-----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, QSELf5zi8tGxW53eZzX+49A6t2ahjgwxDce0Oks6MFyWMHPf0jV9CTsX973u3ePz of1XtJAx/xsR7KfhuxrNPg== 0001017062-99-001929.txt : 19991117 0001017062-99-001929.hdr.sgml : 19991117 ACCESSION NUMBER: 0001017062-99-001929 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOURCINGLINK NET INC CENTRAL INDEX KEY: 0000825517 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 980132465 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 033-18600-D FILM NUMBER: 99751942 BUSINESS ADDRESS: STREET 1: 650 CASTRO STREET SUITE 210 STREET 2: C/O RICHARD S LANE ESQ CITY: MOUNTAIN VIEW STATE: CA ZIP: 94041 BUSINESS PHONE: 6509661214 MAIL ADDRESS: STREET 1: 650 CASTRO ST STREET 2: STE 210 CITY: MOUNTAIN VIEW STATE: CA ZIP: 94041 FORMER COMPANY: FORMER CONFORMED NAME: QCS NET CORP DATE OF NAME CHANGE: 19990621 FORMER COMPANY: FORMER CONFORMED NAME: QCS CORP DATE OF NAME CHANGE: 19941216 FORMER COMPANY: FORMER CONFORMED NAME: PARKWAY CAPITAL CORP DATE OF NAME CHANGE: 19920703 10QSB 1 FOR THE QUARTERLY PERIOD ENDED SEPT. 30, 1999 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999. ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ___________ to ___________. Commission File Number: 33-18600-D ---------- SourcingLink.net, Inc. - -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) DELAWARE 98-0132465 -------------------------------- ---------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 16855 WEST BERNARDO DRIVE, SUITE 260, SAN DIEGO, CA 92127 - -------------------------------------------------------------------------------- (Address of principal executive offices) (858) 385-8900 - -------------------------------------------------------------------------------- (Issuer's telephone number) FORMER ADDRESS: 650 CASTRO STREET, SUITE 210, MOUNTAIN VIEW, CA 94041 - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X YES NO ------- ______ Shares of Common Stock outstanding as of November 9, 1999: 7,082,661 shares SourcingLink.net, Inc. CONTENTS --------
Page PART I FINANCIAL INFORMATION Item 1 Financial Statements Consolidated Condensed Balance Sheets as of September 30, 1999 (unaudited) and March 31, 1999 3 Consolidated Condensed Statements of Operations for the three and six months ended September 30, 1999 and 1998 (unaudited) 4 Consolidated Condensed Statements of Cash Flows for the six months ended September 30, 1999 and 1998 (unaudited) 5 Notes to Consolidated Unaudited Financial Statements 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II OTHER INFORMATION Item 2 Changes in Securities and Use of Proceeds 14 Item 4 Submission of Matters to a Vote of Security Holders 15 Item 5 Other Information 16 Item 6 Exhibits and Reports on Form 8-K 16 Signature 18
2 PART I FINANCIAL INFORMATION Item 1 Financial Statements SourcingLink.net, Inc. Consolidated Condensed Balance Sheets
September 30, March 31, ASSETS 1999 1999 --------------- ---------------- Current assets: (Unaudited) Cash and cash equivalents $ 7,259,463 $ 1,266,880 Accounts receivable, net 191,008 222,769 Other current assets 166,375 7,111 -------------- -------------- Total current assets 7,616,846 1,496,760 Property and equipment, net 197,513 185,286 Other non-current assets 81,642 12,839 -------------- -------------- Total assets $ 7,896,001 $ 1,694,885 ============== ============== LIABILITIES Current liabilities: Accounts payable and accrued liabilities $ 1,058,066 $ 707,121 Deferred revenue and other 115,911 42,437 -------------- -------------- Total current liabilities 1,173,977 749,558 STOCKHOLDERS' EQUITY Series A convertible preferred stock 3,233 3,816 Common stock 7,051 5,631 Additional paid-in capital 22,687,133 15,315,395 Common stock note receivable (40,000) (40,000) Accumulated deficit (16,016,394) (14,420,409) Cumulative foreign currency translation adjustments 81,001 80,894 -------------- -------------- Total stockholders' equity 6,722,024 945,327 -------------- -------------- Total liabilities and stockholders' equity $ 7,896,001 $ 1,694,885 ============== ==============
The accompanying notes are an integral part of these consolidated condensed financial statements. 3 SourcingLink.net, Inc. Consolidated Condensed Statements Of Operations (Unaudited)
Three months ended September 30, Six months ended September 30, ------------------------------- ------------------------------- 1999 1998 1999 1998 --------- --------- ------------ ---------- Revenue: Network $ 197,938 $ 149,146 $ 402,565 $ 291,367 Consulting 89,749 98,144 154,498 203,144 --------- --------- ---------- ---------- 287,687 247,290 557,063 494,511 Cost of revenue: Network 80,681 61,172 164,032 119,630 Consulting 64,749 98,144 129,498 203,144 --------- --------- ---------- ---------- 145,430 159,316 293,530 322,774 Gross profit 142,257 87,974 263,533 171,737 Operating expenses: Selling, general and administrative 824,300 400,728 1,436,989 1,265,596 Product development 286,923 144,619 484,848 270,188 --------- --------- ---------- ---------- Total operating expenses 1,111,223 545,347 1,921,837 1,535,784 Operating loss (968,966) (457,373) (1,658,304) (1,364,047) Other income (expense), net 2,592 82,678 (1,735) 103,391 Interest income 53,220 3,108 64,054 4,242 --------- --------- ---------- ---------- Net loss (913,154) (371,587) (1,595,985) (1,256,414) Preferred dividend - - - (68,463) --------- --------- ---------- ---------- Net loss attributed to common stockholders $(913,154) $(371,587) $(1,595,985) $(1,324,877) ========= ========= ========== ========== Net loss per share (basic and diluted) $ (0.14) $ (0.08) $ (0.26) $ (0.28) ========= ========= ========== ========== Weighted average number of shares used in per share calculation (basic and diluted) 6,482,378 4,752,840 6,101,628 4,672,803 ========= ========= ========== ==========
The accompanying notes are an integral part of these consolidated condensed financial statements. 4 SourcingLink.net, Inc. Consolidated Condensed Statements of Cash Flows (Unaudited)
Six months ended September 30, ---------------------------------- 1999 1998 ------------ ------------- Cash flows from operating activities: Net loss $ (1,595,985) $ (1,256,414) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense 55,369 39,496 Unrealized exchange (gain) loss 1,209 (107,738) Loss on disposal of fixed assets - 71,243 Expense related to stock options and warrants - 370,693 Changes in operating assets liabilities-net 232,158 103,891 ------------ ------------- Net cash used in operating activities (1,307,249) (778,829) Cash flows from investing activities: Purchases of fixed assets (67,596) (143,370) Proceeds from disposal of fixed assets - 4,413 ------------ ------------- Net cash used in investing activities (67,596) (138,957) Cash flows from financing activities: Proceeds from issuance of common stock 7,309,076 846,159 Proceeds from exercise of stock options 63,500 - Payments on capital leases (4,045) (4,874) ------------ ------------- Net cash provided by financing activities 7,368,531 841,285 Effect of exchange rate changes on cash (1,103) (13,622) ------------ ------------- Net increase (decrease) in cash and cash equivalents 5,992,583 (90,123) Cash and cash equivalents, beginning of the period 1,266,880 475,145 ------------ ------------- Cash and cash equivalents, end of the period $ 7,259,463 $ 385,022 ============ =============
The accompanying notes are an integral part of these consolidated condensed financial statements. 5 SourcingLink.net, Inc. NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS 1. Basis of presentation: - --------------------------- On July 20, 1999, the stockholders of the Company approved a proposal to change the Company's name from QCS.net Corporation to SourcingLink.net, Inc. The name change became effective as of that date upon the Company's filing of its Amended and Restated Certificate of Incorporation with the Delaware Secretary of State. The interim consolidated condensed financial statements of SourcingLink.net, Inc. ("SourcingLink" or the "Company") are unaudited and reflect all adjustments (consisting only of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation, in all material respects, of the financial position and operating results of the Company for the interim periods. The results of operations for the three and six months ended September 30, 1999 are not necessarily indicative of the results to be expected for the entire fiscal year ending March 31, 2000. The year-end balance sheet data at March 31, 1999 was derived from the audited financial statements. All prior period share and per share amounts have been restated to reflect the 1 for 4 reverse stock split, which was effective August 25, 1999. The consolidated financial statements include the accounts of SourcingLink.net, Inc. and its wholly owned subsidiary. All significant intercompany transactions and account balances have been eliminated in consolidation. This financial information should be read in conjunction with the audited financial statements and notes thereto included in the Company's Form 10-KSB for the fiscal period ended March 31, 1999. Effective April 1, 1999, the Company changed its year end to March 31, from June 30. The corresponding comparative Statements of Operations and Cash Flows for the six months ended September 30, 1998 have been presented accordingly. 2. Computation of net loss per share: - --------------------------------------- Net loss per share is presented on a basic and diluted basis. Basic earnings per share is computed by dividing the income available to holders of Common Stock by the weighted average number of shares of Common Stock outstanding for the period. Diluted earnings per share are computed by giving effect to all dilutive potential shares of Common Stock that were outstanding during the period. For the Company, dilutive potential shares of Common Stock consist of incremental shares of Common Stock issuable upon the exercise of stock options and warrants and conversion of preferred stock for all periods. Basic and diluted earnings per share are calculated as follows for the three and six months ended September 30, 1999 and 1998 (unaudited):
Three months ended September 30, Six months ended September 30, ---------------------------------------- ---------------------------------------- Basic and diluted: 1999 1998 1999 1998 ----------------- ------------------ ----------------- ------------------ Net loss attributed to Common shareholders $ (913,154) $ (371,587) $ (1,595,985) $ (1,324,877) ================= ================== ================= ================== Weighted average shares outstanding for the period 6,482,378 4,752,840 6,101,628 4,672,803 ----------------- ------------------ ----------------- ------------------ Net loss per share $ (0.14) $ (0.08) $ (0.26) $ (0.28) ================= ================== ================= ==================
All prior period share and per share amounts have been restated to reflect the 1 for 4 reverse stock split, which was effective August 25, 1999. 6 At September 30, 1999, the Company had 944,250 options and 896,059 warrants outstanding to purchase shares of Common Stock compared to 896,270 options and 844,660 warrants outstanding at March 31, 1999. These options and warrants were not included in the computation of diluted earnings per share because their inclusion would be anti-dilutive. 3. Reclassification: - ---------------------- Certain prior period balances have been reclassified to conform to the current period's presentation. These reclassifications did not affect the loss or total stockholders' equity for the periods presented. 4. Comprehensive loss: - ----------------------- Comprehensive loss for the three months ended September 30, 1999 and 1998 was $919,111 and $461,917, respectively. For the six months ended September 30, 1999 and 1998 the comprehensive loss was $1,595,878 and $1,376,435, respectively. The principal difference between comprehensive loss and net loss is the treatment of cumulative foreign currency translation adjustments. 5. Issuance of Common Stock: - ----------------------------- In August 1999, the Company completed a private placement of Common Stock, primarily to institutional investors. The investment banking firm of Needham and Co. acted as placement agent for the offering which totaled 1,258,000 Common shares at a price of $6.40 per share, as adjusted for the August 25, 1999 1 for 4 reverse stock split. Gross proceeds were $8.1 million, and net proceeds, after placement agent fees and other offering costs, were approximately $7.3 million. The net proceeds of the offering are expected to be used primarily for general working capital and corporate purposes, including product development and sales and marketing of the Company's Internet solutions. 6. Recent pronouncements: - --------------------------- 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." The Company has adopted SOP No. 98-1 as of the first quarter of fiscal year 2000. The adoption of SOP No. 98-1 did not have a material impact on the Company's financial statements. Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this Report, including, without limitation, statements containing the words "believes," "anticipates," "expects" and the like, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, the factors discussed under the caption "Risk Factors" below, and are discussed in more detail in the Risk Factors section of the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1999. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to announce publicly the results of any revisions of the forward-looking statements contained or incorporated by reference herein to reflect future events or developments. Overview The Company has developed an Internet-based turnkey solution for business-to- business eCommerce that enables retailers to organize, automate and significantly reduce the cost of their merchandise sourcing activities by connecting directly with their retail merchandise suppliers around the globe. The Company's revenues are generated principally from network revenues consisting of fees for access to and use of the Company's solutions. These fees include initial registration fees, fixed monthly or annual subscription fees or "pay-as-you-go" transactional fees. 7 Effective April 1, 1999, the Company discontinued offering the pay-as-you-go transactional fee option for new subscribers. Historically, network revenues have been primarily from customer use of the Company's private network desktop solution. In February 1999, the Company began a rollout of its new Internet solution to selected merchandise suppliers of the Company's retailer subscribers. While there continues to be revenue from the desktop solution, the Company's focus is now centered on the broad Internet solution, and current retailer customers are either adopting or have committed to convert to the Internet solution. The Company entered into a multi-faceted eCommerce agreement with IBM in the third quarter of fiscal 1998, as an amendment to an earlier 1996 agreement under which the Company became an active participant in IBM's e-commerce group. Under the 1998 contract, referred to as the IBM Agreement or the Agreement in the discussion below, IBM has been providing most of the sales and marketing effort, worldwide help desk support and project management for the Company, as well as the network and server infrastructure supporting the Company's solution. Payments to IBM for these services have been based on a percentage of sales under a revenue sharing provision of the Agreement. These payments to IBM comprise the majority of cost of sales for network revenue. The Company has assisted IBM with sales and marketing of the Company's solution, and has billed IBM at cost for such services. These billings to IBM have been recorded as consulting revenue. The Company's new strategy and intent is to bring sales and project management in-house; therefore, the Company does not expect to continue providing or billing these consulting services to IBM after September 30, 1999. Accounting for New IBM Agreements Effective October 1, 1999, the Company entered into a new network services and infrastructure agreement with IBM. In addition, the Company believes it has nearly completed negotiations on a new agreement to define its on-going co- marketing relationship with IBM. As mentioned above, the cost of these services was historically based on revenue sharing, and was all included in cost of revenue. Effective October 1, 1999, the Company expects that payments to IBM will be accounted for as described below. For the infrastructure agreement, which includes the housing of servers in IBM's secure data management center, the Company will pay IBM under a combined fixed and variable price structure, based upon the level of service. Payments for these services will be accounted for as cost of revenue. For the co-marketing agreement, which is anticipated to include service for the active promotion of the Company's merchandise sourcing solution in the US, use of the IBM logo and e-business mark on Company marketing material and our website, and participation with IBM at its e-commerce trade show booths, payments will be made on a revenue sharing basis and will be accounted for as sales and marketing expense. Accumulated Losses From its inception in 1993 through September 30, 1999, the Company has generated an accumulated deficit of $16.0 million. Since inception, the Company has incurred substantial costs to develop its technology, to create, introduce and enhance its sourcing solution, to establish marketing and distribution relationships, to recruit and train a sales and marketing group and to build an administrative organization. The Company's prospects must be considered in light of its operating history, and the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new, unproved and rapidly evolving markets. The limited operating history of the Company makes the prediction of future results of operations difficult or impossible and, therefore, there can be no assurance that the Company will grow or that it will be able to achieve or sustain profitability. The Company's success depends to a significant degree upon the Company's ability to raise additional capital, and continued contributions of key management, engineering, sales and marketing, and finance personnel, certain of whom would be difficult to replace. The loss of the services of any of the key personnel or the inability to attract or retain qualified management and other personnel in the future, or delays in hiring required personnel, could have a material adverse effect on the Company's business, operating results or financial condition. Also, the Company's success is highly dependent on its ability to execute in a timely manner its new sales and marketing plan, of which no assurance can be made. 8 Change in Fiscal Year In May 1999, the Company's Board of Directors approved a change in the Company's fiscal year end from June 30 to March 31, commencing April 1, 1999. In the comparison of the three and six-month periods ended September 30, 1999 and 1998, the current fiscal year's periods represent the second quarter and first six months of fiscal year 2000. The 1998 comparative three-month period is the first quarter of old fiscal year 1999. The 1998 comparative six-month period is the fourth quarter of old fiscal year 1998 plus the first quarter of old fiscal year 1999. RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 Revenues Total revenues for the three months ended September 30, 1999 increased $40,000, or 16%, to $288,000 from $247,000 in the three months ended September 30, 1998. This includes an increase in Network revenues of $49,000, or 33%, to $198,000 from $149,000, which was primarily attributable to revenue from the Company's new Internet sourcing solution. The Company began rolling-out its Internet solution in February 1999, and therefore was not receiving revenue from this solution in the three-month period ended September 30, 1998. Consulting revenues decreased $8,000, or 9%, to $90,000 for the three months ended September 30, 1999 from $98,000 for the same period one year ago. Consulting revenues are derived primarily from the IBM Agreement, for sales, marketing and project management assistance provided to IBM by the Company. This assistance to IBM has been reduced in scope as compared to the prior year's three month period, and, as mentioned above, the Company has reduced both its reliance on, and its assistance to, IBM's sales and project management efforts. Under the new IBM agreements discussed above, effective October 1, 1999 the Company will not receive any further Consulting revenue from IBM. In addition to the IBM revenue during the quarter, the Company also received Consulting revenue from one of its retailer customers for custom modifications to the desktop solution. These fees offset a portion of the decline, as compared to the prior year, in Consulting revenue from IBM. Total revenues for the six months ended September 30, 1999 increased $63,000, or 13%, to $557,000 from $495,000 in the six months ended September 30, 1998. The six-month increase in Network revenues was $111,000, or 38%, to $403,000 from $291,000 last year. As in the three-month period, this increase is primarily attributable to the new Internet sourcing solution which the Company began rolling-out in February 1999. Consulting revenues for the current year's six- month period decreased $49,000, or 24%, to $154,000 from $203,000 for the six- month period one year ago. This decrease is attributable to the reduction in the assistance to IBM this year, as described above. Sales of the Company's Internet solution generally require adoption by retailers and then a roll-out to the retailer's merchandise suppliers which the Company expects will result in lengthy sales and implementation cycles. Revenues from the Internet solution in the current year are primarily from subscriptions among the groups of suppliers that have been made available for roll-out by two of the Company's current retailer customers. Cost of Revenues For the quarter ended September 30, 1999, the cost of Network revenues increased $20,000, or 32%, to $81,000 from $61,000 in the quarter ended September 30, 1998. For the six months ended September 30, 1999, the cost of Network revenues increased $44,000, or 37%, to $164,000 from $120,000 during the comparable six- month period one year ago. The cost of Network revenues consists primarily of revenue sharing payments under the IBM Agreement, and the increase in these costs for both the three and six-month periods is largely due to the increase in revenue. The cost of Consulting revenue was $65,000 in the second quarter of this year, compared to $98,000 in the quarter ended September 30, 1998. For the six-month periods, the cost of Consulting revenue was $129,000 in the current year compared to $203,000 in the six months ended September 30, 1998. Consulting revenues from IBM, which comprise the majority of the total Consulting revenues received, have a cost of the revenue equal to the revenues received. The reduction in these costs for both the three and six-month periods is due to the decrease in the Consulting activities with IBM, as previously described. 9 Overall, gross profit in the current quarter increased $54,000 to $142,000, or 49% of revenues, from $88,000, or 36% of revenues, in the three months ended September 30, 1998. For the six-month periods, overall gross profit increased to $264,000, or 47% of revenues in the current year, from $172,000, or 35% of revenues in the six months ended September 30, 1998. The increase in gross profit as a percent of sales for both the three and six-month periods is largely attributable to the reduction in consulting revenue, as the majority of such revenue is billed at cost and there is no associated gross profit margin. Under the new infrastructure agreement with IBM, effective October 1, 1999, network and other infrastructure support costs will not be as closely tied to revenue sharing, and will be relatively fixed over varying levels of activity; accordingly, future fluctuations in revenue may have a greater impact on gross profit margins than in prior periods. Operating Expenses Selling, General and Administrative Expenses. In the quarter ended September 30, 1999, the Company's selling, general and administrative expenses increased $424,000, or 106%, to $824,000 from $401,000 in the quarter ended September 30, 1998. The Company has expanded its management team, and began hiring an internal sales and project management staff during the second quarter of the current year. The associated labor and travel costs, as well as costs related to shareholder relations and directors and officers' insurance, comprise the majority of the increase in selling, general and administrative expenses compared to the same period in the prior year. For the six months ended September 30, 1999, selling, general and administrative expenses increased $171,000, or 14%, to $1.44 million from $1.27 million in the same six months of the prior year. The increase in these costs for the six-month period is not as great as the current quarter increase because of charges taken in the three months ended June 30, 1998 with no similar charges this year. The charges taken in the quarter ended June 30, 1998 related to the issuance of warrants, and to legal and accounting fees associated with the closure of offices in France and Hong Kong. Such costs more than offset the increased expenses associated with the expanded management team in the first quarter of the current fiscal year. Product Development Expenses. Product development expenses during the three months ended September 30, 1999 increased by $142,000, or 98%, to $287,000 from $145,000 in the three months ended September 30, 1998. For the six months, product development expenses increased $215,000, or 79%, to $485,000 from $270,000 for the same period last year. The increase in product development expenses for both the three and six-month periods is primarily labor and support costs associated with continued enhancement of the Company's Internet solution, including new management and development personnel. The Company expects that product development and selling, general and administrative expenses will increase as it expands its operations, increases its in-house sales and project management capabilities, and incurs additional labor and other costs related to the enhancement and sales of its solutions. Other Income (Expense), net and Interest Income The principal component of other income (expense), net is the exchange gain or loss on foreign currency translations with the Company's subsidiary in France. Primarily as a result of these foreign currency translations, other income (expense), net was income of $3,000 in the current year's second quarter compared to income of $83,000 in the same period one year ago. For the six-month periods, the current year result is an expense of $2,000 compared to income of $103,000 in the prior year. Interest income increased to $53,000 in the current year's second quarter from $3,000 in the quarter ended September 30, 1998. For the six months ended September 30, 1999 and 1998, interest income was $64,000 from $4,000, respectively. During August 1999, the Company completed a private placement of 1,258,000 shares of its Common Stock, primarily to a limited number of institutional investors. Gross proceeds of the offering were $8.1 million, and after placement agent fees and other offering costs, net proceeds of $7.3 million were received by the Company. The increases in interest income for the three and six-month periods are primarily attributable to the increased cash available for investment as a result of this private placement. Income Taxes The Company recorded net losses of $1.6 million and $1.3 million during the six months ended September 30, 1999 and 1998, respectively. Accordingly, no provision for income taxes was recorded in any of these periods. As of 10 September 30, 1999, the Company had net operating loss carryforwards for United States income tax purposes of approximately $9 million. These losses expire at various dates between 2002 and 2020. As of September 30, 1999, the Company also had net operating loss carryforwards for income tax purposes in France of approximately $3.7 million which expire at various dates between 1999 and 2003. A valuation allowance has been recorded for the tax benefit of the net operating loss carryforwards and the deferred tax assets of the Company due to the fact that, as of the present time, it is more likely than not that such assets will not be realized. Fluctuations in Quarterly Operating Results Our quarterly operating results have varied significantly in the past and will likely vary significantly in the future. We believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indicators of future performance. Our operating results could fall below the expectations of securities analysts or investors in some future quarter or quarters. Our failure to meet these expectations would likely adversely affect the market price of our Common Stock. Our quarterly operating results may vary depending on a number of factors, including: demand for our solution and services; actions taken by our competitors, including new product introductions and enhancements; delays or reductions in spending for, or the implementation of, supply chain management solutions by our potential customers as companies attempt to stabilize their computer systems prior to January 1, 2000 in order to reduce the risk of computer system problems associated with the year 2000; ability to scale our network and operations infrastructure; ability to develop, introduce and market new solutions and enhancements to our existing solution on a timely basis; changes in our pricing policies or those of our competitors; ability to expand our sales and marketing operations, including hiring additional sales personnel; size and timing of sales of our solution and services; success in maintaining and enhancing existing relationships and developing new relationships with strategic partners; ability to control costs; technological changes in our markets; deferrals of customer subscriptions in anticipation of new enhancements or features of our solution; customer budget cycles and changes in these budget cycles; and general economic factors. We have increased our operating expenses substantially, and plan to continue to do so, to expand our sales and marketing operations, fund greater levels of product development, increase general and administrative support, develop new partnerships, increase our professional services and support capabilities and improve our operational and financial systems. If our revenues do not increase along with these expenses, our business, operating results and financial condition could be seriously harmed and net losses in a given quarter could be even larger than expected. In addition, because our expense levels are relatively fixed in the near term and are based in part on expectations of our future revenues, any decline in our revenues to a level that is below our expectations would have a disproportionately adverse impact on our operating results. Liquidity and Capital Resources The Company's cash and cash equivalents at September 30, 1999 were $7.3 million, an increase of $6.0 million from March 31, 1999. During August 1999, the Company completed a private placement of its Common Stock through a placement agent to a limited number of institutional investors. The offering included 1,258,000 Common shares and gross proceeds were $8.1 million. Net proceeds, after placement agent fees and other offering costs, were $7.3 million, and are expected to be used primarily for general working capital and corporate purposes, including product development and the expansion of the sales, marketing and management functions. Cash used in operating activities for the six months ended September 30, 1999 was $1.3 million, compared to $779,000 for the six months ended September 30, 1998. While the cash usage in each period was primarily due to the net losses, approximately $540,000 less cash was used in operations in the six-month period one year ago even though the net operating loss was only $340,000 lower in that period. This is primarily due to non-cash stock options and warrants expense in the six-month period ended September 30, 1998, with no similar no-cash expense in this year's six-month period. The Company plans to continue investing in product development and sales and marketing of its Internet sourcing solution, and use of cash to fund such activities is expected to continue at or above current levels for the foreseeable future. The Company believes that its current working capital will be sufficient to meet its working capital requirements for the next 15 months. The Company plans to actively seek additional equity investment to fund operations beyond that 11 period. If such efforts are unsuccessful, the Company will need to reduce operating spending significantly, which would materially and adversely affect the Company's business. Subsequent to the end of the second quarter, the Company moved its headquarters and operations from Mountain View, California to San Diego, California. The majority of the employees located in Mountain View also relocated to San Diego. There was no significant impact on operations or cash flow from the move. The Company currently does not have a bank credit line. The Company does not intend to pay cash dividends with respect to capital stock in the foreseeable future. Recent Pronouncements 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." The Company has adopted SOP No. 98-1 as of the first quarter of fiscal year 2000. The adoption of SOP No. 98-1 did not have a material impact on the Company's financial statements. Year 2000 Compliance The "Year 2000" issue is the result of computer programs being written using two digits rather than four to define the applicable year. As such, computer programs that have date sensitive software might recognize a date using "00" as the year 1900 rather than the year 2000. This could result in program failure or miscalculation causing disruptions of operations including, among other things, a temporary inability to process transactions, send invoices, operate equipment or engage in similar normal business activities. The Company has reviewed its internal computer systems, its Internet solution and its desktop software solution that could be affected by the "Year 2000" issue. The Company's Internet solution is "Year 2000" compliant. Within its internal computer systems and its desktop software solution the Company identified some systems and software applications that would be affected. The Company presently believes that "Year 2000" issues relating to internal computer systems and the desktop software solution have been resolved, and therefore will not cause significant operational or customer problems. However, if the modifications and conversions that have been made are not adequate, "Year 2000" related problems could have a material adverse effect on the business, financial condition and results of operations of the Company. The Company began initiating formal communications with its significant suppliers and large customers in fiscal 1999 to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own "Year 2000" issues. However, there can be no guarantee that the systems of other companies on which the Company directly or indirectly relies will be timely converted, or that a failure to convert by another company or a conversion that is incompatible with the Company's systems will not have a material adverse impact on the Company. RISK FACTORS - ------------ We have a history of losses and expect to incur losses in the future. We incurred net losses of $1.5 million in fiscal 1999 and $1.6 million in the first six months of fiscal 2000. As of September 30, 1999, we had an accumulated deficit of approximately $16.0 million. We expect to derive substantially all of our revenues for the foreseeable future from subscription fees of our Internet sourcing solution, which is based on an unproven business model. Although these revenues have grown in the most recent quarter, we may not be able to sustain this growth in the future. In fact, we may not have any revenue growth, and our revenues could decline. Moreover, we expect to incur significant sales and marketing, product development, and general and administrative expenses. As a result, we expect to incur significant losses for the foreseeable future. The Company believes that its current working capital will be sufficient to meet its working capital requirements for the next 15 months. The Company plans to actively seek additional equity investment to fund operations beyond that period. If such efforts are unsuccessful, the Company will need to reduce operating spending significantly, which would materially and adversely affect the Company's business. 12 We expect to depend on our Internet solution for substantially all of our revenues for the foreseeable future. Our solution and related services account for substantially all of our revenues. We anticipate that revenues from our solution and related services will continue to constitute substantially all of our revenues for the foreseeable future. Consequently, a decline in the price of, or demand for, our solution, or its failure to achieve broad market acceptance, would seriously harm our business. Implementation of our solutions by large retailers is complex, time consuming and expensive. We frequently experience long sales and implementation cycles. Our supply chain management solution is an enterprise-wide solution that must be deployed with many users within a large retailer's sourcing organization. Its adoption by large retailers is characterized by long sales cycles beginning with pilot studies and concluding with retailers strongly encouraging their merchandise suppliers to subscribe to our solution. In many cases, our customers must change established business practices and conduct business in new ways. In addition, they must generally consider a wide range of other issues before committing to purchase our product, including product benefits, integration, interoperability with existing computer systems, scalability, functionality and reliability. As a result, we must educate potential customers on the use and benefits of our solution. It frequently takes several months to finalize a sale and the sale must often be approved by a number of management levels within the customer organization. The implementation of our solution requires a commitment of resources by our customers and third-party and our professional services organizations. Delay of these commitments may adversely affect our financial results of any particular quarter. We currently depend on IBM for marketing of our solution and for the management and security of our network infrastructure. We have a marketing alliance with IBM, and are currently dependent on IBM for a significant portion of our marketing activities. Therefore, IBM's decisions and performance with respect to these matters have a material impact on our ability to market our solution. While our current plans call for us to take over a substantial portion of our sales and marketing activities, we may not be able to do so effectively. Our agreement with IBM will permit IBM to discontinue marketing our solution upon specified notice. A decision by IBM to cease or reduce substantially its marketing efforts would have an immediate and material adverse effect on our financial condition and results of operations. In addition, we depend on IBM Global Network, or IGN, for certain services relating to our infrastructure, including maintenance of communications lines and management of network data centers. IGN may terminate its performance of these services for us at any time on 90 days notice to us. If IGN were to terminate these services, we would have to obtain them from another service provider or perform them ourselves. There can be no assurance that we would be able to obtain or perform these services on a timely or cost-effective basis. If we were able to obtain such services from a third party, we would be entirely dependent on them to manage and maintain our network infrastructure and to provide security for it. We depend on our key personnel. Our future performance depends on the continued service of our senior management, product development and sales personnel. The loss of the services of one or more of our key personnel could seriously harm our business. Our future success also depends on our continuing ability to attract, hire, train and retain a substantial number of highly skilled managerial, technical, sales, marketing and customer support personnel. We are particularly dependent on hiring additional personnel to increase our direct sales and product development organizations. In addition, new hires frequently require extensive training before they achieve desired levels of productivity. Competition for qualified personnel is intense, and we may fail to retain our key employees or to attract or retain other highly qualified personnel. 13 We depend on increasing use of the Internet and on the growth of eCommerce. If the use of the Internet and eCommerce do not grow as anticipated, our business will be seriously harmed. Our success depends on the increased acceptance and use of the Internet as a medium of commerce on a global basis. Rapid growth in the use of the Internet is a recent phenomenon. As a result, acceptance and use may not continue to develop at historical rates and a sufficiently broad base of business customers may not adopt or continue to use the Internet as a medium of commerce. Demand and market acceptance for recently introduced services and products over the Internet are subject to a high level of uncertainty, and there exist few proven services and products. Our business would be seriously harmed if: . Use of the Internet, the web and other online services does not continue to increase or increases more slowly than expected; . The infrastructure for the Internet, the web and other online services does not effectively support expansion that may occur; or . The Internet, the web and other online services do not create a viable commercial marketplace, inhibiting the development of eCommerce and reducing the need for our solution. The market for our solution is at an early stage. We need a critical mass of retailers and their merchandise suppliers to implement and use our solution. The market for Internet-based supply chain management solutions and services is at an early stage of development. Our success depends on a significant number of large retailers implementing our solution and requiring their merchandise suppliers to subscribe to our solution. The implementation of our solution by major retailers and their merchandise suppliers is controlled by multiple parties in the retail organization. In many cases, these organizations must change established business practices and conduct business in new ways. Our ability to attract additional customers for our solution will depend on leveraging our existing customers as reference accounts. Our solution may not achieve significant market acceptance. Unless a critical mass of retailers and their merchandise suppliers implement our solution, our solution may not achieve widespread market acceptance and our business would be seriously harmed. We face intense competition. If we are unable to compete successfully, our business will be seriously harmed. The market for business-to-business eCommerce solutions in general, and supply chain management solutions in particular, is extremely competitive, evolving and characterized by continuous rapid development of technology. Competition to capture business users is intense and is expected to increase dramatically in the future, which will likely result in price reductions, reduced profit margins and a decrease in our market share, which could have a serious adverse impact on our business. Indirect competitors are traditional Value Added Network, or VAN, solution providers that have extended their VAN connections over the Internet and new Internet companies that are focused on trading exchanges that allow merchandise buyers and sellers to access each other on channels within existing portals. One or more of these companies may develop and add preorder merchandise sourcing capabilities to their existing product offerings, giving them a more comprehensive solution than our solution, which could adversely affect our business. We expect that additional established and emerging companies will seek to enter our market as it continues to develop and expand. We may not be able to compete successfully against future competitors, especially those with significantly greater financial, marketing, service, support, technical and other resources. Additional risk factors are discussed in more detail in the risk factor section of the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1999. PART II OTHER INFORMATION Item 2 Changes in Securities and Use of Proceeds On August 9, 1999 the Company issued 1,257,970 shares of Common Stock in a private placement to certain existing and new stockholders of the Company at a price of $6.40 per share (as adjusted for the August 25, 1999 1 for 4 reverse stock split). Net proceeds to the Company, after placement agent fees and other offering costs, were approximately 14 $7.3 million. This private placement transaction was effected in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), as contained in Section 4(2) of the Securities Act on the basis that such transaction did not involve a public offering. On August 10, 1999, the Company issued 24,272 (post split) shares of Common Stock in exchange for 97,088 of Series A preferred shares at the election of the series A shareholder. These preferred shares were converted to Common Stock under the terms and conditions of the November 22, 1994 Series A Convertible Preferred Stock Purchase Agreement. This private placement transaction was effected in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), as contained in Section 4(2) of the Securities Act on the basis that such transaction did not involve a public offering. On August 25, 1999 the Company executed a 1 for 4 reverse split of its Common Stock. Item 4 Submission of Matters to a Vote of Security Holders The Company held a Meeting of Stockholders on July 20, 1999, at which time the following matters were submitted to a vote of the Company's stockholders: Proposal 1: The election of the following persons as directors to serve until the next succeeding Meeting of Stockholders and until their respective successors have been elected and qualified, or until their earlier resignation or removal:
Number of Shares ---------------------------------------------------------------------- For Against Withheld ------------------ ----------------- ------------------ Marcel van Heesewijk 22,541,661 -0- 34,300 Sean M. Maloy 22,541,661 -0- 34,300 Mattheus Wegbrans 16,551,940 5,989,061 34,300 Johan A. Vunderink 22,541,661 -0- 34,300 Louis A. Delmonico 22,541,661 -0- 34,300 Proposal 2: To ratify the adoption of the 1999 Stock Incentive Plan. Number of Shares ---------------------------------------------------------------------- For Against Withheld ------------------ ----------------- ------------------ 17,606,880 59,175 2,116,800 Proposal 3: To ratify the adoption of the Employee Stock Purchase Plan. Number of Shares ---------------------------------------------------------------------- For Against Withheld ------------------ ----------------- ------------------ 17,638,380 31,675 2,114,800
Proposal 4(a): To approve the filing of an Amended and Restated Certificate of Incorporation to change the Company's name to SourcingLink.net, Inc.
Number of Shares ---------------------------------------------------------------------- For Against Withheld ------------------ ----------------- ------------------ 20,375,101 86,280 2,114,600
15 Proposal 4(b): To approve the filing of an Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock to 60,000,000.
Number of Shares ---------------------------------------------------------------------- For Against Withheld ------------------ ----------------- ------------------ 20,413,651 45,550 2,116,100
Proposal 4(c): To approve the filing of an Amended and Restated Certificate of Incorporation to authorize 10,000,000 shares of blank check preferred stock.
Number of Shares ---------------------------------------------------------------------- For Against Withheld ------------------ ----------------- ------------------ 17,632,370 35,505 2,114,300
Proposal 4(d): To approve the filing of an Amended and Restated Certificate of Incorporation for other technical and clarifying amendments.
Number of Shares ---------------------------------------------------------------------- For Against Withheld ------------------ ----------------- ------------------ 20,438,251 15,850 2,121,180
Proposal 5: To approve the filing of an amendment to the Company's Certificate of Incorporation to effect a 1 for 4 reverse stock split.
Number of Shares ---------------------------------------------------------------------- For Against Withheld ------------------ ----------------- ------------------ 19,669,930 2,902,551 2,700
Proposal 6: To approve and ratify the appointment of PricewaterhouseCoopers LLP as independent auditors of the Company for the fiscal year ending March 31, 2000.
Number of Shares ---------------------------------------------------------------------- For Against Withheld ------------------ ----------------- ------------------ 20,434,501 26,600 2,114,780
Item 5 Other Information Effective October 15, 1999, the Company moved its operations and corporate headquarters to San Diego, California. Its new address is 16855 West Bernardo Drive, Suite 260, San Diego, California 92127 (telephone 858-385-8900). Item 6 Exhibits and Reports on Form 8-K a. Exhibits 3.1 Amended and Restated Certificate of Incorporation of the Company, as filed July 20, 1999 (incorporated by reference to Exhibit C to the Company's definitive proxy materials filed with the Commission on June 17, 1999 - the "1999 Proxy Statement"). 10.1 1999 Stock Option Plan (incorporated by reference to Exhibit A to the 1999 Proxy Statement). 10.2 Employee Stock Purchase Agreement (incorporated by reference to Exhibit B to the 1999 Proxy Statement). 16 10.3 Form of Common Stock Purchase Agreement (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3, File Number 333-87051) between the Company and each of the Investors in the Company's 1999 Private Placement of Common Stock 10.4 Bernardo Executive center Gross Office Lease dated August 25, 1999 between the Company and Bernardo Three Flags, Inc. 10.5 Employment Agreement dated April 30, 1999 between the Company and Gary Davidson. 27.1 Financial Data Schedule b. Reports on Form 8-K On July 30, 1999, the Company filed a Current Report on Form 8-K reporting that it had changed its corporate name to SourcingLink.net, Inc. and had changed its trading symbol on the OTC Bulletin Board to SNET. 17 SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 15, 1999 SourcingLink.net, Inc. By: /s/ Gary Davidson ----------------- Gary Davidson, Vice President Finance and Administration, Chief Financial Officer 18 EX-10.4 2 GROSS OFFICE LEASE DATED AUGUST 25, 1999 EXHIBIT 10.4 BERNARDO EXECUTIVE CENTER GROSS OFFICE LEASE BERNARDO THREE FLAGS, INC. A DELAWARE CORPORATION Landlord AND SOURCINGLINK.NET,INC. A DELAWARE CORPORATION Tenant August 25, 1999 GROSS OFFICE LEASE REFERENCE PAGE
BUILDING: Benardo Executive Center LANDLORD: Bernardo/Three Flags, Inc. a Delaware Corporation c/o The Rreef Funds LANDLORD'S ADDRESS:: 16835 W. Bernardo Drive, Suite 203, San Diego, CA 92127 LEASE REFERENCE DATE: August 25, 1999 TENANT: SourcingLink.net, Inc., a Delaware Corporation TENANT'S ADDRESS: (a) As of beginning of Term: 16855 West Bernardo Drive, Suite 205, San Diego, CA 92127 (b) Prior to beginning of Term: 16855 West Bernardo Drive, Suite 205, San Diego, CA 92127 PREMISES IDENTIFICATION: Suite Number: 260/ (For outline of premises, See Exhibit B) USE & PREMISES RENTABLE AREA: General office use as allowed under existing zoning, consisting of approximately 8,452 rentable square feet. SCHEDULED COMMENCEMENT DATE: Upon completion of tenant improvements, anticipated to be October 15, 1999, or sooner. TERMINATION DATE: October 14, 2002. TERM OF LEASE: Three (3) years, beginning on the Commencement Date and ending on the Termination Date. INITIAL ANNUAL RENT (Article 3): $187,634.40 plus electricity. INITIAL MONTHLY INSTALLMENT OF ANNUAL $15,636.20 plus electricity/ RENT (Article 3): BASE YEAR (DIRECT EXPENSES INSURANCE AND Calendar Year: 2000 ESCLATIONS): BASE YEAR (TAXES): Calendar Year: 2000 TENANT'S PROPORTIONATE SHARE: 4.96% SECURITY DEPOSIT: $46,908.60 ASSIGNMENT/SUBLETTING FEE: $1,000.00 REAL ESTATE BROKER DUE CB Richard Ellis, Inc.
COMMISSION: The Reference Page information is incorporated into and made a part of the Lease. In the event of any conflict between any Reference Page information and the Lease, the Lease shall control. This Lease includes Exhibits A through E, all of which are made a part of this Lease. LANDLORD TENANT: BERNARDO/THREE FLAGS, INC., SourcingLink.net, Inc. a Delaware Corporation a Delaware Corporation By: By: ------------------------------ ------------------------------ Jill E. Shanahan Sean M. Maloy Title: Vice President Title: CEO and President Dated: Dated: -------------------------- -------------------------- 3 LEASE By this Lease Landlord leases to Tenant and Tenant leases from Landlord thc Premises in the Building as set forth and described on thc Reference Page. The Reference Page, including all terms defined thereon, is incorporated as part of this Lease. 1. USE AND RESTRICTIONS ON USE. 1.1 The Premises are to be used solely for general office purposes. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or injure, annoy, or disturb them or allow the Premises to be used for any improper, unmoral, unlawful, or objectionable purpose. Tenant shall not do, permit or suffer in, on, or about the Premises the sale of any alcoholic Liquor without the written consent of Landlord first obtained, or the commission of any waste. Tenant shall comply with all governmental laws, ordinances and regulations applicable to the use of the Premises and its occupancy and shall promptly comply with all governmental orders and directions for the correction, prevention and abatement of any violations in or upon, or in connection with, the Premises, all at Tenant's sole expense. Tenant shall not do or permit anything to be done on or about the Premises or bring or keep anything into the Premises which will in any way increase the rate of, invalidate or prevent the procuring of any insurance protecting against loss or damage to the Building or any of its contents by fire or other casualty or against liability for damage to property or injury to persons in or about the Building or any part thereof. 1.2 Tenant shall not, and shall not direct, suffer or permit any of its agents, contractors, employees, licensees or invitees to at any time handle, use, manufacture, store or dispose of in or about the Premises or the Building any (collectively "Hazardous Materials") flammables, explosives, radioactive materials, hazardous wastes or materials, toxic wastes or materials, or other similar substances, petroleum products or derivatives or any substance subject to regulation by or under any federal, state and local laws and ordinances relating to the protection of the environment or the keeping, use or disposition of environmentally hazardous materials, substances, or wastes, presently in effect or hereafter adopted, all amendments to any of them, and all rules and regulations issued pursuant to any of such laws or ordinances (collectively "Environmental Laws") nor shall Tenant suffer or permit any Hazardous Materials to be used in any manner not fully in compliance with all Environmental Laws, in the Premises or the Building and appurtenant land or allow the environment to become contaminated with any Hazardous Materials. Notwithstanding the foregoing, and subject to Landlord's prior consent, Tenant may handle, store, use or dispose of products containing small quantities of Hazardous Materials (such as aerosol cans containing insecticides, toner for copiers, paints, paint remover and the like) to the extent customary and necessary for the use of the Premises for general office purposes; provided that Tenant shall always handle, store, use, and dispose of any such Hazardous Materials in a safe and lawful manner and never allow such Hazardous Materials to contaminate the Premises, Building and appurtenant land or the environment. Tenant shall protect, defend, indemnify and hold each and all of the Landlord Entities (as defined in Article 30) harmless from and against any and all loss, claims, liability or costs (including court costs and attorney's fees) incurred by reason of any actual or asserted failure of Tenant to fully comply with all applicable Environmental Laws, or the presence, handling, use or disposition in or from the Premises of any Hazardous Materials by Tenant (even though permissible under all applicable Environmental Laws or the provisions of this Lease), or by reason of any actual or asserted failure of Tenant to keep, observe, or perform any provision of this Section 1.2. 2. TERM. 2.1 The Term of this Lease shall begin on the date ("Commencement Date") which shall be the later of the Scheduled Commencement Date as shown on the Reference Page and the date that Landlord shall tender possession of the Premises to Tenant. Landlord shall tender possession of the Premises with all the work, if any, to be performed by Landlord pursuant to Exhibit B to this Lease substantially completed. Tenant shall deliver a punch list of items not completed within 30 days after Landlord tenders possession of the Premises and Landlord agrees to proceed with due diligence to perform its obligations regarding such items. Landlord and Tenant shall execute a memorandum setting forth the actual Commencement Date and Termination Date. 2.2 Tenant agrees that in the event of the inability of Landlord to deliver possession of the Premises on the Scheduled Commencement Date, Landlord shall not be liable for any damage resulting from such inability, but Tenant shall not be liable for any rent or utilities until the time when Landlord can, after notice to Tenant, deliver possession of the Premises to Tenant No such failure to give possession on the Scheduled Commencement Date shall affect the other obligations of Tenant under 1 this Lease, except that if Landlord is unable to deliver possession of the Premises within sixty (6O) days of the Scheduled Commencement Date. Tenant shall have the option to terminate this Lease unless said delay is as a result of: (a) Tenant's failure to agree to plans and specifications; (b) Tenant's request for materials, finishes or installations other than Landlord's standard except those, if any, that Landlord shall have expressly agreed to furnish without extension of time agreed by Landlord; (c) Tenant's change in any plans or specifications; or, (d) performance or completion by a party employed by Tenant. If any delay is the result of any of the foregoing, the Commencement Date and the payment of rent under this Lease shall be accelerated by the number of days of such delay. 2.3 In the event Landlord shall permit Tenant to occupy the Premises prior to the Commencement Date, such occupancy shall be subject to all the provisions of this Lease. Said early possession shall not advance the Termination Date. 3. RENT. 3.1 Tenant agrees to pay to Landlord the Annual Rent in effect from time to time by paying the Monthly Installment of Rent then in effect on or before the first day of each full calendar month during the Term, except that the first month's rent shall be paid upon the execution of this Lease. The Monthly Installment of Rent in effect at any time shall be one-twelfth of the Annual Rent in effect at such time. Rent for any period during the Term which is less than a full month shall be a prorated portion of the Monthly Installment of Rent based upon a thirty (30) day month. Said rent shall be paid to Landlord, without deduction or offset and without notice or demand, at the Landlord's address, as set forth on the Reference Page, or to such other person or at such other place as Landlord may from time to time designate in writing. 3.2 Tenant recognizes that late payment of any rent or other sum due under this Lease win result in administrative expense to Landlord, the extent of which additional expense is extremely difficult and economically impractical to ascertain. Tenant therefore agrees that if rent or any other sum is not paid when due and payable pursuant to this Lease, a late charge may be imposed in an amount equal to the greater of: (a) Fifty Dollars ($50.00), or (b) a sum equal to three percent (3%) per month of the unpaid rent or other payment. The amount of the late charge to be paid by Tenant shall be reassessed and added to Tenant's obligation for each successive monthly period until paid. The provisions of this Section 3.2 in no way relieve Tenant of the obligation to pay rent or other payments on or before the date on which they are due, nor do the terms of this Section 3.2 in any way affect Landlord's remedies pursuant to Article 19 of this Lease in the event said rent or other payment is unpaid after date due. 4. RENT ADJUSTMENTS. 4.1 For the purpose of this Article 4, the following terms are defined as follows: 4.1.1 Lease Year: Each calendar year falling partly or wholly within the Term. 4.1.2 Direct Expenses: All direct costs of operation, maintenance, repair and management of the Building (including the amount of any credits which Landlord may grant to particular tenants of the Building in lieu of providing any standard services or paying any standard costs described in this Section 4.1.2 for similar tenants), as determined in accordance with generally accepted accounting principles, including the following costs by way of Illustration, but not limitation: water and sewer charges; insurance charges of or relating to all insurance policies and endorsements deemed by Landlord to be reasonably necessary or desirable and relating in any manner to the protection, preservation, or operation of the Building or any part thereof; utility costs, including, but not limited to, the cost of heat, light, power, steam, gas, and waste disposal; the cost of janitorial services; the cost of security and alarm services; window cleaning costs; labor costs; costs and expenses of managing the Building including management fees; air conditioning maintenance costs; elevator maintenance fees and supplies; material costs; equipment costs including the cost of maintenance, repair and service agreements and rental and leasing costs; purchase costs of equipment other than capital items; current rental and leasing costs of items which would be amortizable capital items if purchased; tool costs; licenses, permits and inspection fees; wages and salaries; employee benefits and payroll taxes; accounting and legal fees; any sales, use or service taxes incurred in connection therewith. Direct Expenses shall not include depreciation or amortization of the Building or equipment in the Building except as provided herein, loan principal payments, costs of alterations of tenants' premises, leasing commissions, interest expenses on long-term borrowings, advertising costs or management salaries for executive personnel other than personnel located at the Building. In addition, Landlord shall be entitled to amortize and include as an additional rental adjustment: (i) an 2 allocable portion of the cost of capital improvement items which are reasonably calculated to reduce operating expenses; (ii) fire sprinklers and suppression systems and other life safety systems; and (iii) other capital expenses which are required under any governmental laws, regulations or ordinances which were not applicable to the Building at the time it was constructed. All such costs shall be amortized over the reasonable life of such improvements in accordance with such reasonable Life and amortization schedules as shall be determined by Landlord in accordance with generally accepted accounting principles, with interest on the unamortized amount at one percent (1%) in excess of the prime lending rate announced from time to time as such by The Northern Trust Company of Chicago, Illinois. 4.1.3 Taxes: Real estate taxes and any other taxes, charges and assessments which are levied with respect to the Building or the land appurtenant to the Building, or with respect to any improvements, fixtures and equipment or other property of Landlord, real or personal, located in the Building and used in connection with the operation of the Building and said land, any payments to any ground lessor in reimbursement of tax payments made by such lessor, and all fees, expenses and costs incurred by Landlord in investigating, protesting, contesting or in any way seeking to reduce or avoid increase in any assessments, levies or the tax rate pertaining to any Taxes to be paid by Landlord in any Lease Year. Taxes shall not include any corporate franchise, or estate, inheritance or net income tax, or tax imposed upon any transfer by Landlord of its interest in this Lease or the Building. 4.2 If in any Lease Year, (i) Direct Expenses paid or incurred shall exceed Direct Expenses paid or incurred in the Base Year (Direct Expenses) and or (ii) Taxes paid or incurred by Landlord in any Lease Year shall exceed the amount of such Taxes which became due and payable in the Base Year (Taxes), Tenant shall pay as additional rent for such Lease Year Tenant's Proportionate Share of such excess. 4.3 The annual determination of Direct Expenses shall be made by Landlord and if certified by a nationally recognized firm of public accountants selected by Landlord shall be binding upon Landlord and Tenant. Tenant may review the books and records supporting such determination in the office of Landlord, or Landlord's agent, during normal business hours, upon giving Landlord five (5) days advance written notice within sixty (60) days after receipt of such determination, but in no event more often than once in any one year period. In the event that during all or any portion of any Lease Year, the Building is not fully rented and occupied Landlord may make any appropriate adjustment in occupancy-related Direct Expenses for such year for the purpose of avoiding distortion of the amount of such Direct Expenses to be attributed to Tenant by reason of variation in total occupancy of the Building by employing sound accounting and management principles to determine Direct Expenses that would have been paid or incurred by Landlord had the Building been fully rented and occupied, and the amount so determined shall be deemed to have been Direct Expenses for such Lease Year. 4.4 Prior to the actual determination thereof for a Lease Year, Landlord may from time to time estimate Tenant's liability for Direct Expenses and/or Taxes under Section 4.2. Article 6 and Article 29 for the Lease Year or portion thereof. Landlord will give Tenant written notification of the amount of such estimate and Tenant agrees that it will pay, by increase of its Monthly Installments of Rent due in such Lease Year, additional rent in the amount of such estimate. Any such increased rate of Monthly Installments of Rent pursuant to this Section 4.4 shall remain in effect until further written notification to Tenant pursuant hereto. 4.5 When the above mentioned actual determination of Tenant's liability for Direct Expenses and/or Taxes is made for any Lease Year and when Tenant is so notified in writing, then: 4.5.1 If the total additional rent Tenant actually paid pursuant to Section 4.3 on account of Direct Expenses and/or Taxes for the Lease Year is less than Tenant's liability for Direct Expenses and/or Taxes, then Tenant shall pay such deficiency to Landlord as additional rent in one lump sum within thirty (30) days of receipt of Landlord's bill therefor; and 4.5.2 If the total additional rent Tenant actually paid pursuant to Section 4.3 on account of Direct Expenses and/or Taxes for the Lease Year is more than Tenant's liability for Direct Expenses and/or Taxes, then Landlord shall credit the difference against the then next due payments to be made by Tenant under this Article 4. Tenant shall not be entitled to an credit by reason of actual Direct Expenses and/or Taxes in any Lease Year being less than Direct Expenses and/or Taxes in the Base Year (Direct Expenses and/or Taxes). 3 4.6 If the Commencement Date is other than January 1 or if the Termination Date is other than December 31, Tenant's liability for Direct Expenses and Taxes for the Lease Year in which said Date occurs shall be prorated based upon a three hundred sixty-five (365) day year. 5. SECURITY DEPOSIT. Tenant shall deposit the Security Deposit with Landlord upon the execution of this Lease. Said sum shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants and conditions of this Lease to be kept and performed by Tenant and not as an advance rental deposit or as a measure of Landlord's damage in case of Tenant's default. If Tenant defaults with respect to any provision of this Lease, Landlord may use any part of the Security Deposit for the payment of any rent or any other sum in default, or for the payment of any amount which Landlord may spend or become obligated to spend by reason of Tenant's default, or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion is so used, Tenant shall within five (5) days after written demand therefor, deposit with Landlord an amount sufficient to restore the Security Deposit to its original amount and Tenant's failure to do so shall be a material breach of this Lease. Except to such extent, if any, as shall be required by law, Landlord shall not be required to keep the Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on such deposit. If Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, the Security Deposit or any balance thereof shall be returned to Tenant at such time after termination of this Lease when Landlord shall have determined that all of Tenant's obligations under this Lease have been fulfilled. 6. ALTERATIONS. 6.1 Except for those, if any, specifically provided for in Exhibit B to this Lease, Tenant shall not make or suffer to be made any alterations, additions, or improvements, including, but not limited to, the attachment of any fixtures or equipment in, on, or to the Premises or any part thereof or the making of any improvements as required by Article 7, without the prior written consent of Landlord. When applying for such consent, Tenant shall, if requested by Landlord, furnish complete plans and specifications for such alterations, additions and improvements. 6.2 In the event Landlord consents to the making of any such alteration, addition or improvement by Tenant, the same shall be made using Landlord's contractor (unless Landlord agrees otherwise) at Tenant's sole cost and expense. If Tenant shall employ any Contractor other than Landlord's Contractor and such other Contractor or any Subcontractor of such other Contractor shall employ any non-union labor or supplier, Tenant shall be responsible for and bold Landlord harmless from any and all delays, damages and extra costs suffered by Landlord as a result of any dispute with any labor unions concerning the wage, hours, terms or conditions of the employment of any such labor. In any event Landlord may charge Tenant a reasonable charge to cover its overhead as it relates to such proposed work. 6.3 All alterations, additions or improvements proposed by Tenant shall be constructed in accordance with all government laws, ordinances, rules and regulations and Tenant shall, prior to construction, provide the additional insurance required under Article 11 in such case, and also all such assurances to Landlord, including but not limited to, waivers of lien, surety company performance bonds and personal guaranties of individuals of substance as Landlord shall require to assure payment of the costs thereof and to protect Landlord and the Building and appurtenant land against any loss from any mechanic's, materialmen's or other liens. Tenant shall pay in addition to any sums due pursuant to Article 4, any increase in real estate taxes attributable to any such alteration, addition or improvement for so long, during the Term, as such increase is ascertainable; at Landlord's, election said sums shall be paid in the same way as sums due under Article 4. 6.4 All alterations, additions, and improvements in, on, or to the Premises made or installed by Tenant, including carpeting, shall be and remain the property of Tenant during the Term but, excepting furniture, furnishings, movable partitions of less than full height from floor to ceiling and other trade fixtures, shall become a part of the realty and belong to Landlord without compensation to Tenant upon the expiration or sooner termination of the Term, at which time title shall pass to Landlord under this Lease as by a bill of sale, unless Landlord elects otherwise at the time of installation. Upon such election by Landlord, Tenant shall upon Lease expiration, at Tenant's sole cost and expense, forthwith and with all due diligence remove any such alterations, additions or improvements which are designated by Landlord to be removed, and Tenant shall forthwith and with all due diligence, at its sole cost and expense, repair and restore the Premises to their original condition, reasonable wear and Lear and damage by fire or other casualty excepted. 4 7. REPAIR. 7.1 Landlord shall have no obligation to alter, remodel, improve, repair, decorate or paint the Premises, except as specified in Exhibit B if attached to this Lease and except that Landlord shall repair and maintain the structural portions of the Building, including the basic plumbing, air conditioning, heating and electrical systems installed or furnished by Landlord. By taking possession of the Premises, Tenant accepts them as being in good order, condition and repair and in the condition in which Landlord is obligated to deliver them. It is hereby understood and agreed that no representations respecting the condition of the Premises or the Building have been made by Landlord to Tenant, except as specifically set forth in this Lease. 7.2 Tenant shall, at all times during the Term, keep the Premises in good condition and repair excepting damage by fire, or other casualty, and in compliance with all applicable governmental laws, ordinances and regulations, promptly complying with all governmental orders and directives for the correction, prevention and abatement of any violations or nuisances in or upon, or connected with, the Premises, all at Tenant's sole expense. 7.3 Landlord shall not be liable for any failure to make any repairs or to perform any maintenance unless such failure shall persist for an unreasonable time after written notice of the need of such repairs or maintenance is given to Landlord by Tenant. 7.4 Except as provided in Article 22, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Building or the Premises or to fixtures, appurtenances and equipment in the Building. Except to the extent, if any, prohibited by law, Tenant waives the right to make repairs at Landlord's expense under any law, statute or ordinance now or hereafter in effect. 8. LIENS. Tenant shall keep the Premises, the Building and appurtenant land and Tenant's leasehold interest in the Premises free from any liens arising out of any services, work or materials performed, furnished, or contracted for by Tenant, or obligations incurred by Tenant. In the event that Tenant shall not, within ten (10) days following the imposition of any such lien, either cause the same to be released of record or provide Landlord with insurance against the same issued by a major title insurance company or such other protection against the same as Landlord shall accept, Landlord shall have the right to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All such sums paid by Landlord and all expenses incurred by it in connection therewith shall be considered additional rent and shall be payable to it by Tenant on demand. 9. ASSIGNMENT AND SUBLETTING. 9.1 Tenant shall not have the right to assign or pledge this Lease or to sublet the whole or any part of the Premises whether voluntarily or by operation of law, or permit the use or occupancy of the Premises by anyone other than Tenant, and shall not make, suffer or permit such assignment, subleasing or occupancy without the prior written consent of Landlord, and said restrictions shall be binding upon any and all assignees of the Lease and subtenants of the Premises. In the event Tenant desires to sublet, or permit such occupancy of, the Premises, or any portion, thereof, or assign this Lease, Tenant shall give written notice thereof to Landlord at least (30) thirty days but no more than one hundred eighty (180) days prior to the proposed commencement date of such subletting or assignment, which notice shall set forth the name of the proposed subtenant or assignee, the relevant terms of any sublease or assignment and copies of financial reports and other relevant financial reports and other relevant financial information of the proposed subtenant or assignee. Landlord's consent shall not be unreasonably withheld. 9.2 Notwithstanding any assignment or subletting, permitted or otherwise, Tenant shall at all times remain directly, primarily and fully responsible and liable for the payment of the rent specified in this Lease and for compliance with all of its other obligations under the terms, provisions and covenants of this Lease. Upon the occurrence of an Event of Default, if the Premises or any part of them are then assigned or sublet, Landlord, in addition to any other remedies provided in this Lease or provided by law, may, at its option, collect directly from such assignee or subtenant all rents due and becoming due to Tenant under such assignment or sublease and apply such rent against any sums due to Landlord from Tenant under this Lease, and no such collection shall be construed to constitute a novation or release of Tenant from the further performance of Tenant's obligations under this Lease. 5 9.3 In addition to Landlord's right to approve of any subtenant or assignee, Landlord shall have the option, in its sole discretion, in the event of any proposed subletting or assignment, to terminate this Lease, or in the case of a proposed subletting of less than the entire Premises, to recapture the portion of the Premises to be sublet, as of the date the subletting or assignment is to be effective. The option shall be exercised, if at all, by Landlord giving Tenant written notice given by Landlord to Tenant within sixty (60) days following Landlord's receipt of Tenant's written notice as required above. If this Lease shall be terminated with respect to the entire Premises pursuant to this Section, the Term of this Lease shall end on the date stated in Tenant's notice as the effective date of the sublease or assignment as if that date had been originally fixed in this Lease for the expiration of the Term. If Landlord recaptures under this Section only a portion of the Premises, the rent to be paid from time to time during the unexpired Term shall abate proportionately based on the proportion by which the approximate square footage of the remaining portion of the Premises shall be less than that of the Premises as of the date immediately prior to such recapture. Tenant shall, at Tenant's own cost and expense, discharge in full any outstanding commission obligation on the part of Landlord with respect to this Lease, and any commissions which may be due and owing as a result of any proposed assignment or subletting, whether or not the Premises are recaptured pursuant to this Section 9.3 and rented by Landlord to the proposed tenant or any other tenant. 9.4 In the event that Tenant sells, sublets, assigns or transfers this Lease, Tenant shall pay to Landlord as additional rent an amount equal to one hundred percent (100%) of any Increased Rent (as defined below) when and as such Increased Rent is received by Tenant. As used in this Section, "Increased Rent" shall mean the excess of (a) all rent and other consideration which Tenant is entitled to receive by reason of any sale, sublease, assignment or other transfer of this Lease, over (ii) the rent otherwise payable by Tenant under this Lease at such time. For purposes of the foregoing, any consideration received by Tenant in form other than cash shall be valued at its fair market value as determined by Landlord in good faith. 9.5 Notwithstanding any other provision hereof, Tenant shall have no right to make (and Landlord shall have the absolute right to refuse consent to) any assignment of this Lease or sublease of any portion of the Premises if at the time of either Tenant's notice of the proposed assignment or sublease or the proposed commencement date thereof, there shall exist any uncured default of Tenant or matter which will become a default of Tenant with passage of time unless cured, or if the proposed assignee or sublessee is an entity: (a) with which Landlord is already in negotiation as evidenced by the issuance of a written proposal; (b) is already an occupant of the Building unless Landlord is unable to provide the amount of space required by such occupant; (c) is a governmental agency; (d) is incompatible with the character of occupancy of the Building; or (e) would subject the Premises to a use which would: (i) involve increased personnel or wear upon the Building; (ii) violate any exclusive right granted to another tenant of the Building; (iii) require any addition to or modification of the Premises or the Building in order to comply with building code or other governmental requirements; or, (iv) involve a violation of Section 1.2. Tenant expressly agrees that Landlord shall have the reasonable right to refuse consent to any such assignment or sublease and that for the purposes of any statutory or other requirement of reasonableness on the part of Landlord such refusal shall be reasonable. 9.6 Upon any request to assign or sublet, Tenant will pay to Landlord the Assignment Subletting Fee plus, on demand, a sum equal to all of Landlord's reasonable actual out of pocket costs, including reasonable attorney's fees, incurred in investigating and considering any proposed or purported assignment or pledge of this Lease or sublease of any of the Premises, regardless of whether Landlord shall consent to, refuse consent, or determine that Landlord's consent is not required for, such assignment, pledge or sublease. Any purported sale, assignment, mortgage, transfer of this Lease or subletting which does not comply with the provisions of this Article 9 shall be void. 9.7 If Tenant is a corporation, partnership or trust, any transfer or transfers of or change or changes within any twelve month period in the number of the outstanding voting shares of the corporation, the general partnership interests in the partnership or the identity of the persons or entities controlling the activities of such partnership or trust resulting in the persons or entities owning or controlling a majority of such shares, partnership interests or activities of such partnership or trust at the beginning of such period no longer having such ownership or control shall be regarded as equivalent to an assignment of this Lease to the persons or entities acquiring such ownership or control and shall be subject to all the provisions of this Article 9 to the same extent and for all intents and purposes as though such an assignment. [This provision does not apply to a public offering or stock by the company, mergers, acquisitions, or the exercising of stock options by employees, provided the Tenant maintains a similar net worth (of at least $8 million) as of the lease execution 6 date. Tenant shall have the obligation to provide Landlord written notice of any merger or acquisitions.] 10. INDEMNIFICATION. None of the Landlord Entities shall be liable and Tenant hereby waives all claims against them for any damage to any property or any injury to any person in or about the Premises or the Building by or from any cause whatsoever (including without limiting the foregoing, rain or water leakage of any character from the roof, windows, walls, basement, pipes, plumbing works or appliances, the Building not being in good condition or repair, gas, fire, oil, electricity or theft), except to the extent caused by or arising from the gross negligence or willful misconduct of Landlord or its agents, employees or contractors. Tenant shall protect, indemnify and hold the Landlord Entities harmless from and against any and all loss, claims, liability or costs (including court costs and attorney's fees) incurred by reason of (a) any damage to any property (including but not limited to property of any Landlord Entity) or any injury (including but not limited to death) to any person occurring in, on or about the Premises or the Building to the extent that such injury or damage shall be caused by or arise from any actual or alleged act, neglect, fault, or omission by or of Tenant, its agents, servants, employees, invitees, or visitors to meet any standards imposed by any duty with respect to the injury or damage; (b) the conduct or management of any work or thing whatsoever done by the Tenant in or about the Premises or from transactions of the Tenant concerning the Premises; (c) Tenant's failure to comply with any and all governmental laws, ordinances and regulations applicable to the condition or use of the Premises or its occupancy; or (d) any breach or default on the part of Tenant in the performance of any covenant or agreement on the part of the Tenant to be performed pursuant to this Lease. The provisions of this Article shall survive the termination of this Lease with respect to any claims or liability accruing prior to such termination. 11. INSURANCE. 11.1 Tenant shall keep in force throughout the Term: (a) a Commercial General Liability insurance policy or policies to protect the Landlord Entities against any liability to the public or to any invitee of Tenant or a Landlord Entity incidental to the use of or resulting from any accident occurring in or upon the Premises with a limit of not less than $1,000,000.00 per occurrence and not less than $2,000,000.00 in the annual aggregate, or such larger amount as Landlord may prudently require from time to time, covering bodily injury and property damage Liability and $1,000,000 products/completed operations aggregate; (b) Business Auto Liability covering owned, non-owned and hired vehicles with a limit of not less than $1,000,000 per accident; (c) insurance protecting against liability under Worker's Compensation Laws with limits at least as required by statute; (d) Employers Liability with limits of $500,000 each accident, $500,000 disease policy limit, $500,000 disease--each employee; (e) All Risk or Special Form coverage protecting Tenant against loss of or damage to Tenant's alterations, additions, improvements, carpeting, floor coverings, panelings, decorations, fixtures, inventory and other business personal property situated in or about the Premises to the full replacement value of the property so insured; and, (f) Business Interruption Insurance with limit of liability representing loss of at least approximately six months of income. 11.2 Each of the aforesaid policies shall (a) be provided at Tenant's expense; (b) name the Landlord and the building management company, if any, as additional insureds; (c) be issued by an insurance company with a minimum Best's rating of "A:VII" during the Term; and (d) provide that said insurance shall not be cancelled unless thirty (30) days prior written notice (ten days for non- payment of premium) shall have been given to Landlord; and said policy or policies or certificates thereof shall be delivered to Landlord by Tenant upon the Commencement Date and at least thirty (30) days prior to each renewal of said insurance. 11.3 Whenever Tenant shall undertake any alterations, additions or improvements in, to or about the Premises ("Work") the aforesaid insurance protection must extend to and include injuries to persons and damage to property arising in connection with such Work, without limitation including liability under any applicable structural work act, and such other insurance as Landlord shall require; and the policies of or certificates evidencing such insurance must be delivered to Landlord prior to the commencement of any such Work. 12. WAIVER OF SUBROGATION. So long as their respective insurers so permit, Tenant and Landlord hereby mutually waive their respective rights of recovery against each other for any loss insured by fire, extended coverage, All Risks or other insurance now or hereafter existing for the benefit of the respective party but only to the extent of the net insurance proceeds payable under such policies. Each party shall obtain any 7 special endorsements required by their insurer to evidence compliance with the aforementioned waiver. 13. SERVICES AND UTILITIES 13.1 Provided Tenant shall not be in default under this Lease beyond all applicable cure periods and subject to the other provisions of this Lease, Landlord agrees to furnish to the Premises during ordinary business hours on generally recognized business days (but exclusive in any event of Sundays and legal holidays), the following services and utilities subject to the rules and regulations of the Building prescribed from time to time: (a) water suitable for normal office use of the Premises; (b) heat and air conditioning required in Landlord's judgment for the use and occupation of the Premises; (c) cleaning and janitorial service; (d) elevator service by nonattended automatic elevators; (e) such window washing as may from time to time in Landlord's judgment be reasonably requited; and, (f) equipment to bring to Tenant's meter, electricity for lighting, convenience outlets and other normal office use. To the extent that Tenant is not billed directly by a public utility, Tenant shall pay, upon demand, as additional rent, for all electricity used by Tenant in the Premises. The charge shall be at the rates charged for such services by the local public utility. Landlord shall nor be liable for, and Tenant shall not be entitled to, any abatement or reduction of rental by reason of Landlord's failure to furnish any of the foregoing, unless such failure shall persist for an unreasonable time after written notice of such failure is given to Landlord by Tenant and provided further that Landlord shall not be liable when such failure is caused by accident, breakage, repairs, labor disputes of any character, energy usage restrictions or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. Landlord shall use reasonable efforts to remedy any interruption in the furnishing of services and utilities. 13.2 Should Tenant require any additional work or service, as described above, including services furnished outside ordinary business hours specified above, Landlord may, on terms to be agreed, upon reasonable advance notice by Tenant, furnish such additional service and Tenant agrees to pay Landlord such charges as may be agreed upon, including any tax imposed thereon, but in no event at a charge less than Landlord's actual cost plus overhead for such additional service and, where appropriate, a reasonable allowance for depreciation of any systems being used to provide such service. 13.3 Wherever heat-generating machines or equipment are used by Tenant in the Premises which affect the temperature otherwise maintained by the air conditioning system, Landlord reserves the right to install supplementary air conditioning units in or for the benefit of the Premises and the cost thereof, including the cost of installation and the cost of operations and maintenance, shall be paid by Tenant to Landlord upon demand as such additional rent. 13.4 Tenant will not, without the written consent of Landlord, use any apparatus or device in the Premises, including but not limited to, electronic data processing machines and machines using current in excess of 200 watts or 110 volts, which will in any way increase the amount of electricity or water usually furnished or supplied for use of the Premises for normal office use, nor connect with electric current, except through existing electrical outlets in the Premises, or water pipes, any apparatus or device for the purposes of using electrical current or water. If Tenant shall require water or electric current in excess of that usually furnished or supplied for use of the Premises as normal office use, Tenant shall procure the prior written consent of Landlord for the use thereof, which Landlord may refuse, and if Landlord does consent, Landlord may cause a water meter or electric current meter to be installed so as to measure the amount of such excess water and electric current. The cost of any such meters shall be paid for by Tenant. Tenant agrees to pay as additional rent to Landlord promptly upon demand therefor, the cost of all such excess water and electric current consumed (as shown by said meters, if any, or, if none, as reasonably estimated by Landlord) at the rates charged for such services by the local public utility or agency, as the case may be, furnishing the same, plus any additional expense incurred in keeping account of the water and electric current so consumed. 14. HOLDING OVER. Tenant shall pay Landlord for each day Tenant retains possession of the Premises or part of them after termination of this Lease by lapse of time or otherwise at the rate ("Holdover Rate") which shall be 200% of the greater of: (a) the amount of the Annual Rent for the last period prior to the date of such termination plus all Rent Adjustments under Article 4; and, (b) the then market rental value of the Premises as determined by Landlord assuming a new lease of the Premises of the then usual duration and other terms, in either case prorated on a daily basis, and also pay all damages sustained by Landlord by reason of such retention. If Landlord gives notice to Tenant of Landlord's election to 8 that effect, such holding over shall constitute renewal of this Lease for a period from month to month or one year, whichever shall be specified in such notice, in either case at the Holdover Rate, but if the Landlord does not so elect, no such renewal shall result notwithstanding acceptance by Landlord of any sums due hereunder after such termination; and instead, a tenancy at sufferance at the Holdover Rate shall be deemed to have been created. In any event, no provision of this Article 14 shall be deemed to waive Landlord's right of reentry or any other right under this Lease or at law. 15. SUBORDINATION. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, this Lease shall be subject and subordinate at all times to ground or underlying leases and to the lien of any mortgages or deeds of trust now or hereafter placed on, against or affecting the Building, Landlord's interest or estate in the Building, or any ground or underlying lease; provided, however, that if the lessor, mortgagee, trustee, or holder of any such mortgages or deed of trust elects to have Tenant's interest in this Lease be superior to any such instrument, then, by notice to Tenant, this Lease shall be deemed superior, whether this Lease was executed before or after said instrumental. Notwithstanding the foregoing, Tenant covenants and agrees to execute and deliver upon demand such further instruments evidencing such subordination or superiority of this Lease as may be required by Landlord. 16. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with all the rules and regulations as set forth in Exhibit C to this Lease and all reasonable modifications of and additions to them from time to time put into effect by Landlord. Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of the Building of any such rules and regulations. 17. REENTRY BY LANDLORD. 17.1 Landlord reserves and shall at all Limes have the right to re-enter the Premises to inspect the same, to supply janitor service and any other service to be provided by Landlord to Tenant under this Lease, to show said Premises to prospective purchasers, mortgagees or tenants, and to alter, improve or repair the Premises and any portion of the Building, without abatement of rent, and may for that purpose erect, use and maintain scaffolding, pipes, conduits and other necessary structures and open any wall, ceiling or floor in and through the Building and Premises where reasonably required by the character of the work to be performed, provided entrance to the Premises shall not be blocked thereby, and further provided that the business of Tenant shall not be interfered with unreasonably. 17.2 Landlord shall have the right at any time to change the arrangement and/or locations of entrance, or passageways, doors and doorways, and corridors, windows, elevators, stairs, toilets or other public parts of the Building and to change the name, number or designation by which the Building is commonly known. In the event that Landlord damages any portion of any wall or wall covering, ceiling, or floor or floor covering Within the Premises, Landlord shall repair or replace the damaged portion to match the original as nearly as commercially reasonable but shall not be required to repair or replace more than the portion actually damaged. 17.3 Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet employment of the Premises, and any ocher loss occasioned by any action of Landlord authorized by this Article 17. Tenant agrees to reimburse Landlord, on demand, as additional rent, for any expenses which Landlord may incur in thus effecting compliance with Tenant's obligations under this Lease. 17.4 For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in the Premises, excluding Tenant's vaults and safes or special security areas (designated in advance), and Landlord shall have the right to use any and all means which Landlord may deem proper to open said doors in an emergency to obtain entry to any portion of the Premises. As to any portion to which access can't be had by means of a key or keys in Landlord's possession, Landlord is authorized to gain access by such means as Landlord shall elect and the cost of repairing any damage occurring in doing so shall be borne by Tenant and paid to Landlord as additional rent upon demand. Landlord shall provide Tenant one day notice before entering Tenant's premises (other than emergencies). 9 18. DEFAULT. 18.1 Except as otherwise provided in Article 20. the following events shall be deemed to be Events of Default under this Lease: 18.1.1 Tenant shall fail to pay within five (5) days of when due any sum of money becoming due to be paid to Landlord under this Lease, whether such sum be any installment of the rent reserved by this Lease, any other amount treated as additional rent under this Lease, or any other payment or reimbursement to Landlord required by this Lease, whether or not treated as additional rent under this Lease, and such failure shall continue for a period of five days after written notice that such payment was not made when due, but if any such notice shall be given, for the twelve month period commencing with the date of such notice, the failure to pay within five days after due any additional sum of money becoming due to be paid to Landlord under this Lease during such period shall be an Event of Default, without notice. 18.1.2 Tenant shall fail to comply with any term, provision or covenant of this Lease which is not provided for in another Section of this Article and shall not cure such failure within twenty (20) days (forthwith, if the failure involves a hazardous condition) after written notice of such failure to Tenant. 18.1.3 Tenant shall fail to vacate the Premises immediately upon termination of this Lease, by lapse of time or otherwise, or upon termination of Tenant's right to possession only. 18.1.4 Tenant shall become insolvent, admit in writing its inability to pay its debts generally as they become due, file a petition in bankruptcy or a petition to take advantage of any insolvency statute, make an assignment for the benefit of creditors, make a transfer in fraud of creditors, apply for or consent to the appointment of a receiver of itself or of the whole or any substantial part of its property, or file a petition or answer seeking reorganization or arrangement under the federal bankruptcy laws, as now in effect or hereafter amended, or any other applicable law or statute of the United States or any state thereof. 18.1.5 A court of competent jurisdiction shall enter an order, judgment or decree adjudicating Tenant bankrupt, or appointing a receiver of Tenant, or of the whole or any substantial part of its property, without the consent of Tenant, or approving a petition filed against Tenant seeking reorganization or arrangement of Tenant under the bankruptcy laws of the United States, as now in effect or hereafter amended, or any state thereof, and such order, judgment or decree shall not be vacated or set aside or stayed within thirty (30) days from the date of entry thereof. 19. REMEDIES. 19.1 Except as otherwise provided in Article 20, upon the occurrence of any of the Events of Default described or referred to in Article 18, Landlord shall have the option to pursue any one or more of the following remedies without any notice or demand whatsoever, concurrently or consecutively and not alternatively: 19.1.1 Landlord may, at its election, terminate this Lease or terminate Tenant's right to possession only, without terminating the Lease. 19.1.2 Upon any termination of this Lease, whether by lapse of time or otherwise, or upon any termination of Tenant's right to possession without termination of the Lease, Tenant shall surrender possession and vacate the Premises immediately, and deliver possession thereof to Landlord, and Tenant hereby grants to Landlord full and free license to enter into and upon the Premises in such event and to repossess Landlord of the Premises as of Landlord's former estate and to expel or remove Tenant and any others who may be occupying or be within the Premises and to remove Tenant's signs and other evidence of tenancy and all other property of Tenant therefrom without being deemed in any manner guilty of trespass, eviction or forcible entry or detainer, and without incurring any liability for any damage resulting therefrom, Tenant waiving any right to claim damages for such re-entry and expulsion, and without relinquishing Landlord's right to rent or any other right given to Landlord under this Lease or by operation of law. 19.1.3 Upon any termination of this Lease, whether by lapse of time or otherwise, Landlord shall be entitled to recover as damages, all rent, including any amounts treated as additional rent under this Lease, and other sums due and payable by Tenant on the date of termination, plus as liquidated damages and not as a penalty, an amount equal to the sum of: (a) an amount equal to the then present value of the rent reserved in this Lease for the residue of the stated Term of this Lease 10 including any amounts treated as additional rent under this Lease and all other sums provided in this Lease to be paid by Tenant, minus the fair rental value of the Premises for such residue; (b) the value of the time and expense necessary to obtain a replacement tenant or tenants, and the estimated expenses described in Section 19.1.4 relating to recovery of the Premises, preparation for reletting and for reletting itself; and (c) the cost of performing any other covenants which would have otherwise been performed by Tenant. 19.1.4 Upon any termination of Tenant's right to possession only without termination of the Lease: 19.1.4.1.1 Neither such termination of Tenant's right to possession nor Landlord's taking and holding possession thereof as provided in Section 19.1.2 shall terminate the Lease or release Tenant, in whole or in part, from any obligation, including Tenant's obligation to pay the rent, including any amounts treated as additional rent, under this Lease for the full Term, and if Landlord so elects Tenant shall pay forthwith to Landlord the sum equal to the entire amount of the rent, including any amounts treated as additional rent under this Lease, for the remainder of the Term plus any other sums provided in this Lease to be paid by Tenant for the remainder of the Term. 19.1.4.1.2 Landlord may, but need not, relet the Premises or any part thereof for such rent and upon such terms as Landlord, in its sole discretion, shall determine (including the right to relet the premises for a greater or lesser term than that remaining under this Lease, the right to relet the Premises as a part of a larger area, and the right to change the character or use made of the Premises). In connection with or in preparation for any reletting, Landlord may, but shall not be required to, make repairs, alterations and additions in or to the Premises and redecorate the same to the extent Landlord deems necessary or desirable, and Tenant shall, upon demand, pay the cost thereof, together with Landlord's expenses of reletting, including, without limitation, any commission incurred by Landlord. If Landlord decides to relet the Premises or a duty to relet is imposed upon Landlord by law, Landlord and Tenant agree that nevertheless Landlord shall at most be required to use only the same efforts Landlord then uses to lease premises in the Building generally and that in any case that Landlord shall not be required to give any preference or priority to the showing or leasing of the Premises over any other space that Landlord may be leasing or have available and may place a suitable prospective tenant in any such other space regardless of when such other space becomes available. Landlord shall not be required to observe any instruction given by Tenant about any reletting or accept any tenant offered by Tenant unless such offered tenant has a credit-worthiness acceptable to Landlord and leases the entire Premises upon terms and conditions including a rate of rent (after giving effect to all expenditures by Landlord for tenant improvements, broker's commissions and other leasing costs) all no less favorable to Landlord than as called for in this Lease, nor shall Landlord be required o make or permit any assignment or sublease for more than the current term or which Landlord would not be required to permit under the provisions of Article 9. 19.1.4.1.3 Until such time as Landlord shall elect to terminate the Lease and shall thereupon be entitled to recover thc amounts specified in such case in Section 19.13, Tenant shall pay to Landlord upon demand the full amount of all rent, including any amounts treated as additional rent under this Lease and other sums reserved in this Lease for the remaining Term, together with the costs of repairs, alterations, additions, redecorating and Landlord's expenses of reletting and the collection of the rent accruing therefrom (including attorney's fees and broker's commissions), as the same shall then be due or become due from time to time, less only such consideration as Landlord may have received from any reletting of the Premises; and Tenant agrees that Landlord may file suits from time to time to recover any sums falling due under this Article 19 as they become due. Any proceeds of reletting by Landlord in excess of the amount then owed by Tenant to Landlord from time to time shall be credited against Tenant's future obligations under this License but shall not otherwise be refunded to Tenant or inure to Tenant's benefit. 19.2 Landlord may, at Landlord's option, enter into and upon the Premises if Landlord determines in its sole discretion that Tenant is not acting within a commercially reasonable time to maintain, repair or replace anything for which Tenant is responsible under this Lease and correct the same, without being deemed in any manner guilty of trespass, eviction or forcible entry and detainer and without incurring any liability for any damage or interruption of Tenant's business resulting therefrom. If Tenant shall have vacated the Premises, Landlord may at Landlord's option re-enter the Premises at any time during the last six months of the then current Term of this Lease and make any and all such changes, alterations, revisions, additions and tenant and other improvements in or about the Premises as Landlord shall elect, all without any abatement of any of the rent otherwise to be paid by Tenant under this Lease. 11 19.3 If, on account of any breach or default by Tenant in Tenant's obligations under the terms and conditions of this Lease, it shall become necessary or appropriate for Landlord to employ or consult with an attorney concerning or to enforce or defend any of Landlord's rights or remedies arising under this Lease, Tenant agrees to pay all Landlord's attorney's fees so incurred. Tenant expressly waives any right to: (a) trial by jury; and (b) service of any notice required by any present or future law or ordinance applicable to landlords or tenants but not required by the terms of this Lease. 19.4 Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies provided in this Lease or any other remedies provided by law (all such remedies being cumulative), nor shall pursuit of any remedy provided in this Lease constitute a forfeiture or waiver of any rent due to Landlord under this Lease or of any damages accruing to Landlord by reason of the violation of any of the terms, provisions and covenants contained in this Lease. 19.5 No act or thing done by Landlord or its agents during the Term shall be deemed a termination of this Lease or an acceptance of the surrender of the Premises, and no agreement to terminate this Lease or accept a surrender of said Premises shall be valid, unless in writing signed by Landlord. No waiver by Landlord of any violation or breach of any of the terms, provisions and covenants contained in this Lease shall be deemed or construed to constitute a waiver of any other violation or breach of any of the terms, provisions and covenants contained in this Lease. Landlord's acceptance of the payment of rental or other payments after the occurrence of an Event of Default shall not be construed as a waiver of such Default, unless Landlord so notifies Tenant in writing. Forbearance by Landlord in enforcing one or more of the remedies provided in this Lease upon an Event of Default shall not be deemed or construed to constitute a waiver of such Default or of Landlord's right to enforce any such remedies with respect to such Default or any subsequent Default. 19.6 Any and all properly which may be removed from the Premises by Landlord pursuant to the authority of this Lease or of law, to which Tenant is or may be entitled, may be handled, removed and/or stored, as the case may be, by or at the direction of Landlord but at the risk, cost and expense of Tenant, and Landlord shall in no event be responsible for the value, preservation or safekeeping thereof. Tenant shall pay to Landlord, upon demand, any and all expenses incurred in such removal and all storage charges against such property so long as the same shall be in Landlord's possession or under Landlord's control. Any such property of Tenant not retaken by Tenant from storage within thirty (30) days after removal from the Premises shall, at Landlord's option, be deemed conveyed by Tenant to Landlord under this Lease as by a bill of sale without further payment or credit by Landlord to Tenant. 20. TENANT'S BANKRUPTCY OR INSOLVENCY. 20.1 If at any time and for so long as Tenant shall be subjected to the provisions of the United States Bankruptcy Code or other law of the United States or any state thereof for the protection of debtors as in effect at such time (each a "Debtor's Law"): 20.1.1 Tenant, Tenant as debtor-in-possession, and any trustee or receiver of Tenant's assets (each a "Tenant's Representative") shall have no greater right to assume or assign this Lease or any interest in this Lease, or to sublease any of the Premises than accorded to Tenant in Article 9, except to the extent Landlord shall be required to permit such assumption, assignment or sublease by the provisions of such Debtor's Law. Without limitation of the generality of the foregoing, any right of any Tenant's Representative to assume or assign this Lease or to sublease any of the Premises shall be subject to the conditions that: 20.1.1.1.1 Such Debtor's Law shall provide to Tenant's Representative a right of assumption of this Lease which Tenant's Representative shall have timely exercised and Tenant's Representative shall have fully cured any default of Tenant under this Lease. 20.1.2 Tenant's Representative or the proposed assignee as the case shall be, shall have deposited with Landlord as security for the timely payment of rent an amount equal to the larger of: (a) three months' rent and other monetary charges accruing under this Lease; and (b) any sum specified in Article 5; and shall have provided Landlord with adequate other assurance of the future performance of the obligations of the Tenant under this Lease. Without limitation, such assurances shall include, at least, in the case of assumption of this Lease, demonstration to the satisfaction of the Landlord that Tenant's Representative has and will continue to have sufficient unencumbered assets after the payment of all secured obligations and administrative expenses to assure Landlord that Tenant's Representative will have sufficient funds to fulfill the obligations of Tenant under this 12 Lease; and, in the case of assignment, submission of current financial statements of the proposed assignee, audited by an independent certified public accountant reasonably acceptable to Landlord and showing a net worth and working capital in amounts determined by Landlord to be sufficient to assure the future performance by such assignee of all of the Tenant's obligations under this Lease. 20.1.3 The assumption or any contemplated assignment of this Lease or subleasing any part of the Premises, as shall be the case, will not breach any provision in any other lease, mortgage, financing agreement or other agreement by which Landlord is bound. 20.1.4 Landlord shall have, or would have had absent the Debtor's Law, no right under Article 9 to refuse consent to the proposed assignment or sublease by reason of the identity or nature of the proposed assignee or sublessee or the proposed use of the Premises concerned. 21. QUIET' ENJOYMENT. Landlord represents and warrants that it has full right and authority to enter into this Lease and that Tenant, while paying the rental and performing its other covenants and agreements contained in this Lease, shall peaceably and quietly have, hold and enjoy the Premises for the Term without hindrance or molestation from Landlord subject to the terms and provisions of this Lease. Landlord shall not be liable for any interference or disturbance by other tenants or third persons, nor shall Tenant be released from any of the obligations of this Lease because of such interference or disturbance. 22. DAMAGE BY FIRE, ETC. 22.1 In the event the Premises or the Building are damaged by fire or other cause and in Landlord's reasonable estimation such damage can be materially restored within ninety (90) days, Landlord shall forthwith repair the same and this Lease shall remain in full force and effect, except that Tenant shall be entitled to a proportionate abatement in rent from the date of such damage. Such abatement of rent shall be made pro rata in accordance with the extent to which the damage and the making of such repairs shall interfere with the use and occupancy by Tenant of the Premises from time to time. Within forty- five (45) days from the date of such damage. Landlord shall notify Tenant, in writing, of Landlord's reasonable estimation of the length of time within which material restoration can be made, and Landlord's determination shall be binding on Tenant. For purposes of this Lease, the Building or Premises shall be deemed "materially restored" if they are in such condition as would not prevent or materially interfere with Tenant's use of the Premises for the purpose for which it was being used immediately before such damage. 22.2 If such repairs cannot, in Landlord's reasonable estimation, be made within ninety (90) days, Landlord and Tenant shall each have the option of giving the other, at any time within sixty (60) days after such damage, notice terminating this Lease as of the date of such damage. In the event of the giving of such notice, this Lease shall expire and all interest of the Tenant in the Premises shall terminate as of the date of such damage as if such date bad been originally fixed in this Lease for the expiration of the Term. In the event that neither Landlord nor Tenant exercises its option to terminate this Lease, then Landlord shall repair or restore such damage, this Lease continuing in full force and effect, and the rent hereunder shall be proportionately abated as provided in Section 22.1. 22.3 Landlord shall not be required to repair or replace any damage or loss by or from fire or other cause to any partitions, decorations, partitions, additions, railings, ceilings, floor coverings, office fixtures or any other property or improvements installed on the Premises or belonging to Tenant. Any insurance which may be carried by Landlord or Tenant against loss or damage to the Building or Premises shall be for the sole benefit of the party carrying such insurance and under its sole control. 22.4 In the event that Landlord should fail to complete such repairs and material restoration within sixty (60) days after the date estimated by Landlord therefor as extended by this Section 22.4, Tenant may at its option and as its sole remedy terminate this Lease by delivering written notice to Landlord, within fifteen (15) days after the expiration of said period of time, whereupon the Lease shall end on the date of such notice or such later date fixed in such notice as if the date of such notice was the date originally fixed in this Lease for the expiration of the Term; provided, however, that if construction is delayed because of changes, deletions or additions in construction requested by Tenant, strikes, lockouts, casualties, Acts of God, war, material or labor shortages, government regulation or control or other causes beyond the reasonable control of Landlord, the period for restoration, repair or rebuilding shall be extended for the amount of time Landlord is so delayed. 13 22.5 Notwithstanding anything to the contrary contained in this Article: (a) Landlord shall not have any obligation whatsoever to repair, reconstruct, or restore the Premises when the damages resulting from any casually covered by the provisions of this Article 22 occur during the last twelve (12) months of the Term or any extension thereof, but if Landlord determines not to repair such damages Landlord shall notify Tenant and if such damages shall render any material portion of the Premises untenantable Tenant shall have the right to terminate this Lease by notice to Landlord within fifteen (15) days after receipt of Landlord's notice; and (b) in the event the bolder of any indebtedness secured by a mortgage or deed of trust covering the Premises or Building requires that any insurance proceeds be applied to such indebtedness, then Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within fifteen (15) days after such requirement is made by any such holder, whereupon this Lease shall end on the date of such damage as if the date of such damage were the date originally fixed in this Lease for the expiration of the Term. 22.6 In the event of any damage or destruction to the Building or Premises by any peril covered by the provisions of this Article 22, it shall be Tenant's responsibility to properly secure the Premises and upon notice from Landlord to remove forthwith, at its sole cost and expense, such portion of all of the property belonging to Tenant or its licensees from such portion or all of the Building or Premises as Landlord shall request. 23. EMINENT DOMAIN. If all or any substantial part of the Premises shall be taken or appropriated by any public or quasi-public authority under the power of eminent domain, or conveyance in lieu of such appropriation, either party to this Lease shall have the right, at its option, of giving the other, at any time within thirty (30) days after such taking, notice terminating this Lease, except that Tenant may only terminate this Lease by reason of taking or appropriation, if such taking or appropriation shall be so substantial as to materially interfere with Tenant's use and occupancy of the Premises. If neither party to this Lease shall so elect to terminate this Lease, the rental thereafter to be paid shall be adjusted on a fair and equitable basis under the circumstances. In addition to the rights of Landlord above, if any substantial part of the Building shall be taken or appropriated by any public or quasi-public authority under the power of eminent domain or conveyance in lieu thereof, and regardless of whether the Premises or any part thereof are so taken or appropriated, Landlord shall have the right, at its sole option, to terminate this Lease. Landlord shall be entitled to any and all income, rent, award, or any interest whatsoever in or upon any such sum, which may be paid or made in connection with any such public or quasi-public use or purpose, and Tenant hereby assigns to Landlord any interest it may have in or claim to all or any part of such sums, other than any separate award which may be made with respect to Tenant's trade fixtures and moving expenses; Tenant shall make no claim for the value of any unexpired Term. 24. SALE BY LANDLORD. In event of a sale or conveyance by Landlord of the Building, the same shall operate to release Landlord from any future liability upon any of the covenants or conditions, expressed or implied, contained in this Lease in favor of Tenant, and in such event Tenant agrees to look solely to the responsibility of the successor in interest of Landlord in and to this Lease. Except as set forth in this Article 24, this Lease shall not be affected by any such sale and Tenant agrees to attorn to the purchaser or assignee. If any security has been given by Tenant to secure the faithful performance of any of the covenants of this Lease, Landlord may transfer or deliver said security, as such, to Landlord's successor in interest and thereupon Landlord shall be discharged from any further liability with regard to said security. 25. ESTOPPEL CERTIFICATES Within ten (10) days following any written request which Landlord may make from time to time, Tenant shall execute and deliver to Landlord or mortgagee or prospective mortgagee a sworn statement certifying: (a) the dare of commencement of this Lease; (b) the fact that this Lease is unmodified and in full force and effect (or, If there have been modifications to this Lease, that this lease is in full force and effect, as modified, and stating the date and nature of such modifications); (c) the date to which the rent and other sums payable under this Lease have been paid; (d) the fact that there are no current defaults under this Lease by either Landlord or Tenant except as specified in Tenant's statement; and (e) such other matters as may be requested by Landlord. Landlord and Tenant intend that any statement delivered pursuant to this Article 25 may be relied upon by any mortgagee, beneficiary or purchaser and Tenant shall be liable for all loss, cost or expense resulting from the failure of any sale or funding of any loan caused by any material misstatement contained in 14 such estoppel certificate. Tenant irrevocably agrees that if Tenant fails to execute and deliver such certificate within such ten (10) day period Landlord or Landlord's beneficiary or agent may execute and deliver such certificate on Tenant's behalf, and that such certificate shall be fully binding on Tenant. 26. SURRENDER OF PREMISES. 26.1 Tenant shall, at least thirty (30) days before the last day of the Term, arrange to meet Landlord for a joint inspection of the Premises. In the event of Tenant's failure to arrange such joint inspection to be held prior to vacating the Premises, Landlord's inspection at or after Tenant's vacating the Premises shall be conclusively deemed correct for purposes of determining Tenant's responsibility for repairs and restoration. 26.2 At the end of the Term or any renewal of the Term or other sooner termination of this Lease, Tenant will peaceably deliver up to Landlord possession of the Premises, together with all improvements or additions upon or belonging to the same, by whomsoever made, in the same conditions received or first installed, broom clean and free of all debris, excepting only ordinary wear and tear and damage by fire or other casualty. Tenant may, and at Landlord's request shall, at Tenant's sole cost, remove upon termination of this Lease, any and all furniture, furnishings, movable partitions of less than full height from floor to ceiling, trade fixtures and other property installed by Tenant, title to which shall not be in or pass automatically to Landlord upon such termination, repairing all damage caused by such removal. Property not so removed shall, unless requested to be removed, be deemed abandoned by the Tenant and title to the same shall thereupon pass to Landlord under this Lease as by a bill of sale. All other alterations, additions and improvements in, on or to the Premises shall be dealt with and disposed of as provided in Article 6 hereof. 26.3 All obligations of Tenant under this Lease not fully performed as of the expiration or earlier termination of the Term shall survive the expiration or earlier termination of the Term. In the event that Tenant's failure to perform prevents Landlord from releasing the Premises, Tenant shall continue to pay rent pursuant to the provisions of Article 14 until such performance is complete. Upon the expiration or earlier termination of the Term, Tenant shall pay to Landlord the amount, as estimated by Landlord, necessary to repair and restore the Premises as provided in this Lease and/or to discharge Tenant's obligation for unpaid amounts due or to become due to Landlord. All such amounts shall be used and held by Landlord for payment of such obligations of Tenant, with Tenant being liable for any additional costs upon demand by Landlord, or with any excess to be returned to Tenant after all such obligations have been determined and satisfied. Any otherwise unused Security Deposit shall be credited against the amount payable by Tenant under this Lease. 27. NOTICES. Any notice or document required or permitted to be delivered under this Lease shall be addressed to the intended recipient, shall be transmitted personally, by fully prepaid registered or certified United States Mail return receipt requested, or by reputable independent contract delivery service furnishing a written record of attempted or actual delivery, and shall be deemed to be delivered when tendered for delivery to the addressee at its address set forth on the Reference Page, or at such other address as it has then last specified by written notice delivered in accordance with this Article 27, or if to Tenant at either its aforesaid address or its last known registered office or home of a general partner or individual owner, whether or not actually accepted or received by the addressee. 28. TAXES PAYABLE BY TENANT. In addition to rent and other charges to be paid by Tenant under this Lease, Tenant shall reimburse to Landlord, upon demand, any and all taxes payable by Landlord (other than net income taxes) whether or not now customary or within the contemplation of the parties to this Lease: (a) upon, allocable to, or measured by or on the gross or net rent payable under this Lease, including without limitation any gross income tax or excise tax levied by the State any political subdivision thereof, or the Federal Government with respect to the receipt of such rent; (b) upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy of the Premises or any portion thereof, including any sales, use or service tax imposed as a result thereof; (c) upon or measured by the Tenant's gross receipts or payroll or the value of Tenant's equipment, furniture, fixtures and other personal property of Tenant or leasehold improvements, alterations or additions located in the Premises; or (d) upon this transaction or any document to which Tenant is a party creating or transferring any interest of Tenant in this Lease or the Premises. In addition to the foregoing Tenant agrees to pay, before delinquency, any and all taxes levied or assessed against 15 Tenant and which become payable during the term hereof upon Tenant's equipment, furniture, fixtures and other personal property of Tenant located in the Premises. 29. RELOCATION OF TENANT Landlord at its sole expense, on at least ninety (90) days prior written notice, may require Tenant to move from the Premises the location shall be per mutual consent, where the consent shall not be reasonably withheld to other space of comparable size and decor in order to permit Landlord to consolidate the space leased to Tenant with other adjoining space leased or to be leased to another tenant. In the event of any such relocation, Landlord will pay all expenses of preparing and decorating the new premises so that they will be substantially similar to the Premises from which Tenant is moving, and Landlord will also pay the expense of moving Tenant's furniture and equipment to the relocated premises. In such event this Lease and each and all of the terms and covenants and conditions hereof shall remain in full force and effect and thereupon be deemed applicable to such new space except that a revised Reference Page and a revised Exhibit A shall become part of this Lease and shall reflect the location of the new premises. 30. DEFINED TERMS AND HEADINGS. The Article headings shown in this Lease are for convenience of reference and shall in no way define, increase, limit or describe the scope or intent of any provision of this Lease. Any indemnification or insurance of Landlord shall apply to and inure to the benefit of all the following "Landlord Entities", being Landlord, Landlord's investment manager, and the trustees, boards of directors, officers, general partners, beneficiaries, stockholders, employees and agents of each of them. Any option granted to Landlord shall also include or be exercisable by Landlord's trustee, beneficiary, agents and employees, as the case may be. In any case where this Lease is signed by more than one person, the obligations under this Lease shall be joint and several. The terms "Tenant" and "Landlord" or any pronoun used in place thereof shall indicate and include the masculine or feminine, the singular or plural number, individuals, firms or corporations, and each of their respective successors, executors, administrators and permitted assigns, according to the context hereof. The term "rentable area" shall mean the rentable area of the Premises or the Building as calculated by the Landlord on the basis of the plans and specifications of the Building including a proportionate share of any common areas. Tenant hereby accepts and agrees to be bound by the figures for the rentable space footage of the Premises and Tenant's Proportionate Share shown on the Reference Page. 31. TENANT'S AUTHORITY. If Tenant signs as a corporation each of the persons executing this Lease on behalf of Tenant represents and warrants that Tenant has been and is qualified to do business in the state in which the Building is located, that the corporation has full right and authority to enter into this Lease, and that all persons signing on behalf of the corporation were authorized to do so by appropriate corporate actions. If Tenant signs as a partnership, trust or other legal entity, each of the persons executing this Lease on behalf of Tenant represents and warrants that Tenant has complied with all applicable laws, rules and governmental regulations relative to its right to do business in the state and that such entity on behalf of the Tenant was authorized to do so by any and all appropriate partnership, trust or other actions, Tenant agrees to furnish promptly upon request a corporate resolution, proof of due authorization by partners, or other appropriate documentation evidencing the due authorization of Tenant to enter into this Lease. 32. COMMISSIONS. Each of the panics represents and warrants to the other that it has not dealt with any broker or finder in connection with this Lease, except as described on the Reference Page. Landlord is to pay all brokerage fees in connection with this Lease. 33. TIME AND APPLICABLE LAW. Time is of the essence of this Lease and all of its provisions. This Lease shall in all respects be governed by the laws of the state in which the Building is located. 34. SUCCESSORS AND ASSIGNS. Subject to the provisions of Article 9, the terms, covenants and conditions contained in this Lease shall be binding upon and inure to the benefit of the heirs, successors, executors, administrators and assigns of the parties to this Lease. 16 35. ENTIRE AGREEMENT. This Lease, together with its exhibits, contains all agreements of the parties to this Lease and supersedes any previous negotiations. There have been no representations made by the Landlord or understandings made between the parties other than those set forth in this Lease and its exhibits. This Lease may not be modified except by a written instrument duly executed by the parties to this Lease. 36. EXAMINATION NOT OPTION. Submission of this Lease shall not be deemed to be a reservation of the Premises. Landlord shall not be bound by this Lease until it has received a copy of this Lease duly executed by Tenant and has delivered to Tenant a copy of this Lease duly executed by Landlord, and until such delivery Landlord reserves the right to exhibit and lease the Premises to other prospective tenants. Notwithstanding anything contained in this Lease to the contrary, Landlord may withhold delivery of possession of the Premises from Tenant until such time as Tenant has paid to Landlord any security deposit required by Article 5, the first month's rent as set forth in Article 3 and any sum owed pursuant to this Lease. 37. RECORDATION. Tenant shall not record or register this Lease or a short form memorandum hereof without the prior written consent of Landlord, and then shall pay all charges and taxes incident such recording or registration. 38. LIMITATION OF LANDLORD'S LIABILITY. Redress for any claim against Landlord under this Lease shall be limited to and enforceable only against and to the extent of Landlord's interest in the Building. The obligations of Landlord under this Lease are not intended to and shall not be personally binding on, nor shall any resort be had to the private properties of, any of its trustees or board of directors and officers, as the case may be, its investment manager, the general partners thereof, or any beneficiaries, stockholders, employees, or agents of Landlord or the investment manager. 39. RENT SCHEDULE Rent for the period Month 1, 8-12 shall be $15,636.20 per month Rent for the period Month 2-7 shall be $ 7,818.10 per month Rent for the period Year 2 shall be $16,183.47 per month Rent for the period Year 3 shall be $16,749.89 per month
40. TENANT'S PROPORTIONATE SHARE "Tenant's Proportionate Share" is defined, for purposes of this Lease, as the percentage which the total square footage of the Premises bears to the total square footage of the building that Tenant is located in. Tenant's Share is subject to change according to BOMA standards. 41. PARKING Tenant shall be entitled to park free of charge and in common with other tenants on a non-exclusive basis and to use the parking areas under a irrevocable license. Landlord shall not be subject to any liability and Tenant shall not be entitled to any compensation or abatement of rent, nor shall such revocation or diminution be deemed constructive or actual eviction. Landlord reserves the right to relocate, improve, adjust, alter, modify, reduce or change the size, level, arrangement or location of such parking areas. Tenant shall comply with all rules and regulations that may be hereafter promulgated by Landlord with respect to the parking of automobiles in said parking areas. Unless otherwise provided in the Lease, Tenant will be entitled to use parking spaces based on a ratio of 4.0 cars for every 1,000 square feet of useable area of the Premises during the term of the Lease. Tenant's use of the parking spaces shall be unassigned, unreserved, undesignated and non-exclusive. Landlord reserves the right, except during the initial Lease term, to establish and enforce parking charges and adjust the parking charges in Landlord's sole and absolute discretion at any time after thirty (30) days prior written notice. Parking charges shall constitute additional rent and shall be due and payable (in addition to monthly base rent) in advance at the same place and at the same time as the monthly base rent. 17 Landlord reserves the right to assign and reassign, from time to time, parking spaces for use by persons as specifically designated by Landlord. Tenant shall not park in any numbered space or any space designated as reserved, handicapped, visitor, time-limited, loading or other similar restricted designation. Landlord further reserves the right to restrict parking by tenants, their officers, agents and employees to employee parking areas; to discourage non-customer parking; and to close all or any portion of the parking areas to such extent as may, in the opinion of Landlord's counsel, be legally sufficient to prevent a dedication thereof or the accrual of any rights to any person or the public therein. Neither Landlord nor any operator of the parking areas shall be liable for any loss of, or damage to any automobile parked in the parking areas, any contents of such automobile, accessories to any such automobile, or any property left in any of the parking areas, resulting from fire, theft, vandalism, accident, conduct of other users of the parking areas and other persons, or any other casualty or cause, including negligence or misconduct by Landlord, its agents, employees or operators. Landlord shall not be liable to Tenant for any unavailable parking spaces, or will the unavailability of parking spaces entitle Tenant to any offset, deduction or allowance under the terms of the Lease. Tenant acknowledges and agrees that (a) Landlord will not be obligated to provide any traffic control, security protection or operator for the parking areas; (b) Tenant uses the parking areas at its own risk; and (c) Landlord will not be liable for personal injury or death, or theft, loss of, or damage to property occurring in the parking areas. Tenant waives and releases Landlord from any and all liability arising out of the use of the parking areas by Tenant, its employees, agents, invitees, and visitors. If the parking areas are damaged or destroyed, or if the use of the parking areas is limited or prohibited by any governmental entity or authority, or the use or operation of the parking areas is limited or prevented by strike or other labor difficulties or other causes beyond Landlord's control, Landlord shall not be liable to Tenant for any inconvenience or damages caused to Tenant. Tenant's inability or prevention from using said parking areas shall riot subject Landlord or any operator to any liability to Tenant and shall not release Tenant of any of its obligations under the Lease and the Lease shall remain in full force and effect. 42. TEMPORARY PREMISES Landlord will permit Tenant to occupy Suite 104 located at 16855 West Bernardo Drive upon Landlord's receipt of this Lease executed by the Tenant which is also accompanied by first months rent and three (3) months security deposit for Suite 250. The Tenant will pay Landlord a total of Three Thousand Dollars ($3,000.00) plus any pro rata share of utilities for its occupancy of Suite 104. The term of this temporary premises shall commence on approximately Monday, August 30, 1999 (subject to the receiving of the signed lease, check, and all necessary insurance) and end when the Tenant Improvements are completed for Suite 250, but in no event shall the term extend beyond November 30, 1999. 43. ADA AND LIFE SAFETY COMPLIANCE If necessary, Landlord will make modifications in the common areas of the project to comply with ADA. Landlord will accept its responsibility and the costs associated therewith so long as it is deemed required by the governmental agency having jurisdiction thereof, and if not required due to Tenant's specific use of premises; or, if appropriate, Landlord will be able to secure an Unreasonable Hardship Exemption for the benefit of Tenant and Landlord. However, Tenant shall be responsible for any ADA requirements within the premises after Landlord delivers the fully permitted premises meeting the code as of the date of the permit. Further, Tenant shall be responsible for complying with all codes and regulations and regulations relating to its own specific required improvements within the premises. 44. RENEWAL OPTION Landlord grants Tenant one (I) option to extend the lease term for an additional term of three (3) years on the same terms and conditions as set forth in the lease except that the rental rate shall be at the then prevailing market rate for comparable space in comparable buildings. Said option shall be exercised only by written notice delivered to Landlord at least one hundred twenty (120) days prior to the expiration of the lease term. 18 45. SIGNAGE Tenant shall be entitled to standard building and suite directory signage. All costs of associated with the purchase, installation, maintenance, and the eventual removal of said signage shall be borne exclusively by the Tenant, but the costs may be deducted from the Tenant Improvement Allowance stated in Exhibit "B" of this lease. All signage shall conform with all City of San Diego's rules and regulations. 46. HAZARDOUS MATERIALS 46.1 Tenant agrees that Tenant, its agents and contractors, licensees, or invitees shall not handle, use, manufacture, store or dispose of any flammables, explosives, radioactive materials, hazardous wastes or materials, toxic wastes or materials, or other similar substances, petroleum products or derivatives (collectively "Hazardous Materials") on, under, or about the Premises, without Landlord's prior written consent (which consent may be given or withheld in Landlord's sole discretion), provided that Tenant may handle, store, use or dispose of products containing small quantities of Hazardous Materials, which products are of a type customarily found in offices and households (such as aerosol cans containing insecticides, toner for copies, paints, paint remover, and the like) provided further that Tenant shall handle, store, use and dispose of any such Hazardous Materials in a safe and lawful manner and shall not allow such Hazardous Materials to contaminate the Premises or the environment. 46.2 Without limiting the above, Tenant shall reimburse, defend, indemnify and hold Landlord harmless from and against any and all claims, losses, liabilities, damages, costs and expenses, including without limitation, loss of rental income, loss due to business interruption, and attorneys' fees and costs, arising out of or in any way connected with the use, manufacture, storage, or disposal of Hazardous Materials by Tenant, its agents or contractors on, under or about the Premises including, without limitation, the costs of any required or necessary investigation, repair, cleanup or detoxification and the preparation of any closure or other required plans in connection herewith, whether voluntary or compelled by governmental authority. The indemnity obligations of Tenant under this clause shall survive any termination of the Lease. 46.3 Notwithstanding anything set forth in this Lease, Tenant shall only be responsible for contamination of Hazardous Materials or any cleanup resulting directly therefrom, resulting directly from matters occurring or Hazardous Materials deposited (other than by contractors, agents or representatives controlled by Landlord) during the Lease term, and any other period of time during which Tenant is in actual or constructive occupancy of the Premises. Tenant shall take reasonable precautions to prevent the contamination of the Premises with Hazardous Materials by third parties. 46.4 It shall not be unreasonable for Landlord to withhold its consent to any proposed Assignment or Sublease of (i) the proposed Assignee's or subtenant's anticipated use of the premises involves the generation, storage, use, treatment or disposal of Hazardous Materials; (ii) the proposed Assignee or subtenant has been required by any prior Landlord, lender, or governmental authority to take remedial action in connection with Hazardous Materials contaminating a property if the contamination resulted from such Assignee's or subtenant's actions or use of the property in question; or (iii) the proposed Assignee or subtenant is subject to an enforcement order issued by any governmental authority in connection with the use, disposal, or storage of hazardous material. 47. SQUARE FOOTAGE VERIFICATION Upon final agreement as to the Space Plan (Exhibit "B") for Suite 260 this Lease shall be amended to confirm the resulting change in square footage change (if any). Additionally, all appropriate numbers that are affected by a square footage change (if any) e.g., rent, tenant's proportionate share, security deposit, etc., shall be documented in the previously mentioned Amendment. 48. CORPORATE AUTHORITY If Tenant is a corporation, Tenant represents and warrants that this Lease and the undersigned's execution of this Lease has been duly authorized and approved by the corporation's Board of Directors. The undersigned officers and representatives of the corporation executing this Lease on behalf of the corporation represent and warrant that they are officers of the corporation with authority to execute this Lease on behalf of the corporation. 19 LANDLORD: TENANT: BERNARDO/THREE FLAGS, INC., SourcingLink.net, Inc. a Delaware Corporation a Delaware Corporation By: By: ---------------------- --------------------------- Jill E Shanahan Sean M. Maloy Title: Vice President Title: CEO and President Dated: Dated: ------------------- ------------------------ 20 FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE, dated this 4th day of October, 1999 between Bernardo/Three Flags, Inc., a Delaware Corporation ("Landlord") and SourcingLink.net, Inc. ("Tenant"), for the premises located in the City of San Diego, County of San Diego, State of California, commonly known as Suite 250, 16855 West Bernardo Drive, San Diego, California 92127 (Bernardo Executive Center) ("Premises"). - -------------------------------------------------------------------------------- Page 1 of 1 WITNESSETH: WHEREAS, Landlord and Tenant entered into that certain Lease dated August 25, 1999 (hereinafter collectively referred to as the "Lease"); and WHEREAS, now, therefore: 1. Definitions. Unless otherwise specifically set forth herein, all ----------- capitalized terms herein shall have the same meaning as set forth in the Lease. a. Use & Premises Rentable Area: General office use as allowed under ---------------------------- existing zoning, consisting of approximately of 8,373 rentable feet. b. Initial Annual Rent (Article 3): $185,880.60 plus electricity. ------------------------------- c. Initial Monthly Installment of Annual Rent (Article 3): $15,490.05 ------------------------------------------------------ plus electricity. d. Tenant's Proportionate Share: 4.91%. ---------------------------- e. Security Deposit: Security Deposit of $46,470.15. ---------------- f. Rent Schedule: (Article 39) ------------- Rent for the Period: Months 1, 8-12 shall be $15,490.05 per month Rent for the Period: Month 2-7 shall be $ 7,745.03 per month Rent for the Period: Year 2 shall be $16,032.20 per month Rent for the Period: Year 3 shall be $16,593.44 per month 2. Incorporation. Except as modified herein, all other terms and conditions ------------- of the Lease between the parties above described, as attached hereto, shall continue in full force and effect. 3. Limitation of Landlord's Liability. Redress for any claims against ---------------------------------- Landlord under this Amendment or under the Lease shall only be made against Landlord to the extent of Landlord's interest in the property to which the Premises are a part. The obligations of Landlord under this Amendment and the Lease shall not be personally binding on, or shall any resort be had to the private properties of, any of its trustees or board of directors and officers, as the case may be, the general partners thereof or any beneficiaries, stockholders, employees or agents of Landlord, or its investment manager. LANDLORD: TENANT: BERNARDO/THREE FLAGS, INC. SOURCINGLINK.NET, INC. A Delaware Corporation a California Corporation By: By: /s/ SEAN M. MALOY --------------------------- ----------------------------- Jill E. Shanahan Sean M. Maloy EX-10.5 3 EMPLOYMENT AGREEMENT -- GARY DAVIDSON EXHIBIT 10.5 [LETTERHEAD OF QCS.NET APPEARS HERE] April 30, 1999 Gary Davidson 1852 Coltridge Place Escondido, California 92029 Dear Gary: We are pleased to offer you the position of Vice President of Finance and Chief Financial Officer of QCS.net Corporation (the "Company"), reporting to the Chief Executive Officer of the Company. Your base salary will start at $14,166.67 per month. In addition to your base salary, you shall be eligible for an annual performance bonus of up to $59,500(35% of your annual base salary), which shall be based upon the attainment of certain objectives to be mutually determined by the Chief Executive Officer and you. We would anticipate your start date to be no later than June 1, 1999, and will work to permit you to concurrently fulfill any remaining reasonable commitments from your current position. Upon commencement of your employment (the "Effective Date") the Company will grant you a stock option to purchase 300,000 shares of the Company's Common Stock at an exercise price equal to the closing price of the Company's Common Stock on the Effective Date, which option shall vest over a period of four (4) years at the rate of 25% per year on each anniversary of the Effective Date. As a regular employee of the Company, you will be eligible for four (4) weeks of vacation per year, coverage under the Company's group medical and dental plans, and the other benefits that the Company provides from time to time to comparable employees. In addition, during the term of your employment the Company will pay the cost of your universal life insurance coverage, up to a maximum of $2,500 per year. You will also be reimbursed for all reasonable business expenses, including commuting expenses for travel between San Diego and San Jose, subject to your compliance with the Company's reimbursement policies. Employment with the Company is not for a specific term and can be terminated by yourself or by the Company at any time for any reason, with or without cause. Any contrary representations which have been made or which may be made to you are superseded by this offer. This provision can only be changed or revoked in a formal written contract signed by the Chief Executive Officer of the Company, and cannot be changed by any express or implied agreement based on statements or actions. This letter sets forth the entire agreement between you and the Company. Once signed by you and ratified by the Company's Board of Directors, it will become a legally binding contract, and will supersede all prior discussions, promises, and negotiations. Any additions or modifications of these terms would have to be in writing and signed by yourself and the Chief Executive Officer. Your employment pursuant to this offer is contingent upon you executing the enclosed Proprietary Information and Inventions Agreement, upon you providing the Company with the legally required proof of your identity and authorization to work in the United States, and upon your continued compliance with the Company's policies and procedures as established from time to time. 2 I am very excited about the opportunity to work together again. I believe that with the proper team and level of dedication, we will build a successful business together in the exciting world of the Internet. If you accept the above-described offer, please return to me a signed copy of this letter and the executed Proprietary Information and Inventions Agreement. This offer, if not accepted, will expire on May 6, 1999. Sincerely, QCS.NET CORPORATION By: /s/ Sean Maloy ______________________ Sean Maloy, Chief Executive Officer I accept this offer: /s/ Gary Davidson ______________________________ ________________ Gary Davidson Date cc: Marcel VanHeesewijk Offer Letter to Gary Davidson Addendum A Should Sean Maloy cease to be employed by QCS.net for any reason other than termination for cause, Gary Davidson will be entitled to six months severance pay should he also cease to be employed by QCS.net for any reason other than termination for cause. The exercise price for the stock option to purchase 300,000 shares of the Company's Common Stock will be at an exercise price equal to the closing price of the Company's Common Stock on the date of employment. Any stock options which have not vested will be accelerated and treated as fully vested at any time during the four year vesting period if there is a change in control of the Company. These amendments to the Offer Letter are accepted by: /s/ SEAN MALOY /s/ GARY DAVIDSON - ------------------------------- ------------------------------- Sean Maloy Gary Davidson Chief Executive Officer 5-5-99 - ------------------------------- ------------------------------- Date Date EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000825517 SOURCINGLINK.NET 1,000 3-MOS MAR-31-2000 APR-01-1999 SEP-30-1999 7,259 0 221 30 0 167 396 198 7,896 1,174 0 0 3 7 6,712 7,896 0 288 0 145 1,055 0 0 (913) 0 (913) 0 0 0 (913) (.14) (.14)
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