and expenses shall be borne equally by the parties. 42 SECTION 34.2. "AS IS" CONDITION. Tenant agrees to accept the Premises to be covered by this Lease during the Renewal Term in an "as is" physical condition and Tenant shall not be entitled to receive any allowance, credit, concession or payment from Landlord for the improvement thereof. SECTION 34.3. AMENDMENT. In the event that Tenant exercises the Renewal Option, then Landlord and Tenant shall mutually execute and deliver an amendment to this Lease reflecting the renewal of the Term on the terms herein provided, which amendment shall be executed and delivered promptly after the determination of Rent to be applicable to the Renewal Term as hereinabove provided. SECTION 34.4. TERMINATION. The Renewal Option herein granted shall automatically terminate upon the earliest to occur of (i) the expiration or termination of this Lease, (ii) the termination of Tenant's right to possession of the Premises, (iii) any assignment or subletting by Tenant other than a subletting expressly permitted hereunder, or (iv) the failure of Tenant to timely or properly exercise the Renewal Option. SECTION 34.5. NO COMMISSIONS. Landlord and Tenant acknowledge and agree that no real estate brokerage commission or finder's fee shall be payable by Landlord in connection with any exercise by Tenant of the Renewal Option herein contained. IN WITNESS WHEREOF, the parties have executed this Lease as of the date set forth above. LANDLORD: CENTERPOINT PROPERTIES TRUST, a Maryland real estate investment trust By: /s/ PAUL T. AHERN ------------------------------------------------- Its: Chief Investment Officer By: /s/ BRIAN M. SHEEHAN ------------------------------------------------- Its: Assistant Vice President and Controller TENANT: NEOFORMA.COM, INC., a Delaware corporation By: ------------------------------------------------- Its: Vice President 43 EXHIBIT "A" PREMISES 44 EXHIBIT "B" LEGAL DESCRIPTION PARCEL 1: LOTS 1 AND 2 IN TACO BELL RESUBDIVISION, BEING A RESUBDIVISION OF SECTION 34, TOWNSHIP 41 NORTH, RANGE 11 EAST OF THE THIRD PRINCIPAL MERIDIAN, IN COOK COUNTY, ILLINOIS PARCEL 2: EASEMENT FOR THE BENEFIT OF PARCEL 1 FOR INGRESS AND EGRESS AS CREATED BY EASEMENT AND LICENSE AGREEMENT DATED APRIL 30, 1987 AND RECORDED MAY 8, 1987 AS DOCUMENT 87250925 AND AMENDED BY FIRST AMENDMENT RECORDED NOVEMBER 15, 1988 AS DOCUMENT 88526155 MADE BY BOULEVARD BANK NATIONAL ASSOCIATION, AS TRUSTEE UNDER TRUST AGREEMENT DATED OCTOBER 10, 1986 AND KNOWN AS TRUST NUMBER 8365 AND BETWEEN MCDONALD'S CORPORATION OVER THE FOLLOWING DESCRIBED PROPERTY: THE EAST 193.53 FEET (AS MEASURED ALONG THE EAST LINE) OF LOT 285 IN CENTEX INDUSTRIAL PARK UNIT 165, BEING A SUBDIVISION OF THE EAST 1/2 OF THE NORTHEAST 1/4 OF SECTION 34, TOWNSHIP 41 NORTH, RANGE 11 EAST OF THE THIRD PRINCIPAL MERIDIAN, IN COOK COUNTY, ILLINOIS 45 EXHIBIT "C" TENANT ESTOPPEL CERTIFICATE Property Name: ___________________________________________________ ("Property") Tenant: ___________________________________________________ To: ___________________________________________________ DEFINITIONS: Lease Date: ___________________________________________________ Landlord: ___________________________________________________ Tenant: ___________________________________________________ Security Deposit: ___________________________________________________ Date of Possession: ___________________________________________________ Rent Commencement Date: ___________________________________________________ Monthly Base Rent: ___________________________________________________ 46 Annual Base Rental Amount: ___________________________________________________ Monthly Deposits: ___________________________________________________ Term: ___________________________________________________ Termination Date: ___________________________________________________ Renewal Option(s): ___________________________________________________ Square Footage: ___________________________________________________ Use: ___________________________________________________ Tenants Address For Notices: ___________________________________________________ ["Purchaser"] ["Lender"] proposes to [purchase the Property] [finance the Property] and this Tenant Estoppel Certificate is to be made and delivered in connection with that [purchase] [financing]. The undersigned Tenant under the above-referenced lease dated as of the Lease Date between Landlord and Tenant ("Lease"), certifies, represents, confirms and agrees in favor of [Purchaser] [Lender] the following: 1. The above-described Lease has not been cancelled, modified, assigned, extended or amended and contains the entire agreement between Landlord and Tenant except as follows: 2. Rent has been paid to _______________________________________. There is no Prepaid Rent. The amount of the Security Deposit is as set forth above, which is currently being held by Landlord. 3. Tenant took possession of the leased premises on the Date of Possession, and commenced to pay rent on the Rent Commencement Date, in the amount of the Monthly Base Rent, each payable in advance. Our current Annual Base Rental Amount is as set forth above, payable in equal monthly installments, subject to percentage rental, common area maintenance charges, escalation charges and other charges in accordance with the terms and provisions of the Lease, which as of the date hereof total the Monthly Deposit Amount, each payable in equal 47 monthly installments in advance. We are currently in occupancy of the leased premises. No "discounts", "free rent", "discounted rent" or "abatements of rent" have been agreed to or are in effect. 4. The Lease is for the Term set forth above and ending on the Termination Date, and we have the Renewal Option(s) set forth above. 5. All space and improvements covered by the Lease have been completed and furnished to the satisfaction of Tenant, all conditions required under the Lease have been met, and Tenant has accepted and taken possession of the leased premises on the Date of Possession as set forth above and presently occupies the leased premises, presently consisting of the Square Footage as set forth above. 6. The Lease is (a) in full force and effect, and (b) free from default by both Landlord and Tenant; and we have no claims, liens, charges or credits against Landlord or offsets against rent. 7. The undersigned has not assigned or sublet the Lease, nor does the undersigned hold the Property under assignment or sublease. 8. There are no other agreements written or oral, between the undersigned and Landlord with respect to the Lease and/or the leased premises and building. Landlord has satisfied all commitments, arrangements or understandings made to induce Tenant to enter into the Lease, and Landlord is not in any respect in default in the performance of the terms and provisions of the Lease, nor is there now any fact or condition which, with notice or lapse of time or both, would become such a default. 9. The leased premises are currently being used for the Use set forth above. 10. Tenant is maintaining (free of default) all insurance policies that the Lease requires Tenant to maintain. 11. Neither Landlord nor [Purchaser] [Lender] nor any of their respective successor or assigns, has or will have any personal liability of any kind or nature under or in connection with the Lease; and, in the event of a default by Landlord or [Purchaser] [Lender] under the Lease, Tenant shall look solely to Landlord's or [Purchaser's] [Lender's] interest in the building in which the leased premises are located. 12. Tenant is not in any respect in default under the terms and provisions of the Lease (nor is there now any fact or condition which, with notice or lapse of time or both, would become such a default), and Tenant has not assigned, transferred or hypothecated its interest under the Lease. 13. Tenant (i) does not have any option or preferential right to purchase all or any part of the leased premises or all or any part of the building of which the leased premises are a part; and (ii) does not have any right, title or interest with respect to the leased premises other than as lessee under the Lease. 14. We understand that [Purchaser] [Lender] is planning to [purchase] [finance] the Property on which the leased premises is located to Purchaser, and we agree to make all payments required under the Lease to [Purchaser] [Lender] upon our receipt of notice from Landlord and/or [Purchaser] [Lender]. Further, upon receipt of such notice, we will thereafter look to [Purchaser] [Lender] and not Landlord as the landlord under the Lease. We agree to give all notices required to be given by us to Landlord under the Lease to [Purchaser] [Lender] upon our receipt of said notice. 15. The statements contained herein may be relied upon by [Purchaser] [Lender] and by any prospective purchaser or lender of the Property. 48 16. If Tenant is a Corporation, the undersigned is a duly appointed officer of the corporation signing this Agreement, and is the incumbent in the office indicated under his or her name. If Tenant is a partnership or joint venture, the undersigned is a duly appointed partner or officer of the partnership or joint venture signing this certificate. In any event, the undersigned individual is duly authorized to execute this Agreement on behalf of Tenant. 17. Tenant (a) executes this certificate with the understanding that [Purchaser] [Lender] is contemplating [purchasing] [financing] the Property, and that if [Purchaser] [Lender] [purchases] [finances] the Property, [Purchaser] [Lender] will do so in material reliance on this certificate; and (b) agrees that the certifications and representations made herein shall survive such acquisition. 18. The current address to which all notices to Tenant as required under the Lease should be sent is the Tenant's Address for Notices. 19. [Purchaser's] [Lender's] rights hereunder shall inure to its successors and assigns. 20. Tenant is obligated under the Lease to pay the real estate taxes which are assessed against the Property in a calendar year. Tenant is obligated to pay to Tenant the real estate taxes assessed against the Property during the last year of the term upon Landlord's receipt of a real estate tax bill with respect thereto, even though the Lease term may have expired and Tenant has vacated the Property prior to the issuance of said real estate tax bill. IN WITNESS WHEREOF, Tenant has executed this estoppel certificate as of this ______ day of ________________, 199__. ___________________________, a ______________ By: _________________________________________ Its: EX-23.02 7 EXHIBIT 23.02 1 Exhibit 23.02 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. /s/ Arthur Andersen LLP - ------------------------------ San Jose, California December 21, 1999 -----END PRIVACY-ENHANCED MESSAGE-----