-----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, VbqWZFIHNmBdntQIH0RYal4K3oqnyZKmFXxyVOFMG5N9xb2l268IM5x7JnhHiJPE y6DoErMRoDVgcGOPNth4wQ== 0001047469-99-024808.txt : 19990623 0001047469-99-024808.hdr.sgml : 19990623 ACCESSION NUMBER: 0001047469-99-024808 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990621 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QCS NET CORP CENTRAL INDEX KEY: 0000825517 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 841057621 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 033-18600-D FILM NUMBER: 99649745 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: 4159661214 MAIL ADDRESS: STREET 1: 650 CASTRO ST STREET 2: STE 210 CITY: MOUNTAIN VIEW STATE: CA ZIP: 94041 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 10KSB 1 10KSB - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB / / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended __________. /X/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from July 1, 1998 to March 31, 1999 Commission File Number: 33-18600-D QCS.NET CORPORATION (Name of small business issuer in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 98-0132465 (IRS Employer Identification Number) ______________650 CASTRO STREET, SUITE 210, MOUNTAIN VIEW, CA 94041_____________ (Address of Principal Executive Offices) _________________________________(650) 966-1214_________________________________ (Issuer's Telephone Number) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, $0.001 Par Value per share Indicate by check mark whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days (X) YES ( ) NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of the Issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB ( ) The Issuer's revenues for the nine months of fiscal year ended March 31, 1999 were $740,997. The aggregate market value of the Common Stock held by non-affiliates of the Issuer as of June 4, 1999 was $26,961,337. The number of shares of Common Stock, par value $.001 per share, outstanding as of June 4, 1999 was 23,010,874. DOCUMENTS INCORPORATED BY REFERENCE The Issuer's definitive Proxy Statement will be filed with the Securities and Exchange Commission on or before June 18, 1999 in connection with the Issuer's Annual Meeting of Stockholders to be held on July 20, 1999 and is incorporated by reference into Part III of this Report. Transitional Small Business Disclosure Format: ( ) YES (X) NO - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ----- PART I Item 1. Business...................................................................................... 3 Item 2. Properties.................................................................................... 19 Item 3. Legal Proceedings............................................................................. 19 Item 4. Submission of Matters to a Vote of Security Holders........................................... 19 PART II Item 5. Market For Common Equity and Related Stockholders Matters..................................... 20 Item 6. Management's Discussion and Analysis of Financial Condition and Result of Operations.................................................................................... 21 Item 7. Financial Statements.......................................................................... 27 Item 8. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure................................................................................... 28 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(A) of the Exchange Act of the Registrant.......................................... 28 Item 10. Executive Compensation........................................................................ 28 Item 11. Security Ownership of Certain Beneficial Owners and Management................................ 28 Item 12. Certain Relationships and Related Transactions................................................ 28 PART IV Item 13. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K.................. 29
2 PART I ITEM 1. BUSINESS THIS REPORT CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR THE FUTURE PERFORMANCE OF THE COMPANY. PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS IDENTIFIED IN THIS REPORT, INCLUDING THE MATTERS SET FORTH BELOW UNDER THE CAPTION "RISK FACTORS," WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. HISTORY OF THE COMPANY QCS.net Corporation (the "Company" or "QCS") was founded in 1993 in France by Marcel van Heesewijk, our Chairman, to develop desktop software that would enable retailers to manage their preorder merchandise sourcing activities over a private network. Concurrent with our formation, we established a relationship with Carrefour, a major world-wide retailer headquartered in France, that enabled us to develop a thorough knowledge of the systems, processes and forms required by retailers and their merchandise suppliers to effectively source merchandise on a global basis. In 1994, we merged with a publicly-held Colorado corporation as a means of raising capital to further develop our business, and moved our headquarters from France to California. By the end of 1994, we had successfully developed a proprietary desktop software solution that enabled retailers and their merchandise suppliers to transact sourcing activities over a private network. In late 1996, we entered into a strategic alliance agreement with IBM for global sales, marketing and infrastructure support, becoming an IBM partner for eBusiness. The Company is incorporated in Delaware and its shares of Common Stock are traded on the OTC Bulletin Board under the symbol QCSC. The Company intends to change its corporate name to SourcingLink.net, Inc. (See Item 4.) Pending that change the Company is adopting such name as a fictitious business name. The Company's principal office is located at 650 Castro Street, Suite 210, Mountain View, CA 94041 and its telephone number is (650) 966-1214. The Company's home page on the Internet can be located at www.QCS.net. TRANSITION TO WEB-ENABLED SOFTWARE While we were successful in launching the desktop solution to a number of retailers, the product's relatively high installation and support costs and private network nature created barriers for wide adoption and restricted the number of potential users. We also recognized that the Internet would become the standard for business-to-business eCommerce. In 1997, we began to web-enable our proprietary software to substantially reduce the connectivity cost and enable broader distribution of our solution. During 1998, we completed this development effort and pilot tested our Internet solution with PETsMART, a major U.S.-based pet food and supply specialty retailer, and Promodes, a leading European operator of hypermarkets. Based upon the successful completion of these pilots, we believe we have successfully transitioned from a proprietary desktop software solution to a secure Internet-based communications system, and are well positioned to benefit from first-to-market advantages. PETsMART is currently rolling out our Internet solution to its entire supplier base and Promodes is rolling out our Internet solution to its central buying organization's merchandise suppliers. Carrefour is now transitioning from our desktop software solution to our Internet solution in anticipation of rolling out our solution to its central buying organization's merchandise suppliers. 3 INDUSTRY BACKGROUND BUSINESS-TO-BUSINESS ECOMMERCE SOLUTIONS FOR THE RETAIL MARKET The global retail industry is characterized by intense competition, consolidation and tightening profit margins. Consumers increasingly are more discerning and demand that retailers offer more value in return for the consumers' purchasing dollars. To maintain market share and operate profitably, retailers must offer more desirable products and prices while optimizing factors such as product variety, inventory carrying costs, retail prices and costs of goods. The average large department store carries more than one hundred thousand stock keeping units, or SKUs, at any given time, each unique in terms of product style, size, color, features and packaging. Retailers need to source these SKUs from hundreds, or in some cases thousands, of merchandise suppliers globally. The merchandising workflow activities of the sourcing and procurement of the retailer's merchandise are divided into three functions: 1) preorder or "sourcing," 2) order and post-order, and 3) reorder marketing. In order to locate, qualify, initiate, negotiate, purchase, track, receive and pay for merchandise, retailers and merchandise suppliers must communicate and often exchange large amounts of data about products and transactions. In our global supplier marketplace, this process often occurs over different time zones, using different methods and many languages. With increasingly competitive retail markets, where productivity and use of information can affect profit margins, the ability to capture and manage this information faster and more efficiently than the competition is crucial to success. In an effort to increase the efficiency of the order and post-order functions, the largest retailers were early adopters of electronic procurement technologies, primarily in the form of EDI managed over private value added network services, or VANs. While EDI represents an advancement over paper-based ordering systems, EDI only addresses the order and post-order function of basic transactional data, and does not support the automation of preorder merchandise sourcing, which comprises the majority of the work involved in acquiring merchandise. In addition to addressing only a limited portion of the workflow, traditional EDI systems are based on closed and proprietary system technologies and can be expensive to develop, making them cost prohibitive for most retailers and merchandise suppliers. Conversely, traditional preorder merchandise sourcing processes have remained largely unstructured, using paper based processes, telephone calls, faxes, courier services, travel and personal visits. This error prone, time-consuming and expensive process makes it difficult for retail merchandise buyers to easily compare different merchandise and for senior management to monitor the buying practices of their merchandise buyers. Many retailers and merchandise suppliers dedicate costly resources to the manual entry of sourcing information. Retailers spend significant resources in identifying, locating and qualifying potential merchandise suppliers, while merchandise suppliers spend significant resources on customer acquisition and sales costs, including the production and distribution of paper catalogs and samples. In addition to these inefficiencies, the current sourcing process can also lead to less than optimal merchandise buying. The result is often a misalignment between what the consumers want and what is actually on the store shelf, leading to lost sales, price discounts and unsold merchandise. Due to these factors, retailers and merchandise suppliers have a compelling need to automate the preorder merchandise sourcing function. The global reach and ease of access of the Internet make it an ideal enabling technology to facilitate this automation. However, retailers and merchandise suppliers have historically not had the service and software providers who understand the unique requirements of the retail industry and who can provide a reliable and secure system which enables them to manage their sourcing transactions over the Internet. We believe our solution is uniquely positioned to take advantage of this market opportunity. 4 OVERVIEW OF THE QCS.NET SOLUTION QCS.net has developed a cost-effective, comprehensive Internet-based solution for business-to-business eCommerce that provides retailers and merchandise suppliers with a reliable and secure system enabling them to manage their preorder merchandise sourcing transactions. Our solution uses our proprietary software to organize and automate a broad range of sourcing activities, thereby significantly improving productivity and reducing costs. We believe the ease of use and low cost implementation and maintenance of our solution brings these capabilities within reach of a large number of retailers and merchandise suppliers. FEATURES AND FUNCTIONS OF THE QCS.NET SOLUTION The QCS.net solution automates and organizes the preorder merchandise sourcing function of merchandise for retailers and their merchandise suppliers. Our solution enables the retailers and merchandise suppliers to electronically:
RETAILER MERCHANDISE SUPPLIER - -------------------------------------- --------------------------------------------- - Create their own supply chain - Create their own supply chain management extranet with their management extranet with their existing existing merchandise suppliers retailers using our turnkey solution. using our turnkey solution. - Publish their company profile, - Publish their company profile, where where they present themselves to they present themselves to their existing their existing merchandise retailers as well as all other QCS.net suppliers as well as all other subscribers. The profile may include: QCS.net subscribers. The profile name, address, telephone number, annual may include: name, address, revenues, production capacity, plant telephone number, annual locations, contact persons, production, revenues, contact persons, company logo, link to website and other company logo, link to website general information the merchandise and other general information supplier wishes to publish. the retailer wishes to publish. - Publish company policies and - Publish company policies and procedures procedures (e.g., EDI (e.g., selling practices, sample and specifications, warehouse proce- return policies) to all their retailers dures, insurance requirements) on a one-to- many basis. to all their merchandise suppliers on a one-to-many basis. - Publish confidential company - Receive on-line updates from their information on one-to-one or customers for items such as inventory need to know basis (e.g., status or accounts receivable. inventory status per distribution center for replenishment or accounts payable per a merchandise vendor). - Configure accessibility for - Configure accessibility for their their buying organization selling organization according to according to individual settings individual settings and preferences. and preferences. - Create their own customized - Create their own customized forms, forms, which, if desired, will which, if desired, will have the same have the same look and feel as look and feel as the forms they are the forms they are used to work used to work with on paper. with on paper. - Define mandatory data fields for - Define mandatory data fields for all all customized forms to ensure customized forms to ensure complete data complete data submission. submission.
5
RETAILER MERCHANDISE SUPPLIER - -------------------------------------- --------------------------------------------- - View electronic catalogs, select - Create electronic catalogs to be viewed products and compare product by one or several merchandise buyers. specifications and terms among Catalogs include digitized images, full multiple merchandise suppliers; product description, size and generate requests for proposals, dimensions, price conditions, or RFP's. warranties, logistics and shipping information, manufacturing lead times, import and tariff information, and packaging options. - Transmit RFP's to one or - Receive RFP's from merchandise buyers multiple merchandise suppliers in a standard format. in a standard format. - Receive offers in response to - Respond to RFP's and negotiate with RFP's and negotiate the offers. merchandise buyers. - Create internal merchandise - Create internal merchandise catalogs catalogs for access by other for access by other internal salespeople. internal merchandisers. - Create and maintain their own - Import product data from in-house internal catalogs selected from applications automatically into QCS.net. the merchandise suppliers' offers which can be directly downloaded into their own product databases. - Integrate their order management - Enable integration of EDI capabilities system (EDI-based or manual) to which may be a pre-requisite to QCS.net and send electronic transact business with the retailer. orders to their merchandise suppliers. - Transmit electronic purchase - Receive electronic purchase orders orders to all of their without installing EDI software. merchandise suppliers. - Receive electronic advance - Transmit electronic advance shipping shipping notices which can be notices to their buyers. imported into the retailer's in- house management information systems. - Locate new merchandise suppliers - Locate new merchandise buyers using the using the search capabilities of search capabilities of QCS.net. Access QCS.net. Access is provided to is provided to retail company profile supplier company profile and including supporting merchandise electronic catalogs. categories.
The merchandise supplier's information is entered in a standard format and is "mapped" using proprietary software incorporating virus scanning functions by the QCS.net solution. The information is then transmitted and displayed to each retailer in their specified format. Our software resides on a dedicated and secure server hosted by IBM. This centrally managed clearinghouse approach enables retailers and merchandise suppliers to transmit information without customizing their information to meet each other's specific requirements. This ensures compatibility with a large number of proprietary systems. The QCS.net solution can be accessed from any PC via the Internet using a password and user ID and is available 24 hours a day, seven days a week. Communication on the QCS.net solution is private and secure. Although it is not our primary business focus, we offer Internet EDI using IBM's EDI mailbox and EDI-to-Domino translation services. Merchandise suppliers can access EDI information from a simple web browser and communicate while all EDI messages are automatically "mapped" to the retailer's in-house EDI system. 6 BENEFITS OF OUR SOLUTION FOR RETAILERS AND MERCHANDISE SUPPLIERS - - LOW IMPLEMENTATION AND MAINTENANCE COSTS Our solution presents the retailers and merchandise suppliers a turnkey solution to fully automate their merchandise sourcing processes with minimal up-front investment. Our solution can be easily integrated with a retailer's and merchandise supplier's existing in-house management information system with appropriate "firewalls." In addition, the maintenance expense associated with the QCS.net solution is included in the fixed monthly subscription fee. Our solution enables a merchandise supplier to connect with as many retailers as it desires for the same monthly subscription fee. As a result, the merchandise supplier is able to leverage its up-front investment for connecting to the service and the creation of electronic offerings. - - INCREASED PRODUCTIVITY AND LOWER COSTS OF DOING BUSINESS Our solution significantly improves the productivity while lowering the costs of sourcing activities by enabling retailers and merchandise suppliers to eliminate the current inefficient, time consuming and expensive methods of sourcing. Retailers and merchandise suppliers are able to more precisely deliver information and compare merchandise, obtain lower merchandise costs, expedite negotiations, shorten merchandise development and buying cycles, reduce errors and conflicts by recording communications, eliminate the need for manual entry of sourcing data, increase quality assurance, reduce inventory and reduce communication and travel expenses. Our solution also allows retailers and merchandise suppliers to transmit requests for proposals, or RFPs, catalogs and other information at a significantly lower cost than paper-based methods. In addition, the retailer's senior management is able to closely monitor and enforce compliance with sourcing policies. - - MORE EFFECTIVE BUYING DECISION Our solution enables retailers to make buying decisions more accurately with more information and closer to the selling season, resulting in improved inventory turnover and fewer discounts and unsold products. Our solution enables merchandise suppliers to provide product and pricing information directly to the merchandise buyer's desktop, reducing miscommunication and improving customer service. Once retrieved by retail merchandise buyers, data from participating merchandise suppliers is computer accessible in the retailer's standard formats, thereby permitting a meaningful and efficient comparison of products offered by multiple merchandise suppliers. - - INCREASED RETAILER AND MERCHANDISE SUPPLIER CONNECTIVITY The global availability of access to the Internet, combined with our fixed price model and the global support of our strategic partner, IBM, makes connectivity very affordable and provides a compelling cost effective solution to the retailer and merchandise supplier. Our solution significantly reduces the cost, and improves the ease, of communication between retailers and merchandise suppliers, enabling retailers to communicate electronically for the first time with substantially all of their merchandise suppliers. If either party desires, information can be connected into their existing legacy system or Enterprise Resource Planning applications such as SAP, Peoplesoft or BAAN. Our solution can also support EDI transactions. Once connected to QCS.net, a retail buyer can create its supply chain extranet with existing merchandise suppliers and can also access product information from other subscribing merchandise suppliers based upon standardized product categories. In addition, a merchandise supplier is able to electronically communicate with a broader range of retailers. - - ENHANCED REVENUE OPPORTUNITIES Using the QCS.net solution, the merchandise supplier can create an extranet with all of its retailer customers for the fixed monthly subscription fee. The merchandise supplier can submit information about itself, its product offerings and its electronic catalogs to be viewed by all or certain QCS.net subscribers. The merchandise supplier can send its catalog to any retail merchandise buyer in the world 7 who has an e-mail address that has been registered with QCS.net by the merchandise supplier or the retailer. The QCS.net solution allows merchandise suppliers to update their catalogs, send portions of their product catalogs to global listings and to send confidential customized and detailed offers from their catalogs to merchandise buyers on a point-to-point mode. As a result, the merchandise supplier can significantly increase the efficiency of its selling activities, improve its relationships with buyers and increase its revenue and profitability. The retailer, by streamlining the sourcing process and having access to a wider group of merchandise suppliers and information, is able to improve product selection and availability while reducing costs, thereby enhancing revenue and profitability. SALES AND MARKETING AND IBM STRATEGIC ALLIANCE Our initial strategic alliance agreement with IBM provided that we would primarily rely upon IBM for our sales effort. As part of our new strategy, we are currently renegotiating our strategic relationship with IBM in an effort to reduce our reliance on IBM for the sales and marketing of our solution. As such, we are establishing an internal sales and marketing force in order to build direct relationships with our retailer customers allowing a more rapid penetration of the market and better customer feedback. We currently anticipate that, under this new agreement, IBM will continue to provide certain worldwide marketing services for our solution. We further anticipate that, under a separate agreement, we will continue to purchase our global infrastructure and customer support from IBM. Our solution will remain a part of IBM's global supply chain solutions products and services portfolio and will continue to be marketed under IBM's e-business marketing initiatives for the retail industry. We have been and will continue to focus our sales and marketing efforts on developing flagship reference accounts in selected retail segments. We believe once retailers adopt our solution, they will strongly encourage their merchandise suppliers to use our solution for all of the preorder merchandise sourcing functions including catalog submission, specifications, RFPs, negotiations and offer sheets. Upon selection of our solution by the retailer, the retailer will notify its merchandise suppliers and will provide us with a contact list for our follow-up. We then provide each merchandise supplier with information regarding our solution, together with the necessary documentation for subscription to our solution. Through our online help menu and the IBM global help-desk, we assist the merchandise supplier in initializing our solution, training its personnel, developing its electronic catalog and electronically communicating with its retailers. In addition, our solution enables the merchandise supplier to connect to all of its retail customers for the same fixed monthly or annual subscription fee. This benefit not only provides additional value to the merchandise supplier, but also motivates it to recommend our solution to its other retailer customers. These recommendations allow us to target these additional retailers and, in turn, their merchandise suppliers. TECHNOLOGY AND INFRASTRUCTURE Since 1997, our development has been focused on our web-enabled solution which capitalizes on the connectivity, flexibility and low-cost offered by the Internet. Our solution is available to any supplier or retailer organization with a standard Internet connection. Access to our solution is achieved through local Internet Service Providers using TCP/IP protocol over the Internet and standard web browsers (Netscape Navigator or Microsoft Internet Explorer). The back-end architecture of our solution is built using IBM's Lotus Domino-TM- technology, which allows shared database replication, user authentication and controlled access, messaging and workflow management and offers support of industry standards such as HTTP, SSL or SMTP. We maintain our hub servers externally under a facility management agreement with IBM. Documents exchanged between our subscribers are encrypted using Lotus Notes-TM- secure protocol and the standard SSL protocol over the Internet. Both provide the highest level of security permitted by U.S. export laws. 8 We are also capable of handling traditional EDI transactions, such as purchase orders, invoicing, advance shipping notices and shipping tracking data using IBM's EDI mailbox and EDI-to-Domino translation services. The supplier can access EDI messages from a simple web browser and carry out trading dialogue while all EDI communications are automatically "mapped" to the retailer's in-house EDI system. DEVELOPMENT We use a strategy that combines internal development, alliances and licensing of applications from third parties. New product development and enhancements of our existing solution are typically performed internally. Responsibilities include design, development, documentation and quality control. Contractors and third party companies are involved in non-critical projects. COMPETITION 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. We believe we are one of the few companies currently focused on organizing and automating the preorder merchandise sourcing process over the Internet. Furthermore, we believe we are the only company addressing preorder merchandise sourcing with our type of business strategy. We address the preorder and post-order sourcing and procurement needs of major retailers by offering a comprehensive, independent, industry standard solution. Indirect competitors are traditional 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. Companies which offer EDI over VANs include General Electric Information Services, Sterling Commerce, Harbinger Corporation, QRS Inc. and IBM. Companies which offer exchange solutions include VerticalNet, Wiznet (E.C. Portal), Commerce One, Netscape, Ariba.com and Cyber Merchants Exchange, Inc. Some of these companies have longer operating histories, significantly greater financial, technical, marketing and other resources than us, significantly greater name recognition and a larger installed base of customers. In addition, many of our competitors have well-established relationships with certain of our current and potential retailer or supplier customers and have extensive knowledge of our industry. 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 believe that the primary competitive factors that will influence the success of companies seeking to provide supply chain management solutions will be industry knowledge, value-added content, product features, quality and performance, attractive pricing, global reach and information management capabilities. Although we believe that our solution effectively addresses these factors, our market is relatively new and rapidly evolving. We may not be able to compete successfully against future competitors, especially those with significantly greater financial, marketing, service, support, technical and other resources. 9 INTELLECTUAL PROPERTY RIGHTS AND OTHER PROPERTY RIGHTS We depend on our ability to develop and maintain the proprietary aspects of our technology. To protect our proprietary technology, we rely primarily on a combination of contractual provisions, confidentiality procedures, trade secrets and copyright and trademark laws. We require our customers to enter into agreements which impose restrictions on their ability to utilize our service and prohibit unauthorized use or copying of the software incorporated in our service. In addition, we seek to avoid disclosure of our trade secrets, including but not limited to, requiring those persons with access to our proprietary information to execute confidentiality agreements with us and restricting access to our source code. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. We cannot assure you that any of our proprietary rights with respect to our solution will be viable or of value in the future since the validity, enforceability and type of protection of proprietary rights in Internet-related industries are uncertain and still evolving. We may not develop proprietary products or technologies that are patentable and it is possible that any patent issued to us may not provide us with any competitive advantages, or that the patents of others will seriously harm our ability to do business. We rely on technology that we license from third parties, including software that is integrated with internally developed software and used in our service to perform key functions. If we are unable to continue to license any of this software on commercially reasonable terms, we will face delays in releases of new versions of our service until equivalent technology can be identified, licensed or developed and integrated into our service. These delays, if they occur, could seriously harm our business. We intend to apply for registration of our name and logo as trademarks in the United States and certain other foreign countries. The trademark applications will be subject to review by the applicable governmental authority, may be opposed by private parties and the trademarks may not issue. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our service is difficult, and while we are unable to determine the extent to which such unauthorized use or piracy of our software exists, there can be expected to be persistent problems. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Our means of protecting our proprietary rights may not be adequate and our competitors may independently develop similar technology, duplicate our service or design around patents issued to us or our other intellectual property. There has been a substantial amount of litigation in the software and Internet industries regarding intellectual property rights. It is possible that in the future third parties may claim that we or our current or potential future products infringe their intellectual property. We expect that providers of eCommerce solutions will increasingly be subject to infringement claims as the number of competitors in our industry segment grows and the functionality of products and services in different industry segments overlaps. Any claims, with or without merit, could be time-consuming, result in costly litigation, cause delays in the introduction of new technology or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could seriously harm our business. EMPLOYEES The Company currently has 23 full time employees, including three in sales and marketing, nine in engineering and development, four in field operations, and seven in management and administrative support functions. As of June 2, 1999, one of these employees was located in Hong Kong and the remaining employees were located in the United States. Our employees are not represented by a labor union and we believe that our relations with our employees are good. 10 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS. THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THE ACCURACY OF WHICH IS SUBJECT TO MANY RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING RISK FACTORS. RISKS RELATED TO OUR BUSINESS WE ARE AN EARLY-STAGE COMPANY. OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE PROSPECTS. We were founded in 1993 and have a limited operating history. Our limited operating history makes the evaluation of our future prospects difficult or impossible. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new, unproven and rapidly evolving markets. To address these risks, we must, among other things, continue to upgrade our technology, commercialize products incorporating such technology, continue to attract, retain and motivate qualified persons and respond to competitive developments. Since competition for experienced information technology personnel is intense, we cannot be certain that we will be able to attract such required personnel. There can be no assurance that we will be successful in addressing such risks. If we do not successfully address these risks, our business will be seriously harmed. The growth of our quarterly revenues is especially subject to fluctuation because it depends on the adoption of our solution by a small number of relatively large retailers, who then strongly encourage their merchandise suppliers to subscribe to our solution. As a result, the growth of our quarterly revenue may be effected if we are unable to complete one or more substantial retailer rollouts in any given quarter. Therefore, if we do not attract a sufficient number of retailers who adopt our solution in a particular quarter, our revenues in future periods could be lower than expected. See Item 6 for detailed information on our limited operating history. 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. As of May 31, 1999, only three retailers had adopted our solution and approximately 400 merchandise suppliers had subscribed to our Internet solution. Accordingly, 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 HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE. We incurred net losses of $2.8 million in fiscal 1998 and $1.5 million in fiscal 1999. Fiscal 1999 is a nine month accounting period. As of March 31, 1999, we had an accumulated deficit of approximately $14.4 million. The report of our independent accountants accompanying our consolidated financial statements notes that our recurring operating losses raise substantial doubt about our ability to continue as a going concern, however, note 2 to our consolidated financial statements described management's plan in 11 regard to these matters. We expect to derive substantially all of our revenues for the foreseeable future from subscription fees for our solution, which is based on an unproven business model. Although these revenues have grown slightly in the most recent quarter, we may not be able to sustain growth in the future necessary to achieve profitability. 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. See Item 6 for more detailed information. OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT. IF WE FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE MARKET PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY. 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. 12 We plan to increase our operating expenses substantially 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. See Item 6 for detailed information on our quarterly operating results. WE EXPECT TO DEPEND ON OUR SOLUTION FOR SUBSTANTIALLY ALL OF OUR REVENUES FOR THE FORESEEABLE FUTURE. Our solution and related services accounted for substantially all of our revenues in fiscal 1999. 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 SOLUTION BY LARGE RETAILERS IS TIME CONSUMING. 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, security 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 retailer commitment to adopt our solution and the commitment 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 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 an alliance with IBM for co-marketing and customer support. We are currently dependent on IBM for most of our marketing and support activities. Therefore, IBM's decisions and performance with respect to these matters have a material impact on our ability to market our solution. While we are currently negotiating new agreements to cover our relationship, and our future 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. IBM is under no contractual obligation to continue to market our solution. 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. There can be no assurance that, in such an event, we would succeed in alternative sales methods. 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. If IGN were to terminate these services, we would have to obtain them from another service provider or perform them ourselves. There 13 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 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 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. Companies which offer EDI over VANs include General Electric Information Services, Sterling Commerce, Harbinger Corporation, QRS Inc. and IBM. Companies which offer exchange solutions include VerticalNet, Wiznet (E.C. Portal), Commerce One, Netscape, Ariba.com and Cyber Merchants Exchange, Inc. Some of these companies have longer operating histories, significantly greater financial, technical, marketing and other resources than us, significantly greater name recognition and a larger installed base of customers. In addition, many of our competitors have well-established relationships with our current and potential customers and have extensive knowledge of our industry. 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. WE DEPEND ON THE INTRODUCTION OF NEW VERSIONS OF OUR PROPRIETARY SOLUTION AND ON ENHANCING THE FUNCTIONALITY AND SERVICES OFFERED BY OUR SOLUTION. If we are unable to develop new software or enhancements to our existing solution on a timely and cost-effective basis, or if new software or enhancements do not achieve market acceptance, our business would be seriously harmed. The life cycle of our solution is difficult to predict because the market for our solution is new and emerging, and is characterized by rapid technological change, changing customer needs and evolving industry standards. The introduction of services employing new technologies and emerging industry standards could render our existing solution obsolete and unmarketable. To be successful, our solution must keep pace with technological developments and emerging industry standards, address the ever-changing and increasingly sophisticated needs of our customers and achieve market acceptance. In developing new features of our solution, we may: - Fail to develop and market features that respond to technological changes or evolving industry standards in a timely or cost-effective manner; - Encounter products, capabilities or technologies developed by others that render our solution obsolete or noncompetitive or that shorten the life cycles of our existing solution; - Experience difficulties that could delay or prevent the successful development, introduction and marketing of these new features; or - Fail to develop new features that adequately meet the requirements of the marketplace or achieve market acceptance. 14 OUR SOFTWARE MAY CONTAIN ERRORS OR DEFECTS. Our software is complex and, accordingly, may contain undetected errors or failures when first introduced. This may result in loss of, or delay in, market acceptance of our solution. We have in the past discovered programming errors in our new releases after their introduction. We have experienced delays in release and customer frustration during the period required to correct these errors. We may in the future discover errors, including Year 2000 errors and additional scalability limitations, in new versions after release. WE DEPEND ON OUR KEY PERSONNEL. Our future performance depends on the continued service of our senior management, product development and sales personnel, in particular Marcel van Heesewijk, our Chairman, and Sean Maloy, our President and Chief Executive Officer. 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. PROTECTION OF OUR INTELLECTUAL PROPERTY MAY NOT BE ADEQUATE. We depend on our ability to develop and maintain the proprietary aspects of our solution. To protect our proprietary technology, we rely primarily on a combination of contractual provisions, confidentiality procedures, trade secrets, and patent, copyright and trademark laws. We do not sell our software and we require our customers to enter into user agreements, which impose restrictions on their ability to utilize the software. In addition, we seek to avoid disclosure of our trade secrets, including but not limited to, requiring those persons with access to our proprietary information to execute confidentiality agreements with us and restricting access to our source code. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. We cannot assure you that any of our proprietary rights with respect to our solution will be viable or of value in the future because the validity, enforceability and type of protection of proprietary rights in Internet-related industries are uncertain and still evolving. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our solution or to obtain and use information that we regard as proprietary. Policing unauthorized use of our solution is difficult, and while we are unable to determine the extent to which unauthorized use exists, can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Our means of protecting our proprietary rights may not be adequate and our competitors may independently develop similar technology, duplicate our solution or design around patents issued to us or our other intellectual property. There has been a substantial amount of litigation in the Internet industry regarding intellectual property rights. It is possible that in the future, third parties may claim that we or our current or potential future solutions infringe their intellectual property. Any claims, with or without merit, could be time- consuming, result in costly litigation, cause delays in the introduction of new versions or features or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could seriously harm our business. We must now, and may in the future have to, license or otherwise obtain access to intellectual property of third parties. For example, we are currently dependent on licenses of IBM's Lotus Domino 15 software for our solution, and may in the future be dependent on developers' licenses from enterprise resource planning, database and other system software merchandise suppliers in order to ensure compliance of our solution with their systems. We may not be able to obtain any required third party intellectual property in the future. IN ORDER TO MANAGE OUR GROWTH AND EXPANSION, WE WILL NEED TO IMPROVE AND IMPLEMENT NEW SYSTEMS, PROCEDURES AND CONTROLS. We currently plan to hire a significant number of employees and to expand the geographic scope of our customer base and operations. This expansion will result in substantial demands on our management resources. Our ability to compete effectively and to manage future expansion of our operations, if any, will require us to continue to improve our financial and management controls, reporting systems and procedures on a timely basis, and expand, train and manage our employee work force. We may encounter difficulties in transitioning to new management information software systems and our personnel, systems, procedures and controls may be inadequate to support our future operations. OUR BUSINESS IS SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. We market our solution to retailers worldwide, and historically have derived a significant portion of our revenues from international sales. As such, we are subject to a number of risks associated with international business activities. These risks generally include: - Seasonal fluctuations in purchasing patterns; - Unexpected changes in regulatory requirements; - Tariffs, export controls and other trade barriers; - Longer accounts receivable payment cycles and difficulties in collecting accounts receivable; - Difficulties in managing and staffing international operations; - Potentially adverse tax consequences, including restrictions on the repatriation of earnings; - The burdens of complying with a wide variety of foreign laws; - The risks related to global economic turbulence and adverse economic circumstances; - Political instability; and - Currency exchange rate fluctuations. OUR BUSINESS COULD BE AFFECTED BY YEAR 2000 ISSUES. The risks posed by Year 2000 issues could adversely affect our business in a number of significant ways. Although we believe that our internally developed systems and technology are Year 2000 compliant, our information technology systems nevertheless could be substantially impaired or cease to operate due to Year 2000 problems. Additionally, we rely on information technology supplied by third parties, and our participating sellers also are heavily dependent on information technology systems and on their own third-party merchandise supplier systems. Year 2000 problems experienced by us or any of these third parties could materially adversely affect our business. Additionally, the Internet could face serious disruptions arising from the Year 2000 problem. Many of our customers and potential customers have implemented policies that prohibit or strongly discourage making changes or additions to their internal computer systems until after January 1, 2000. We will experience lower net revenues if potential customers who might otherwise subscribe to our solution delay such subscriptions until after January 1, 2000 due to the risk of Year 2000 issues. If our potential customers delay subscribing to our solution in anticipation of the Year 2000 problem, our business would be seriously harmed. 16 We cannot guarantee that any of our participating retailers or merchandise suppliers will be Year 2000 compliant in a timely manner, or that there will not be significant interoperability problems among information technology systems. We also cannot guarantee that retailers and merchandise suppliers will be able to use our solution without serious disruptions arising from the Year 2000 problem. Given the pervasive nature of the Year 2000 problem, we cannot guarantee that disruptions in other industries and market segments will not adversely affect our business. Moreover, the costs related to Year 2000 compliance, which thus far have not been material, could ultimately be significant. In the event that we experience disruptions as a result of the Year 2000 problem, our business could be seriously harmed. OUR BUSINESS COULD BE AFFECTED AS A RESULT OF ANY FUTURE ACQUISITIONS. In order to remain competitive, we may find it necessary to acquire additional businesses, products or technologies. If we identify an appropriate acquisition candidate, we may not be able to negotiate the terms of the acquisition successfully, finance the acquisition, or integrate the acquired business, products or technologies into our existing business and operations. Further, completing a potential acquisition and integrating an acquired business will cause significant diversions of management time and resources. If we consummate one or more significant acquisitions in which the consideration consists of stock or other securities, your equity could be significantly diluted. If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash to consummate any acquisition. Acquisition financing may not be available on favorable terms, or at all. In addition, we may be required to amortize significant amounts of goodwill and other intangible assets in connection with future acquisitions, which would seriously harm our business. RISKS RELATED TO THE INTERNET INDUSTRY 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. CAPACITY CONSTRAINTS MAY RESTRICT THE USE OF THE INTERNET AS A COMMERCIAL MARKETPLACE. The Internet may not be accepted as a viable long-term commercial marketplace for a number of reasons. These include: - Potentially inadequate development of the necessary communication and network infrastructure; - Delayed development of enabling technologies and performance improvements; - Delays in the development or adoption of new standards and protocols; and - Increased governmental regulation. 17 SECURITY RISKS AND CONCERNS MAY DETER THE USE OF THE INTERNET FOR CONDUCTING ECOMMERCE. A significant barrier to eCommerce and communications is the secure transmission of confidential information over public networks. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of our security systems or those of other web sites to protect proprietary information. If any well-publicized compromises of security were to occur, it could have the effect of substantially reducing the use of the web for commerce and communications. Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations. The Internet is a public network, and data is sent over this network from many sources. In the past, computer viruses, software programs that disable or impair computers, have been distributed and have rapidly spread over the Internet. Computer viruses could be introduced into our systems or those of our customers or merchandise suppliers, which could disrupt our network or make it inaccessible to customers or merchandise suppliers. We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches. To the extent that our activities may involve the storage and transmission of proprietary information, such as credit card numbers, security breaches, could expose us to a risk of loss or litigation and possible liability. Our security measures may be inadequate to prevent security breaches, and our business would be harmed if we do not prevent them. OUR SOFTWARE SOLUTION MAY EXPERIENCE DELAYS AS A RESULT OF HIGH VOLUMES OF TRAFFIC. Our solution is currently operating on a limited basis. Our software may not be fully scalable, if the volume of traffic on the website for our solution significantly increases, our solution may experience slower response times or other problems. In addition, users will depend on Internet Service Providers, telecommunications companies and the efficient operation of their computer networks and other computer equipment for access to our solution. Each of these has experienced significant outages in the past and could experience outages, delays and other difficulties due to system failures unrelated to our systems. Any delays in response time or performance problems could cause users of our solution to perceive this service as not functioning properly and therefore cause them to use other methods to manage their sourcing and procurement activities. Even if the Internet infrastructure is adequately developed and maintained, we may incur substantial expenditures in order to adapt our solution to changing Internet technologies. Such additional expenses could severely harm our financial results. INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR, OR IMPOSE SALES AND OTHER TAXES ON THE SALE OF OUR SOLUTION AND SERVICES. As eCommerce evolves, we expect that federal, state or foreign agencies will adopt regulations covering issues such as user privacy, pricing, content and quality of products and services. It is possible that legislation could expose companies involved in eCommerce to liability, which could limit the growth of eCommerce generally. Legislation could dampen the growth in Internet usage and decrease its acceptance as a communications and commercial medium. If enacted, these laws, rules or regulations could limit the market for our solution and services. We do not collect sales or other similar taxes in respect of registration and subscription fees for the use of our solution. However, one or more states or countries may seek to impose use tax on companies like us. Legislation limiting the ability of the states to impose taxes on Internet-based transactions has been adopted by the U.S. Congress. This legislation could contain a limited time period in which this tax moratorium will apply. In the event that the tax moratorium is imposed for a limited time period, legislation could be renewed at the end of this period. Failure to enact or renew this legislation could allow various states to impose taxes on eCommerce, and the imposition of these taxes could seriously harm our business. 18 ITEM 2. PROPERTIES The Company maintains one office in Mountain View, California occupying approximately 2,148 square feet of space. Our operating lease on this facility expires in September 2000. The employee in Hong Kong is located in an IBM facility. We believe the facility requirements for our expansion plans will be readily available. ITEM 3. LEGAL PROCEEDINGS No legal proceedings were commenced by or against the Company during Fiscal 1999. The Company is subject to other legal actions arising in the ordinary course of business. The Company believes that the results of any such actions will not have a material adverse effect on the Company's business, financial condition and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended March 31, 1999. The following matters will be submitted to a vote of security holders during the first quarter of the fiscal year ending March 31, 2000 at the 1999 Annual Meeting of the Stockholders on July 20, 1999: (1) elect five nominees to serve as directors until the next annual meeting of stockholders or until their successors are elected and have qualified; (2) ratify the adoption of the Company's 1999 Stock Option Plan which authorizes the grant of options to purchase up to 1,000,000 shares of the Company's Common Stock; (3) ratify the adoption of the Company's Employee Stock Purchase Plan which authorizes the sale of up to 500,000 shares of the Company's Common Stock; (4) consider and approve the Amended and Restated Certificate of Incorporation which would effect changes to the Company's current Certificate of Incorporation by: (a) changing the Company's name to SourcingLink.net, Inc., (b) increasing the number of authorized shares of Common Stock to 60,000,000 shares, (c) increasing the number of authorized shares of Preferred Stock to 15,000,000 shares, which will provide for 10,000,000 shares of blank check Preferred Stock, and (d) providing for other technical and clarifying amendments; (5) consider and approve a Certificate of Amendment which would effect a 1-for-4 Reverse Stock Split; (6) ratify the appointment of PricewaterhouseCoopers LLP as independent auditors of the Company for fiscal year 2000. 19 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS The Company's Common Stock is traded on the OTC Bulletin Board under the symbol "QCSC". The following table indicates the high and low bid prices for the Company's Common Stock as quoted on the OTC Bulletin Board for the periods indicated. The prices shown are representative inter-dealer prices, do not include retail markups, markdowns, or commissions and may not necessarily reflect actual transactions.
BID PRICES ($) -------------------- HIGH LOW --------- --------- 1999 - --------------------------------------------------------------------------- First Quarter ended 9/30/98................................................ 2.50 0.875 Second Quarter ended 12/31/98.............................................. 6.50 0.875 Third Quarter ended 3/31/99................................................ 5.625 1.625 1998 - --------------------------------------------------------------------------- First Quarter ended 9/30/97................................................ 1.1875 0.50 Second Quarter ended 12/31/97.............................................. 1.5625 0.4375 Third Quarter ended 3/31/98................................................ 1.625 0.50 Fourth Quarter ended 6/30/98............................................... 3.875 1.50 1997 - --------------------------------------------------------------------------- First Quarter ended 9/30/96................................................ 5.00 2.50 Second Quarter ended 12/31/96.............................................. 4.50 3.00 Third Quarter ended 3/31/97................................................ 4.125 1.50 Fourth Quarter ended 6/30/97............................................... 1.375 0.625
As of March 31, 1999, there were approximately 203 holders of record and 427 beneficial holders of the Company's Common Stock and nine holders of the Company's Series A Convertible Preferred Stock for which no market is maintained. The Company has never declared nor paid dividends on its Common Stock and does not anticipate paying dividends on its Common Stock for the foreseeable future. Quarterly dividends of $0.012875 per share began accruing on the Company's Series A Convertible Preferred Stock on November 22, 1994 and began compounding annually on January 1, 1996 (the "Series A Dividend"). Effective June 30, 1998, the Company completed an agreement with the current holders of shares of Series A Preferred Stock (the "Series A Investors") to restructure the Series A Dividend, whereby the Series A Investors agreed to eliminate the Series A Dividend. In place of the Series A Dividend, the Series A Investors were issued, on a pro rata basis, shares of Series A Preferred Stock. The number of shares issued to the Series A Investors was determined by dividing the accrued dividend as of June 30, 1998 by $1.2069, which was 66 2/3% of the average bid and ask prices of the Company's Common Stock for the prior 20 trading days as reported on the OTC Bulletin Board reporting system. These shares of Series A Preferred Stock have the same voting and other rights as the Series A Preferred Stock. On the date of conversion, the accrued Series A Dividend for the Series A Investors was $797,377. The Company issued 660,681 shares of Series A Preferred Stock in payment of the Series A Dividend accrued through June 30, 1998. After issuance of these shares the remaining Series A Dividend payable in arrears was $65,051, which amount represents those dividends accrued with respect to shares of Series A Preferred Stock which were converted to Common Stock prior to June 30, 1998. In September 1998, the Company issued 44,272 shares of Common Stock to a Series A Investor as payment of $55,804 of the Series A Dividend. After payment of these shares, the remaining dividend payable in arrears was $9,247. 20 RECENT SALES OF UNREGISTERED SECURITIES As discussed above, the Company issued 44,272 shares of Common Stock to a Series A investor in September 1998 as payment of $55,804 of the Series A Dividend. These shares of Common Stock were issued in reliance upon the exemption provided by Section 4(2) of the Securities Act. In September 1998, the Company issued 276,091 shares of Common Stock in a private placement at a price of $1.375 per share for net proceeds of $379,505 (the "September Private Placement"). In November 1998, the Company issued 933,333 equity units at $0.75 per unit, each such unit consisting of one share of Common Stock and one warrant to purchase an additional share of Common Stock at an exercise price of $1.00 (the "November Private Placement"). The Company received net proceeds of $682,500 for the units sold in the November Private Placement. An additional 1,304,347 units were sold in December 1998 at $1.15 per unit, the net proceeds of which totaled $1,445,337 (the "December Private Placement"), each such unit consisting of one share of Common Stock and one warrant to purchase an additional share of Common Stock at an exercise price of $1.75. The shares of Common Stock sold in the September Private Placement and the Units consisting of Common Stock and warrants to purchase Common Stock sold in the November Private Placement and December Private Placement were issued in reliance upon the exemption provided by Section 4(2) of the Securities Act. Additional warrants for 164,330 shares of Common Stock were issued during fiscal 1999 of which a warrant to purchase 150,000 shares of Common Stock at $0.87 is exercisable from February 3, 1999 until February 3, 2002, and warrants to purchase 14,300 shares of Common Stock at prices ranging from $1.14 to $6.65 are exercisable until April 2002. These warrants of Common Stock were issued in reliance upon the exemption provided by Section 4(2) of the Securities Act. During fiscal 1999, the Company issued an aggregate of 1,219,000 incentive stock options and nonqualified stock options to eligible employees, directors and consultants pursuant to the Company's 1997 Stock Option Plan ("the 1997 Option Plan"). The exercise price for such options ranged from $0.969 to $4.00. Such options were issued but not sold, in the view of the Company, and therefore, registration thereof was not required. During the same period, the Company issued an aggregate of 40,000 shares of Common Stock upon the exercise of options under the Company's Stock Option Plan to one former employee. Such shares were issued in reliance upon the exemption provided by Section 4(2) of the Securities Act. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. CERTAIN STATEMENTS CONTAINED IN THIS REPORT, INCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS "BELIEVES," "ANTICIPATES," "EXPECTS" AND OTHER WORDS OF SIMILAR IMPORT, 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" IN ITEM 1 OF THIS REPORT. 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. 21 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 preorder 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. Network revenues in prior years were primarily from customer use of the Company's 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. In conjunction with the launch of the Internet solution, the Company is implementing a new sales and marketing strategy under which such efforts will be conducted internally rather than outsourced to a third party. Also under the new strategy, effective April 1, 1999, the Company discontinued offering the pay-as-you-go transaction based subscription fee option for new subscribers. Consulting revenue has been received over the last two years under a contract with IBM. The Company entered into this 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 provided sales, marketing, project management and network, server and other infrastructure support to the Company. Payments to IBM have been based on a percentage of sales under a revenue sharing provision of the Agreement. In addition, the Company has periodically 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. As a result of the Company's new strategy and intent to bring sales, marketing and project management in-house, the Company does not expect to continue providing or billing these consulting services to IBM. Historically, the cost of network revenue consisted primarily of fees paid under the revenue sharing provision of the IBM Agreement, as well as the costs of third party software and the internal costs of maintaining the Company's solution. Payments under the IBM Agreement are for customer support provided by three IBM international solution centers, hosting the Company's applications on network servers in an IBM facilities management environment and IBM-provided sales, marketing and project management services. The cost of consulting revenue, which equals the revenue received, consists primarily of payroll related costs of our employees providing those services to IBM. Selling, general and administrative expenses consist primarily of personnel-related costs for the Company's sales, marketing and general management functions and other administrative support costs such as external legal and financial services. Product development expenses consist primarily of personnel-related costs for software developers, product managers and quality assurance personnel and payments to outside contractors incurred to develop and enhance the Company's technology. ACCOUNTING FOR NEW IBM AGREEMENT The Company is currently in the process of negotiating new agreements to cover its relationship with IBM. The Company anticipates that the alliance with IBM will continue to include both co-marketing and infrastructure support to the Company. Historically, these costs were based primarily on revenue sharing, and were all included in cost of revenue. If the Agreement is modified effective October 1, 1999, as expected, payments to IBM will be accounted for as described below. For the infrastructure portion of the agreement, which includes housing of servers in IBM's secure data management center and global help desk and project management support, the Company will pay 22 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 portion of the agreement, which includes services for the active promotion of the Company's preorder merchandise sourcing solution, use of the IBM logo on Company marketing material, including 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 March 31, 1999, the Company has generated an accumulated deficit of $14.4 million. The report of our independent accountants accompanying our Consolidated Financial Statements notes that our recurring operating losses raise substantial doubt about our ability to continue as a going concern. Note 2 to our Consolidated Financial Statements describes management's plans in regard to these matters. 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. The previous strategy, which included outsourcing the sales and marketing function to IBM, thus far has produced insignificant revenues. As a result of the accumulated losses, the Company has not recorded any provision for income taxes since inception. As of March 31, 1999, net operating loss carryforwards for United States federal and state income tax purposes were approximately $7.7 million. In addition, the Company had net operating loss carryforwards for tax purposes in France of approximately $4.1 million. 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. Fiscal 1998 represents the twelve months ended June 30, 1998 and fiscal 1999 represents the nine months ended March 31, 1999. RESULTS OF OPERATIONS FOR NINE MONTHS ENDED MARCH 31, 1999 AND 1998 REVENUES Total revenues for fiscal 1999 increased $96,000, or 15%, to $741,000 from $645,000, in the first nine months of fiscal 1998. This increase was primarily due to an increase in consulting revenues under the IBM Agreement, primarily for sales, marketing and project management assistance provided to IBM by the Company, which amounted to $261,000 in fiscal 1999, as compared with $105,000 in the same period last year. The agreement with IBM which provided for such services became effective in the third quarter of fiscal 1998, and therefore was present for all of fiscal 1999 but only a portion of the comparable prior 23 period. Consulting revenues from IBM are expected to decline in the future as the Company intends to reduce both its reliance on, and its assistance to, IBM's sales and marketing of the Company's solutions. Instead the Company intends to enhance its own sales and marketing capabilities and bring this function in-house. Network revenues in fiscal 1999 decreased by $60,000, or 11%, to $480,000 from $540,000 for the first nine months of fiscal 1998. This decrease is primarily due to the Company's transition from its desktop solution to its Internet solution. As part of the transition, the Company has de-emphasized sales of its desktop solution, and the reduction in these sales has not yet been offset by revenues from the Internet solution which has only recently begun to be rolled-out. Sales of the Company's Internet solution generally requires 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. COST OF REVENUES In fiscal 1999, the cost of network revenues decreased $155,000, or 44%, to $201,000 from $356,000 in the first nine months of fiscal 1998. In fiscal 1999, the cost of network revenues consisted primarily of revenue sharing payments under the IBM Agreement. Network and other infrastructure support is provided by IBM under this Agreement. In the first half of fiscal 1998, prior to entering into the Agreement with IBM, the cost of network revenues was greater as additional costs were incurred internally for network support, including internal and external labor to install and support customer sites, and the cost of third party software and hardware for our solution. The cost of consulting revenue, which equals the revenues received, was $261,000 in fiscal 1999 and $105,000 in the first nine months of fiscal 1998. Overall, gross profit in fiscal 1999 increased $95,000 to $279,000, or 38% of revenues, from $184,000, or 29% of revenues, in fiscal 1998. Under the infrastructure portion of the new agreement with IBM that is expected to become effective October 1, 1999, network and other infrastructure support costs 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 In fiscal 1999, the Company's selling, general and administrative expenses decreased by $266,000, or 16%, to $1.4 million from $1.5 million in the first nine months of fiscal 1998. The decrease in these expenses was primarily due to the impact of the IBM Agreement, under which certain sales, marketing and customer support services were charged to IBM beginning in the third quarter of fiscal 1998, and the reduction in costs from the closure of the France and Hong Kong offices in December 1997. Fiscal 1999 product development expenses increased by $197,000, or 70%, to $479,000 from $282,000 in the first nine months of fiscal 1998. The increase in product development is primarily labor costs associated with continued enhancement of the Company's Internet solution, including release of a new version of this Internet solution. The Company expects that product development and selling, general and administrative expenses will continue to increase as it expands its operations, brings its sales and marketing function in-house, and incurs additional labor and other costs related to the enhancement and sales of its solution. OTHER INCOME (EXPENSE), NET The principal component of other income (expense), net, a gain of $62,000 and an expense of $65,000 in fiscal 1999 and the nine months ended March 31, 1998, respectively, consists of exchange gains and losses arising on foreign currency transactions with the Company's foreign subsidiaries in France and Hong Kong. 24 INCOME TAXES The Company recorded net losses of $1.5, $2.8 and $3.0 million in fiscal 1999, 1998 and 1997, respectively. Accordingly, no provision for income taxes was recorded in any of these periods. As of March 31, 1999, the Company had net operating loss carryforwards for United States federal and state income tax purposes of approximately $7.7 million. These losses expire at various dates between 2002 and 2019. As of March 31, 1999, the Company also had net operating loss carryforwards for income tax purposes in France of approximately $4.1 million which expire at various dates between 1999 and 2003. The Internal Revenue Code of 1986, as amended, contains provisions that limit the use in any future period of net operating loss and credit carryforwards upon the occurrence of certain events, including a significant change in ownership interests. At March 31, 1999, the Company had deferred tax assets, including U.S. net operating loss carryforwards, totaling approximately $4.6 million. A valuation allowance has been recorded for the entire deferred tax asset due to the fact that, as of the present time, it is more likely than not that such asset will not be realized. RESULTS OF OPERATIONS FOR FISCAL YEARS ENDED JUNE 30, 1998 AND 1997 REVENUES Total revenues for fiscal 1998 decreased $383,000, or 30%, to $892,000 from $1.3 million in fiscal 1997. This decrease is largely attributable to a 46% reduction in the Company's network revenues, primarily due to the Company's transition from its desktop solution to its Internet solution. As part of the transition, the Company de-emphasized sales of its desktop solution. The resulting reduction in those revenues was not offset by revenue from the Internet solution, which was introduced only for pilot testing during fiscal 1998. Consulting revenue commenced during the third quarter of fiscal 1998, as the Company amended its agreement with IBM to include payment to the Company for certain sales, marketing and project management services provided by the Company to IBM. Such consulting revenues were $210,000 in fiscal 1998. COST OF REVENUES In fiscal 1998, the cost of network revenues decreased by $422,000, or 50%, to $415,000 from $837,000 in fiscal 1997. This decrease in the cost of network revenue was primarily due to the Agreement entered into with IBM in the third quarter of fiscal 1998 under which IBM took on certain network and other support costs which had previously been incurred by the Company, as well as the reduction in the overall level of sales. The cost of consulting revenue, which equals the revenues received, was $210,000 in fiscal 1998. Overall, gross profit in fiscal 1998 declined $170,000 to $267,000, or 30% of sales, from $437,000, or 34% of sales, in fiscal 1997. OPERATING EXPENSES In fiscal 1998, the Company's selling, general and administrative expenses decreased by $567,000, or 19%, to $2.3 million from $2.9 million in fiscal 1997. The decrease in these expenses was primarily due to the impact of the IBM Agreement entered into in the third quarter of fiscal 1998, under which certain sales, marketing and customer support services began being charged to IBM, as well as a reduction in travel and consulting expenses. Fiscal 1998 product development expenses increased by $42,000, or 12%, to $407,000 from $365,000 in fiscal 1997. The increase in product development is primarily due to increased investment in internally developed enhancements and consulting services purchased for the development of back-end administrative features of the Company's Internet solution. 25 OTHER INCOME (EXPENSE), NET The principal component of other income (expense), net, an expense of $44,000 and $36,000 in fiscal 1998 and 1997, respectively, consists of exchange gains and losses arising on foreign currency transactions with the Company's foreign subsidiaries in France and Hong Kong. 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 plan to increase our operating expenses substantially 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 March 31, 1999 were $1.3 million, representing an increase of $794,000 from June 30, 1998. Cash used in operating activities for the nine months ended March 31, 1999 was $1.7 million, compared to $1.4 million for the nine months ended March 31, 1998. The cash usage was primarily due to the net losses that occurred in each of the periods and the payment of certain accounts payable and other current liabilities during fiscal 1999. During fiscal 1999, the Company received $2.5 million in net proceeds from a private placement of 2.2 million equity units to 19 investors at prices ranging from $0.75 to $1.15 per unit, each such unit consisting of one share of Common Stock and one warrant to purchase an additional share of Common Stock at an exercise price ranging from $1.00 to $1.75. At June 30, 1998, cash and cash equivalents were $473,000, representing a decrease of $801,000 from the $1.3 million at June 30, 1997. Cash used in operating activities was $1.7 million in fiscal 1998 compared to $2.5 million in fiscal 1997. This reduction in cash used in operating activities was primarily due to the 26 reduction in the net loss (adjusted for non-cash compensation expenses) and an increase in accounts payable in fiscal 1998. The Company believes that its current working capital will be sufficient to meet its working capital requirements through September 1999. The Company is actively seeking additional equity investment to fund future operations. If such efforts are unsuccessful, the Company will need to reduce operating spending significantly, which would materially and adversely affect the Company's business. 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 is reviewing the impact of SOP No. 98-1, which will be effective in fiscal year 2000. Currently, we do not anticipate that SOP No. 98-1 will 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. Within its internal computer systems and its desktop software solution, the Company has identified some systems and software applications that will be affected. The Company presently believes, with modification to existing software and converting to new software, the "Year 2000" issues relating to internal computer systems and desktop software solution will not cause significant operational or customer problems. Furthermore, the Company does not anticipate that the cost of implementing these solutions will be material to its financial position or results of operations. However, if such modifications and conversions are not made, or are not completed on a timely basis, "Year 2000" related problems could have a material adverse effect on the business, financial condition and results of operations of the Company. Furthermore, the costs of such conversions and updates are based on management's best estimates, which are derived utilizing numerous assumptions of future events including such things as, but not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties. The Company has begun 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 other companies rely will be timely converted, or 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. ITEM 7. FINANCIAL STATEMENTS Financial statements and supplementary data are set forth on pages F-1 through F-21. 27 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF THE REGISTRANT The information required by this item is included under the captions entitled "Election of Directors" and "Information Concerning Directors and Executive Officers" in the Company's Proxy Statement and is incorporated herein by reference. ITEM 10. EXECUTIVE COMPENSATION The information required by this item is included under the caption entitled "Executive Compensation" in the Company's Proxy Statement and is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is included under the caption entitled "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement and is incorporated herein by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is included under the caption entitled "Certain Relationships and Related Transactions" in the Company's Proxy Statement and is incorporated herein by reference. 28 PART IV ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE --------- (a) The following documents are filed as a part of this form: 1. Financial Statements: Report of Independent Accountants................................................................ F-1 Consolidated Balance Sheets--As of March 31, 1999 and June 30, 1998.............................. F-2 Consolidated Statements of Operations--For the nine months of Fiscal Year ended March 31, 1999 and twelve months of Fiscal Year 1998 and Fiscal Year 1997..................................... F-3 Consolidated Statements of Stockholders' Equity (Deficit)--For the nine months of Fiscal Year ended March 31, 1999 and twelve months of Fiscal Year 1998 and Fiscal Year 1997................ F-4 Consolidated Statements of Cash Flows--For the nine months of Fiscal Year ended March 31, 1999 and twelve months of Fiscal Year 1998 and Fiscal Year 1997..................................... F-5 Notes to Consolidated Financial Statements....................................................... F-6 2. Financial Statement Schedules--For fiscal years ended March 31, 1999 and June 30, 1998: Schedule II--Valuation and other Qualification Accounts.......................................... F-21 All other schedules are omitted because they are not applicable or the required information is shown in The consolidated financial statements or notes thereto. 3. Exhibits: The list of exhibits on the Exhibit Index is herein incorporated by reference. (b) Reports on Form 8-K: none.
29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized, this 18th day of June 1999. QCS.net CORPORATION (Registrant) By: /s/ SEAN MALOY ----------------------------------------- Sean Maloy PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY We, the undersigned directors and officers of QCS.net Corporation do hereby constitute and appoint Sean Maloy with full power of substitution and resubstitution, our true and lawful attorney and agent, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorney and agent, may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission in connection with this Annual Report on Form 10-KSB, including specifically, but without limitation, power and authority to sign for us or any of us in our names and in the capacities indicated below, any and all amendments (including post-effective amendments) hereto; and we do hereby ratify and confirm all that the said attorney and agent, or either of them, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-KSB has been signed below by the following persons in the capacities and on the dates indicated this 18th day of June, 1999.
SIGNATURE TITLE - ------------------------------ -------------------------- President, Chief Executive /s/ SEAN MALOY Officer and Director - ------------------------------ (Principal Executive Sean Maloy Officer) Vice President of Finance /s/ GARY DAVIDSON and Chief Financial - ------------------------------ Officer (Principal Gary Davidson Financial and Accounting Officer) /s/ MARCEL VAN HEESEWIJK - ------------------------------ Chairman of the Board of Marcel van Heesewijk Directors /s/ MATTHEUS WEGBRANS - ------------------------------ Director Mattheus Wegbrans /s/ JOHAN VUNDERINK - ------------------------------ Director Johan Vunderink /s/ LOUIS DELMONICO - ------------------------------ Director Louis Delmonico
30 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of QCS.net Corporation (dba SourcingLink.net): In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of QCS.net Corporation and its subsidiaries at March 31, 1999 and June 30, 1998, and the results of their operations and their cash flows for the nine months ended March 31, 1999 and the years ended June 30, 1998 and 1997, in conformity with generally accepted accounting principles. These consolidated financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits of these consolidated financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred losses from operations since inception which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. San Jose, California PricewaterhouseCoopers LLP May 21, 1999 F-1 QCS.NET CORPORATION (DBA SOURCINGLINK.NET) CONSOLIDATED BALANCE SHEETS
MARCH 31, JUNE 30, 1999 1998 -------------- -------------- ASSETS Current assets: Cash and cash equivalents....................................................... $ 1,266,880 $ 473,170 Accounts receivable (net of allowance for doubtful accounts of $35,121 at March 31, 1999 and $29,657 at June 30, 1998)........................................ 222,769 203,921 Other current assets............................................................ 7,111 5,345 -------------- -------------- Total current assets.......................................................... 1,496,760 682,436 Property and equipment, net....................................................... 185,286 248,871 Security deposits................................................................. 12,839 27,942 -------------- -------------- Total assets.................................................................. $ 1,694,885 $ 959,249 -------------- -------------- -------------- -------------- LIABILITIES Current liabilities: Accounts payable................................................................ $ 207,303 $ 344,436 Accrued liabilities............................................................. 534,054 655,577 Capital lease obligations, current portion...................................... 8,201 8,423 -------------- -------------- Total current liabilities..................................................... 749,558 1,008,436 Capital lease obligations, net of current portion................................. -- 6,468 -------------- -------------- Total liabilities............................................................. 749,558 1,014,904 Commitments (Note 7) STOCKHOLDERS' EQUITY (DEFICIT) Series A convertible preferred stock, par value $.001 per share: Authorized: 5,000,000 shares; issued and outstanding 3,816,023 and 4,680,102 shares at March 31, 1999 and June 30, 1998, respectively (aggregate liquidation preference: $3,930,504)..................................................................... 3,816 4,680 Common Stock, par value $.001 per share: Authorized: 40,000,000 shares; issued issued and outstanding 22,525,437 and 18,831,552 at March 31, 1999 and June 30, 1998, respectively.............................................................. 22,525 18,832 Additional paid-in capital........................................................ 15,298,501 12,898,284 Subscriptions receivable from stockholders........................................ -- (200,100) Common stock note receivable...................................................... (40,000) -- Accumulated deficit............................................................... (14,420,409) (12,928,630) Cumulative foreign currency translation adjustments............................... 80,894 151,279 -------------- -------------- Total stockholders' equity (deficit)............................................ 945,327 (55,655) -------------- -------------- Total liabilities and stockholders' equity (deficit).......................... $ 1,694,885 $ 959,249 -------------- -------------- -------------- --------------
The accompanying notes are an integral part of these consolidated financial statements. F-2 QCS.NET CORPORATION (DBA SOURCINGLINK.NET) CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS TWELVE MONTHS TWELVE MONTHS ENDED MARCH ENDED JUNE ENDED JUNE 31, 1999 30, 1998 30, 1997 ------------- ------------- ------------- Revenue: Network........................................................ $ 480,082 $ 682,192 $ 1,274,611 Consulting..................................................... 260,915 210,000 -- ------------- ------------- ------------- 740,997 892,192 1,274,611 Cost of revenue: Network........................................................ 201,032 414,815 837,131 Consulting..................................................... 260,915 210,000 -- ------------- ------------- ------------- 461,947 624,815 837,131 Gross profit....................................................... 279,050 267,377 437,480 Operating expenses: Selling, general and administrative............................ 1,371,269 2,344,971 2,912,498 Product development............................................ 479,416 407,479 364,539 ------------- ------------- ------------- Total operating expenses........................................... 1,850,685 2,752,450 3,277,037 Operating loss..................................................... (1,571,635) (2,485,073) (2,839,557) Other income (expense), net........................................ 62,056 (44,433) (36,458) Interest income.................................................... 17,800 18,704 98,238 ------------- ------------- ------------- Net loss........................................................... (1,491,779) (2,510,802) (2,777,777) Preferred dividend................................................. -- (256,966) (243,118) ------------- ------------- ------------- Net loss attributed to common stockholders......................... $(1,491,779) $(2,767,768) $(3,020,895) ------------- ------------- ------------- ------------- ------------- ------------- Net loss per share (basic and diluted)............................. $ (0.07) $ (0.16) $ (0.18) ------------- ------------- ------------- ------------- ------------- ------------- Weighted average number of shares used in per share calculation (basic and diluted).............................................. 20,193,250 17,539,820 17,074,660 ------------- ------------- ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. F-3 QCS.NET CORPORATION (DBA SOURCINGLINK.NET) CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE NINE MONTHS ENDED MARCH 31,1999 AND TWELVE MONTHS ENDED JUNE 30, 1998 AND 1997
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED ---------------------- ---------------------- PAID-IN STOCK OPTION SHARES AMOUNTS SHARES AMOUNTS CAPITAL COMPENSATION --------- ----------- --------- ----------- ---------- ------------- BALANCES AT JUNE 30, 1996........................... 4,368,937 $ 4,369 16,692,531 $ 16,693 $9,688,531 $(301,638) Issuance of common stock in connection with a private placement................................. 344,000 344 1,031,475 Common stock subscriptions received................. Write-off of common stock warrants.................. (66,775) Exercise of stock options........................... 100,000 100 Compensation related to stock options............... 194,388 Preference dividend payable......................... Translation adjustment.............................. Net loss for the year............................... --------- ----------- --------- ----------- ---------- ------------- BALANCES AT JUNE 30, 1997........................... 4,368,937 4,369 17,136,531 17,137 10,653,231 (107,250) Issuance of common stock in connection with a private placement................................. 1,270,505 1,270 1,076,969 Conversion of preferred stock to common stock....... (349,516) (350) 349,516 350 Exercise of warrants................................ 75,000 75 675 Payment of dividend in preferred stock.............. 660,681 661 796,716 Compensation related to stock options and warrants.......................................... 370,693 107,250 Preferred dividend payable.......................... Translation adjustment.............................. Net loss for the year............................... --------- ----------- --------- ----------- ---------- ------------- BALANCES AT JUNE 30, 1998........................... 4,680,102 4,680 18,831,552 18,832 12,898,284 -- Preference dividend payable in Common Stock......... 44,272 44 55,760 Exercise of Options & Warrants...................... 338,463 338 39,662 Proceeds from Private Placements.................... 2,513,771 2,514 2,504,828 Conversion of Preferred to Common stock............. (864,079) (864) 864,079 864 Cancellation of Stock Note.......................... (66,700) (67) (200,033) Translation adjustment.............................. Net loss for the nine month period.................. --------- ----------- --------- ----------- ---------- ------------- BALANCE AT MARCH 31, 1999........................... 3,816,023 $ 3,816 22,525,437 $ 22,525 $15,298,501 $ -- --------- ----------- --------- ----------- ---------- ------------- --------- ----------- --------- ----------- ---------- ------------- CUMULATIVE TOTAL NOTES FOREIGN STOCK- RECEIVABLE CURRENCY HOLDERS' FROM STOCK- ACCUMULATED TRANSLATION EQUITY/ HOLDERS DEFICIT ADJUSTMENTS (DEFICIT) ----------- ------------ ----------- --------- BALANCES AT JUNE 30, 1996........................... $(462,584) $(7,139,967) $ 5,004 $1,810,408 Issuance of common stock in connection with a private placement................................. 1,031,819 Common stock subscriptions received................. 262,484 262,484 Write-off of common stock warrants.................. (66,775) Exercise of stock options........................... 100 Compensation related to stock options............... 194,388 Preference dividend payable......................... (243,118) (243,118) Translation adjustment.............................. 114,852 114,852 Net loss for the year............................... (2,777,777) (2,777,777) ----------- ------------ ----------- --------- BALANCES AT JUNE 30, 1997........................... (200,100) (10,160,862) 119,856 326,381 Issuance of common stock in connection with a private placement................................. 1,078,239 Conversion of preferred stock to common stock....... 0 Exercise of warrants................................ 750 Payment of dividend in preferred stock.............. 797,377 Compensation related to stock options and warrants.......................................... 477,943 Preferred dividend payable.......................... (256,966) (256,966) Translation adjustment.............................. 31,423 31,423 Net loss for the year............................... (2,510,802) (2,510,802) ----------- ------------ ----------- --------- BALANCES AT JUNE 30, 1998........................... (200,100) (12,928,630) 151,279 (55,655) Preference dividend payable in Common Stock......... 55,804 Exercise of Options & Warrants...................... (40,000) 0 Proceeds from Private Placements.................... 2,507,342 Conversion of Preferred to Common stock............. 0 Cancellation of Stock Note.......................... 200,100 0 Translation adjustment.............................. (70,385) (70,385) Net loss for the nine month period.................. (1,491,779) (1,491,779) ----------- ------------ ----------- --------- BALANCE AT MARCH 31, 1999........................... $ (40,000) ($14,420,409) $ 80,894 $ 945,327 ----------- ------------ ----------- --------- ----------- ------------ ----------- ---------
The accompanying notes are an integral part of these consolidated financial statements. F-4 QCS.NET CORPORATION (DBA SOURCINGLINK.NET) CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS TWELVE MONTHS TWELVE MONTHS ENDED ENDED ENDED MARCH 31, JUNE 30, JUNE 30, 1999 1998 1997 ------------- -------------- -------------- Cash flows from operating activities: Net loss......................................................... $ (1,491,779) $ (2,510,802) $ (2,777,777) Adjustments to reconcile net loss to net cash used in Operating activities: Depreciation and amortization expense............................ 81,549 63,536 79,914 Unrealized exchange (gain) loss.................................. (64,329) 39,532 128,992 Loss on disposal of fixed assets................................. 4,809 86,424 13,158 Expense related to stock options and warrants.................... -- 477,943 194,388 Changes in operating assets and liabilities: Accounts receivable............................................ (18,848) (51,132) 18,638 Other current assets and security deposits..................... 13,337 13,668 14,309 Accounts payable............................................... (137,133) 104,429 (322,698) Accrued and other liabilities.................................. (65,719) 70,221 126,315 ------------- -------------- -------------- Net cash used in operating activities........................ (1,678,113) (1,706,181) (2,524,761) Cash flows from investing activities: Purchases of fixed assets........................................ (22,773) (180,406) (100,433) Proceeds from disposal of fixed assets........................... -- 23,818 -- ------------- -------------- -------------- Net cash used in investing activities........................ (22,773) (156,588) (100,433) Cash flows from financing activities: Proceeds from issuance of common stock........................... 2,507,342 1,078,239 1,031,919 Common stock subscriptions received.............................. -- -- 262,484 Proceeds from exercise of warrants............................... -- 750 -- Payments on capital leases....................................... (6,690) (9,098) (4,038) ------------- -------------- -------------- Net cash provided by financing activities.................... 2,500,652 1,069,891 1,290,365 Effect of exchange rate changes on cash............................ (6,056) (8,109) 1,868 ------------- -------------- -------------- Net increase (decrease) in cash and cash equivalents......... 793,710 (800,987) (1,332,961) Cash and cash equivalents, beginning of the period................. 473,170 1,274,157 2,607,118 ------------- -------------- -------------- Cash and cash equivalents, end of the period....................... $ 1,266,880 $ 473,170 $ 1,274,157 ------------- -------------- -------------- ------------- -------------- -------------- Supplemental disclosure of cash flow information: Cash paid during the period for interest......................... $ 1,573 $ 4,153 $ 2,331 Cash paid during the period for taxes............................ 800 800 800 Non-cash financing transactions: Conversion of preference dividend payable to stock............... 55,804 797,377 21,593 Issuance of note receivable for exercise of employee stock option......................................................... 40,000 -- -- Cancellation of common stock subscription receivable............. 200,100 -- 66,775
The accompanying notes are an integral part of these consolidated financial statements. F-5 QCS.NET CORPORATION (DBA SOURCINGLINK.NET) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS QCS.net Corporation ("the Company") was incorporated in 1994 as a Delaware corporation. The Company owns all of the outstanding shares of its subsidiary, QCS Development Company S.A. The Company maintains its office in Mountain View, California. During fiscal 1999 the Company liquidated QCS Global Retail Information Network Asia Pacific Ltd. ("the Hong Kong Subsidiary") in Hong Kong, and has ceased operations of QCS Development Company S.A. ("the French Subsidiary") in France. The Company has no other subsidiaries. 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 merchandise suppliers around the globe. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR: The Company has changed its fiscal year end from June 30th, to March 31st. Amounts for the nine month period ended March 31, 1999 are defined as Fiscal 1999. Amounts for the years ended June 30, 1998 and 1997 are defined as Fiscal 1998 and 1997, respectively. BASIS OF PRESENTATION: These consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred losses from operations since its inception. This factor raises substantial doubt about the Company's ability to continue as a going concern. Management plans to raise further equity funding to expand operations and in order to fund growth in revenue. If these fund raising efforts are not successful, the Company would have to reduce operating spending significantly, which would materially and adversely effect the Company's business, and raise substantial doubts about its ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The consolidated financial statements include the accounts of QCS.net Corporation and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation of financial statements in conformity with generally accepted accounting principles requires management to makes use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of highly liquid instruments with an original or remaining maturity of 90 days or less as of the date of purchase. F-6 QCS.NET CORPORATION (DBA SOURCINGLINK.NET) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, ranging from one to five years, or over the term of the lease, if shorter. The cost of property retired or otherwise disposed of and the related accumulated depreciation or amortization are removed from the accounts, and the resulting gains or losses are included in the results of operations. REVENUE RECOGNITION: The Company's revenues are generated from fees for access to and use of the Company's network product. These fees include initial registration fees, fixed monthly or annual subscription fees or "pay-as-you-go" transactional fees. In April 1999, the Company suspended the pay as-you-go payment option for new subscribers. Network revenues are recognized as the services are provided. Revenues from consulting services are recognized at the time the service is performed and accepted by the customer. PRODUCT DEVELOPMENT: All product development expenditures are expensed as incurred. Software development costs are accounted for in accordance with Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Under this Standard, capitalization of software development costs begins upon the establishment of technological feasibility, subject to net realizable value considerations. The Company begins capitalization upon completion of a working model. In Fiscal 1999, no software development costs were capitalized, as the costs incurred between technological feasibility and general release were not significant. In Fiscal 1998, the Company capitalized $141,132 of external costs associated with the development of its Internet product. These capitalized costs are being amortized on the straight-line basis over the estimated life of the products or the ratio of current revenue to the total of current and anticipated future revenue, whichever amortization expense is greater. EMPLOYEE STOCK PLANS: The Company complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". The Company accounts for its stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25. Under APB No. 25 compensation expense is based on the difference, if any, on the date of grant between fair market value of the Company's stock and exercise price. INCOME TAXES: The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes", which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to F-7 QCS.NET CORPORATION (DBA SOURCINGLINK.NET) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) reduce deferred tax assets to the amounts expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. FAIR VALUE OF FINANCIAL INSTRUMENTS: Carrying amounts of certain of the Company's financial instruments including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities approximate fair value due to their short maturities. Based upon borrowing rates currently available to the Company for loans with similar terms, the carrying value of capital lease obligations approximate fair value. CONCENTRATION OF CREDIT RISK: The Company performs ongoing credit of its customers, does not require collateral, and maintains reserves for potential credit losses on customer accounts when deemed necessary. Financial instruments that are potentially subject to a concentration of credit risk for the Company consist of cash equivalents and accounts receivable. Cash and cash equivalents are deposited with financial institutions in the United States. There were three customers representing 52%, 25% and 14% of accounts receivable at March 31, 1999 and two customers representing 43% and 29% of accounts receivable at June 30, 1998. NET LOSS PER SHARE: Basic EPS is computed by dividing the income available to common stockholders by weighted average number of common shares outstanding for the period. Diluted EPS is computed by giving effect to all dilutive potential common shares that were outstanding during the period. For the Company, dilutive potential common shares consist of incremental common shares issuable upon the exercise of stock options and warrants for all periods. FOREIGN CURRENCY TRANSLATION: Assets and liabilities of the foreign subsidiaries were translated into U.S. dollars at year-end exchange rates. Revenue and expenses have been translated at average exchange rates during the year. Local currencies are considered to be the functional currencies for the Company's foreign subsidiaries. Accordingly, currency translation adjustments are accumulated as a separate component of stockholders' equity. Foreign currency transaction gains and losses are included in other income (expense) in the determination of net loss. 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 is reviewing the impact of SOP No. 98-1, which will be effective in Fiscal 2000. F-8 QCS.NET CORPORATION (DBA SOURCINGLINK.NET) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COMPREHENSIVE LOSS: For the nine month period of Fiscal 1999, twelve month period of Fiscal 1998 and 1997, the comprehensive loss was $1,562,164, $2,479,379 and $2,662,925, respectively. The principal difference between comprehensive loss and net loss is the treatment of cumulative foreign translation adjustments. 3. BALANCE SHEET DETAIL PROPERTY AND EQUIPMENT:
MARCH 31, JUNE 30, 1999 1998 ----------- ---------- Furniture and equipment.............................................. $ 158,145 $ 151,609 Computer software.................................................... 159,727 159,727 Leasehold improvements............................................... 10,559 10,559 ----------- ---------- 328,431 321,895 Less accumulated depreciation and amortization....................... (143,145) (73,024) ----------- ---------- $ 185,286 $ 248,871 ----------- ---------- ----------- ----------
Depreciation and amortization expense for the nine months of Fiscal 1999 was $81,549, Fiscal 1998 was $63,536 and $79,914 for Fiscal 1997. Assets acquired under capital leases arrangements included in property and equipment above are as follows:
MARCH 31, JUNE 30, 1999 1998 ---------- ---------- Furniture and equipment............................................... $ 21,593 $ 29,820 Less accumulated amortization......................................... (14,395) (15,853) ---------- ---------- $ 7,198 $ 13,967 ---------- ---------- ---------- ----------
ACCRUED LIABILITIES: Accrued liabilities consisted of the following:
MARCH 31, JUNE 30, 1999 1998 ---------- ---------- Payroll and related taxes............................................. $ 98,594 $ 130,167 Accrued legal and audit expenses...................................... 98,829 114,502 Other accrued expenses................................................ 327,384 345,857 Preference dividend payable........................................... 9,247 65,051 ---------- ---------- $ 534,054 $ 655,577 ---------- ---------- ---------- ----------
F-9 QCS.NET CORPORATION (DBA SOURCINGLINK.NET) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. STOCKHOLDERS' EQUITY PRIVATE PLACEMENTS: In June 1998, the Company issued 1,270,505 shares of common stock in a private placement at prices ranging from $0.75 to $1.375 per share for net proceeds of $1,078,239. In September 1998, the Company issued 276,091 shares of common stock in a private placement at a price of $1.375 per share for net proceeds of $379,505. In November 1998, the Company issued 933,333 equity "Units" at $0.75 per unit, each such unit consist of one share of common stock and one warrant to purchase an additional share of common stock at an exercise price of $1.00. The Company received net proceeds of $682,500. The warrants are exercisable immediately and expire in November 2001. In December 1998, the Company issued 1,304,347 equity "Units" at $1.15 per unit, each such unit consist of one share of common stock and one warrant to purchase an additional share of common stock at an exercise price of $1.75. The Company received net proceeds of $1,445,337. The warrants are exercisable immediately and expire in December 2002. PREFERRED STOCK: The Company issued 4,368,937 shares of Series A convertible preferred stock, "Series A preferred stock" on November 11, 1994 for a consideration of $4,580,812. The holders of Series A preferred stock were entitled to receive, out of funds legally available dividends at 5% per annum on the original issue price of $1.03 per share. Such dividends were cumulative from November 22, 1994 and began compounding annually on January 1, 1996. Dividends were accrued whether or not earned or declared. Such dividends were payable upon the earlier of the liquidation of the Company or, with respect to any shares of Series A preferred stock that are converted into common stock, such dividends shall be payable six months following such conversion. Effective June 30, 1998, the Company completed an agreement with the current Series A preferred stockholders to restructure the Series A dividend. The Company and Series A preferred stockholders agreed to eliminate the dividend on the Series A preferred stock. In satisfaction of the preferred dividend payable, the Series A preferred stockholder were issued, on a pro rata basis, shares of preferred stock. The number of shares the Series A preferred stockholders were issued was determined by dividing the accrued dividend as of June 30, 1998 by $1.2069, which was 66 2/3% of the average bid and ask prices of the Company's common stock for the prior 20 trading days as reported on the Over-The-Counter Bulletin Board reporting system. These shares have the same voting and other rights as the Series A preferred stock. This agreement, which was approved by the Company's common stockholders in October 1998, also eliminated the accrual of future preferred dividends. At the date of conversion, the accrued dividend for the Series A preferred stockholders on that date was $797,377. The Company issued 660,681 shares of preferred stock in payment of the Series A preferred dividend accrued through June 30, 1998. In September 1998, the Company issued 44,272 shares of common stock to a Series A preferred shareholder as payment of $55,804 of the Series A preferred dividend. This was a Series A preferred investor whose shares had been to common stock. After issuance of these shares, the remaining dividend payable in arrears was $9,247. This represents dividends accrued on shares of Series A preferred stock which were converted to common stock prior to June 30, 1998. F-10 QCS.NET CORPORATION (DBA SOURCINGLINK.NET) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. STOCKHOLDERS' EQUITY (CONTINUED) Upon any liquidation, dissolution, or winding up of the company, whether voluntary or involuntary, the holders of Series A preferred stock shall be paid $1.03 per share plus an amount equal to dividends accrued but unpaid thereon, before any payment shall be made to holders of any other class or series of stock. If upon liquidation, dissolution or winding up the Company, the assets to be distributed to the holders of the Series A preferred stock shall be insufficient to permit payment to such stockholders of full preferential amounts aforesaid, then the assets of the Company shall be distributed to such holders of the Series A preferred stock pro rata, so that each holder receives that portion of assets available for distribution as the liquidation preference payment amounts of the shares of Series A preferred stock held by such holders bear to the aggregate liquidation preference payment amounts for all shares of Series A preferred stock then outstanding. Each holder of Series A preferred stock has the right to convert the Series A preferred stock at any time into common shares of the Company on a one to one ratio. Unless earlier converted, the Series A preferred stock will automatically convert into common stock upon the earlier of (i) the effective date of a registration pertaining to, and subject to the consummation of an underwritten public offering of the Company's common stock at a price of at least $5.00 per share and, (ii) the first business day following the occurrence of the last of the three following events (a) the completion of a 36 month period commencing on the closing date, (b) the completion of six consecutive quarters of sustained profitability of the Company and; (c) the completion of a 30 consecutive day period during which the low bid for the Company's common stock shall have been in excess of $5.00. During Fiscal 1998, 864,079 shares of preferred stock were converted to common stock. During Fiscal 1999, 349,516 shares of preferred stock were converted to common stock. WARRANTS: At March 31, 1999, there was a warrant outstanding to purchase 145,631 shares of common stock at $0.01 per share, which is exercisable at any time until November 1999 or upon the automatic conversion of preferred stock to common stock, whichever is earlier. During March 1998, the Company issued warrants for 810,000 shares of common stock, at a price of $1.00 per share. The 810,000 warrants are exercisable until March 6, 2002. During March 1998, the Company issued a warrant for 21,000 shares of common stock, at a price of $0.75 per share. The warrant is exercisable at any time until February 23, 2001. During November 1998 the Company issued warrants for 933,333 shares of common stock, at a price of $1.00 per share as a part of its private placement. The warrants for 933,333 shares are exercisable at any time until November 13, 2001. During December 1998 the Company issued warrants for 1,304,347 shares of common stock, at a price of $1.75 per share as a part of its private placement. The warrants for 1,304,347 shares are exercisable until December 1, 2002. Additional warrants for 164,330 shares of common stock were issued during Fiscal 1999 of which a warrant to purchase 150,000 shares of common stock at $0.87 is exercisable from February 3,1999 until February 3, 2002, and warrants to purchase 14,300 shares of common stock at prices ranging from $1.14 to $6.65 are exercisable until April 2002. F-11 QCS.NET CORPORATION (DBA SOURCINGLINK.NET) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. STOCKHOLDERS' EQUITY (CONTINUED) All warrants were valued using the Noreen-Woolfson model and an amount of zero and $370,693 was recognized as expense during Fiscal 1999 and 1998, respectively. The weighted average fair market value, at grant date of the warrants issued in Fiscal 1998 was $0.46. Substantially all the warrants granted in Fiscal 1999 were in connection with the Company's private placements accordingly, these warrants were treated as a cost of the financings. All warrants were outstanding at March 31, 1999. 5. STOCK OPTION PLANS In 1995 and 1997, respectively, the Board of Directors adopted the Stock Option Plan and the 1997 Stock Option Plan ("the Plans") for employees, directors and others. A total of 700,000 and 4,000,000 shares of common stock were authorized under the Stock Option Plan and the 1997 Stock Option Plan, respectively, for eligible employees, directors and consultants. Options may be granted at an exercise price of not less than 85% of the estimated fair value of the common stock, at the date of grant, as determined by the Board of Directors. Options are exercisable at such times and under such conditions as determined by the Board of Directors. Options granted under the Plans generally become exercisable over a four-year period and generally expire ten years from the date of grant. Unvested options are canceled 90 days after termination of employment and become available under the Plans. Activity under the Plans is as follows:
OPTIONS OUTSTANDING ------------------------------------------ AGGREGATE SHARES EXERCISE AVAILABLE SHARES PRICE PER SHARE PRICE ----------- ---------- --------------- ------------- Balance at June 30, 1996........... 562,000 810,000 $0.15-$1.00 $ 555,000 Shares authorized................ 3,000,000 Options granted.................. (2,068,077) 2,068,077 $0.001-$3.13 4,103,965 Options exercised................ (100,000) $0.001 (100) Options canceled................. 130,000 (130,000) $1.00 (130,000) ----------- ---------- --------------- ------------- Balance at June 30, 1997........... 1,623,923 2,648,077 $0.15-$3.13 $ 4,528,865 Options granted.................. (366,000) 366,000 $0.70 256,200 Options canceled................. 28,000 (28,000) $0.75-$3.00 (77,250) ----------- ---------- --------------- ------------- Balance at June 30, 1998........... 1,285,923 2,986,077 $0.15-$3.13 $ 4,707,815 Shares authorized................ 1,000,000 Options granted.................. (1,219,000) 1,219,000 $0.969-$4.00 3,600,171 Options exercised................ (40,000) $1.00 (40,000) Options canceled................. 580,000 (580,000) $0.50-$3.00 (690,600) ----------- ---------- --------------- ------------- Balance at March 31, 1999.......... 1,646,923 3,585,077 $0.15-$4.00 $ 7,577,386 ----------- ---------- --------------- ------------- ----------- ---------- --------------- -------------
F-12 QCS.NET CORPORATION (DBA SOURCINGLINK.NET) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. STOCK OPTION PLANS (CONTINUED) The following table summarizes information with respect to stock options outstanding at March 31, 1999:
OPTIONS OUTSTANDING -------------------------------------------- OPTIONS EXERCISABLE WEIGHTED --------------------------- AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE AVERAGE OUTSTANDING AT CONTRACTUAL EXERCISE NUMBER AT EXERCISE RANGE OF EXERCISE PRICE MARCH 31, 1999 LIFE (YEARS) PRICE MARCH 31, 1999 PRICE - ---------------------------------------------- -------------- --------------- ----------- -------------- ----------- $0.15......................................... 300,000 4.76 $ 0.15 300,000 $ 0.15 $0.70 - $1.00................................. 900000 6.08 $ 0.90 445,500 $ 0.89 $1.88 - $2.27................................. 1,532,077 9.02 $ 2.23 1,432,077 $ 2.25 $3.00 - $4.00................................. 853,000 9.67 $ 3.88 68,667 $ 3.02 -------------- --- ----- -------------- ----- 3,585,077 8.76 $ 2.11 2,246,244 $ 1.73 -------------- --- ----- -------------- ----- -------------- --- ----- -------------- -----
At June 30, 1998, options to purchase 2,352,828 shares of common stock were exercisable. For certain options granted, the Company recognized $107,250 in Fiscal 1998 as compensation for the excess of the fair value of the stock at the date of grant of the common stock issuable upon exercise of such options over the aggregate exercise price of such options. The compensation expense was charged to operations as the options vested. The Company has adopted the disclosure only provisions of SFAS No. 123. Had compensation cost for the Plan been determined based on the fair market value at the grant date for the options granted in Fiscal 1999, 1998 and 1997, consistent with the provisions of SFAS No. 123, the Company's net loss for Fiscal 1999, 1998 and 1997 would have been increased to the pro forma amounts indicated below:
1999 1998 1997 ------------ ------------ ------------ Net loss as attributed to common stockholders--as reported.............. $ 1,491,779 $ 2,767,768 $ 3,020,895 ------------ ------------ ------------ ------------ ------------ ------------ Net loss as attributed to common stockholders--pro forma................ $ 1,724,905 $ 2,868,733 $ 3,065,545 ------------ ------------ ------------ ------------ ------------ ------------ Loss per share--as reported............................................. $ (0.07) $ (0.16) $ (0.18) ------------ ------------ ------------ ------------ ------------ ------------ Loss per share--pro forma............................................... $ (0.09) $ (0.16) $ (0.18) ------------ ------------ ------------ ------------ ------------ ------------
The above pro forma disclosures are not necessarily representative of the effects on reported net income or loss for future years because additional awards in future years are anticipated. F-13 QCS.NET CORPORATION (DBA SOURCINGLINK.NET) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. STOCK OPTION PLANS (CONTINUED) The aggregate fair values of each option granted in Fiscal year 1999 ranged from $0.77 to $3.19 and in Fiscal 1998 and 1997 were $0.56 and $0.58, respectively. The fair value of each option grant for the Plan is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
1999 1998 1997 --------- --------- --------- Risk-free interest rate........................................ 4.74% 6.06% 6.25% Expected life.................................................. 4 years 5 years 5 years Expected volatility............................................ 122% 84% 10% Expected dividend yield........................................ 0.0% 0.0% 0.0%
The Black-Scholes option valuation model was developed for use in estimating the fair market value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in these subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not provide a single measure of the fair value of its employee stock options. 6. INCOME TAXES The Company has paid no income tax to date other than the California minimum franchise tax. Deferred tax assets arise from both carried forward losses and differences between the expenses for tax purposes and that for financial accounting purposes. The components of deferred tax assets consist of the following:
MARCH 31, JUNE 30, JUNE 30, 1999 1998 1997 ------------- ------------- ------------- Miscellaneous accruals........................... $ 56,917 $ 138,559 $ 131,254 Provision for doubtful accounts receivable....... 14,048 2,018 4,000 Set up costs and product development expenditures................................... 163,480 106,589 52,881 Compensation related to stock options granted........................................ 190,507 190,508 147,606 Net operating loss carryforwards................. 4,216,102 3,532,888 2,541,491 ------------- ------------- ------------- Total deferred tax asset......................... 4,641,054 3,970,562 2,877,232 Valuation allowance.............................. (4,641,054) (3,970,562) (2,877,232) ------------- ------------- ------------- Net deferred tax asset....................... $ -- $ -- $ -- ------------- ------------- ------------- ------------- ------------- -------------
A valuation allowance is provided due to the uncertainty surrounding the realization of the deferred tax assets in view of the Company's not having achieved profitable operations. F-14 QCS.NET CORPORATION (DBA SOURCINGLINK.NET) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. INCOME TAXES (CONTINUED) Net operating losses of the French Subsidiary are available for offset against future taxable income of the French Subsidiary and will expire five years after the year in which they arose, as follows:
FUTURE TAX BENEFITS ON FRENCH TAX OPERATING YEAR OF YEAR IN WHICH LOSS AROSE LOSSES LOSSES EXPIRATION - ----------------------------------------------- ------------- -------------- --------------- 1994........................................... $ 403,312 $ 147,854 1999 1995........................................... 2,020,161 740,598 2000 1996........................................... 1,140,162 417,983 2001 1997........................................... 416,040 152,520 2002 1998........................................... 183,018 67,094 2003 -------------- $ 1,526,049(1) -------------- --------------
- ------------------------ (1) The deferred tax asset is before the application of the valuation allowance. Net operating losses of the Hong Kong subsidiary were available for offset against future taxable income in the Hong Kong operating subsidiary and would have expired fifteen years after the year-end in which they arose, however, as the subsidiary has been liquidated the Company will not realize any benefit from these losses. Net operating losses of the U.S. are available for offset against future taxable income in the U.S. and will expire fifteen or twenty years after the year-end in which they arose, as follows:
FUTURE TAX BENEFITS ON U.S. TAX OPERATING YEAR OF YEAR IN WHICH LOSS AROSE LOSSES LOSSES EXPIRATION - ------------------------------------------------ ------------ -------------- --------------- 1987............................................ $ 201 $ 70 2002 1988............................................ 35,896 12,564 2003 1989............................................ 61,333 21,467 2004 1990............................................ 60,480 21,168 2005 1993............................................ 53,731 18,806 2008 1994............................................ 141,598 49,559 2009 1995............................................ 77,446 27,106 2010 1996............................................ 997,417 349,096 2011 1997............................................ 1,520,725 517,045 2012 1998............................................ 2,111,388 717,872 2013 1999............................................ 2,676,160 909,894 2019 -------------- $ 2,644,647(1) -------------- --------------
- ------------------------ (1) The deferred tax asset is before the application of the valuation allowance. Due to changes in the Company's ownership during Fiscal 1997 and prior fiscal years, the amount of loss and credit carryforwards available to offset future U.S. federal taxable income or tax may be subject to annual limitations by IRS Code Section 382. The amount of such limitation, if any, has not been determined. F-15 QCS.NET CORPORATION (DBA SOURCINGLINK.NET) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. INCOME TAXES (CONTINUED) The difference between the statutory U.S. federal income tax rate on income (loss) before income taxes and the company's effective tax rate is summarized as follows:
1999 % 1998 % 1997 % ------------- --------- ------------- --------- ------------- --------- Net loss.................................... $ (1,491,779) $ (2,510,802) $ (2,777,777) Federal tax at statutory rate............... (522,123) 35.0% (853,673) 34.0% (972,222) 35.0% Foreign taxes--rate differential............ (150,193) 10.0% 21,840 (0.9%) 58,838 (2.1%) R&D credit.................................. -- -- (40,245) 1.6% -- -- State tax benefit........................... -- -- (221,252) 8.8% -- -- Increase in valuation allowance............. 672,316 (45.0%) 1,093,330 (43.5%) 913,384 (32.9%) ------------- --------- ------------- --------- ------------- --------- Total provision............................. $ -- -- $ -- -- $ -- -- ------------- --------- ------------- --------- ------------- --------- ------------- --------- ------------- --------- ------------- ---------
7. COMMITMENTS CAPITAL LEASE OBLIGATIONS: The Company leases certain office equipment under a lease arrangement expiring March 2000 with an interest rate of 17%. Future minimum lease payments under these capital leases is as follows: For Year Ending March 31, 2000...................................... $ 9,004 --------- Total minimum lease payments........................................ 9,004 Less amounts representing interest.................................. (803) --------- Present value of net minimum lease payments......................... 8,201 Less current obligation............................................. -- --------- Long-term obligation under capital lease............................ $ 8,201 --------- ---------
OPERATING LEASE OBLIGATIONS: The Company leases its offices, housing for certain employees, and certain motor vehicles under operating lease agreements expiring in future years. These agreements require the Company to pay taxes, insurance, and maintenance expenses. Rental expense was approximately $56,000, $174,000 and $257,000 for the nine months of Fiscal 1999 and twelve months of Fiscal 1998 and Fiscal 1997, respectively. The annual minimum rental commitments under all non-cancelable operating lease arrangements are as follows: Fiscal year ending March 31, 2000............................................................ $ 74,000 2001............................................................ 38,000 --------- $ 112,000 --------- ---------
F-16 QCS.NET CORPORATION (DBA SOURCINGLINK.NET) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. EARNINGS PER SHARE Reconciliation of the numerator and denominator of both basic and diluted EPS is provided as follows:
TWELVE MONTHS TWELVE MONTHS NINE MONTHS ENDED ENDED JUNE ENDED MARCH JUNE 30, 30, 31, 1999 1998 1997 ------------- ------------- ------------- Basic and diluted; Weighted average shares outstanding.............................. 20,193,250 17,539,820 17,074,660 ------------- ------------- ------------- Shares used in calculating per share amounts..................... 20,193,250 17,539,820 17,074,660 ------------- ------------- ------------- Net loss attributed to common stockholders....................... $ 1,491,779 $ 2,767,768 $ 3,020,895 ------------- ------------- ------------- ------------- ------------- ------------- Net loss per share attributed to common stockholders............. $ (0.07) $ (0.16) $ (0.18) ------------- ------------- ------------- ------------- ------------- -------------
At March 31, 1999 the Company had 3,585,077 options and 3,378,641 warrants outstanding to purchase shares of Common Stock compared to 2,986,077 options and 1,267,894 warrants outstanding at June 30, 1998. At June 30, 1997 the Company had 2,648,077 options and 436,894 warrants outstanding. These were not included in the computation of diluted earnings per share because inclusion of the options and warrants was anti-dilutive. 9. BUSINESS SEGMENT, FOREIGN SALES AND OPERATIONS AND MAJOR CUSTOMERS The Company operates in a single industry segment and sells its products and services primarily to the retail industry. The Company markets its products and services in the U.S. and foreign countries (mainly Europe and Asia) through its sales organizations and distributors. The geographical distribution of the revenues, operating loss and total identifiable assets is as follows:
REVENUES ------------------------------------------ TWELVE MONTHS TWELVE MONTHS NINE MONTHS ENDED JUNE ENDED JUNE ENDED MARCH 30, 30, 31, 1999 1998 1997 ------------ ------------- ------------- North and South America.............................................. $ 172,418 $ 145,695 $ 137,236 Europe/Africa........................................................ 336,508 428,257 517,324 Asia/Pacific Rim..................................................... 232,071 318,240 620,051 ------------ ------------- ------------- $ 740,997 $ 892,192 $ 1,274,611 ------------ ------------- ------------- ------------ ------------- -------------
F-17 QCS.NET CORPORATION (DBA SOURCINGLINK.NET) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. BUSINESS SEGMENT, FOREIGN SALES AND OPERATIONS AND MAJOR CUSTOMERS (CONTINUED)
OPERATING LOSS -------------------------------------------- NINE MONTHS TWELVE MONTHS TWELVE MONTHS ENDED MARCH ENDED JUNE 30, ENDED JUNE 30, 31, 1999 1998 1997 ------------ -------------- -------------- North and South America............................................. $1,432,015 $ 2,028,824 $ 2,119,350 Europe/Africa....................................................... 76,349 277,198 112,629 Asia/Pacific Rim.................................................... 63,271 179,051 605,578 ------------ -------------- -------------- $1,571,635 $ 2,485,073 $ 2,839,557 ------------ -------------- -------------- ------------ -------------- --------------
TOTAL IDENTIFIABLE ASSETS -------------------------------------------- MARCH 31, JUNE 30, JUNE 30, 1999 1998 1997 ------------ -------------- -------------- North and South America............................................. $ 423,023 $ 440,165 $ 137,654 Europe/Africa....................................................... 4,983 28,430 114,545 Asia/Pacific Rim.................................................... -- 17,484 189,788 ------------ -------------- -------------- $ 428,006 $ 486,079 $ 441,987 ------------ -------------- -------------- ------------ -------------- --------------
There were two customers representing 51% and 35% of revenues in Fiscal 1999, two customers representing 48% and 24% of revenues in Fiscal 1998, and one customer representing 21% of revenues in Fiscal 1997. 10. CONTINGENCIES The Company is subject to a number of claims arising out of the conduct of business. The Company believes that the results of the claims will not have a materially adverse effect on the Company's financial condition. 11. TRANSITION PERIOD COMPARATIVE DATA The accompanying statements of operations and cash flows for the nine months ended March 31, 1998 are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the results of the period. F-18 QCS.NET CORPORATION (DBA SOURCINGLINK.NET) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. TRANSITION PERIOD COMPARATIVE DATA (CONTINUED) The following table presents financial information for the nine months ended March 31, 1999 and 1998, respectively:
NINE MONTHS ENDED ---------------------------- MARCH 31, 1999 MARCH 31, ------------- 1998 ------------- (UNAUDITED) Revenue: Network....................................................... $ 480,082 $ 539,971 Consulting.................................................... 260,915 105,000 ------------- ------------- 740,997 644,971 Cost of revenue: Network....................................................... 201,032 356,357 Consulting.................................................... 260,915 105,000 ------------- ------------- 461,947 461,357 ------------- ------------- Gross profit.................................................... 279,050 183,614 Operating expenses: Selling, general and administrative........................... 1,371,269 1,480,103 Product development........................................... 479,416 281,910 ------------- ------------- Total operating expenses........................................ 1,850,685 1,762,013 ------------- ------------- Operating loss.................................................. (1,571,635) (1,578,399) Other income (expense), net..................................... 62,056 (65,146) Interest income................................................. 17,800 17,570 ------------- ------------- Net loss........................................................ (1,491,779) (1,625,975) Preferred dividend.............................................. -- (188,503) ------------- ------------- Net loss attributed to common stockholders...................... $ (1,491,779) $ (1,814,478) ------------- ------------- ------------- ------------- Net loss per share (basic and diluted).......................... $ (0.07) $ (0.11) ------------- ------------- ------------- ------------- Weighted average number of shares used in per share calculation (basic and diluted)........................................... 20,193,250 17,264,914 ------------- ------------- ------------- -------------
F-19 QCS.NET CORPORATION (DBA SOURCINGLINK.NET) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. TRANSITION PERIOD COMPARATIVE DATA (CONTINUED) The following table presents cash flow information for the nine months ended March 31, 1999 and 1998, respectively:
NINE MONTHS ENDED ---------------------------- MARCH 31, 1999 MARCH 31, ------------- 1998 ------------- (UNAUDITED) Cash flows from operating activities: Net loss...................................................... $ (1,491,779) $ (1,625,975) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense......................... 81,549 50,803 Unrealized exchange (gain) loss............................... (64,329) 64,516 Write-off of fixed assets..................................... 4,809 15,181 Compensation related to stock options & warrants.............. -- 107,250 Changes in operating assets and liabilities: Changes in accounts receivable.............................. (18,848) (97,961) Changes in other current assets and security deposits....... 13,337 24,904 Changes in accounts payable................................. (137,133) 86,931 Changes in accrued and other liabilities.................... (65,719) (3,601) ------------- ------------- Net cash used in operating activities..................... (1,678,113) (1,377,952) Cash flows from investing activities: Purchases of fixed assets..................................... (22,773) (44,034) Proceeds from sale of fixed assets............................ -- 19,405 ------------- ------------- Net cash used in investing activities..................... (22,773) (24,629) Cash flows from financing activities: Proceeds from issuance of common stock........................ 2,507,342 611,585 Exercise of stock options..................................... -- 750 Payments on capital leases.................................... (6,690) (6,703) ------------- ------------- Net cash provided by financing activities................. 2,500,652 605,632 Effect of exchange rate changes on cash......................... (6,056) (2,063) ------------- ------------- Net increase (decrease) in cash and cash equivalents...... 793,710 (799,012) Cash and cash equivalents, beginning of the period.............. 473,170 1,274,157 ------------- ------------- Cash and cash equivalents, end of the period.................... $ 1,266,880 $ 475,145 ------------- ------------- ------------- ------------- Supplemental disclosure of cash flow information: Cash paid during the period for interest...................... $ 1,573 $ 3,225 Cash paid during the period for taxes......................... 800 -- Non-cash financing transactions: Conversion of preference dividend payable to common stock..... 55,804 -- Issuance of note receivable for exercise of employee stock options..................................................... 40,000 --
F-20 FINANCIAL STATEMENT SCHEDULE REQUIRED RULE BY 5-04 OF REGULATION S-X QCS.NET CORPORATION (DBA SOURCINGLINK.NET) SCHEDULE II VALUATION AND QUALIFICATION ACCOUNTS
ADDITIONS ------------------------------ BALANCE AT CHARGED TO BEGINNING OF COSTS AND CHARGED TO BALANCE AT DESCRIPTION PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD - ---------------------------------- ------------- -------------- -------------- -------------- ------------- YEAR ENDED MARCH 31, 1999 Provision for doubtful accounts receivable...................... $ 29,657 $ 15,000 $ (9,536) $ 35,121 Deferred tax valuation allowance....................... 3,970,562 670,492 4,641,054 YEAR ENDED JUNE 30, 1998 Provision for doubtful accounts receivable...................... 55,036 31,883 -- (57,262) 29,657 Deferred tax valuation allowance....................... $ 2,877,232 -- $ 1,093,330 -- $ 3,970,562
F-21 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------------------------------- 3.1 Certificate of Incorporation filed March 26, 1993. 3.2 Certificate of Amendment of Certificate of Incorporation filed July 26, 1994. 3.3 Certificate of Amendment of Certificate of Incorporation filed November 22, 1994. (incorporated herein by reference to Exhibit 28(ii) to Form 8-K) 3.4 Certificate of Amendment of Certificate of Incorporation filed November 12, 1998. 4.1 Specimen form of stock certificate for Common Stock. 4.2 Series A Convertible Preferred Stock Purchase Agreement by and between QCS and the Series A Purchasers. (incorporated herein by reference to Exhibit 28(i) to Form 8-K filed on November 22, 1994) 4.3 Registration Rights Agreement by and between QCS and the Series A Purchasers. (incorporated herein by reference to Exhibit 28(ii) to Form 8-K filed on November 22, 1994) 4.4 Shareholders' Agreement by and between QCS and the Series A Purchasers. (incorporated herein by reference to Exhibit 28(vi) to Form 8-K filed on November 22, 1994) 4.6 Class U Warrant to Purchase Common Stock by and between QCS and the Series A Purchasers. (incorporated herein by reference to Exhibit 28(iii) to Form 8-K filed on November 22, 1994) 4.7 Amendment No. 1 to Series A Convertible Preferred Stock Purchase Agreement by and between QCS and the Series A Purchasers. 4.8 Amended and Restated Shareholders' Agreement by and between QCS and the Series A Purchasers. 4.9 Amended and Restated Class U Warrant to Purchase Common Stock by and between QCS and the Series A Purchasers. 10.1 Engagement Letter for consulting services from QCS to Het Goede Paard dated August 30, 1997. 10.2 Consulting Agreement by and between QCS and L.A. Delmonico Consulting, Inc. dated May 1, 1998. 10.3 Employment Agreement by and between QCS and Sean Maloy dated January 29, 1999. 10.4 Employment Agreement by and among QCS and John Buckles dated July 6, 1998. 10.5 Stock Option Plan. (the "Stock Option Plan") 10.6 Form of Stock Option Agreement pertaining to the Stock Option Plan. 10.7 1997 Stock Option Plan, as amended. (the "1997 Option Plan") 10.8 Incentive Stock Option Agreement pertaining to the 1997 Option Plan. 10.9 Nonstatutory Stock Option Agreement pertaining to the 1997 Stock Option Plan. 10.10 Form of Indemnification Agreement for Officers and Directors of QCS. 10.11 City Center Office Lease by and between QCS and Eagle Square Partners dated July 20, 1995. 10.12 Services Agreement between International Business Machines Corporation and QCS dated November 23, 1996.* 21.1 Subsidiaries of the Registrant. 23.1 Report of Independent Accountants on Financial Statement Schedule. 27 Financial Data Schedule.
- ------------------------ * Issuer has sought confidential treatment pursuant to Rule 406 for a portion of the referenced exhibits. EX-3.1 2 EX-3.1 Exhibit 3.1 STATE OF DELAWARE PAGE 1 Office of the Secretary of State ________________________________________ I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF INCORPORATION OF "QCS CORPORATION", FILED IN THIS OFFICE ON THE TWENTY-SIXTH DAY OF MARCH, A.D. 1993, AT 4:30 O'CLOCK P.M. -------------------------------- [SEAL] EDWARD J. FREEL, SECRETARY OF STATE 2330564 8100 AUTHENTICATION: 9742783 991190924 DATE: 05-13-99 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 04:30 PM 03/26/1993 733085031 - 2330564 CERTIFICATE OF INCORPORATION OF QCS CORPORATION FIRST: The name of the Corporation is QCS Corporation (the "Corporation"). SECOND: The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, the City of Wilmington, County of New Castle 19801. The name of its registered agent at such address is the Corporation Trust Company. THIRD: The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is Twenty Thousand (20,000) shares of Common Stock, $0.01 par value per share. FIFTH: The board of directors ("Board of Directors") is authorized to make, alter or repeal the by-laws of the Corporation. Election of directors need not be by written ballot. SIXTH: A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is hereafter amended to authorize the further elimination or limitation of the liability of directors, then the liability of the directors of the Corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended Delaware General Corporation Law. Any appeal or modification of this paragraph by they stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation at the time of such repeal or modification. 2 SEVENTH: A. Each person who was or is a party or is threatened to be made a party to or is involved in any threatened, pending or completed action, suite or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgements, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) actually and reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in Paragraph B hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification confrred in this Article SEVENTH shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Article SEVENTH or otherwise. The Corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the Corporation with 2 the same scope and effect as the foregoing indemnification of directors and officers. B. If a claim under Paragraph A of this Article SEVENTH is not paid in full by the Corporation within thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) than the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of providing such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action than indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. C. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article SEVENTH shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. D. The Corporation may maintain insurance, at its expense, to protect itself and any person who is or was a director, officer, employee or agent of the Corp or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power t indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. 3 EIGHTH: The names and mailing addresses of the incorporators are: M. C. Kinnamon 1209 Orange Street Wilmington, Delaware 19801 J. L. Austin 1209 Orange Street Wilmington, Delaware 19801 A. S. Wright 1209 Orange Street Wilmington, Delaware 19801 WE, THE UNDERSIGNED, being the incorporators hereinbefore named, for the purpose of forming a corporation pursuant to the General Corporation Law of Delaware, do make this certificate, hereby declaring and certifying that this is our act and deed and the facts herein stated are true, and accordingly have hereunto set our hands this 26th day of March, 1993. -------------------------------------- M. C. Kinnamon -------------------------------------- J. L. Austin -------------------------------------- A. S. Wright 4 EX-3.2 3 EX-3.2 Exhibit 3.2 STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "QCS CORPORATION", FILED IN THIS OFFICE ON THE TWENTY-SIXTH DAY OF JULY, A.D. 1994, AT 9 CLOCK A.M. ----------------------------------- Edward J. Freel, Secretary of State 2330564 8100 AUTHENTICATION: 9742782 991190924 DATE: 05-13-99 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION QCS CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: FIRST: That at a meeting of the Board of Directors of QCS Corporation, resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing the Article thereof numbered " Fourth " so that, as amended said Article shall be and read as follows: The total number of shares of stock which the corporation shall have the authority to issue is 40 million shares of common stock with a par value of $0.001 per share. SECOND: That thereafter, pursuant to the resolution of its Board of Directors, a special meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting of the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the the General Corporation Law of the State of Delaware. FOURTH: That the capital of said corporation shall not be reduced under or reason of said amendment. IN WITNESS WHEREOF, said QCS CORPORATION has caused its corporate seal to be hereunto affixed and this certificate to be signed by MARCEL VAN HEESEWIJK its authorized officer this 27TH day of JUNE, 1994. ----------------------------------------------------- Authorized Officer, Title EX-3.4 4 EX-3.4 Exhibit 3.4 STATE OF DELAWARE PAGE 1 Office of the Secretary of State ________________________________________ I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "QCS.NET CORPORATION", FILED IN THIS OFFICE ON THE TWELFTH DAY OF NOVEMBER, A.D. 1998, AT 9:01 O'CLOCK A.M. ----------------------------------- [SEAL] EDWARD J. FREEL, SECRETARY OF STATE 2330564 8100 AUTHENTICATION: 9742778 991190924 DATE: 05-13-99 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:01 AM 11/12/1998 981436133-2330564 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF QCS.NET CORPORATION QCS.net Corporations, a corporation duly organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "CORPORATION"), does hereby certify as follows: FIRST: That at a meeting duly called of the Board of Directors of the Corporation (the "BOARD"), resolutions were duly adopted approving a proposed amendment of the Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and calling for the consent of the stockholders of the Corporation at a meeting duly called for such purpose in accordance with Section 211 of the Delaware General Corporation Law. The resolution setting forth the proposed amendment is as follows: RESOLVED FURTHER, that the Certificate of Incorporation of the Corporation be amended by changing the Article thereof numbered so that, as amended said Article shall be read as follows: (a) The aggregate number of shares which the Corporation shall have the authority to issue is forty million (40,000,000) shares of Common Stock with a par value of one-tenth of cent ($.001) per share; and five million (5,000,000) shares of Series A Convertible Preferred Stock with a par value of one-tenth of cent ($.001) per share (the "Series A Preferred"). (b) VOTING 1. GENERAL. Except as may be otherwise provided in these terms of the Series A Preferred or by law, the Series A Preferred shall vote together with all other classes and series of stock of the Corporation s a single class on all actions to be taken by the stockholders of the Corporation. Each share of Series A Preferred shall entitle the holder thereof to such number of votes per share on each such action as shall equal the number of shares of Common Stock (including fractions of a share) into which each share of Series A Preferred is then convertible. 2. BOARD SIZE. Subject to the provisions of paragraph (b)3 below, the Corporation shall not, without the written consent of affirmative vote of the holders of at least sixty-five percent (65%) in interest of the then outstanding shares of Series A Preferred in each case given in writing or by vote at a meeting, consenting or voting (as the case may be ) together as one class, increase the maximum number of directors constituting the Board of Directors to a number in excess of seven (7). 3. BOARD SEATS. The holders of the Series A Preferred, voting as a separate series, shall be entitled to elect no less than three (3) directors of the Corporation. At any meeting (or in a written consent in Lieu thereof) held for the purpose of electing directors, the presence in person or by proxy (or written consent) of the holders of at least sixty-five percent (65%) in interest of the then outstanding shares of Series A Preferred shall constitute a quorum of the Series A Preferred for the election of directors to be elected solely by the holders of the Series A Preferred. A vacancy in any directorship elected by the holders of the Series A Preferred shall be filled only by vote or written consent of the holders of at least sixty-five percent (65%) in interest of the then outstanding Series A Preferred. (c) DIVIDENDS. The Series A Preferred shall not be entitled to any preference in the receipt of dividends. In the event that the Board of Directors declares a dividend with respect to the Common Stock, each share of Series A Preferred shall e entitled to participate in and receive said dividend, out of funds legally available therefor, based on the number of shares of Common Stock into which such share of Series A Preferred could be converted as of the date of such declaration. (d) LIQUIDATION, DISSOLUTION AND WINDING-UP. 1. LIQUIDATION. (i) Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, each of the holders of the shares of Series A Preferred shall be paid an amount equal to One Dollar and Three Cents ($1.03) per share of Series A Preferred held by such holder, such amount payable with respect to one (1) share of Series A Preferred being sometimes referred to herein as the "Series A Liquidation Preference Payment," and with respect to all shares of Series A Preferred being sometimes referred to herein as the "Series A Liquidation Preference Payments." (ii) If upon any liquidation, dissolution, or winding up of the Corporation, the assets to be distributed to the holders of the Series A Preferred shall be insufficient to permit payment to such stockholders of the full preferential amounts aforesaid, then all or, as the case may be, that portion of the assets available for distribution as the liquidation preference payment amounts for the shares of Series A Preferred held by such holder bear tot he aggregate liquidation preference payment amounts for all shares of Series A Preferred then outstanding. 2. RANKING. Upon any liquidation, dissolution or winding up of the Corporation, immediately after the holders of Series A Preferred shall have been paid the Series A Liquidation Preference Payments in full, the remaining net assets of the Corporation available for distribution shall be distributed among the holders of Common Stock. 3. NOTICE OF SPECIAL PROVISIONS. Written notice of any such liquidation, dissolution or winding up, stating a payment date and the place where said payments shall be made, shall be given by mail, postage prepaid, or by telex or facsimile transmission to non-U.S. residents, not less than thirty (30) days prior to the payment date stated therein, to the holders of record of Series A Preferred, such notice to be addressed to each such holder at its address as shown by the records of the Corporation. The consolidation or merger of the Corporation into or with any other entity or entitles which results in the exchange of outstanding shares of the Corporation for securities or other consideration issued or paid or caused to be issued or paid by any such entity or affiliate thereof, and the sale or transfer by the Corporation of more than fifty-five percent (55%) of its assets, shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of the provisions of this paragraph (d)3. (e) SPECIAL VOTES OF THE SERIES A PREFERRED. At any time when shares of Series A Preferred are outstanding and in addition to any other vote required by law or the Certificate of Incorporation, without the prior consent of the holders of at least eighty percent (80%) in interest of the then outstanding Series A Preferred given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a series, the Corporation will not: (i) Amend, alter or repeal any provision of its Certificate of Incorporation including, without limitation, any provision which (a) increases the number of shares of authorized capital stock of the Corporation; (ii) Create or authorize the creation of any additional class or series of shares of stock unless the same ranks junior to the Series A Preferred as to dividends and the distribution of assets on the liquidation, dissolution or winding up of the corporation, or increase the authorized amount of Series A Preferred or increase the authorized amounts of any additional class or series of share of stock unless the same ranks junior to the Series A Preferred as to dividends and the distribution of assets on the liquidation, dissolution or winding up of the Corporation, or create or authorize any obligation or security convertible into shares of Series A Preferred or into shares of any other class or series of stock unless the same ranks junior to the Series A Preferred as to dividends and the distribution of assets on the liquidation, dissolution or winding up of the Corporation, whether any such creation, authorization, or increase shall be by means of amendment to the Certificate of Incorporation or by merger, consolidation or otherwise; (iii) In any manner amend, alter or change the designations or the powers, preferences or rights, privileges or the restrictions of the Series A Preferred materially or adversely, including the voting rights of such stock; (iv) Merge or consolidate with or into, or permit any subsidiary to merge or consolidate with or into, any other corporation, corporations, entity or entities (except that any subsidiary may merge into the Corporation or with any other subsidiary); (v) Sell, abandon, transfer, lease or otherwise dispose of mote than fifty-five percent (55%) of its properties or assets; or (vi) except as otherwise provided for herein or in the Series A Convertible Preferred Stock Purchase Agreement dated November 22, 1994 or in the Exhibits thereto, purchase, redeem or otherwise acquire (or pay into or set aside for a sinking fund for such purpose), any of the preferred stock or Common Stock, provided however, that this restriction shall not apply to the repurchase of shares of Common Stock held by officers or employees of the Corporation which are subject to restrictive stock purchase agreements under which the Corporation has the option to repurchase such shares upon the occurrence of certain events, including the termination of employment. (f) CONVERSION. Each holder of shares of Series A Preferred shall have the right to convert any and all of such shares into Common Stock at any time pursuant to a Class U Warrant dated November 22, 1994. (g) AMENDMENTS. Except where the vote or written consent of the holders of a greater number of shares of the Series A Preferred is required by law, the Certificate of Incorporation or any stockholders' agreement to which the holders of Series A Preferred one parties, no provision of the terms of the Series A Preferred may be amended, modified or waived without the prior written consent or affirmative vote of the holders of at least eighty percent (80%) in interest of the then outstanding shares of Series A Preferred. SECOND: That thereafter pursuant to a resolution of the Corporation's Board of Directors, a special meeting of the stockholders of the Corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting the necessary number of shares as required by statue and the Certificate of Incorporation of the Corporation were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Sections 211 and 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said QCS.net Corporation, has caused its corporate seal to be hereunder affixed and this certificate to be signed by its authorized officer hereunder designated this 29 day of October, 1998. By: ----------------------------------- Name: Marcel van Heesewijk Title: President EX-4.1 5 EX-4.1 Exhibit 4.1 [CERTIFICATE] NUMBER SHARES QCS QCS CORPORATION INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE OTC: QCSC COMMON STOCK THIS CERTIFIES THAT: IS OWNER OF FULLY PAID AND NON-ASSESSABLE SHARE OF COMMON STOCK OF NO PAR VALUE EACH OF QCS CORPORATION Transferable on the books of the Corporation in person or by attorney upon surrender of this certificate duly endorsed or assigned. This certificate and the shares represented hereby are subject to the laws of the State of Delaware, and to the Certificate of Incorporation and Bylaws of the Corporation, as now or hereafter amended. This certificate is not valid until countersigned by the Transfer Agent. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. COUNTERSIGNED: OLDE MONMOUTH STOCK TRANSFER CO., INC. 22 CLARIDGE DRIVE, MIDDLETOWN, NJ 07748 TRANSFER AGENT DATED: [SEAL] BY: AUTHORIZED SIGNATURE PRESIDENT EX-4.7 6 EX-4.7 Exhibit 4.7 AMENDMENT NO. 1 TO SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT THIS AMENDMENT NO. 1 TO SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (the "Amendment") is made and entered into as of May , 1996, by and among the parties (the "Parties") to that certain Series A Convertible Preferred Stock Purchase Agreement dated as of November 22, 1994 (the "Agreement") with respect to the purchase and sale of 4,368,937 shares of Series A Preferred Stock of QCS Corporation, a Delaware corporation (the "Company"). Terms not otherwise defined herein shall have the meanings given to them in the Agreement. WHEREAS, the Agreement contains provisions that require the Company to make certain cash payments and/or issue additional shares of capital stock of the Company to the Purchasers if the financial results described in Section 2.4 of the Agreement (the "Financial Results") are not achieved; WHEREAS, the Shareholders' Agreement dated as of November 22, 1994 (the "Shareholders' Agreement"), among certain parties, including the Founders and the Purchasers, contains provisions that require the Founders to make certain cash payments and/or contribute to the Company shares of capital stock of the Company if the Financial Results are not achieved WHEREAS, it appears that the Financial Results will not be achieved; WHEREAS, the Founders have entered into an agreement with the Purchasers, pursuant to which the Founders have acknowledged that the Financial Results will not be achieved and have agreed to make certain payments and/or issue certain shares of capital stock of the Company to the Purchasers in accordance with the terms thereof; and WHEREAS, in light of the foregoing, the Parties desire to amend the Agreement in the manner set forth below; NOW, THEREFORE, in consideration of the mutual agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the Parties, the Parties agree as follows: 1. SECTION 2.1. The seventh sentence of Section 2.1 of the Agreement (which begins "Unless earlier converted") shall be deleted in its entirety and replaced with the following sentence: "Unless earlier converted, all Series A Preferred shall be automatically converted into Common Stock in accordance with the terms of the Class U Warrants." 2. AMENDMENT OF CLASS U WARRANTS. The Class U Warrants shall be amended and restated to read in their entirety as set forth on EXHIBIT A attached hereto. 1. 3. SECTION 2.4(d). Section 2.4(d) of the Agreement shall be deleted in its entirety. 4. SECTION 5.1(i). The following language in Section 5. l(i) of the Agreement shall be deleted in its entirety: "; PROVIDED THAT such changes and material deviations shall be subject to the unanimous consent of the Board of Directors or of the Conseil d' Administration, as the case may be, at their respective regular quarterly meetings should such changes and material deviations require extra cash in excess of five hundred thousand Dollars ($500,000) in the aggregate for both Companies for any given quarter." 5. SECTION 5.2(d). Section 5.2(d) of the Agreement shall be deleted in its entirety. 6. ARTICLE VII. Article VII of the Agreement shall be deleted in its entirety and replaced with the following Article VII: "ARTICLE VII RIGHT OF FIRST REFUSAL 7.1 RIGHT OF FIRST REFUSAL. (a) Subject to any restrictions contained in the Company's Certificate of Incorporation, as amended, Bylaws, as amended, or in any other agreement to which the Company is a party or by which it is bound, the Company may issue New Securities at any time without prior notice to the Purchasers. Except as otherwise provided in Section 7.2(c) below, within 5 days after such issuance, the Company shall give each Purchaser written notice of the issuance describing the New Securities and the consideration for and the general terms upon which they were issued. Except as otherwise provided in Section 7.2(c) below, each Purchaser shall have 20 days (or such longer period as the Company, in its sole discretion, may determine) from the date of mailing of any such notice to agree to purchase up to its Post-Event Pro Rata Participation of such New Securities at the same price and upon the general terms specified in such notice by giving written notice to the Company and stating the quantity of New Securities to be purchased. Such right of first refusal shall terminate, if not theretofore exercised upon the expiration of such 20 day period. (b) In lieu of complying with the provisions of Section 7.1 (a) above, the Company may, in its discretion, but shall not be obligated to, provide the Purchasers with written notice and an opportunity to acquire their Pro Rata Share of any issuance of New Securities (except as specifically excluded under Section 7.2(c) below) before the Company offers such New Securities to others. In the event the Company elects to proceed under this Section 7.1 (b)' (i) the Company shall give each Purchaser written notice of the issuance describing the New Securities and the consideration for and the general terms upon which they are proposed to be issued; (ii) each Purchaser shall have 20 days (or such longer 2. period as the Company, in its sole discretion, may determine) from the date of mailing of any such notice to purchase up to its Pro Rata Share of such New Securities at the same price and upon the general terms specified in such notice by giving written notice to the Company and stating the quantity of New Securities to be purchased; and (iii) the Company shall have 90 days after the expiration of such 20 day period to sell to others any New Securities not acquired by the Purchasers, at a price and upon general terms and conditions materially no more favorable to the purchasers thereof than specified in the Company's notice to the Purchasers. 7.2 DEFINITIONS. (a) "Post-Event Pro Rata Participation" shall mean the number of New Securities necessary to maintain the Purchaser's Pro Rata Share, as such existed immediately prior to an Issuance Event. (b) The "Pro Rata Share" for any Purchaser, for purposes of this Agreement, is the ratio of (i) the number of shares of Common Stock then owned or issuable upon conversion of Preferred Stock then owned by such Purchaser, to (ii) the total number of shares of Common Stock outstanding immediately prior to the issuance of the New Securities, assuming full conversion of all outstanding shares of Preferred Stock and assuming that all outstanding options and warrants exercisable for Common Stock had been exercised. (c) "New Securities" shall mean any capital stock of the Company, whether now authorized or not, and rights, options, or warrants to purchase said capital stock, and securities of any type whatsoever that are, or may become, convertible into said capital stock. Notwithstanding anything to the contrary contained herein, the fight of first refusal established by this Article VII shall not apply to any of the following New Securities' (i) securities issuable upon conversion of Series A Preferred; (ii) securities issued for consideration other than cash pursuant to a merger, consolidation, acquisition or similar business combination; (iii) securities issued pursuant to any fights or agreements or options or warrants outstanding as of the date of this Agreement; (iv) securities issued pursuant to any fights or agreements or options or warrants granted after the date of this Agreement, provided that, excepts as otherwise provided in this Section 7.2(c), the fight of first refusal established by this Article VII applied with respect to the initial sale or grant by the Company of such fights or agreements or options or warrants; 3. (v) shares of Common Stock (and/or options, warrants or other rights to acquire the same) issued or to be issued to employees, officers or directors of, or consultants or advisors to, the Company or any subsidiary of the Company, pursuant to stock option plans or other arrangements that are approved by the Board of Directors; (vi) securities issued in connection with any stock split, stock dividend, or similar recapitalization by the Company; (vii) securities issued pursuant to any equipment leasing arrangement, or bank financing; or (viii) securities issued in connection with strategic transactions involving the Company and other entities, including (A) joint ventures, manufacturing, marketing or distribution arrangements or (B) technology transfer, license or development arrangements; provided that such strategic transactions and the issuance of securities pursuant thereto, have been approved by the Company's Board of Directors. (d) "Issuance Event" shall mean any issuance of New Securities. 7.3 TRANSFERABILITY. The fight of first refusal of each Purchaser pursuant to this Article VII may be assigned by a Purchaser to a transferee or assignee of Series A Preferred which (i) is a subsidiary, parent, general partner, limited partner or retired partner of a Purchaser, or (ii) is a Purchaser's family member or trust for the benefit of an individual Purchaser; provided, however, (A) the transferor shall, within 10 days after such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the securities with respect to which such rights of first refusal are being assigned and (B) such transferee shall agree to be subject to all restrictions set forth in this Agreement." 7. SECTION 8.3. For purposes of Section 8.3 of the Agreement, all notices, requests, demands and other communications to be made to the Company shall be addressed to' QCS Corporation 650 Castro Street, 210 Mountain View, CA 94041 Attn: President Fax: (415) 966-1025 8. DIVIDENDS. (a) The Parties acknowledge and agree that Article 4, Section (c) of the Company's Certificate of Incorporation, as amended (entitled "Dividends"), was intended to have, and shall have, the following meaning: 4. "Holders of Series A Preferred, in preference to the holders of any other stock of the Corporation, shall be entitled to receive only out of funds that are legally available therefor, dividends at the rate of five percent (5%) per annum of the original issue price of one Dollar and three Cents ($1.03) per share on each outstanding share of Series A Preferred (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares). Such dividends shall be cumulative beginning November 22, 1994 and shall begin compounding annually on January 1, 1996. Such dividends shall be payable only upon the first to occur of the liquidation of the corporation pursuant to Section (d) below or, with respect to any shares of Series A Preferred that are converted into shares of Common Stock pursuant to the Class U Warrant, such dividends shall be payable six months following such conversion to the holder of record of the Series A Preferred on the date of such conversion; provided, however, that the Corporation's Board of Directors, in its discretion, may, but shall not be obligated to, declare and pay any such dividends prior to the liquidation of the Corporation or the date that is six months after the conversion of Series A Preferred; and, provided, further, that the conversion of a share of Series A Preferred shall not cause any dividends to become payable with respect to any other shares of Series A Preferred that have not been converted. Dividends payable on the Series A Preferred shall be paid in cash." (b) The Parties agree that as soon as practicable after the effective date of this Amendment, the Parties shall take all reasonable actions, and execute all documents, instruments and agreements, necessary or appropriate to cause Article 4, Section (c) of the Company's Certificate of Incorporation, as amended, to be amended to read as specified in Section 7(a) hereof. 9. EFFECTIVE DATE. This Amendment shall become effective on the date on which it has been executed and delivered by all parties hereto and all of the following agreements have been executed and delivered by all parties thereto, and shall not become effective unless and until all such parties have so executed and delivered such agreements' (a) the Amended and Restated Shareholders' Agreement of even date attached hereto as EXHIBIT B; (b) the Agreement of even date by the Founders in favor of the Purchasers attached hereto as EXHIBIT C; and (c) the Amended and Restated Class U Warrant attached hereto as EXHIBIT D. 10. TERMINATION. The Agreement and this Amendment shall terminate and be of no further force or effect upon the effective date of a registration statement pertaining to, and subject to the consummation of, an underwritten public offering of the Company's Common Stock at a price of at least $5.00 per share. In addition to the foregoing, the rights of the Purchasers under Section 6 hereof (and Article VII of the Agreement) shall terminate and be of no further force or effect upon the adoption by all of the members of the Board of Directors of a resolution to that effect. 5. 11. GOVERNING LAW; JURISDICTION. This Amendment and the legal relationship between the Parties shall be governed by and construed in accordance with the internal laws of the State of New York exclusively, without regard to conflicts of law principles. 12. COUNTERPARTS. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Amendment by signing any such counterpart. 13. REMAINDER OF AGREEMENT UNCHANGED. Except as set forth above or in any other amendment to any exhibit to the Agreement, the Agreement shall remain in full force and effect as of the date thereof. 6. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. QCS CORPORATION By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- QCS DEVELOPMENT COMPANY S.A. By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- PURCHASERS: CARLYLE QCS PARTNERS, L.P. By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- STF MANAGEMENT LIMITED, as General Partner of Sharp Technology Fund I Limited Partnership By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- 7. STF MANAGEMENT LIMITED, as General Partner of Sharp Technology Fund II Limited Partnership By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- LAGUNITAS PARTNERS, L.P. By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- PROACTIVE PARTNERS, L.P. By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- OAKWOOD HOLDINGS, BVI By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- DE NOYANGE S.A. By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- 8. CANNELL CAPITAL MANAGEMENT By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- Mr. Herb Miller ------------------------------------------- Mr. Robert Zangrillo ------------------------------------------- Mr. Hans Robben ------------------------------------------- Mr. Peter Mills ------------------------------------------- Mr. Peter Anson ------------------------------------------- Mr. Steven Lebow ------------------------------------------- 9. EX-4.8 7 EX-4.8 Exhibit 4.8 AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT THIS AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT (the "Agreement") dated as of _______________, 1996, by and among QCS CORPORATION, a Delaware corporation ("QCS"), the Persons listed on Annex 1 hereto (the "Purchasers") and the Persons listed on Annex 2 hereto (the "Existing Shareholders"). The Existing Shareholders and the Purchasers are sometimes hereinafter referred to collectively as "the Shareholders." W I T N E S S E T H WHEREAS, the Shareholders and QCS are parties to the Shareholders' Agreement dated November 22, 1994 (the "Prior Agreement"); and WHEREAS, the Existing Shareholders are currently together the legal and equitable owners of fourteen million sixty-seven thousand one hundred (14,067,100) shares of Common Stock (as hereinafter defined) of QCS; WHEREAS, the Purchasers are currently together the legal and equitable owners of four million three hundred sixty-eight thousand nine hundred thirty-seven (4,368,937) shares of Series A Preferred of QCS; WHEREAS, QCS and the Shareholders desire to amend and restate the Prior Agreement; and WHEREAS, QCS and the Shareholders intend that this Agreement shall supersede the Prior Agreement and that the Prior Agreement shall terminate upon the execution of this Agreement. NOW, THEREFORE, in consideration of the mutual promises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. DEFINITIONS. All terms not otherwise defined herein shall have the meanings given or assigned to them in that certain Stock Purchase Agreement dated as of November 22, 1994, as amended, among certain of the parties hereto (the "Stock Purchase Agreement"). 1. 2. BOARD OF DIRECTORS AND CONDUCT OF QCS' AFFAIRS; VOTING RIGHTS. 2.1 BOARD OF DIRECTORS. 2.1.1 The Board of Directors of QCS shall consist at anytime of no more than seven (7) persons. 2.1.2 The Purchasers acknowledge that the Certificate of Incorporation of QCS, as amended, entitles the holders of Series A Preferred, voting as a separate series, to elect no less than three (3) directors of QCS, Notwithstanding the foregoing, the Purchasers agree that the Purchasers, voting together, shall elect only two (2) directors to the Board of Directors of QCS. The parties hereto further acknowledge and agree that the holders of Common Stock and Series A Preferred, voting together on an as-converted basis, shall elect all remaining members of the Board of Directors in accordance with the applicable provisions of the Delaware General Corporation Law. The Board of Directors shall appoint one (1) of the Directors to be Chairman of QCS by a vote of the majority of its members. Such Chairman shall not have a second or casting vote at any meeting of the Board of Directors. 2.1.3 (a) The Board of directors shall meet at least every quarter at such time as may be fixed by the Chairman of the Board of Directors. Special meetings of the Board of Directors may be called by any Director. Notice of the time and place of regular and/or special meetings of the Board of Directors shall be effective if delivered to each Director by hand, facsimile or telex. In case of a regular meeting, such notice must be delivered at least five (5) business days prior to such meeting, and in the case of a special meeting, such notice must be delivered at least two (2) business days prior to such special meeting. (b) Meetings of the Board of Directors shall be held at such place as the Board of Directors may from time to time agree upon or in the absence of agreement at QCS' principal office. (c) Whenever notice is required to be given under this Section 2.1.3 hereof a written waiver of notice, signed by the Director entitled to notice (whether before of after the time of the meeting) shall be deemed equivalent to notice. A Director's attendance at a meeting shall constitute a waiver of notice of that meeting, except when the Director attends a meeting for the express purpose of objecting, and does object, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. 2.1.4 To the fullest extent permitted by law, QCS shall indemnify and hold harmless each and every one of its Directors from all liabilities incurred by reason of performing their functions. For the purposes of such indemnification, QCS shall purchase an adequate insurance policy from an insurance carrier of national reputation and shall modify its By-laws so as to make this provision fully enforceable. 2.2 ACTION REQUIRING A SUPERMAJORITY VOTE. It is agreed that, in addition to any other vote required by law or QCS's Certificate of Incorporation, as amended, the vote or 2. consent of the holders of eighty percent (80%) in internet of the Series A Preferred shall be required: (i) to amend the Certificate of Incorporation and By-laws of QCS; (ii) to sell, lease or exchange all of substantially all of the property and assets of QCS; (iii) to merge, reorganize and consolidate QCS with any other corporation or entity; (iv) to voluntarily dissolve QCS, or to revoke voluntary dissolution by QCS; and (v) to change materially the principal business conducted by QCS. 3. REPRESENTATION AND WARRANTIES. 3.1 THE EXISTING SHAREHOLDERS. Each of the Existing Shareholders represents and warrants, as to itself, as follows: (a) Each of the Existing Shareholders is currently the legal and equitable owner of the shares of Common Stock of QCS set forth opposite their respective names in Annex 1 hereto. (b) The execution and delivery by each of the Existing Shareholders of this Agreement and the consummation by it of the transactions contemplated herein will not violate any law or any contract to which such Existing Shareholder is a party, and no approval , authorization, consent, or order of, or filing with, any third party, court, administrative agency, or other governmental authority is required for the execution and delivery by such Existing Shareholder of this Agreement or the consummation by it of the transactions contemplated herein. (c) This Agreement is the valid and binding obligation of each of the Existing Shareholders enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization and similar laws of general application affecting the rights and remedies of creditors and subject to general principles of equity. 3.2 QCS. QCS REPRESENTS AND WARRANTS AS FOLLOWS: (a) QCS is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, United States of America, with full power and authority to enter into this Agreement and to consummate the transactions contemplated herein. 3. (b) The execution and delivery by QCS of this Agreement and the consummation by it of the transactions contemplated herein will not violate any law or any contract to which QCS is a party, and no approval, authorization, consent, or order of, or filing with, any third party, court, administrative agency, or other governmental authority is required for the execution and delivery by QCS of this Agreement or the consummation by it of the transactions contemplated herein. (c) This Agreement is the valid binding obligation of QCS enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization and similar laws of general application affecting the rights and remedies of creditors, and subject to general principles of equity. (d) Messrs. Marcel van Heesewijk and Matteus Wegbrans are each duly authorized and empowered to execute this Agreement on behalf of QCS. 3.3 THE PURCHASERS. Each of the Purchasers represents and warrants, as to itself, as follows: (a) Each of the Purchasers is currently the legal and equitable or beneficial owner of the shares of Series A Preferred of QCS set forth opposite its respective name in Annex 1 hereto. (b) The execution and delivery by each of the Purchasers of this Agreement and the consummation by it of the transactions contemplated herein will not violate any law or any contract to which such Purchaser is a party, and no approval, authorization, consent or order of, or filing with, any third party, court, administrative agency, or other governmental authority is required for the execution and delivery by such Purchaser of this Agreement or the consummation by it of the transactions contemplated herein. (c) This Agreement is the valid binding obligation of each of the Purchasers enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization and similar laws of general application affecting the rights and remedies of creditors, and subject to general principles of equity. 4. RESTRICTIONS ON TRANSFERS OF THE SERIES A PREFERRED AND OF THE COMMON STOCK. Each Shareholder agrees not to transfer all or any shares of Series A Preferred or of Common Stock, as the case may be, except in accordance with and subject to the following restrictions and each Shareholder shall hold its shares subject hereto and by accepting the same upon original issue, upon stock dividends or stock distributions or upon subsequent transfer, agrees for itself, its successors, legal representatives and assigns as follows: (a) The Series A Preferred or the Common Stock shall not be sold, transferred, assigned, pledged, hypothecated or otherwise encumbered, whether voluntarily or 4. involuntarily, by operation of law, legal proceedings or otherwise (hereinafter referred to as a "Transfer") other than as provided in this Section 4. (b) The Founders, the holders of Series A Preferred and the holders of Warrants shall not be entitled to dispose of their securities for a period of twenty-four (24) months from the date of Closing, unless otherwise agreed upon by unanimous consent of the Board of Directors of QCS; provided, however, that the Founders, the holders of Series A Preferred and the holders of Warrants shall be entitled to dispose of their securities after expiration of a twelve (12) month period from the date of Closing, if, after the expiration of such twelve (12) month period, the Holders of the Registrable Securities (as these terms are defined in the Registration Rights Agreement) request in writing the registration of such Registrable Securities from QCS pursuant to the Registration Rights Agreement. Subject to the Registration Rights Agreement in the event that, at any time after the above-mentioned twenty-four (24) month or twelve (12) month periods, as the case may be, a Shareholder desires to make a BONA FIDE sale of some or all of its Series A Preferred or Common Stock to a third party (the "Proposed Transferee"), such Shareholder (the "Offeror") shall notify the non-transferring Shareholders (the "Offerees") in writing of such desire, together with the identity of the Proposed Transferee and the price and terms offered in good faith at arm's length by such Proposed Transferee and shall offer to transfer such shares of Series A Preferred or Common Stock to the Offerees pro rata to their shareholdings of QCS at the time at the same price and on the same terms. For a period of thirty (30) days after receipt of such notice, each Offeree shall have the following option: (i) if the Offeree is a holder of shares of Series A Preferred or of Converted Shares, to acquire his or its pro rata share of the shares of Series A Preferred offered for sale, subject to the proposed Transfer; (ii) if the Offeree is a holder of Common Stock (except Converted Shares), to acquire his or its pro rata share of the shares of Common Stock offered for sale, subject to the proposed Transfer. In the event an Offeree has not purchased such shares within such thirty (30) day period, such Offeree shall be deemed to have approved the sale of the Offeror's shares of Common Stock or Preferred Stock to the Proposed Transferee. (c) No disposition to the Proposed Transferee may be made until such Proposed Transferee agrees to be bound by the terms of this Agreement. (d) Notwithstanding the foregoing, the Existing Shareholders may sell all or part of their shares of Common Stock to other Existing Shareholders or to the Purchasers, and the Purchasers may sell all or part of their Shares to other Purchasers or to the Existing Shareholders, at such price and on such terms as the Purchasers and Existing Shareholders who are parties to such sale may together agree. 5. (e) Each of the Shareholders agrees to be bound by the terms and provisions of this Section 4. (f) The provisions restricting the sale of shares contained in this Section 4 shall automatically terminate upon the happening of any of the following events: the adjudication of QCS or QCS Development Company S.A. (the "Subsidiary") as a bankrupt, the execution by QCS or the Subsidiary of any assignment for the benefit of creditors, the appointment of a receiver for all or part of its properties, or the voluntary or involuntary dissolution of QCS or of the Subsidiary. (g) Each certificate for all classes of Series A Preferred and of Common Stock of QCS shall bear the following legend prominently stamped, printed or typed on the face thereof: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE. ANY SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE OR COMMON STOCK RECEIVED UPON CONVERSION OF THE SECURITES REPRESENTED BY THIS CERTIFICATE BY BE MADE ONLY (I) IN A TRANSACTION REGISTERED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR (II) IF AN EXPEMPTION FROM REGISTRATION UNDER SAID ACT IS AVAILABLE AND QCS HAS RECEIVED AN OPINION OF COUNSEL TO SUCH EFFECT REASONABLY SATISFACTORY TO IT. QCS WILL FURNISH A FULL STATEMENT OF ALL OF THE SEDIGNATIONS, PREFERENCES, LIMITATIONS AND RALATIVE RIGHTS OF THE SHARES OF EACH CLASS OF STOCK OR SERIES THEREOF OF QCS TO ANY SHAREHOLDER WITHOUT CHARGE UPON WRITTEN REQUEST TO QCS AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE THE TRANSFER OF SHARES REPRESENTED BY THIS CERTIFICATE IS RESTRICTED BY THE TERMS OF THAT CERTAIN SHAREHOLDERS OF QCS, AS WELL AS OF THAT CERTAIN REGISTRATION RIGHTS AGREEMENT, BOTH DATED AS OF NOVEMBER 22, 1994, WHICH AGREEMENTS ALSO CONTAIN OTHER IMPORTANT PROVISIONS RELATING TO SUCH SHARES. COPIES OF THESE AGREEMENTS ARE ON FILE AT QCS'S PRINCIPAL PLACE OF BUSINESS AND REGISTERED OFFICE AND MAY BE 6. OBTAINED WITHOUT CHARGE UPON WRITTEN REQUEST TO QCS AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE. BY ACCEPTANCE OF THIS CERTIFICATE, THE HOLDER HEREOF AGREES TO BE BOUND BY THE TERMS OF SUCH AGREEMENTS." 5. BOOKS AND RECORDS. QCS shall maintain its books of account on a accrued basis of accounting and shall prepare its financial statements in accordance with Generally Accepted Accounting Principles consistently applied. The year-end balance sheet, statement of operations and statement of changes in financial position shall be audited each year by an independent certified public accountant. Mr. Yves Sisteron and the Carlyle Group, together with their lawful agents, attorneys and representatives, shall have access to the books and records and facilities of QCS on behalf of the syndicates of Shareholders they each lead (as indicated in Exhibit 2.1of the Stock Purchase Agreement) during all normal business hours. 6. NOTICES. All notices required to be given hereunder shall be in writing and shall be deemed to have been properly given if sent by registered or certified mail, postage prepaid, or by telecopy, addressed as follows: (a) if to the Existing Shareholders: Mr. Marcel van Heesewijk QCS Corporation 650 Castro Street, 210 Mountain View, California 94041 Telecopy: (415) 966-1025 (b) if to QCS: QCS Corporation 650 Castro Street, 210 Mountain View, California 94041 Telecopy: (415) 966-1025 7. with a copy to: Robert L. Jones, Esq. Cooley Godward Castro Huddleston & Tatum 3000 El Camino Real Five Palo Alto Square Palo Alto, California 94306-2155 Telecopy: (415) 857-0663 (c) if to the Purchasers: Mr. Yves Sisteron 1116 Cory Avenue Los Angeles, CA 90069 Telecopy: (310) 550-1876 and Carlyle-QCS Partners, L.P. 1001 Pennsylvania Avenue, N.W. Suite 480 North Washington, D.C. 20004 Telecopy: (202) 347-1818 with a copy to: Arent Fox Kintner Plotkin & Kahn 1675 Broadway New York, New York 10019-5874 Attention: Jean-Francois Carreras, Esq. Telecopy: (212) 484-3990 All such notices, requests, demands and other communications shall, when mailed (which mailing must be accomplished by first class mail, postage prepaid; express overnight courier service; or registered mail, return receipt requested) or telegraphed, be effective three (3) days after deposited in the mails or delivered to the telegraph company, respectively, addressed as aforesaid, unless otherwise provided herein. All such notices, requests, demands and other communications shall, when telecopied, be effective immediately upon printing of the corresponding receipt slip by the sending machine, unless otherwise provided herein. 7. ASSIGNMENT. This Agreement shall not be assigned by any Party hereto without the prior written consent of the other Parties hereto. This Agreement shall incure to the benefit of the Parties hereto and shall be binding upon the heirs, administrators, successors (including, witness 8. limitation, former partners of any one of the Parties hereto which would be constituted under the form of a partnership, following the dissolution of such partnership) and assigns of the Parties hereto. 8. AMENDMENT, MODIFICATION AND WAIVER. This Agreement may be modified, amended and supplemented only upon the mutual written agreement of the holders of eighty percent (80%) in interest of the Series A Preferred. Each Party may waive any term, provision or condition intended for its, his or her benefit, provided that such waiver be in writing and be signed by the Party so waiving. 9. SEVERABILITY. If any one or more of the provisions of this Agreement shall be held invalid, illegal or unenforceable under applicable law, the validity, legality and enforceability of the remaining provisions shall not be affected or impaired thereby. Such provision shall be deemed modified to the extent necessary to render it legal, valid and enforceable, and if no modification shall render it legal, valid and enforceable, then this Agreement shall be construed as if not containing the provision held to be invalid, and the rights and obligations of the parties shall be construed and enforced accordingly. 10. GOVERNING LAW. This Agreement and the legal relationships among the Purchasers, the Existing Shareholders and QCS shall be governed by and construed in accordance with, the internal laws of the State of New York exclusively, without regard to conflicts of laws principles. Each of the Parties (i) hereby irrevocably consents and agrees that any legal or equitable action or proceeding arising under or in connection with this Agreement shall be brought exclusively before the federal courts of the State of New York, (ii) by execution and delivery of this Agreement irrevocably submits to and accepts, with respect to any such action or proceeding for itself and in respect of its properties and assets, generally and unconditionally, the exclusive jurisdiction of the aforesaid courts and irrevocably waives any and all rights it may have to object to such jurisdiction under the laws of the State of New York, the laws of France including, without limitation, Articles 14 and 15 of the French Civil Code, the Constitution of the United States of America, the Constitution of France or otherwise, and (iii) irrevocably comments that service of process upon it in any such action or proceeding shall be valid and 9. effective against it if made in the manner provided in Section 6 hereof for delivery of notices hereunder. 12. COUNTERPARTS This Agreement may be executed by the parties in any number of counterparts, all of which taken together shall constitute one (1) and the same instrument. 13. CERTIFICATE OF INCORPORATION AND BYLAWS. To the extent permissible under Delaware law, the provisions of this Agreement shall apply notwithstanding any provisions to the contrary in the Certificate of Incorporation or Bylaws of QCS from time to time being in force and the Parties shall take such actions as may reasonably be required to render effective the provisions of this Agreement. 14. EXPIRATION. This Agreement shall expire on the earlier of (i) the day when the Purchasers or their heirs, transferees, successors (including, without limitation, former partners of any one of the Parties hereto which would be constituted under the form of a partnership, following the dissolution of such partnership) or assignees shall hold no more than thirty percent (30%) of the Common Stock in the aggregate or (ii) the effective date of a registration statement pertaining to, and subject to the consummation of, an underwritten public offering of QCS' Common Stock at a per share price of at least five dollars ($5.00) per share. Such percentage shall be computed on the basis of the total number of shares of Common Stock which would have been held by the Purchasers on the Closing Date if all of the Series A Preferred held by the Purchasers on such date had been immediately converted. 15. EFFECTIVE DATE. This Agreement shall become effective on the date on which it has been executed and delivered by all parties hereto and all of the following agreement have been executed and delivered by all parties thereto, and shall not become effective unless and until all such parties have so executed and delivered such agreements; (a) the Amendment No. 1 to Series A Convertible Preferred Stock Purchase Agreement attached hereto as EXHIBIT A; (b) the Agreement of even date by the Founders in favor of the Purchasers attached hereto as EXHIBIT B; and (c) the Amended and Restated Class U Warrant attached hereto as EXHIBIT C. (Remainder of Page Intentionally Left Blank) 10. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. QCS CORPORATION By: ______________________________ Name: ______________________________ Title: ______________________________ Marcel Van Heesewijk ________________________________ Matteus Wegbrans ________________________________ Reinhardt Stille ________________________________ Leonardus Klijn ________________________________ CARLYLE QCS PARTNERS, L.P. By: ______________________________ Name: ______________________________ Title: ______________________________ 11. STF MANAGEMENT LIMITED, as General Partner of Sharp Technology Fund I Limited Partnership By: _____________________________ Name: _____________________________ Title: ______________________________ STF MANAGEMENT LIMITED, as General Partner of Sharp Technology Fund II Limited Partnership By: _____________________________ Name: _____________________________ Title: _____________________________ LAGUNITAS PARTNERS, L.P. By: _____________________________ Name: _____________________________ Title: _____________________________ PROACTIVE PARTNERS, L.P. By: _____________________________ Name: _____________________________ Title: _____________________________ OAKWOOD HOLDINGS, BVI By: _____________________________ Name: _____________________________ Title: _____________________________ 12. DE NOYANGE S.A. By: _____________________________ Name: _____________________________ Title: _____________________________ CANNELL CAPITAL MANAGEMENT By: _____________________________ Name: _____________________________ Title: _____________________________ Mr. Herb Miller _______________________________________ Mr. Robert Zangrillo _______________________________________ Mr. Hans Robben _______________________________________ Mr. Peter Mills _______________________________________ Mr. Peter Anson _______________________________________ Mr. Steven Lebow ________________________________________ 13. DE NOYANGE S.A. By: ______________________________ Name: ______________________________ Title: ______________________________ CANNELL CAPITAL MANAGEMENT By: ______________________________ Name: ______________________________ Title: ______________________________ Mr. Herb Miller ________________________________________ Mr. Robert Zangrillo ________________________________________ Mr. Hans Robben ________________________________________ Mr. Peter Mills ________________________________________ Mr. Peter Anson ________________________________________ Mr. Steven Lebow ________________________________________ 14. ANNEX 1 PURCHASERS Carlyle-QCS Partners, L.P. STF Management Limited, as General Partner of Sharp Technology Fund I Limited Partnership STF Management Limited, as General Partner of Sharp Technology Fund II Limited Partnership Lagunitas Partners, L.P. Proactive Partners, L.P. Oakwood Holdings, BVI DeNoyange S.A. Cannell Capital Management Mr. Herb Miller Mr. Robert Zangrillo Mr. Hans Robben Mr. Peter Mills Mr. Peter Anson Mr. Steven Lebow 15. ANNEX 2 EXISTING SHAREHOLDERS Mr. Reinhardt Stille Mr. Marcel van Heesewijk Mr. Matteus Wegbrans Mr. Leonardus Klijn 16. EX-4.9 8 EX-4.9 Exhibit 4.9 AMENDED AND RESTATED CLASS U WARRANT TO PURCHASE COMMON STOCK OF QCS CORPORATION THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE. ANY SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION OF THIS WARRANT MAY BE MADE ONLY (I) IN A TRANSACTION REGISTERED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR (II) IF ANY EXEMFIION FROM REGISTRATION UNDER SAID ACT IS AVAILABLE AND QCS HAS RECEIVED AN OPINION OF COUNSEL TO SUCH EFFECT REASONABLY SATISFACTORY TO IT. QCS WITH FURNISH A FULL STATEMENT OF ALL OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND RESTRICTED RIGHTS OF THE SHARES OF EACH CLASS OF STOCK OR SERIES THEREOF OF QCS TO ANY SHAREHOLDER WITHOUT CHARGE UPON WRITTEN REQUEST TO QCS AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE. THE TRANSFER OF THE WARRANT REPRESENTED BY THIS CERTIFICATE IS RESTRICTED BY THE TERMS OF THAT CERTAIN SHAREHOLDERS AGREEMENT AMONG CERTAIN SHAREHOLDERS OF QCS, AS WELL AS OF THAT CERTAIN REGISTRATION RIGHTS AGREEMENT, BOTH DATED AS OF NOVEMBER 22, 1994, AS AMENDED, WHICH AGREEMENTS ALSO CONTAIN OTHER IMPORTANT PROVISIONS RELATING TO SUCH WARRANT. COPIES OF THESE AGREEMENTS ARE ON FILE AT QCS'S PRINCIPAL PLACE OF BUSINESS AND REGISTERED OFFICE AND MAY BE OBTAINED WITHOUT CHARGE UPON WRITTEN REQUEST TO QCS AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE. BY ACCEPTANCE OF THIS CERTIFICATE, THE HOLDER HEREOF AGREES TO BE BOUND BY THE TERMS OF SUCH AGREEMENTS. Void on the first business day following the Termination Date (as hereinafter defined). 1. This is to verify that, FOR VALUE RECEIVED, a Purchaser pursuant to the QCS Corporation Series A Convertible Preferred Stock Purchase Agreement dated November 22, 1994 (the "Stock Purchase Agreement"), or his registered assigns (hereinafter referred to as the "Holder"), is entitled to purchase, subject to the terms and conditions hereof, from QCS Corporation, a Delaware corporation ("QCS"), _______ shares of Common Stock, par value $.001 per share, of QCS (the "Common Stock"), at any time during the period commencing at 9:00 a.m., Eastern Time on November 23, 1994 (the "Commencement Date") and ending upon automatic conversion of the Series A Preferred into Common Stock (the "Termination Date"), which automatic conversion shall take place upon the earlier of: (i) the first business day following the occurrence of the last one of the three (3) following events: (a) the completion of a thirty-six (36) consecutive month period commencing on the Closing date, (b) the completion of six (6) consecutive quarters of sustained profitability of QCS and (c) the completion of a thirty (30) consecutive day period during which the low bid for the Common Stock shall have been in excess of five Dollars ($5.00) and (ii) the effective date of a registration statement pertaining to, and subject to the consummation of, an underwritten public offering of QCS's Common Stock at a price of at least $5.00 per share, at an exercise price of U.S. $1.03 per share of Common Stock, payable solely by exchange of shares of Series A Preferred, which are deemed to have a value of U.S. $1.03 per share. The number of shares of Common Stock purchasable upon exercise of this warrant (the "Warrant") and the exercise price per share shall be subject to adjustment from time to time upon the occurrence of certain events as set forth below. The shares of Common Stock or any other shares or other units of stock or other securities or property, or any combination thereof then receivable upon exercise of this Warrant, as adjusted from time to time, are sometimes referred to hereinafter as "Exercise Shares". The exercise price per share as from time to time in effect is referred to hereinafter as the "Exercise Price". 1. DEFINITIONS. All terms not otherwise defined herein shall have the meanings given or assigned to them in the Stock Purchase Agreement. 2. EXERCISE OF WARRANT; ISSUANCE OF EXERCISE SHARES. (a) EXERCISE OF WARRANT. This Warrant may be exercised in whole or in part, at any time after the Commencement Date and until and including the Termination Date, upon surrender on any business day to QCS at its principal office, presently located at the address of QCS set forth in Section 10 hereof (or such other office of QCS, if any, as shall theretofore, have been designated by QCS by written notice to the Holder), together with: (i) a completed and executed Notice of Warrant Exercise in the form set forth in Appendix A hereto and made a part hereof and (ii) payment of the full Exercise Price by surrender of certificates representing the Series A Preferred, duly endorsed in blank for transfer to QCS. This Warrant shall be automatically exercised, and all of the Series A Preferred shall be automatically converted into Common Stock pursuant to the terms hereof, on the Termination Date at 10:00 A.M. 2. No adjustments to the Exercise Price shall be made for any cash dividends on Exercise Shares issuable upon exercise of the Warrant. QCS shall cancel this Warrant Certificate surrendered upon exercise of this Warrant. (b) ISSUANCE OF EXERCISE SHARES; DELIVERY OF WARRANT CERTIFICATE. QCS shall, within ten (10) business days of the exercise of this Warrant, issue in the name of and cause to be delivered to the Holder (or such other person or persons, if any, as the Holder shall have designated in the Notice of Warrant Exercise) one or more certificates representing the Exercise Shares to which the Holder (or such other person or persons) shall be entitled upon such exercise under the terms hereof. Such certificate or certificates shall be deemed to have been issued and the Holder (or such other person or persons so designated) shall be deemed to have become the record holder of the Exercise Shares as of the date of the due exercise of this Warrant. (c) EXERCISE SHARES FULLY PAID AND NON-ASSESSABLE. QCS agrees and covenants that all Exercise Shares issuable upon the due exercise of the Warrant represented by this Warrant Certificate will, upon issuance in accordance with the terms hereof, be duly authorized, validly issued, fully paid and non- assessable and free and clear of all taxes (other than taxes which, pursuant to Section 3 hereof, QCS shall not be obligated to pay) or liens, charges, and security interests created by QCS with respect to the issuance thereof. (d) RESERVATION OF EXERCISE SHARES. At the time of or before taking any action which would cause an adjustment pursuant to Section 6 hereof increasing the number of shares of capital stock constituting the Exercise Shares, QCS will take any corporate action which may, in the opinion of its counsel, be necessary in order that QCS have remaining, after such adjustment, a number of shares of such capital stock unissued and unreserved for other purposes sufficient to permit the exercise of this Warrant after such adjustment. At the time of or before taking any action which would cause an adjustment pursuant to Section 6 hereof, reducing the Exercise Price below the then par value (if any) of the Exercise Shares issuable upon exercise of this Warrant, QCS will take any corporate action which may, in the opinion of its counsel, be necessary in order to ensure that the par value per share of the Exercise Shares is at all times equal to or less than the Exercise Price per share and so that QCS may validly and legally issue fully paid and non-assessable Exercise Shares at the Exercise Price, as so adjusted. QCS will also, from time to time, take such action if at any time the Exercise Price is below the then par value of the Exercise Shares. (e) FRACTIONAL SHARES. QCS shall not be required to issue fractional shares of capital stock upon the exercise of this Warrant or to deliver Warrant Certificates which evidence fractional shares of capital stock. In the event that any fraction of an Exercise Share would, except for the provisions of this subparagraph (e), be issuable upon the exercise of this Warrant, QCS shall pay to the Holder exercising the Warrant an amount in cash equal to such fraction multiplied by the Current Market Value of the Exercise Share. For purposes of this subparagraph (e), the Current Market Value shall be determined as follows: 3. (i) if the Exercise Shares are traded in the over-the-counter market and not on any national securities exchange and not in the NASDAQ Reporting System, the average of the mean between the last bid and asked prices per share, as reported by the National Quotation Bureau, Inc., or an equivalent generally accepted reporting service, for the last business day prior to the date on which this Warrant is exercised, of if not so reported, the average of the closing bid and asked prices for an Exercise Share as furnished to QCS by any member of the National Association of Securities Dealers, Inc., selected by QCS for that purpose. (ii) if the Exercise Shares are listed or traded on a national securities exchange or in the NASDAQ Reporting System, the closing price on the principal national securities exchange on which they are so listed or traded or in the NASDAQ National Market System, as the case may be, on the last business day prior to the date of the exercise of this Warrant. The closing price referred to in this clause (ii) shall be the last reported sales price or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices, in either case on the national securities exchange on which the Exercise Shares are then listed or in the NASDAQ Reporting System; or (iii) if no such closing price or closing bid and asked prices are available, as determined in any reasonable manner as may be prescribed by the Board of Directors. 3. PAYMENT OF TAXES. QCS will pay all documentary stamp taxes, if any, attributable to the initial issuance of Exercise Shares upon the exercise of this Warrant; provided, however, that QCS shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issue of any Warrant Certificates or any certificates for Exercise Shares in a name other than that of the Holder of a Warrant Certificate surrendered upon the exercise of this Warrant, and QCS shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to QCS the amount of such tax or shall have established to the satisfaction of QCS that such tax has been paid. 4. MUTILATED OR MISSING WARRANT CERTIFICATE. In case this Warrant Certificate shall be mutilated, lost, stolen or destroyed, QCS may in its discretion issue, in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and in substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate or Warrant Certificates of like tenor and in the same aggregate denomination, but only (i) in the case of loss, theft or destruction, upon receipt of evidence satisfactory to QCS of such loss, theft or destruction of such Warrant Certificate and indemnity or bond, if requested, also satisfactory to them and (ii) in the case of mutilation, upon surrender of the mutilated Warrant. Applicants for such substitute Warrant Certificates shall also comply with such other reasonable regulations and pay such other reasonable charges as QCS or its counsel may prescribe. 5. REGISTRATION OF TRANSFERS AND EXCHANGES. The Warrant shall be transferable, subject to the provisions of Section 7 hereof, only upon the books of QCS, if any, to be maintained by it for that purpose, upon surrender of the Warrant Certificate to QCS at its principal office accompanied (if so required by it) by a written instrument or instruments of transfer in form satisfactory to QCS and duly executed by the Holder thereof or the duly appointed legal 4. representative thereof or by a duly authorized attorney and upon payment of any necessary transfer tax or other governmental charge imposed upon such transfer. In all cases of transfer by an attorney, the original letter of attorney, duly approved, or an official copy thereof, duly certified, shall be deposited and remain with QCS. In the case of transfer by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be produced, and may be required to be deposited and remain with QCS in its discretion. Upon any such registration of transfer, a new Warrant Certificate shall be issued to the transferee named in such instrument of transfer, and the surrendered Warrant Certificate shall be cancelled by QCS. Any Warrant Certificate may be exchanged, at the option of the Holders thereof and without charge, when surrendered to QCS at its principal office, or at the office of its transfer agent, if any, for another Warrant Certificate or other Warrant Certificates of like tenor and representing in the aggregate the right to purchase from QCS a like number and kind of Exercise Shares as the warrant Certificate surrendered for exchange or transfer, and the Warrant Certificate so surrendered shall be canceled by QCS or transfer agent, as the case may be. 6. ADJUSTMENT OF EXERCISE SHARES AND EXERCISE PRICE. The Exercise Price and the number and kind of Exercise Shares purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the happening of certain events as hereinafter provided. The Exercise Price in effect at any time and the number and kind of securities purchasable upon exercise of each Warrant shall be subject to adjustment as follows: (a) In the case QCS shall (i) pay a dividend or make a distribution on its shares of Common Stock in shares of Common Stock, (ii) subdivide or classify its outstanding Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding Common Stock into a smaller number of shares, the Exercise Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be proportionally adjusted so that the Holder of this Warrant after such date shall be entitled to receive the aggregate number and kind of shares of Common Stock which, if this Warrant had been exercised by such Holder immediately prior to such date, the Holder would have owned upon such exercise and been entitled to receive upon such dividend subdivision, combination or reclassification. For example, if QCS declares a 2 for 1 stock dividend or stock split and the Exercise Price immediately prior to such event was $1.03 per share, the adjusted Exercise Price immediately after such event would be $0.515 per share. Such adjustment shall be made successively whenever any event listed above shall occur. (b) In case QCS shall hereinafter issue rights or warrants to all holders of its Common Stock entitling them to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock) at a price (or having a conversion price per share) less than the Current Market Price of the Common Stock (as defined in subsection (d) below) on the record date mentioned below, the Exercise Price shall be adjusted so that the same shall equal the price determined by multiplying the Exercise Price in effect immediately prior to the date of such issuance by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding on the record date mentioned below and the number of additional 5. shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so offered (or the aggregate conversion price of the convertible securities so offered) would purchase at such Current Market Price per share of the Common Stock and the denominator of which shall be the sum of the number of shares of Common Stock outstanding on such record date and the number of additional shares of Common Stock offered for subscription or purchase (or into which the convertible securities so offered are convertible). Such adjustment shall be made successively whenever such rights or warrants are issued and shall become effective immediately after the record date for the determination of shareholders entitled to receive such rights or warrants; and to the extent that shares of Common Stock are not delivered (or securities convertible into Common Stock are not delivered) after the expiration of such rights or warrants the Exercise Price shall be readjusted to the Exercise Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made upon the basis of delivery of only the number of shares of Common Stock (or securities convertible into Common Stock) actually delivered. (c) Whenever the Exercise Price payable upon exercise of each Warrant is adjusted pursuant to Subsection (a) above, the number of Exercise Shares purchasable upon exercise of this Warrant shall simultaneously be adjusted by multiplying the number of Exercise Shares initially issuable upon exercise of this Warrant by the Exercise Price in effect on the date hereof and dividing the product so obtained by the Exercise Price, as adjusted. (d) For the purpose of any computation under Subsection (b) above, the Current Market Price per share of Common Stock at any date shall be deemed to be the average of the daily closing prices for thirty (30) consecutive business days before such date. The closing price for each day shall be the last sale price regular way or, in case no such reported sale takes place on such day, the average of the last reported bid and lowest reported asked prices as reported by N ASDAQ, or other similar organization if NASDAQ is no longer reporting such information, or if not so available, the fair market price as determined by the Board of Directors. (e) No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least ten cents ($0.10) in such price; provided, however, that any adjustments which by reason of this Subsection (e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. All calculations under this Section 6 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Notwithstanding anything in this Section 6 to the contrary QCS shall be entitled, but shall not be required, to make such changes in the Exercise Price, in addition to those required by this Section 6, as it, in its sole discretion, shall determine to be advisable in order that any dividend or distribution in shares of Common Stock, subdivision, reclassification or combination of Common Stock, issuance of warrants to purchase Common Stock or distribution of evidences of Indebtedness or other assets (excluding cash dividends) referred to hereinabove in this Section 6 hereafter made by QCS to the holders of its Common Stock shall not result in any tax to the holders of its Common Stock or securities convertible into Common Stock. 6. (f) Whenever the Exercise Price is adjusted, as herein provided, QCS shall promptly cause a notice setting forth the adjusted Exercise Price and adjusted number of Shares issuable upon exercise of each Warrant to be mailed to the Holders, at their last addresses appearing in the Warrant Register, and shall cause a certified copy thereof to be mailed to its transfer agent, if any. QCS may retain a firm of independent certified public accountants selected by the Board of Directors (who may be the regular accountants employed by QCS) to make any computation required by this Section 6, and a certificate signed by such firm shall be conclusive evidence of the correctness of such adjustment. (g) In the event that at any time, as a result of an adjustment made pursuant to Subsection (a) above, the Holder of this Warrant becomes entitled to receive any Exercise Shares of QCS, other than Common Stock, the number of such other shares so receivable upon exercise of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Subsections (a) to (e), inclusive above. (h) Irrespective of any adjustments in the Exercise Price or the number or kind of Exercise Shares purchasable upon exercise of this Warrant, Warrants theretofore or thereafter issued may continue to denominate the same price and number and kind of shares as are stated in the similar Warrants initially issuable pursuant to this Agreement. (i) Whenever the Exercise Price shall be adjusted as required by the provisions of the foregoing Section, QCS shall forthwith file in the custody of its Secretary or an Assistant-Secretary at its principal office and with its stock transfer agent, if any, an officer's certificate showing the adjusted Exercise Price determined as herein provided, setting forth in reasonable detail the facts requiring such adjustment, including a statement of the number of additional shares of Common Stock, if any, and such other facts as shall be necessary to show the reason for and the manner of computing such adjustment. Each such officer's certificate shall be made available at all reasonable times for inspection by the Holder and QCS shall, forthwith after each such adjustment, mail a copy by certified mail of such certificate to the Holder. 7. RESTRICTIONS ON TRANSFERABILITY; RESTRICTIVE LEGEND. Neither this Warrant nor the Exercise Shares shall be transferable except in accordance with the provisions of this Section. (a) RESTRICTIONS ON TRANSFER; INDEMNIFICATION. The Holder is aware that neither the Warrant nor the Exercise Shares are registered under the Securities Act or under any state securities law. The Holder agrees to indemnify and hold harmless QCS against any loss, damage, claim or liability arising from the disposition of this Warrant or any Exercise Share held by such Holder or any interest therein resulting from the Holder's violation of the provisions of this Section 7. (b) The Holder agrees that is shall not offer for sale, sell or otherwise transfer amount of Exercise Shares in any week which exceeds two percent (2 %) of the average weekly 7. reported volume of trading in Common Stock of QCS on the NASDAQ Reporting System or such other exchange as such securities may then be listed, during the four (4) calendar weeks preceding the date of such sale. (c) RESTRICTIVE LEGENDS. (i) Unless and until otherwise permitted by this Section 7, this Warrant Certificate and each Warrant Certificate issued to the Holder or to any transferee or assignee of this Warrant Certificate, shall bear the following legend: "THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THIS WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE. ANY SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION OF THIS WARRANT MAY BE MADE ONLY (I) IN A TRANSACTION REGISTERED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR (II) IF ANY EXEMPTION FROM REGISTRATION UNDER SAID ACT IS AVAILABLE AND QCS HAS RECEIVED AN OPINION OF COUNSEL TO SUCH EFFECT REASONABLY SATISFACTORY TO IT. QCS WILL FURNISH A FULL STATEMENT OF ALL OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OF STOCK OR SERIES THEREOF OF QCS TO ANY SHAREHOLDER WITHOUT CHARGE UPON WRITTEN REQUEST TO QCS AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE. THE TRANSFER OF THIS WARRANT REPRSENTED BY THIS CERTIFICATE IS RESTRICTED BY THE TERMS OF THAT CERTAIN SHAREHOLDERS AGREEMENT AMONG CERTAIN SHAREHOLDERS OF QCS, AS WELL AS OF THAT CERTAIN REGISTRATION RIGHTS AGREEMENT, BOTH DATED AS OF NOVEMBER 22, 1994, AS AMENDED, WHICH AGREEMENTS ALSO CONTAIN OTHER IMPORTANT PROVISIONS RELATING TO SUCH WARRANT. COPIES OF THESE AGREEMENTS ARE ON FILE AT QCS'S PRINCIPAL PLACE OF BUSINESS AND REGISTERED OFFICE AND MAY BE OBTAINED WITHOUT CHARGE UPON WRITTEN REQUEST TO QCS AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE. BY ACCEPTANCE OF THIS CERTIFICATE, THE HOLDER HEREOF AGREES TO BE BOUND BY THE TERMS OF SUCH AGREEMENTS. " 8. (ii) Unless and until otherwise permitted by this Section 7, each stock certificate representing the Exercise Shares issued to the Holder or to any transferee or assignee thereof shall bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE. ANY SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY BE MADE ONLY (I) IN A TRANSACTION REGISTERED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR (II) IF AN EXEMPTION FROM REGISTRATION UNDER SAID ACT IS AVAILABLE AND QCS HAS RECEIVED AN OPINION OF COUNSEL TO SUCH EFFECT REASONABLY SATISFACTORY TO IT. QCS WILL FURNISH A FULL STATEMENT OF ALL OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OF STOCK OR SERIES THEREOF OF QCS TO ANY SHAREHOLDER WITHOUT CHARGE UPON WRITTEN REQUEST TO QCS AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE. THE TRANSFER OF SHARES REPRESENTED BY THIS CERTIFICATE IS RESTRICTED BY THE TERMS OF THAT CERTAIN SHAREHOLDERS AGREEMENT AMONG CERTAIN SHAREHOLDERS OF QCS, AS WELL AS OF THAT CERTAIN REGISTRATION RIGHTS AGREEMENT, BOTH DATED AS OF NOVEMBER 22, 1994, AS AMENDED, WHICH AGREEMENTS ALSO CONTAIN OTHER IMPORTANT PROVISIONS RELATING TO SUCH SHARES. COPIES OF THESE AGREEMENTS ARE ON FILE AT QCS'S PRINCIPAL PLACE OF BUSINESSAND REGISTERED OFFICE AND MAY BE OBTAINED WITHOUT CHARGE UPON WRITTEN REQUEST TO QCS AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE. BY ACCEPTANCE OF THIS CERTIFICATE, THE HOLDER HEREOF AGREES TO BE BOUND BY THE TERMS OF SUCH AGREEMENTS." (d) NOTICE OF PROPOSED TRANSFERS. Prior to any transfer, offer to transfer or attempted transfer of this Warrant or any Exercise Share, the Holder of such security shall give written notice to QCS of such Holder's intention of effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer. 9. 8. REGISTRATION RIGHTS. This Warrant and the Exercise Shares may be registered pursuant to the Registration Rights Agreement dated November 22, 1994 which Agreement is expressly incorporated herein by reference. 9. NOTICES. Any notice, request, instruction or other document to be given hereunder by any Party hereto shall be in writing and shall be delivered and shall be effective as set forth in Section 8.3 of the Stock Purchase Agreement. 10. SUPPLEMENTS AND AMENDMENTS. QCS may, from time to time, supplement or amend this Warrant Certificate without the approval of the Holders of Warrants in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision, or to make any other provisions in regard to matters or question herein arising hereunder which QCS may deem necessary or desirable and which shall not materially adversely affect the interests of the Holder. 11. SUCCESSORS AND ASSIGNS. This Warrant shall insure to the benefit of and be binding on the respective successors, assigns and legal representatives of the Holder and QCS. 12. SEVERABILITY. If for any reason any provision, Section or term of this Warrant Certificate is held to be invalid or unenforceable, all other valid provision herein shall remain in full force and effect and all terms, provisions and paragraphs of this Warrant shall be deemed to be severable. 13. GOVERNING LAW. This Warrant shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be governed by and construed in accordance with the laws of said State. 14. HEADINGS. Paragraph and subparagraph headings, used herein are included herein for convenience of reference only and shall not affect the construction of this Warrant Certificate nor constitute a part of this Warrant Certificate for any other purpose. IN WITNESS WHEREOF, QCS has caused these presents to be duly executed the day and year defined herein as the 'Commencement Date." QCS CORPORATION By.____________________________ Executive Officer 10. APPENDIX A NOTICE OF WARRANT EXERCISE Pursuant to a Warrant by and between the undersigned and QCS Corporation, a Delaware corporation (the "QCS"), dated as of November 22, 1994, (the "Warrant") the undersigned hereby irrevocably elects to exercise its warrant to the extent of purchasing _______ shares of Common Stock (the "Warrant Shares") of QCS as provided for therein. All capitalized terms used herein shall have the meanings assigned to such terms in the Warrant. The undersigned hereby represents and agrees that the Warrant Shares purchased pursuant hereto are being purchased for investment and not with a view to the distribution or resale thereof, and that the undersigned understands that said Warrant Shares have not been registered under the Securities Act of 1933, as amended. Payment of the full Exercise Price of the Exercise Shares is enclosed herewith, in the form of certificates for the Series A Preferred, duly endorsed in blank for transfer to QCS. The undersigned request that a certificate for the Exercise Shares be issued in the name of: _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ (Please print name, address and social security number) Dated: ________________________________, 199________ Address: _____________________________________________ _____________________________________________ _____________________________________________ _____________________________________________ Signature: _____________________________________________ 11. EX-10.1 9 EX-10.1 Exhibit 10.1 QUALIFIED COLLABORATION SOLUTIONS for RETAIL August 12, 1997 Her Goede Paard b.v. Wijchenseweg 112 6538 SX Nijmegen P.O. Box 6641 6503 GC Nijmegen The Netherlands Dear Johan Vunderink: The purpose of this letter is to establish an agreement between Het Goede Paard (the "Finder") and QCS Corporation (the "Company") for the purpose of arranging for prospective investors introduced to the Company by the Finder to acquire equity interests in the Company with a value of $1.50 per share or greater (a "Placement") and to assist with the marketing of the Company. The terms of this Agreement are as follows: 1. On the date of this Agreement, and from time to time thereafter, the Finder shall submit a list of prospective investors to the Company. Within five days after receipt of such list, the Company shall identify in writing to the Finder the prospective investors which meet its approval and which have not already been contacted by the Company regarding the Placement (the "Prospects"). The Finder shall only be entitled to a fee hereunder with respect to the Prospects which have been so approved by the Company. 2. Thereafter, the Finder shall a) contact the Prospects and determine their interest in entered into discussions with the Company regarding the Placement; b) inform such Prospects of the requirements of the Company as to the Placement; c) ascertain, as to the Prospects interested in entering into discussions with the Company regarding the Placement, the terms and conditions under which such Prospects would proceed with negotiations and inform the Company of such terms and conditions; d) fully inform the Prospects of the Copy's technology and its business; and e) act as a liaison between the Company and the interested Prospects to arrange all necessary meetings between the parties and act as advisor to the Company at such meetings. 3. a. During the term of this Agreement, upon the closing of the Placement involving an equity investment made by one or more of the Prospects in the Company, the Finder shall be entitled to a "finder's fee" of 5% of aggregate amount of the equity investments in the Placement by the Prospects to be paid in the following manner: 70% in the form of warrants to purchase shares of capital stock of the Company on the same terms and conditions as the Placement (the "Warrants") and 30% in cash. [LETTERHEAD] b. The Finder's reasonable travel and accommodation expenses will be reimbursed by the Company. c. The Warrants shall be issued to the Finder on the closing date of the Placement and shall expire three years following such closing date. The value of the Warrants shall be equal to the aggregate exercise price of the Warrants. The cash portion of the finder's fee and expenses shall be paid within 15 days of the closing date of the Placement 4. The Finder shall assist the Company with investor relations including introducing the Company to investment bankers. The Finder shall also assist the Company in preparing its financial presentations and strategies for investors. 5. This Agreement shall be non-exclusive to the Finder. The Company may employ other finders or seek an equity investment on its own initiative, utilizing its own or their contacts and sources, without obligation to the Finder hereunder. 6. This Agreement shall have a term of six months from the date it is signed by both parties, unless extended by mutual written agreement of the parties. Either party may terminate this Agreement at any time effective upon delivery of written notice to the other party. Should the Company continue in active discussions with the Prospects after any termination date, the finder's fee shall be paid by the Company for any Placement that is completed with a Prospect within six months of the termination date. The Finder shall have no claim to any fee or override for any agreement entered into between the Company and any Prospect more than six months after the date of termination. 7. The Finder will treat all information which it receives from the Company in a confidential manner (other than information that is or becomes publicly available other than as a result of the wrongful or unlawful disclosure by the Finder) and will use the same degree of care to prevent inappropriate dissemination of such information as it would employ in the protection and preservation of confidential information about its own business. The Finder specifically agrees that it will not (except as required by applicable law, regulation or legal process) disclose to any third party any information received from the Company which is confidential and is not publicly available. The Finder further agrees that monetary damages would not be an adequate remedy for breach of the covenants contained in this paragraph and that the Company will be entitled to injunctive relief for any such breach. 8. This Agreement constitutes the final, complete and exclusive understanding and agreement between the parties hereto with respect to the subject matter hereof. This Agreement cannot be modified or amended except by a writing executed by the party to be charged therewith. [LETTERHEAD] 9. This Agreement shall be deemed to have been made in, and shall be construed pursuant to, the substantive and procedural laws of the State of California. The parries hereby consent to the judicial jurisdiction of the court and arbitrators of the State of California, County of Santa Clara, as to any action instituted by either party arising out of or related to this Agreement. 10. The Finder represents that he does not engage either for all or part of his time, directly or indirectly, as agent, broker or principal, in the business of offering, buying, selling, or otherwise dealing or trading in securities issued by another person. 11. The Finder shall not provide any Prospect with any written material related to the Company unless such written material has previously been approved by the Company and shall not make any other representation on behalf of the Company. Further, the Finder agrees to indemnify, defend and hold the Company harmless for any claim based upon any representation by the Finder or written material provided by the Finder which is not previously approved by the Company. If the terms of the engagement as set forth in this letter arc satisfactory, please sign this letter agreement and return it to the undersigned. Sincerely yours, QCS CORPORATION Marcel van Heesewijk President & CEO AGREED AND ACCEPTED THIS ___ DAY OF AUGUST, 1997: Het Goede Paard b.v. QCS Corporation - --------------------------------- ------------------------------------ Represented by Johan Vunderink Marcel van Heesewijk [LETTERHEAD] EX-10.2 10 EX-10.2 Exhibit 10.2 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT (this "Agreement") is made and entered into as of this 1st day of May 1998, by and between L.A. DELMONICO CONSULTING, INC. ("Consultant") AND QCS CORPORATION (the "Company"). 1. CONSULTING SERVICES. Consultant will provide to the Company the consulting and advisory services (the "Consulting Services") more particularly described in the Description of Consulting Activities attached as Exhibit A to this Agreement. 2. CONSULTING FEES. In consideration of the Consulting Services, the Company agrees to pay Consultant consulting fees at the rates and in accordance with the terms specified in the Fee Schedule attached as Exhibit B to this Agreement. 3. TERMS. The term of this Agreement shall commence as of the date of this Agreement and shall terminate ninety (90) days receipt by a party of the other party's written election to terminate this Agreement. Either party may elect at any time and in its discretion to terminate this Agreement, with or without cause. 4. EXPENSES. The Company shall reimburse Consultant for all actual out-of-pocket expenses incurred by Consultant in the performance of the Consulting Services. Travel by private automobile will be reimbursed at the rate of Thirty-One Cents ($0.31) per mile. Expenses for out-of-town travel must be approved in advance by the Company. Consultant shall prepare and submit to the Company itemized expense reports (which shall include where available receipts and comparable documentation) concurrent with Consultant's monthly fee statements. The Company shall reimburse Consultant for such expenses within ten (10) days after receipt of each expense report. 5. CONFIDENTIALITY. Consultant agrees to hold in confidence and not disclose to any third party any of the Company's trade secrets or proprietary information both during and after the term of this Agreement. 6. OWNERSHIP. The work product resulting from the Consulting Services shall be and remain the property of the Company unless otherwise agreed in writing by both parties. 7. INDEPENDENT CONTRACTOR. The parties intend that an independent contractor relationship is created by this Agreement and that Consultant is being retained by the Company only for the purposes and to the extent set forth herein. Consultant shall not be considered an agent or employee of the Company for any purpose and shall not be eligible to participate or receive any type or form of insurance or benefits provided by the Company to its employees. Consultant is free to provide consulting and advisory services to others during the term of this Agreement. 8. RESPONSIBILITY FOR TAXES. As an independent contractor, Consultant agrees that it is solely responsible for the payment of any taxes and assessments imposed on account of the payment of compensation to Consultant under this Agreement, including without limitation any unemployment insurance tax, federal, state and foreign income taxes, federal Social Security (FICA) payments, and state disability insurance taxes. Consultant agrees to indemnify and hold the Company and its employees harmless from any and all liability, penalties and judgments arising out of Consultant's failure to make any payment of taxes required to be paid by Consultant under this Paragraph 8. 9. NO AUTHORITY TO BIND. Consultant is not by this Agreement granted any right or authority, express or implied, on behalf of or in the name of the Company to bind the Company in any manner whatsoever unless specifically requested by the Company. Similarly, Consultant shall not be liable for or be deemed to have assumed any liability or obligation of the Company, and the Company agrees to indemnify and hold Consultant and its employees harmless from any and all liability, loss, damage, penalties and judgments arising out of the Company's business and its operations. 10. MISCELLANEOUS. (a) NO ASSIGNMENT. Neither party may assign this Agreement without the prior written consent of the other. (b) COMPLETE AGREEMENT. This Agreement contains the entire agreement of the parties with respect to the subject matter hereof and supersedes all previous oral and written agreements and all contemporaneous oral negotiations, commitments, writings and understandings. (c) GOVERNING LAW/JURISDICTION. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California. Each party consents to the jurisdiction and proper venue of the California State Courts and the Federal Court for the Central District of California. (d) NO WARRANTY/LIMITATIONS. No warranty is made by Consultant as to the results of the Consulting Services to be provided hereunder and Consultant and its employees shall have no liability as a result of such Consulting Services or the Company's use thereof. In no event shall Consultant, together with its employees, be liable for any amount under any circumstances greater than the aggregate consulting fees actually paid to Consultant by the Company during the term of this Agreement. (e) MODIFICATIONS AND WAIVERS. No waiver or modification of this Agreement shall be binding unless it is in a writing signed by both parties hereto. (f) SEVERABILITY. In the event any provision or provisions of this Agreement is or are to be held invalid, the remaining provisions of this Agreement shall not be affected thereby. (g) LEGAL FEES. If any legal action, arbitration or other proceeding is brought for the enforcement of this Agreement, or because of any alleged dispute, breach or default in connection with this Agreement, the successful or prevailing party shall be entitled to recover all of its costs incurred in such action or proceeding, including without limitation its attorneys' fees and disbursements, in addition to any other relief to which it may be entitled. (h) CONSTRUCTION. The language of this Agreement shall be construed simply and according to its fair meaning, and shall not be construed for or against any party hereto as a result of the source of its draftsmanship. 2 (i) NOTICES. All notices and other communications required or permitted under this Agreement shall be in writing, served personally on, or mailed by certified or registered United States mail to, the party to be charged with receipt hereof. Notices and other communications served by mail shall be deemed given hereunder seventy-two (72) hours after deposit of such notice or communication in the United States Post Office as certified or registered mail with postage prepaid and duly addressed to the receiving party at the address set below such party's signature hereon, or at such other address as such party has designated in a written notice given as provided herein. (j) EXHIBITS. The Exhibits to this Agreement are hereby incorporated into and are an integral part of this Agreement as though fully set forth herein. L.A. DELMONICO CONSULTING, INC. QCS CORPORATION - ---------------------------------- --------------------------------- BY: LOUIS A. DELMONICO BY: MARCEL VAN HEESEWIJK TITLE: PRESIDENT TITLE: PRESIDENT & CEO ADDRESS: 6907 AVENIDA DE SANTIAGO ADDRESS: 650 CASTRO STREET, SUITE 210 ANAHEIM HILLS, CA 92807 MOUNTAIN VIEW, CA 94041 ATTN: LOUIS A. DELMONICO, PH.D. ATTN: MARCEL VAN HEESEWIJK 3 EXHIBIT A DESCRIPTION OF CONSULTING SERVICES STATEMENT OF WORK Consultant's efforts and work shall be primarily focused on the following tasks and subject areas: -Business and organizational planning -Partnering relations -Company positioning -Marketing and sales planning -General business matters Consultant's efforts and work, in connection with this agreement, shall be exclusive of consultant's work as an outside director of the Company. LOCATION Unless otherwise directed by the Company, all Consulting Services will be conducted and performed either at Consultant's offices or the Company's offices. REPORTING Consultant shall report to the following Company officer: Marcel Van Heesewijk President & CEO 4 EXHIBIT B FEE SCHEDULE
SCHEDULE OF FEES ---------------- Full Day: $1,500 Per Hour: $ 200
Agreed to by: L.A. DELMONICO CONSULTING, INC. QCS CORPORATION -------------------------------- -------------------------------- By: Louis A. Delmonico By: Marcel Van Heesewijk Title: President Title: President & CEO FEDERAL ID#: 33-0619554 5 EX-10.3 11 EX-10.3 Exhibit 10.3 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of January 29, 1999 by and between SEAN MALOY ("Executive"), and QCS.net CORPORATION, a Delaware corporation (the "Company"). WHEREAS, Executive and the Company deem it to be in their respective best interests to enter into an agreement providing for the employment of Executive with the Company pursuant to the terms herein stated, which terms include provisions for salary payments and death, disability, retirement and severance and other benefits to be paid by the Company to Executive or his designated beneficiaries; and WHEREAS, Executive and the Company mutually desire that Executive's employment with the Company will commence as of the date the Board of Directors shall approve this Agreement (the "Effective Date"), except that for salary, bonus and benefits purposes his employment will be effective as of February 15, 1999 (the "Salary Effective Date"); NOW, THEREFORE, in consideration of the premises and the mutual promises and agreements contained herein, Executive and the Company have agreed and do hereby agree as follows: 1. DUTIES. (a) Commencing as of the Effective Date, the Company does hereby employ, engage and hire Executive as President and Chief Executive Officer of the Company, and Executive does hereby accept and agree to such hiring, engagement and employment. Executive shall be responsible for the business and operations of the Company and for worldwide marketing, sales and business development efforts on behalf of Company and shall do and perform all services and acts necessary or advisable to fulfill the duties and responsibilities of his position and shall render such services on the terms set forth herein. Executive shall report to and be subject to the supervision and control of the Board of Directors of the Company. In addition, Executive shall have such other executive and managerial powers and duties with respect to the Company and its subsidiaries as may reasonably be assigned to him by the Board, to the extent consistent with his position and status as President and Chief Executive Officer of the Company. It is understood and agreed that Executive's initial duties shall include, without limitation, the preparation of a business plan for the Company relating to the location of corporate facilities and personnel functions, functions of management, sales and marketing and business operations, to be approved by the Board of Directors, and, subject to such approval, the Company agrees to use all reasonable effort to obtain the reasonable and necessary capital investment for such plan which is 1 Exhibit 10.3 expected to be funded by outside investor capital from among existing investors in the Company. (b) Executive agrees that he may be appointed on or after the Effective Date to serve on the Board of Directors of the Company. If elected, Executive agrees to serve as a director of the Company upon such appointment and to resign such directorship upon the termination of his employment with the Company for any reason. 2. TERM OF AGREEMENT. The term ("Term") of this Agreement shall commence on the Effective Date and shall continue indefinitely unless Executive's employment hereunder is terminated in accordance with the terms of this Agreement. 3. COMPENSATION. (a) BASE SALARY. Effective from and after the Salary Effective Date, the Company shall pay Executive an annual base salary at the rate of $300,000 per year or such higher amount as the Company may from time to time determine (the "Base Salary"), payable in equal biweekly installments in accordance with the normal payroll procedures of the Company or at such other time or times as Executive and the Company shall agree. Executive shall receive an annual performance review no less frequently than on each anniversary of the Effective Date during his employment hereunder and shall be entitled to such merit increases in his Base Salary at the Board of Directors in their discretion may determine. The Base Salary, once increased, shall not subsequently be decreased, and the term "Base Salary," as used herein, shall include any such increases. Except as otherwise provided herein, the Company's obligation to pay Executive's Base Salary under this Agreement shall cease as of the date of termination of Executive's employment. (b) BONUS. Executive shall be eligible to receive an annual bonus of up to 60% of Executive's Base Salary payable after the conclusion of each fiscal year of the Company. Such bonus shall be determined by the Board of Directors contingent on and subject to the achievement by Executive of certain mutually agreed objectives relating to the Company as approved by the Chairman of the Company's Compensation Committee, which objectives are to be defined and agreed within thirty (30) days after the Effective Date and yearly thereafter prior to the commencement of each fiscal year of the Company. Executive may also receive a discretionary bonus in excess of 60% of Base Salary to be determined and approved by the Board of Directors in their discretion in the event that Executive substantially and materially exceeds the mutually agreed objectives for the Company in the reasonable judgment of the Board of Directors. Such bonus as determined and approved by the Board of Directors will be paid annually within ninety (90) days of the end of the fiscal year of the Company to which it relates. To be eligible for such bonus, Executive must be on the Company's payroll when the bonus is paid, and no payment of such bonus will be paid if Executive is not employed by the Company; provided that, if Executive's employment is terminated during the second half of a fiscal year of the Company, he shall be entitled to receive a pro rata portion of such bonus for the period of service during such year to the extent that the agreed objectives had been achieved prior to the date of termination. 2 Exhibit 10.3 (c) BENEFITS. From and after the Salary Effective Date, Executive shall be entitled to participate in employee benefit programs adopted from time to time by the Company for the benefit of its employees, including, but not limited to, reimbursement of business expenses and medical and health insurance in accordance with the Company's existing policies. (d) STOCK OPTIONS. As of the Effective Date of this Agreement, the Company shall grant Executive options (the "Options") to purchase 750,000 shares of Common Stock of the Company, pursuant to and all of the terms and conditions of the Company's existing Stock Option Plan, and at an exercise price equal to the fair market value of the Common Stock on the date of grant. The Options shall be incentive stock options except for any portion thereof which shall not meet all of the requirements of incentive stock options under applicable law. (e) WARRANTS. The Company agrees to grant Executive Warrants (the "Warrants") to purchase up to 250,000 shares of the Company's Common Stock at an exercise price equal to the fair market value of the Company's Common Stock on the date of issuance of the Warrants in two tranches of 125,000 shares each. The issuance of the Warrants shall be contingent on and subject to the achievement by Executive of certain mutually agreed objectives relating to an increase in the share value of the Company as approved by the Chairman of the Company's Compensation Committee, which objectives are to be mutually defined and agreed within thirty (30) days after the Effective Date. (f) LOAN. As of the Salary Effective Date, the Company shall make a loan (the "Loan") to Executive in the amount of $100,000 bearing interest at the rate of 7% and due and payable on February 15, 2000; provided, however, that the Loan shall be forgiven and discharged by the Company as additional compensation to Executive hereunder in the event that Executive shall have been continuously employed by the Company from and after the Effective Date to and including February 15, 2000. In the event that Executive should leave the employ of the Company for any reason prior to February 15, 2000, the Loan shall be due and payable by Executive in accordance with its terms unless Executive is terminated by the Company without Cause in which case the Loan shall be forgiven and discharged effective on the date of termination. The Loan shall be evidenced by a Promissory Note from Executive containing these terms and other usual and customary terms. 4. TERMINATION OF EXECUTIVE'S EMPLOYMENT. (a) DEATH. In the event Executive's employment hereunder is terminated by reason of Executive's death, the Executive's employment shall terminate without further obligation of the Company. (b) DISABILITY. If, as a result of Executive's incapacity due to physical or mental illness ("Disability"), Executive shall have been absent from the full-time performance of his duties with the Company for ninety (90) days during any eighteen (18) month period, and, within thirty (30) days after written notice is provided to his by the Company, he shall not have returned to the full-time performance of his duties, Executive's 3 Exhibit 10.3 employment under this Agreement may be terminated by the Company for Disability. During any period prior to such termination during which Executive is absent from the full-time performance of his duties with the Company due to Disability, the Company shall continue to pay Executive his Base Salary at the rate in effect at the commencement of such period of Disability. Following termination for Disability, Executive's Base Salary shall terminate and Executive's benefits shall be determined under the Company's retirement insurance, and other compensation and benefit plans and programs then in effect, in accordance with the terms of such programs. (c) TERMINATION FOR CAUSE. The Company may terminate Executive's employment under this Agreement for "Cause," at any time, but only in the event of (i) Executive's conviction of a felony (provided, however, that following indictment for a felony, and prior to conviction, the Company may, without limiting or modifying in any other way its obligations under this Agreement, suspend Executive from the performance of his duties hereunder), or (ii) a determination by the Board, acting reasonably and in good faith, that Executive has (A) failed to meet annual performance standards established by the Board and agreed by Executive, (B) habitually neglected his duties or performed his duties in a grossly incompetent manner despite adequate warnings from the Board, (C) committed materially fraudulent or dishonest actions with respect to the Company, or (D) deliberately injured or attempted to injure the Company so as to cause or attempt to cause material adverse consequences for the Company; provided, however, that Executive shall not be deemed to have been terminated for Cause unless the Board of Directors has delivered to the Executive a written warning with indicating the matter(s) prompting the notice and required remedial action to be taken by the Executive. If the matter(s) indicated in the notice are not remedied by the Executive within thirty (30) days after delivery of the notice, and then there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the entire membership of the Board of Directors of the Company, finding that, in the good faith opinion of such board, he failed to perform in a manner, was guilty of, or had engaged in conduct constituting, Cause as set forth herein and specifying the particulars thereof in detail. In the event of termination of Executive's employment for Cause, this Agreement shall terminate without further obligation of the Company. (d) TERMINATION FOLLOWING CHANGE IN CONTROL. In the event that fifty percent (50%) or more of the securities of the Company are acquired by a party not holding fifty percent (50%) or more of the securities of the Company as of the Effective Date (a "Change in Control") and Executive is not retained by the Company in a comparable executive role for a period of two (2) year thereafter or is terminated by the Company within such period, the Company shall, for the two (2) year period commencing on the date of such termination or diminished role, (i) continue to pay Executive his then Base Salary and benefits (as set forth in Sections 3(a) and 3(c) respectively), (ii) pay Executive in each year the average bonus paid to Executive in the prior three or fewer years of service under Section 3(b) hereof, and (iii) cause all of Executive's Options which have not yet vested to immediately vest as of the date of termination and provide Executive ninety (90) days from the date of termination to exercise all or any portion of his Options. 4 Exhibit 10.3 (e) TERMINATION BY THE COMPANY OTHER THAN BY REASON OF DEATH, DISABILITY OR CHANGE IN CONTROL. If Executive's employment is terminated by the Company for any reason other than Executive's death, Disability, for Cause or on a Change in Control, the Company shall continue to pay Executive his then Base Salary and benefits (as set forth in Sections 3(a) and 3(c) respectively) and the bonus under Section 3(b) hereof, which in the first year hereunder shall be 60% of Base Salary pro rata for the number of days served in such fiscal year and in any subsequent year shall be the average of Executive's bonus for the last three or fewer years pro rata for the number of says served in such fiscal year, until the expiration of the one (1) year period commencing on the date of such termination, and all of Executive's Options which have not yet vested shall immediately vest as of the date of termination and Executive shall have ninety (90) days from the date of termination to exercise all or any portion of his Options. This shall be the entire obligation of the Company to Executive for termination hereunder. 5. ASSIGNMENT OF INTELLECTUAL PROPERTY RIGHTS. (a) DEFINITION OF "INVENTIONS." As used herein, the term "Inventions" shall mean all inventions, discoveries, improvements, trade secrets, formulas, techniques, data, programs, systems, specifications, documentation, algorithms, flow charts, logic diagrams, source codes, processes and other information, including works-in-progress, whether or not subject to patent, trademark, copyright, trade secret or mask work protection, and whether or not reduced to practice, which are made, created, authored, conceived or reduced to practice by Executive, either alone or jointly with others, during the period of employment with the Company, which (A) relate to the actual or anticipated business, activities, research or investigations of the Company or (B) result from or is suggested by work performed by Executive for the Company (whether or not made or conceived during normal working hours or on the premises of the Company), or (C) which result, to any extent, from use of the Company's premises or property. (b) WORK FOR HIRE. Executive expressly acknowledges that all copyrightable aspects of the Inventions (as defined below) are to be considered "works made for hire" within the meaning the Copyright Act of 1976, as amended (the "Act"), and that the Company is to be "author" within the meaning of such Act for all purposes. All such copyrightable works, as well as all copies of such works in whatever medium fixed or embodied, shall be owned exclusively by the Company as of its creation, and Executive hereby expressly disclaims any and al interest in any of such copyrightable works and waives any right of DROIT MORALE or similar rights. (c) ASSIGNMENT. Executive acknowledges and agrees that all Inventions constitute trade secrets of the Company and shall be the sole property of the Company or any other entity designated by the Company. In the event that title to any or all of the Inventions or any part or element thereof, may not, by operation of law, vest in the Company or such Inventions may be found as a matter of law not to be "works made for hire" within the meaning of the Act, Executive hereby conveys and irrevocably assigns to the Company, without further consideration, all his right, title and interest, throughout the universe and in perpetuity, in all Inventions and all copies of them, in whatever medium fixed 5 Exhibit 10.3 or embodied, and in all written records, graphics, diagrams, notes or reports relating thereto in Executive's possession or under his control, including, with respect to any of the foregoing, all rights of copyright, patent, trademark, trade secret, mask work and any and all other proprietary rights therein, the right to modify and create derivative works, the right to invoke the benefit of any priority under any international convention and all rights to register and renew same. (d) PROPRIETARY NOTICES; NO FILINGS; WAIVER OF MORAL RIGHTS. Executive acknowledges that all Inventions shall at the sole option of the Company bear the Company's patent, copyright, trademark, trade secret and mask work notices. Executive agrees not to file any patent, copyright or trademark applications relating to any Invention, except with prior written consent of an authorized representative of the Company. Executive hereby expressly disclaims any and all interest in any Inventions and waives any right of DROIT MORALE or similar rights, such as rights of integrity or the right to be attributed as the creator of the Invention. (e) FURTHER ASSURANCES. Executive agrees to assist the Company, or any party designated by the Company, promptly on the Company's request, whether before or after the termination of employment however such termination may occur, in perfecting, registering, maintaining and enforcing, in any jurisdiction, the Company's rights in the Inventions by performing all acts and executing all documents and instruments deemed necessary or convenient by the Company, including, by way of illustration and not limitation: i) Executing assignments, applications and other documents and instruments in connection with (A) obtaining patents, copyrights, trademarks, mask works or other proprietary protections for the Inventions and (B) confirming the assignment to the Company of all right, title and interest in the Inventions or otherwise establishing the Company's exclusive ownership rights therein. ii) Cooperating in the prosecution of patent, copyright, trademark and mask work applications, as well as in the enforcement of the Company's rights in the Inventions, including, but not limited to, testifying in court or before any patent, copyright, trademark or mask work registry office or any other administrative body. Executive will be reimbursed for all out-of-pocket costs incurred in connection with the foregoing, if such assistance is requested by the Company after the termination of employment. In addition, to the extent that, after the termination of employment for whatever reason, Executive's technical expertise shall be required in connection with the fulfillment of the aforementioned obligations, the Company will compensate Executive at a reasonable rate for the time actually spent by Executive at the Company's request rendering such assistance. 6 Exhibit 10.3 (f) POWER OF ATTORNEY. Executive hereby irrevocably appoints the Company to be his Attorney-in-Fact in his name and on his behalf to execute any document and to take any action and to generally use his name for the purpose of giving to the Company the full benefit of the assignment provisions set forth in this Section 5. (g) CONSENT TO USE OF NAME. The Company reserves the right (but shall not have the obligation) to publicize Executive's name and background in connection with the marketing of the Inventions or the enforcement of the Company's rights therein. Executive is responsible for supplying to the Company his resume or curriculum vitae for such purposes. Executive agrees that the Company shall have the sole control over the type style, type size or placement of his name on any materials, or over the final content of any biography used in said material. (h) DISCLOSURE OF INVENTIONS. Executive will make full and prompt disclosure to the Company of all Inventions subject to assignment to the Company, and all information relating thereto in Executive's possession or under his control as to possible applications and use thereof, to an authorized representative of the Company. (i) NO VIOLATION OF THIRD PARTY RIGHTS. Executive represents, warrants and covenants that he: i) will not, in the course of employment, knowingly infringe upon or violate any proprietary rights of any third party (including, without limitation, any third party confidential relationships, patents, copyrights, mask works, trade secrets or other proprietary rights); ii) is not a party to any conflicting agreements with third parties which will prevent his from fulfilling the terms of employment and the obligations of this Agreement; iii) does not have in his possession any confidential or proprietary information or documents belonging to any other person in competition with the Company and will not disclose to the Company, use, or induce the Company to use, any confidential or proprietary information or documents of any other person; and iv) agrees to respect any and all valid obligations which he may now have to prior employers or to others relating to confidential information, inventions or discoveries which are the property of those prior employers or others, as the case may be. Executive has supplied or shall promptly supply to the Company a copy of each written agreement to which Executive is subject (other than any agreement to which the Company is a party) which includes any obligation of confidentiality, assignment of Inventions or non-competition. 7 Exhibit 10.3 Executive agrees to indemnify and save harmless the Company from any loss, claim, damage, costs or expenses of any kind (including without limitation, reasonable attorney's fees) to which the Company may be subjected by virtue of an actual breach by Executive of the foregoing representations, warranties and covenants. (j) OBLIGATIONS UPON TERMINATION. In the event of any termination of his employment, for whatever reason, Executive will promptly (A) deliver to the Company all physical property, discs, documents, notes, printouts and all copies thereof and other materials in Executive's possession or under Executive's control pertaining to the business of the Company, including, but not limited to, those embodying or relating to the Inventions and the Confidential Information (as defined herein), (B) deliver to the Company's patent department or legal department or other person designated by the Company all notebooks and other data relating to research or experiments or other work conducted by Executive in the scope of employment or any Inventions made, created, authored, conceived or reduced to practice by Executive, either alone or jointly with others, and (C) make full disclosure relating to any Inventions. If Executive would like to keep certain property, such as material relating to professional societies or other non-confidential material, upon the termination of employment with the Company, he agrees to discuss such issues with the Company. Where such a request does not put Confidential Information of the Company at risk, the Company will customarily grant the request. Upon termination of employment with the Company, Executive shall, if requested by the Company, reaffirm Executive's recognition of the importance of maintaining the confidentiality of the Company's Confidential Information and reaffirm all of the Executive's obligations set forth in this Section 5. 6. CONFIDENTIAL INFORMATION AND NON-COMPETITION. (a) CONFIDENTIALITY. Executive acknowledges that in his employment hereunder he will occupy a position of trust and confidence. Executive shall not, except as may be required to perform his duties hereunder or as required by applicable law, without limitation in time or until such information shall have become public other than by Executive's unauthorized disclosure, disclose to others or use, whether directly or indirectly, any Confidential Information regarding the Company. "Confidential Information" shall mean information about the Company, its subsidiaries and affiliates, and their respective clients and customers that is not disclosed by the Company for financial reporting purposes and that was learned by Executive in the course of his employment by the Company, including (without limitation) any proprietary knowledge, trade secrets, data, formulae, information and client and customer lists and all papers, resumes and records (including computer records) of the documents containing such Confidential Information. Executive acknowledges that such Confidential Information is specialized, unique in nature and of great value to the Company, and that such information gives the Company a competitive advantage. Executive agrees to deliver or return to the Company, at the Company's request at any time or upon termination or 8 Exhibit 10.3 expiration of his employment or as soon as possible thereafter, all documents, computer tapes and disks, records, lists, data, drawings, prints, notes and written information (and all copies thereof) furnished by the Company or prepared by the Executive during the term of his employment by the Company. (b) NON-COMPETITION. During the period of Executive's employment hereunder, Executive shall not, directly or indirectly, without the prior written consent of the Company, provide consultative services or otherwise provide services to (whether as an employee or a consultant, with or without pay), own, manage, operate, join, control, participate in or be connected with (as a stockholder, partner or otherwise), any business, individual, partner, firm corporation or other entity that is then a competitor of the Company, including any entity engaged in the design, manufacture and/or distribution of network service systems or software that have substantially the same features or functionality to or otherwise competes with the systems that are designed, manufactured or distributed by the Company or any direct or indirect subsidiary of Company (each such competitor a "Competitor of the Company"); provided, however, that the "beneficial ownership" by Executive, either individually or as a member of a "group," as such terms are used in Rule 13d of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of not more than five percent (5%) of the voting stock of any publicly held corporation shall not alone constitute a violation of this Agreement. It is further expressly agreed that the Company will or would suffer irreparable injury if Executive were to compete with the Company or any subsidiary or affiliate of the Company in violation of this Agreement and that the Company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction, and, the provisions of Section 11 notwithstanding, Executive further consents and stipulates to the entry of such injunctive relief in such a court prohibiting Executive from competing with the Company or any subsidiary or affiliate of the Company in violation of this Agreement. Notwithstanding the foregoing and providing that such service does not interfere in any material way with the performance of Executive's duties under this Agreement and the operations of the Company, Executive shall be permitted to perform consulting services for his prior employer Maxwell up to one day per month through July 1999 and to serve as a director of PurePulse and Dynabil. (c) NON-SOLICITATION OF CUSTOMERS AND SUPPLIERS. During the period of Executive's employment hereunder, Executive shall not, directly or indirectly, influence or attempt to influence customers or suppliers of the Company or any of its subsidiaries or affiliates, to divert their business to any Competitor of the Company. (d) NON-SOLICITATION OF EMPLOYEES. Executive recognizes that he possesses and will possess confidential information about other employees of the Company relating to their education, experience, skills, abilities, compensation and benefits and interpersonal relationships with customers of the Company. Executive recognizes that the information he possesses and will possess about these other employees is not generally known, is of substantial value to the Company in developing its business and in securing and retaining customers, and has been and will be acquired by him because of his business position with the Company. Executive agrees that, during the period of Executive's employment hereunder and for a period of one (1) year thereafter, he will not, directly or indirectly, solicit or recruit any 9 Exhibit 10.3 employee of the Company for the purpose of being employed by him or by any Competitor of the Company on whose behalf he is acting as an agent, representative or employee and that he will not convey any such confidential information or trade secrets about other employees of the Company to any other person. (e) SURVIVAL OF PROVISIONS. The obligations contained in this Section 6 shall survive the termination or expiration of Executive's employment with the Company and shall be fully enforceable thereafter in accordance with their terms. If it is determined by a court of competent jurisdiction in any state that any restriction in this Section 6 is excessive in duration or scope or is unreasonable or unenforceable under the laws of that state, it is the intention of the parties that such restriction may be modified or amended by the court to render it enforceable to the maximum extent permitted by the law of that state. 7. NOTICES. All notices and other communications under this Agreement shall be in writing and shall be given by facsimile, e-mail or first-class mail, certified or registered with return receipt requested, and shall be deemed to have been duly given three (3) days after mailing or twenty-four (24) hours after transmission of an e-mail facsimile to the respective persons named below: If to Company: QCS.net CORPORATION 650 Castro Street, Suite 210 Mountain View, California 94041 Attention: Chairman Facsimile: (415) 966-1025 If to Executive: SEAN MALOY 10065 Rue Chantemar San Diego, California 92131 E-mail: sammaloy@concentric.net Either party may change such party's address for notices by notice duly given pursuant hereto. 8. TERMINATION OF PRIOR AGREEMENTS. This Agreement terminates and supersedes any and all prior agreements and understandings between the parties with respect to Executive's employment and compensation by the Company. 9. ASSIGNMENT; SUCCESSORS. This Agreement is personal in its nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder; provided that, in the event of the merger, consolidation, transfer or sale of all or substantially all of the assets of the Company with or to any other individual or entity, this Agreement shall, subject to the provisions thereof, be binding upon and inure to the benefit of such successor and such successor shall discharge and perform all the promises, covenants, duties and obligations of the Company hereunder. 10 Exhibit 10.3 10. DISPUTE RESOLUTION; GOVERNING LAW. In the event of any dispute regarding the terms of employment of Executive, including, but not limited to, any dispute regarding the negotiation and entering into of the terms of employment, any termination or employment or the interpretation or performance of the terms and conditions hereof, Executive and Company hereby agree that such dispute shall be subject to and shall be determined exclusively by binding arbitration in accordance with the rules of the American Arbitration Association. This Agreement and the legal relations thus created between the parties hereto shall be governed by and construed under and in accordance with the laws of the State of California, without giving effect to provisions thereof regarding conflict of laws. 11. WITHHOLDING. The Company shall make such deductions and withhold such amounts from each payment made to the Executive hereunder as may be required from time to time by law, governmental regulation or order. 12. INDEMNIFICATION. The Company will defend and indemnify Executive from any action or claim brought against Executive or the Company which arises out of the performance of Executive's duties as an officer or director of the Company to the fullest extent permitted under Section 145 of the Delaware General Corporation Law. 13. ENTIRE AGREEMENT; HEADINGS. This Agreement embodies the entire agreement of the parties respecting the matters within its scope and may be modified only in writing. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 14. WAIVER; MODIFICATION. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant or condition, nor shall any waiver or relinquishment of, or failure to insist upon strict compliance with, any right or power hereunder at any one or more times to be deemed a waiver or relinquishment of such right or power at any other time or times. This Agreement shall not be modified in any respect except by a writing executed by each party hereto. 15. SEVERABILITY. In the event that a court of competent jurisdiction determines that any portion of this Agreement is in violation of any statute or public policy, only the portion of this Agreement that violates such statute or public policy shall be stricken. All portions of this Agreement that do not violate any statute or public policy shall continue in full force and effect. Further, any court order striking any portion of this Agreement shall modify the stricken terms as narrowly as possible to give as much effect as possible to the intentions of the parties under this Agreement. 16. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11 Exhibit 10.3 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Executive has hereunto signed this Agreement, effective as of the date first above written. QCS.net CORPORATION By: /s/Marcel van Heesewijk ----------------------- Its: Chairman of the Board of Directors ----------------------------------- /s/Sean Maloy ------------------------ SEAN MALOY EX-10.4 12 EX-10.4 Exhibit 10.4 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement"), effective as of July 6, 1998 ("Effective Date"), is entered into by and between John F. Buckles ("Executive"), and QCS CORPORATION, a Delaware corporation (the "Company"). WHEREAS, Executive and the Company deem it to be in their respective best interests to enter into an agreement providing for the employment of Executive with the Company pursuant to the terms herein stated, which terms include provisions for salary payments and death, disability, retirement, and severance and other benefits to be paid by the Company to Executive or his designated beneficiaries. NOW, THEREFORE, in consideration of the premises and the mutual promises and agreements contained herein, Executive and the Company have agreed and do hereby agree as follows: 1. DUTIES. (a) The Company does hereby employ, engage, and hire Executive as Vice President of Strategic Alliances of the Company, and Executive does hereby accept and agree to such hiring, engagement, and employment. Executive shall be responsible for the achievement of the sales plan for North America through the identified strategic business partners - IBM and QRS; and then to be expanded to the achievement of the world wide sales plan through the strategic alliances. Refer to the position description in Exhibit A. Executive will be based in Cincinnati, Ohio and will report to the CEO of the Company. 2. TERM OF AGREEMENT. The term ("Term") of this Agreement shall commence on the Effective Date and shall continue indefinitely unless Executive's employment hereunder is terminated in accordance with the terms of this Agreement. The Company has an at will employment relationship which can be terminated by you or the Company with or without cause and with or without notice. 3. COMPENSATION. (a) BASE SALARY. The Company shall pay Executive an annual base salary at the rate of $130,000 per year or such higher amount as the Company may from time to time determine ("Base Salary"), payable in equal biweekly installments in accordance with the normal payroll procedures of the Company or at such other time or times as Executive and the Company shall agree. Executive shall receive an annual performance review no less frequently than on each anniversary of the Effective Date during his employment hereunder 1 and shall be entitled to such merit increases in his Base Salary at the CEO in his discretion may determine. (b) BONUS. Executive will participate in establishing a sales plan with the strategic alliances. The performance will be measured as a percentage of the achievement of the sales plan. Executive can earn, as a bonus, 30% of the annual base salary if the sales plan is achieved at 100%. If the sales plan is underachieved or overachieved, then the bonus will be proportionately adjusted, but will not exceed 50% of the annual base salary. (c) CORPORATE OFFICERS INCENTIVE PLAN. Executive shall be entitled to participate in the Corporate Officers Incentive Compensation Plan, which will be defined on a yearly basis by the compensation committee of the board of directors of the Company. (d) FRINGE BENEFITS. Executive shall be entitled to participate in any fringe and other benefit programs adopted from time to time by the Company for the benefit of its executive employees, including, but not limited to, reimbursement of business expenses and medical and health insurance in accordance with the Company's existing policies. (i) VACATION. Executive shall be entitled to five (5) weeks paid vacation each year. Any accrued but unused vacation may be carried over into the following year; provided that Executive may not accrue more than six (6) weeks paid vacation at any time. (ii) MEDICAL/DENTAL INSURANCE. Executive will continue his existing medical/dental program, from his previous employer, under the Federal COBRA provisions for a period not to exceed 18 months from the start of employment with the Company. During such time Executive will bill the Company for the cost of such coverage. It is understood that during this 18-month period Executive shall seek a suitable PPO (Preferred Provider Option) replacement program, which provides for similar coverage and provisions to the COBRA plan. At the time this replacement plan is enacted, the COBRA plan will be dropped. Executive will continue to bill the Company for the replacement medical/dental insurance program. (iii) INTERNATIONAL MEDICAL COVERAGE. During Executives international travel (outside the United States) the Company agrees to pay any difference between the actual cost of treatment/care overseas and the actual coverage provided by the insurance company should an injury/illness occur during such business travel for the Company. (iv) LIFE INSURANCE COVERAGE. The Company agrees to reimburse Executive for the cost of Life Insurance in the amount of one times (1x) the base salary. 2 (v) AUTO ALLOWANCE. Executive will receive an auto allowance of $500 per month in accordance with the Company's expense policy. (e) STOCK OPTIONS. Subject to the terms and conditions set forth the Company's standard Stock Option Agreement, which is attached as Exhibit B to this Agreement, the Company hereby agrees that, as of the Effective Date of this Agreement, it shall grant Executive options (the "Options") to purchase 150,000 shares of common stock of the Company at such price and on the terms set forth in Exhibit B attached hereto. 4. TERMINATION OF EXECUTIVE'S EMPLOYMENT. (a) DEATH. In the event Executive's employment hereunder is terminated by reason of Executive's death, the Executive's employment shall terminate without further obligation of the Company. (b) DISABILITY. If, as a result of Executive's incapacity due to physical or mental illness ("Disability'), Executive shall have been absent from the full-time performance of his duties with the Company for ninety (90) days during any eighteen (18) month period, and, within thirty (30) days after written notice is provided to his by the Company, he shall not have returned to the full-time performance of his duties, Executive's employment under this Agreement may be terminated by the Company for Disability. During any period prior to such termination during which Executive is absent from the full-time performance of his duties with the Company due to Disability, the Company shall continue to pay Executive his Base Salary at the rate in effect at the commencement of such period of Disability. Following termination for Disability, Executive's Base Salary shall terminate and Executive's benefits shall be determined under the Company's retirement insurance, and other compensation and benefit plans and programs then in effect, in accordance with the terms of such programs. (c) TERMINATION FOR CAUSE. The Company may terminate Executive's employment under this Agreement for "Cause," at any time, but only in the event of (i) Executive's conviction of a felony (provided, however, that following indictment for a felony, and prior to conviction, the Company may, without limiting or modifying in any other way its obligations under this Agreement, suspend Executive from the performance of his duties hereunder), or (ii) a determination by the Board, acting reasonably and in good faith, that Executive has (A) failed to meet annual performance standards established by the Board and agreed by Executive, (B) habitually neglected his duties or performed his duties in a grossly incompetent manner despite adequate warnings from the Board, (C) committed materially fraudulent or dishonest actions with respect to the Company, or (D) deliberately injured or attempted to injure the Company so as to cause or attempt to cause material adverse consequences for the Company; provided, however, that Executive shall not be deemed to have been terminated for Cause unless the Board of Directors has delivered to the Executive a written warning indicating the matter(s) prompting the notice and required remedial action to be taken by the Executive. If the matter(s) indicated in the notice is(are) not remedied by the 3 Executive within 30 days after delivery of the notice, then there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the entire membership of the Board of Directors of the Company, finding that, in the good faith opinion of such board, he failed to perform in a manner, was guilty of, or had engaged in conduct constituting Cause as set forth herein and specifying the particulars thereof in detail. In the event of termination of Executive's employment for Cause, this Agreement shall terminate without further obligation of the Company. 5. ASSIGNMENT OF INTELLECTUAL PROPERTY RIGHTS. (a) DEFINITION OF "INVENTIONS." As used herein, the term "Inventions" shall mean all inventions, discoveries, improvements, trade secrets, formulas, techniques, data, programs, systems, specifications, documentation, algorithms, flow charts, logic diagrams, source codes, processes, and other information, including works-in-progress, whether or not subject to patent, trademark, copyright, trade secret, or mask work protection, and whether or not reduced to practice, which are made, created, authored, conceived, or reduced to practice by Executive, either alone or jointly with others, during the period of employment with the Company and for one year following the termination of Executive's employment with the Company which (B) relate to the actual or anticipated business, activities, research, or investigations of the Company or (C) result from or is suggested by work performed by Executive for the Company (whether or not made or conceived during normal working hours or on the premises of the Company), or (D) which result, to any extent, from use of the Company's premises or property. (b) WORK FOR HIRE. Executive expressly acknowledges that all copyrightable aspects of the Inventions (as defined below) are to be considered "works made for hire" within the meaning the Copyright Act of 1976, as amended (the "Act"), and that the Company is to be "author" within the meaning of such Act for all purposes. All such copyrightable works, as well as all copies of such works in whatever medium fixed or embodied, shall be owned exclusively by the Company as of its creation, and Executive hereby expressly disclaims any and al interest in any of such copyrightable works and waives any right of DROIT MORALE or similar rights. (c) ASSIGNMENT. Executive acknowledges and agrees that all Inventions constitute trade secrets of the Company and shall be the sole property of the Company or any other entity designated by the Company. In the event that title to any or all of the Inventions or any part or element thereof, may not, by operation of law, vest in the Company or such Inventions may be found as a matter of law not to be "works made for hire" within the meaning of the Act, Executive hereby conveys and irrevocably assigns to the Company, without further consideration, all his right, title and interest, throughout the universe and in perpetuity, in all Inventions and all copies of them, in whatever medium fixed or embodied, and in all written records, graphics, diagrams, notes, or reports relating thereto in Executive's possession or under his control, including, with respect to any of the foregoing, all rights of copyright, patent, trademark, trade secret, mask work, and any and all other 4 proprietary rights therein, the right to modify and create derivative works, the right to invoke the benefit of any priority under any international convention and all rights to register and renew same. (d) PROPRIETARY NOTICES; NO FILINGS; WAIVER OF MORAL RIGHTS. Executive acknowledges that all Inventions shall at the sole option of the Company bear the Company's patent, copyright, trademark, trade secret, and mask work notices. Executive agrees not to file any patent, copyright, or trademark applications relating to any Invention, except with prior written consent of an authorized representative of the Company. Executive hereby expressly disclaims any and all interest in any Inventions and waives any right of DROIT MORALE or similar rights, such as rights of integrity or the right to be attributed as the creator of the Invention. (e) FURTHER ASSURANCES. Executive agrees to assist the Company, or any party designated by the Company, promptly on the Company's request, whether before or after the termination of employment however such termination may occur, in perfecting, registering, maintaining, and enforcing, in any jurisdiction, the Company's rights in the Inventions by performing all acts and executing all documents and instruments deemed necessary or convenient by the Company, including, by way of illustration and not limitation: i) Executing assignments, applications, and other documents and instruments in connection with (A) obtaining patents, copyrights, trademarks, mask works, or other proprietary protections for the Inventions and (B) confirming the assignment to the Company of all right, title, and interest in the Inventions or otherwise establishing the Company's exclusive ownership rights therein. ii) Cooperating in the prosecution of patent, copyright, trademark and mask work applications, as well as in the enforcement of the Company's rights in the Inventions, including, but not limited to, testifying in court or before any patent, copyright, trademark or mask work registry office, or any other administrative body. Executive will be reimbursed for all out-of-pocket costs incurred in connection with the foregoing, if such assistance is requested by the Company after the termination of employment. In addition, to the extent that, after the termination of employment for whatever reason, Executive's technical expertise shall be required in connection with the fulfillment of the aforementioned obligations, the Company will compensate Executive at a reasonable rate for the time actually spent by Executive at the Company's request rendering such assistance. 5 (f) CONSENT TO USE OF NAME. The Company reserves the right (but shall not have the obligation) to publicize Executive's name and background in connection with the marketing of the Inventions or the enforcement of the Company's rights therein. Executive is responsible for supplying to the Company his resume or curriculum vitae for such purposes. Executive agrees that the Company shall have the sole control over the type style, type size, or placement of his name on any materials, or over the final content of any biography used in said material. (g) DISCLOSURE OF INVENTIONS. Executive will make full and prompt disclosure to the Company of all Inventions subject to assignment to the Company, and all information relating thereto in Executive's possession or under his control as to possible applications and use thereof, to an authorized representative of the Company. (h) NO VIOLATION OF THIRD PARTY RIGHTS. Executive represents, warrants, and covenants that he: i) will not, in the course of employment, infringe upon or violate any proprietary rights of any third party (including, without limitation, any third party confidential relationships, patents, copyrights, mask works, trade secrets, or other proprietary rights); ii) is not a party to any conflicting agreements with third parties which will prevent his from fulfilling the terms of employment and the obligations of this Agreement; iii) does not have in his possession any confidential or proprietary information or documents belonging to others and will not disclose to the Company, use, or induce the Company to use, any confidential or proprietary information or documents of others; and iiii) agrees to respect any and all valid obligations which he may now have to prior employers or to others relating to confidential information, inventions, or discoveries which are the property of those prior employers or others, as the case may be. Executive has supplied or shall promptly supply to the Company a copy of each written agreement to which Executive is subject (other than any agreement to which the Company is a party) which includes any obligation of confidentiality, assignment of Inventions, or non-competition. Executive agrees to indemnify and save harmless the Company from any loss, claim, damage, costs or expenses of any kind (including without limitation, reasonable 6 attorney's fees) to which the Company may be subjected by virtue of a breach by Executive of the foregoing representations, warranties, and covenants. (i) OBLIGATIONS UPON TERMINATION. In the event of any termination of his employment, for whatever reason, Executive will promptly (A) deliver to the Company all physical property, discs, documents, notes, printouts, and all copies thereof and other materials in Executive's possession or under Executive's control pertaining to the business of the Company, including, but not limited to, those embodying or relating to the Inventions and the Confidential Information (as defined herein), (B) deliver to the Company's patent department or legal department or other person designated by the Company all notebooks and other data relating to research or experiments or other work conducted by Executive in the scope of employment or any Inventions made, created, authored, conceived, or reduced to practice by Executive, either alone or jointly with others, and (C) make full disclosure relating to any Inventions. If Executive would like to keep certain property, such as material relating to professional societies or other non-confidential material, upon the termination of employment with the Company, he agrees to discuss such issues with the Company. Where such a request does not put Confidential Information of the Company at risk, the Company will customarily grant the request. Upon termination of employment with the Company, Executive shall, if requested by the Company, reaffirm Executive's recognition of the importance of maintaining the confidentiality of the Company's Confidential Information and reaffirm all of the Executive's obligations set forth in this Section 5. 6. CONFIDENTIAL INFORMATION AND NON-COMPETITION. (a) CONFIDENTIALITY. Executive acknowledges that in his employment hereunder, and during prior period of employment with the Company, he has occupied and will continue to occupy a position 9f trust and confidence. Executive shall not, except as may be required to perform his duties hereunder or as required by applicable law, without limitation in time or until such information shall have become public other than by Executive's unauthorized disclosure, disclose to others or use, whether directly or indirectly, any Confidential Information regarding the Company. "Confidential Information" shall mean information about the Company, its subsidiaries and affiliates, and their respective clients and customers that is not disclosed by the Company for financial report purposes and that was learned by Executive in the course of his employment by the Company, including (without limitation) any proprietary knowledge, trade secrets, data, formulae, information and client and customer lists and all papers, resumes, and records (including computer records) of the documents containing such Confidential Information. Executive acknowledges that such Confidential Information is specialized, unique in nature and of great value to the Company, and that such information gives the Company a competitive advantage. The Executive agrees to deliver or return to the Company, at the Company's request at any time or upon termination 7 or expiration of his employment or as soon thereafter s possible, all documents, computer tapes and disks, records, lists, data, drawings, prints, notes and written information (and all copies thereof) furnished by the Company or prepared by the Executive during the term of his employment by the Company. (b) NON-COMPETITION. During the period of Executive's employment hereunder, Executive shall not, directly or indirectly, without the prior written consent of the Company, provide consultative services or otherwise provide services to (whether as an employee or a consultant, with or without pay), own, manage, operate, join, control, participate in, or be connected with (as a stockholder, partner, or otherwise), any business, individual, partner, firm corporation, or other entity that is then a competitor of the Company, including any entity engaged in the design, manufacture and/or distribution of network service systems or software that have substantially the same features or functionality to or otherwise competes with the systems that are designed, manufactured or distributed by the Company or any direct or indirect subsidiary of Company (each such competitor a "Competitor of the Company"); provided, however, that the "beneficial ownership" by Executive, either individually or as a member of a "group,' as such terms are used in Rule 13d of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of not more than five percent (5 %) of the voting stock of any publicly held corporation shall not alone constitute a violation of this Agreement. It is further expressly agreed that the Company will or would suffer irreparable injury if Executive were to compete with the Company or any subsidiary or affiliate of the Company in violation of this Agreement and that the Company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction, and, the provisions of Section 11 notwithstanding, Executive further consents and stipulates to the entry of such injunctive relief in such a court prohibiting Executive from competing with the Company or any subsidiary or affiliate of the Company in violation of this Agreement. (c) NON-SOLICITATION OF CUSTOMERS AND SUPPLIERS. During the period of Executive's employment hereunder, Executive shall not, directly or indirectly, influence or attempt to influence customers or suppliers of the Company or any of its subsidiaries or affiliates, to divert their business to any Competitor of the Company. (d) NON-SOLICITATION OF EMPLOYEES. Executive recognizes that he possesses and will possess confidential information about other employees of the Company relating to their education, experience, skills, abilities, compensation and benefits, and interpersonal relationships with customers of the Company. Executive recognizes that the information he possesses and will possess about these other employees is not generally known, is of substantial value to the Company in developing its business and in securing and retaining customers, and has been and will be acquired by his because of his business position with the Company. Executive agrees that, during the period of Executive's employment hereunder and for a period of one (1) year thereafter, he will not, directly or indirectly, solicit or recruit any employee of the Company for the purpose of being employed by his or by any Competitor of the Company on whose behalf he is acting as an agent, representative or employee and that he 8 will not convey any such confidential information or trade secrets about other employees of the Company to any other person. (e) SURVIVAL OF PROVISIONS. The obligations contained in this Section 6 shall survive the termination or expiration of Executive's employment with the Company and shall be fully enforceable thereafter. If it is determined by a court of competent jurisdiction in any state that any restriction in this Section 6 is excessive in duration or scope or is unreasonable or unenforceable under the laws of that state, it is the intention of the parties that such restriction may be modified or amended by the court to render it enforceable to the maximum extent permitted by the law of that state. 7. NOTICES. All notices and other communications under this Agreement shall be in writing and shall be given by facsimile or first-class mail, certified or registered with return receipt requested, and shall be deemed to have been duly given three (3) days after mailing or twenty-four (24) hours after transmission of a facsimile to the respective persons named below: If to Company: QCS CORPORATION 650 Castro Street, Suite 210 Mountain View, California 94041 Attention: Marcel van Heesewijk Facsimile: (650) 966-1025 If to Executive: John F. Buckles 9943 Huntersrun Lane, Suite 100 Cincinnati, Ohio 45242-5448 Facsimile: (513) 792-9471 Either party may change such party's address for notices by notice duly given pursuant hereto. 8. TERMINATION OF PRIOR AGREEMENTS. This Agreement terminates and supersedes any and all prior agreements and understandings between the parties with respect to Executive's employment and compensation by the Company. 9. ASSIGNMENT; SUCCESSORS. This Agreement is personal in its nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder; provided that, in the event of the merger, consolidation, transfer, or sale of all or substantially all of the assets of the Company with or to any other individual or entity, this Agreement shall, subject to the provisions thereof, be binding upon and inure to the benefit of such successor and such successor shall discharge and perform all the promises, covenants, duties, and obligations of the Company hereunder. 9 10. DISPUTE RESOLUTION; GOVERNING LAW. In the event of any dispute regarding the terms of employment of Executive, including, but not limited to, any dispute regarding the negotiation and entering into of the terms of employment, any termination or employment or the interpretation or performance of the terms and conditions hereof, Executive and Company hereby agree that such dispute shall be subject to and shall be determined exclusively by binding arbitration in accordance with the rules of the American Arbitration Association. This Agreement and the legal relations thus created between the parties hereto shall be governed by and construed under and in accordance with the laws of the State of California, without giving effect to provisions thereof regarding conflict of laws. 11. WITHHOLDING. Except to the extent otherwise provided in Exhibit B, the Company shall make such deductions and withhold such amounts from each payment made to the Executive hereunder as may be required from time to time by law, governmental regulation or order. 12. ENTIRE AGREEMENT; HEADINGS. This Agreement embodies the entire agreement of the parties respecting the matters within its scope and may be modified only in writing. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 13. WAIVER; MODIFICATION. Failure to insist upon strict compliance with any of the terms, covenants, or conditions hereof shall not be deemed a waiver of such term, covenant, or condition, nor shall any waiver or relinquishment of, or failure to insist upon strict compliance with, any right or power hereunder at any one or more times to be deemed a waiver or relinquishment of such right or power at any other time or times. This Agreement shall not be modified in any respect except by a writing executed by each party hereto. 14. SEVERABILITY. In the event that a court of competent jurisdiction determines that any portion of this Agreement is in violation of any statute or public policy, only the portions of this Agreement that violate such statute or public policy shall be stricken. All portions of this Agreement that do not violate any statute or public policy shall continue in full force and effect. Further, any court order striking any portion of this Agreement shall modify the stricken terms as narrowly as possible to give as much effect as possible to the intentions of the parties under this Agreement. 15. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 10 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Executive has hereunto signed this Agreement, effective as of the date first above written. QCS CORPORATION JOHN F. BUCKLES By: (signature) (signature) Its: (title) Name: (print name) 11 EXHIBIT A QCS CORPORATION POSITION DESCRIPTION TITLE Vice President of Strategic Alliances POSITION OBJECTIVE The achievement of the sales plan for North America through the identified strategic business partners: IBM and QRS; and then to be expanded to the achievement of the world wide sales plan through strategic alliances. MAIN RESPONSIBILITIES PLANNING - Create, with the business partner's, a fiscal year sales plan and develop the required performance measurements. - Develop, with the business partner's, a resource plan to support their respective sales plans. REPORTING - Report on sales achievement and forecasts on a monthly and quarterly basis. - Ensure that the business partner's contribute, on the same basis, to the sales reporting e.g. sales funnel management and revenue forecasting. SALES SUPPORT - Develop and assist with the execution of a sales and support training program of business partners. - Provide feedback to the appropriate QCS colleagues on sales support requirements. MARKET DEVELOPMENT AND INTELLIGENCE - Provide feedback on customer requirements to the appropriate QCS constituents. - Be aware of activities of potential competitors and allies and bring them to the attention of the appropriate management. - Provide suggestions and feedback on market pricing of the QCS services in order to obtain maximum return on a customer's commitment to QCS. 12 POSITION DESCRIPTION (cont.) OTHER RESPONSIBILITIES ---------------------- - Ensure that adequate documentation exists describing account strategies in terms of the business plan and long and short term sales objectives. - Develop sales motivation programs which are industry and business partner compatible and address achievement of objectives. - Access and manage best and ethical sales methods and distribution for QCS' products & network services with the business partners. - Attract, maintain and motivate the best representatives of the business partners according to the business plan and build a cohesive and successful teams within the business partners. measure and hold the business partners accountable to the business plan. - Evaluate the market to ensure that the business partners deliver achievement of increased market share and optimal results from the accessible market. - Liaison between QCS development in Mountain View and IBM customer support in Cincinnati to ensure that sales support resources required are planned in a timely manner relative to retailer hub status. - Develop and coordinate training plans for hot line support and sales and marketing staff of the business partners. - Ensure that services and marketing feedback from the business partners is communicated to QCS' development in Mountain View in a clear and timely manner. - Make sure the business partners work as a team with the QCS organization and vise versa. - Be a QCS resource and representative to the business partners. REQUIRED SKILLS --------------- - Proven organizational and management skills - Able to set projections and deliver results - Technical background required to understand technology which will aid sales - Goal oriented - Market awareness (ability to become an expert on QCS' competition) - Can quickly react to changing environments - Strategic planning - Team Player - Strong internal and external (business partners and customers) communication skills - Hands on - Does not require extensive support staff - Honest and straightforward 13 EXHIBIT B Stock Option Plan EX-10.5 13 EX-10.5 Exhibit 10.5 QCS CORPORATION STOCK OPTION PLAN 1. PURPOSE. This Stock Option Plan (this "Plan") is intended to provide to officers, directors, key Employees and Consultants of the Corporation an opportunity to acquire a proprietary interest in the Corporation, to encourage such key individuals to remain in the employ of or to contract with the Corporation, and to attract and retain new officers, directors, Employees and Consultants with outstanding qualifications. Pursuant to the Plan, the Corporation may grant to officers, directors, Consultants and key Employees of the Corporation options to purchase shares of Common Stock upon such terms and conditions as provided herein. 2. DEFINITIONS. (a) "Affiliate" shall mean any corporation (other than the Corporation) in an unbroken chain of corporations that includes the Corporation if each of such corporations, other than the last corporation in the chain, owns at least 50% of the total voting power of one of the other corporations. (b) "Board" shall mean the Board of Directors of the Corporation. (c) "Code" shall mean the Internal Revenue Code of 1986, as amended. (d) "Common Stock" shall mean the voting common stock of the Corporation. (e) "Consultant" shall mean any person who, or any employee of any firm which, is engaged by the Company or any Affiliate to render consulting services and is compensated for such consulting services, and any Non-employee Director of the Company whether compensated for such services or not. (f) "Corporation" shall mean QCS Corporation, a Delaware corporation. (g) "Effective Date" shall mean January 30, 1995. All options to employees granted prior to this Effective Date shall be considered options granted pursuant to the Plan. (h) "Employee" shall mean any individual who is employed, within the meaning of Section 3401 of the Code and the regulations thereunder, by the Corporation or by any Affiliate. (i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (j) "Exercise Price" shall mean the price per Share at which an Option may be exercised, as determined by the Board and as specified in the Optionee's stock option agreement. (k) "Fair Market Value" shall mean the value of one Share of Common Stock determined as follows: (i) if the Shares are traded on an exchange or on the NASDAQ National Market System, the reported "closing price" on the date of valuation or if no trading occurred on -1- such date, the next preceding day on which trading occurred; (ii) if the Shares are traded over-the-counter on the NASDAQ System (other than on the NASDAQ National Market System), the mean between the bid and the ask prices on said System at the close of business on the date of valuation or if no trading occurred on such date, the next preceding day on which trading occurred; and (iii) if neither (i) nor (ii) applies, the fair market value as determined by the Board in good faith. Such determination shall be conclusive and binding on all persons. (l) "Joint Escrow Instructions" means joint escrow instructions entered into between an Optionee and the Corporation in such form as may be approved by the Board from time to time. (m) "Non-employee Director" shall mean a member of the Board who (i) is not currently an officer or Employee of the Corporation or a parent or Subsidiary of the Corporation, (ii) has not received compensation for serving as a Consultant or in any other non-director capacity or had an interest in any transaction with the Corporation or a parent or Subsidiary of the Corporation that would exceed the $60,000 threshold for which disclosure would be required under Item 404(a) of Regulation S-K, or (iii) has not been engaged through another party in a business relationship with the Corporation which would be disclosable under Item 404(b) of Regulation S-K. If the Board determines that compliance with Section 162(m) of the Code is desirable, then the term "Non-employee Director" shall also be interpreted to satisfy the definition of "outside director" under Section 162(m) and applicable regulations issued pursuant thereto. (n) "Option" shall mean an option to purchase shares of Common Stock granted pursuant to the Plan. Such an Option shall be deemed a non-statutory stock option, not of the type described in Section 422 of the Code. (o) "Optionee" shall mean any person who holds an Option pursuant to the Plan. (p) "Plan" shall mean this stock option plan, as amended from time to time. (q) "Purchase Price" shall mean at any particular time the Exercise Price times the number of Shares for which an Option is being exercised. (r) "Share" shall mean one share of authorized Common Stock. 3. ADMINISTRATION. (a) Powers of the Board. The Plan shall be administered by the Board. Subject to the provisions of the Plan, the Board shall have the authority, in its discretion and on behalf of the Corporation: (i) to grant Options; (ii) to determine the Exercise Price per Share of Options to be granted; (iii) to determine the Employees to whom, and the time or times at which, Options shall be granted and the number of Shares for which an Option will be exercisable; -2- (iv) to interpret the Plan; (v) to prescribe, amend, and rescind rules and regulations relating to the Plan; (vi) to determine the terms and provisions of each Option granted and, with the consent of the holder thereof, modify or amend each Option; (vii) to accelerate or defer, with the consent of the Optionee, the exercise date of any Option; (viii) to authorize any person to execute on behalf of the Corporation any instrument required to effectuate the grant of an Option previously granted by the Board; (ix) with the consent of the Optionee, to re-price, cancel and re-grant, or otherwise adjust the Exercise Price of an Option previously granted by the Board; and (x) to make all other determinations deemed necessary or advisable for the administration of the Plan. (b) Board's Determination of Fair Market Value. The Board shall have the authority to determine, upon review of relevant information, the Fair Market Value of the Common Stock, subject to the provisions of the Plan and irrespective of whether the Board has appointed a Board to administer the Plan. The Board may delegate this authority to the Board. (c) Board's Interpretation of the Plan. The interpretation and construction by the Board of any provision of the Plan or of any Option granted hereunder shall be final and binding on all parties claiming an interest in an Option granted under the Plan. No member of the Board shall be liable for any action or determination made in good faith with respect to the Plan or any Option. 4. PARTICIPATION. (a) Eligibility. The Optionees shall be such persons as the Board may select from among the Employees and Consultants. (b) Ten Percent Stockholders. Any Employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Corporation or any Affiliate shall not be eligible to receive an Option unless: (i) the Exercise Price of the Shares subject to such Option when granted is at least 110% of the Fair Market Value of such Shares, and -3- (ii) such Option by its terms is not exercisable after the expiration of five years from the date of grant. (c) Stock Ownership. For purposes of Section 4(b), in determining stock ownership, an Employee shall be considered as owning the stock owned, directly or indirectly, by or for his or her brothers and sisters, spouse, ancestors, and lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its stockholders, partners, or beneficiaries, respectively. Stock with respect to which such Employee holds an Option will be counted in the determination of stock ownership for purposes of the above Section 4(b). (d) Outstanding Stock. For purposes of Section 4(b), the term "outstanding stock" shall include all stock actually issued and outstanding immediately after the grant of the Option to the Optionee but shall not include any share for which an Option is exercisable by any person. 5. STOCK. (a) Shares Subject to The Plan. The aggregate number of Shares which may be issued upon exercise of Options under the Plan shall not exceed Seven Hundred Thousand (700,000) shares of Common Stock, subject to adjustment pursuant to Section 8 hereof. (b) Options Not to Exceed Shares Available, The number of Shares for which an Option is exercisable at any time shall not exceed the number of Shares remaining available for issuance under the Plan. If any Option expires or is terminated, the number of Shares for which such Option was exercisable may be made exercisable pursuant to other Options under the Plan. The limitations established by this Section 5(b) shall be subject to adjustment in the manner provided in Section 8 hereof upon the occurrence of an event specified therein. 6. TERMS AND CONDITIONS OF OPTIONS. (a) Stock Option Agreements. Options shall be evidenced by a written stock option agreement between the Optionee and the Corporation either in the form of a Stock Option Agreement (attached hereto as EXHIBIT A) or in such other form as the Board shall from time to time determine. No Option or purported Option shall be a valid and binding obligation of the Corporation unless so evidenced in writing. -4- (b) Number of Shares. Each stock option agreement shall state the number of Shares for which the Option is exercisable and shall provide for the adjustment thereof in accordance with Section 8 hereof. The maximum number of shares with respect to which options may be granted to any one Optionee, in the aggregate in any calendar year, shall not exceed Three Hundred Thousand (300,000) Shares. (c) Vesting. An Optionee may not exercise his or her Option for any Shares until the Option, in regard to such Shares, has vested. Each stock option agreement shall include a vesting schedule which shall show when the Option becomes exercisable, subject only to the requirement that each Option granted under this Plan must vest at a rate of not less than 20% per year (with the first 20% vesting not later than the first anniversary of the date on which the Options in question were first granted (the "Grant Date"), and the last 20% vesting not later than the fifth anniversary of said Grant Date). The vesting schedule shall not impose upon the Corporation or any Affiliate any obligation to retain the Optionee in its employ or under contract for any period or otherwise change the employment-at-will status of an Optionee who is an Employee. (d) Lapse of Options. Each stock option agreement shall state the time or times when the Option covered thereby lapses and becomes unexercisable in part or in full. An Option shall lapse on the earliest of the following events (unless otherwise determined by the Board and reflected in an option agreement): (i) The tenth anniversary of the date of grant of the Option; (ii) The first anniversary of the Optionee's death; (iii) The first anniversary of the date when the Optionee ceases to be an Employee due to total and permanent disability, within the meaning of Section 22(e)(3) of the Code; (iv) On the date provided in Section 6(h)(i), unless the Board otherwise extends such period before the applicable expiration date; (v) On the date provided in Section 8 for a transaction described in such Section; (vi) The date the Optionee files or has filed against him or her a petition in bankruptcy; or (vii) The expiration date specified in the Optionee's stock option agreement. -5- (e) Exercise Price. Each stock option agreement shall state the Exercise Price for the Shares for which the Option is exercisable. Subject to Section 4(b), the Exercise Price shall not be less than 85% of the Fair Market Value of the Shares for which the Option is exercisable and not less than the par value of the Shares. (f) Medium and Time of Payment. The Purchase Price shall be payable in full in cash upon the exercise of an Option, provided, however, that the Board may instead allow the Optionee to pay the Purchase Price: (i) by surrendering Shares in good form for transfer, owned by the Optionee for more than 12 months, and having a Fair Market Value on the date of exercise equal to the Purchase Price; or (ii) by delivery of a full recourse promissory note (Note") made by the Optionee in the amount of the Purchase Price, bearing interest, compounded semiannually, at a rate not less than the rate determined under Section 7872 of the Code to insure that no "foregone interest", as defined in such section, will accrue, together with the delivery of a duly executed standard form security agreement securing the Note by a pledge of the Shares purchased; or (iii) in any combination of such consideration, or such other consideration and method of payment for the issuance of Shares permitted under applicable law, so long as the Fair Market Value of the consideration so paid equals the Purchase Price. The Board or a stock option agreement may prescribe requirements with respect to the exercise of Options, including the submission by the Optionee of such forms and documents as the Board may require and the delivery by the Optionee of cash sufficient to satisfy applicable withholding requirements. The Board may vary the exercise requirements and procedures from time to time to facilitate, for example, the broker-assisted exercise of Options. (g) Non-transferability of Options. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee or the Optionee's conservator or legal representative and shall not be assignable or transferable except pursuant to a qualified domestic relations order as defined by the Code. In the event of the Optionee's death, the Option shall not be transferable by the Optionee other than by will or the laws of descent and distribution. (h) Termination of Employment Other than by Death or Disability. (i) If an Optionee ceases to be an Employee for any reason other than his or her death or disability, the Optionee shall have the right, subject to the provisions of this Section 6, to exercise any Option held by the Optionee at any time within ninety (90) days after his or her termination of employment, but not beyond the otherwise applicable term of the Option and only to the extent that on such date of termination of employment the Optionee's right to exercise such Option had vested. -6- (ii) For purposes of this Section 6(h), the employment relationship shall be treated as continuing intact while the Optionee is an active employee of the Corporation or any Affiliate, or is on military leave, sick leave, or other bona fide leave of absence to be determined in the sole discretion of the Board. (i) Death of Optionee. If an Optionee dies while an Employee, or after ceasing to be an Employee but during the period while he or she could have exercised an Option under Section 6(h), any Option granted to the Optionee may be exercised, to the extent it had vested at the time of death and subject to the Plan, at any time within 12 months after the Optionee's death, by the executors or administrators of his or her estate or by any person or persons who acquire the Option by will or the laws of descent and distribution, but not beyond the otherwise applicable term of the Option. (j) Disability of Optionee. If an Optionee ceases to be an Employee due to becoming totally and permanently disabled within the meaning of Section 22(e)(3) of the Code, any Option granted to the Optionee may be exercised to the extent it had vested at the time of cessation and, subject to the Plan, at any time within 12 months after the Optionee's termination of employment, but not beyond the otherwise applicable term of the Option. (k) Rights as a Stockholder. An Optionee, or a transferee of an Optionee, shall have no rights as a stockholder of the Corporation with respect to any Shares for which his or her Option is exercisable until the date of the issuance of a stock certificate for such Shares. No adjustment shall be made for dividends, ordinary or extraordinary or whether in currency, securities, or other property, distributions, or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 8 hereof. (l) Modification, Extension, and Renewal of Options. Within the limitations of the Plan, the Board may modify, extend or renew outstanding Options or accept the cancellation of outstanding Options for the granting of new Options in substitution therefor. Notwithstanding the preceding sentence, no modification of an Option shall, without the consent of the Optionee, alter or impair any rights or obligations under any Option previously granted. (m) Other Provisions. The stock option agreements authorized under the Plan may contain such other provisions which are not inconsistent with the terms of the Plan, including, without limitation, restrictions upon the exercise of the Option, as the Board shall deem advisable. -7- 7. TERM OF PLAN. Options may be granted pursuant to the Plan until a date no later than ten years following the Effective Date, and all Options which are outstanding on such date shall remain in effect until they are exercised or expire by their respective terms. The Plan shall expire for all purposes on the date that is 10 years following the Effective Date. 8. RECAPITALIZATION, TAKEOVERS, AND LIQUIDATIONS. (a) Reorganizations. The number of Shares covered by the Plan, as provided in Section 5 hereof and the number of Shares for which each Option is exercisable shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, a reverse stock split, the payment of a stock dividend, re-capitalization, combination or reclassification of the Corporation's stock or any other event which results in an increase or decrease in the number of issued Shares effected without receipt of consideration by the Corporation, and the Exercise Price shall be proportionately increased in the event the number of Shares subject to such Option are decreased and shall be proportionately decreased in the event the number of Shares subject to such Option are increased. For the purposes of this Section 8(a), the conversion of any convertible securities of the Corporation shall not be deemed to have been "effected without receipt of consideration." Adjustments shall be made by the Board, whose determination in that respect shall be final binding and conclusive. Except as expressly provided herein, no issuance by the Corporation of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option. (b) Liquidation. In the event of the dissolution or liquidation of the Corporation, each Option shall terminate immediately prior to the consummation of such action. The Board shall notify the Optionee not less than 15 days prior to the proposed consummation of a pending dissolution or liquidation, and such Option shall be exercisable as to all Shares which are vested prior to expiration until immediately prior to the consummation of such action. (c) Merger. In the event of (i) a proposed merger of the Corporation with or into another corporation, as a result of which the Corporation is not the surviving corporation and (ii) the Option is not assumed or an equivalent option substituted by the successor corporation or a parent or subsidiary of the successor corporation, then in such case the Option shall terminate immediately prior to the consummation of such transaction. The Board shall notify the Optionee not less than 15 days prior to the proposed consummation of such transaction, and the Option shall be exercisable as to all Shares which are vested prior to expiration and until immediately prior to the consummation of such transaction. -8- (d) Determination by Board. All adjustments described in this Section 8 shall be made by the Board, whose determination shall be conclusive and binding on all persons. (e) Limitation on Rights of Optionee. Except as expressly provided in this Section 8, no Optionee shall have any rights by reason of any payment of any stock dividend, stock split or reverse stock split or any other increase or decrease in the number of shares of stock of any class, or by reason of any reorganization, consolidation, dissolution, liquidation, merger, exchange, split-up or reverse split-up, or spin-off of assets or stock of another corporation. Any issuance by the Corporation of Shares, Options or securities convertible into Shares or Options shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of the Shares for which an Option is exercisable. Notwithstanding the foregoing, if the Corporation enters into a transaction affecting the Corporation's capital stock or distributions to the holders of its capital stock for which a revision in the terms of each Option is not required pursuant to this Section 8, the Board shall have the right, but not the obligation, to revise the terms of each Option in a manner that the Board, in its sole discretion, deems fair and reasonable given the transaction involved. If necessary or appropriate in connection with such transaction, the Board may declare that any Option shall terminate as of a date fixed by the Board and give each Optionee the right to exercise his or her Option in whole or in part, including exercise as to Shares to which the Option would not otherwise be exercisable. (f) No Restriction on Rights of Corporation. The grant of an Option shall not affect or restrict in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure, or to merge or consolidate, or to dissolve, liquidate, sell, or transfer all or any part of its business or assets. 9. SECURITIES LAW REQUIREMENTS. (a) Legality of Issuance. No Shares shall be issued upon the exercise of any Option unless and until the Corporation has determined that: (i) the Corporation and the Optionee have taken all actions required to exempt the issuance of the Shares from the registration requirements under the Securities Act of 1933, as amended (the "Act"), or the Corporation and the Optionee will determine that the registration requirements of the Act do not apply to such exercise or issuance; (ii) any applicable listing requirement of any stock exchange on which the Common Stock is listed has been satisfied; and (iii) any other applicable provision of state or Federal law has been satisfied. (b) Restrictions on Transfer Representations of Optionee. Legends. Regardless of whether the offering and sale of Shares has been registered under the Act or has been registered or qualified under the securities laws of any state, the Corporation may impose restrictions upon the sale, pledge, or other transfer of such Shares, including the placement of appropriate legends on stock certificates, it in the judgment of the Corporation and its counsel, such -9- restrictions are necessary or desirable in order to achieve compliance with the provisions of the Act, the securities laws of any state, or any other law. If the sale of Shares is not registered under the Act and the Corporation will determine that the registration requirements of the Act apply to such sale, but an exemption is available which requires an investment representation or other representation, the Optionee will be required, as a condition to purchasing Shares by exercise of his or her Option, to represent that such Shares are being acquired for investment, and not with a view to the sale or distribution thereof except in compliance with the Act, and to make such other representations as are deemed necessary or appropriate by the Corporation and its counsel. Stock certificates evidencing Shares acquired pursuant to an unregistered transaction to which the Act applies will bear a restrictive legend substantially in the following form and such other restrictive legends as are required or deemed advisable under the Plan or the provisions of any applicable law. "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE. THESE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF, AND MAY NOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION UNDER THE ACT AND/OR QUALIFICATION UNDER ANY APPLICABLE STATE SECURITIES LAWS, OR WITHOUT AN OPINION OF COUNSEL ACCEPTABLE TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION OR QUALIFICATION IS NOT REQUIRED." Any determination by the Corporation and its counsel in connection with any of the matters set forth in this Section 9 will be conclusive and binding on all persons: (c) Registration or Qualification of Securities. The Corporation may, but will not be obligated to, register or qualify the sale of Shares under the Act or any other applicable law. In connection with any such registration or qualification, the Corporation will provide each Optionee with such information required pursuant to all applicable laws and regulations. (d) Exchange of Certificate. If, in the opinion of the Corporation and its counsel, any legend placed on a stock certificate representing Shares issued hereunder is no longer required, the Optionee or the holder of such certificate will be entitled to exchange such certificate for a certificate representing the same number of Shares but without such legend. (e) Market Standoff Agreement. By acceptance of an Option, each Optionee agrees that if so requested by the Corporation or any representative of the underwriters in connection with any registration of any securities of the Corporation under the Act, Optionee shall not sell or otherwise transfer any of the Shares or other securities of the Corporation during the period requested by the Corporation or the representative of the underwriters, as the case may be. Each Optionee agrees that the Corporation -10- may impose stop-transfer instructions with respect to the securities subject to the foregoing restrictions. 10. EXERCISE OF UNVESTED OPTIONS. The Board may grant to any Optionee the right to exercise any Option prior to the complete vesting of such Option. Without limiting the generality of the foregoing, the Board may provide that if an Option is exercised prior to having completely vested, the Shares issued upon such exercise shall remain subject to vesting at the same rate as under the Option so exercised and shall be subject to a right, but not an obligation, of repurchase by the Corporation with respect to all unvested Shares if the Optionee ceases to be an Employee for any reason. For the purposes of facilitating the enforcement of any such right of repurchase, at the request of the Board, the Optionee shall enter into the Joint Escrow Instructions with the Corporation and deliver every certificate for his or her unvested Shares with a stock power executed in blank by the Optionee and by the Optionee's spouse, if required for transfer. 11. AMENDMENT OF THE PLAN. The Board may, from time to time, terminate, suspend or discontinue the Plan, in whole or in part, or revise or amend the Plan in any respect whatsoever including, but not limited to, the adoption of any amendment(s) deemed necessary or advisable to qualify the Options under rules and regulations promulgated by the Securities and Exchange Commission with respect to Employees who are subject to the provisions of Section 16 of the Exchange Act or to correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Option granted thereunder, without approval of the stockholders of the Corporation, but without the approval of the Corporation's stockholders, no such revision or amendment shall: (a) Increase the number of Shares subject to the Plan, other than any increase pursuant to Section 8; (b) Materially modify the requirements as to eligibility for participation in the Plan; (c) Materially increase the benefits accruing to Optionees under the Plan; (d) Extend the term of the Plan; or (e) Amend this Section to defeat its purpose. No amendment, termination or modification of the Plan shall affect any Option theretofore granted in any material adverse way without the consent of the Optionee. 12. APPLICATION OF FUNDS. The proceeds received by the Corporation from the sale of Common Stock pursuant to the exercise of an Option shall be used for general corporate purposes. -11- 13. WITHHOLDING OF TAXES. In the event the Corporation or an Affiliate determines that it is required to withhold Federal, state, or local taxes in connection with the exercise of an Option or the disposition of Shares issued pursuant to the exercise of an Option, the Optionee or any person succeeding to the rights of the Optionee, as a condition to such exercise or disposition, may be required to make arrangements satisfactory to the Corporation or the Affiliate to enable it to satisfy such withholding requirements. Alternatively, the Corporation may issue or transfer Shares net of the number of Shares sufficient to satisfy withholding tax requirements. For withholding tax purposes, the Shares will be valued on the date the withholding obligation is incurred. 14. RIGHTS AS AN EMPLOYEE. Neither the Plan nor any Option granted pursuant thereto shall be construed to give any person the right to remain in the employ of the Corporation or any Affiliate, or to affect the right of the Corporation or any Affiliate to terminate such individual's employment at any time with or without cause. The grant of an Option shall not entitle the Optionee to, or disqualify the Optionee from, participation in the grant of any other Option under the Plan or participation in any other benefit plan maintained by the Corporation or any Affiliate. 15. DISAVOWAL OF REPRESENTATIONS, UNDERTAKINGS OR CREATION OF IMPLIED RIGHTS. In adopting and maintaining the Plan and granting options hereunder, neither the Corporation nor any Affiliate makes any representations or undertakings with respect to the initial qualification or treatment of Options under Federal or state tax or securities laws. The Corporation and each Affiliate expressly disavows the creation of any rights in Employees, Optionees, or beneficiaries of any obligations on the part of the Corporation, any Affiliate or the Board, except as expressly provided herein. 16. INSPECTION OF RECORDS. Copies of the Plan, records reflecting each Optionee's Option, and any other documents and records which an Optionee is entitled by law to inspect shall be open to inspection by the Optionee and his or her duly authorized representative at the office of the Board at any reasonable business hour. 17. INFORMATION TO OPTIONEES. Each Optionee shall be provided with such information regarding the Corporation as the Board from time to time deems necessary or appropriate; provided, however, that each Optionee shall at all times be provided with such information as is required to be provided from time to time pursuant to applicable regulatory requirements, including, but not limited to, any applicable requirements of the Securities and Exchange Commission, the California Department of Corporations and other state securities agencies. -12- EX-10.6 14 EX-10.6 Exhibit 10.6 QCS CORPORATION STOCK OPTION This Stock Option Agreement is made and entered into this _____ day of _______________. The Board of Directors of QCS Corporation (the "Corporation") has selected _______________ (the "Optionee") to receive the following grant of a stock option ("Stock Option") to purchase shares of the common stock of the Corporation, on the terms and conditions set forth below to which Optionee accepts and agrees: 1. STOCK OPTIONS GRANTED: No. of Shares Subject to Option. . . . . . Date of Grant. . . . . . . . . . . . . . . Vesting Commencement Date. . . . . . . . . Exercise Price Per Share . . . . . . . . . Expiration Date. . . . . . . . . . . . . .
The Stock Option is granted to purchase the number of shares of authorized but unissued common stock of the Corporation specified in Section 1 hereof (the "Shares"). The Stock Option shall expire, and all rights to exercise it shall terminate on the Expiration Date, except that the Stock Option may expire earlier as provided herein. The number of shares subject to the Stock Option granted hereunder shall be adjusted as provided herein. 2. DEFINITIONS. (a) "AFFILIATE" shall mean any corporation (other than the Corporation) in an unbroken chain of corporations that includes the Corporation if each of such corporations, other than the last corporation in the chain, owns at least 50% of the total voting power of one of the other corporations. (b) "BOARD" shall mean the Board of Directors of the Corporation. (c) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (d) "COMMON STOCK" shall mean the voting common stock of the Corporation. (e) "CONSULTANT" shall mean any person who, or any employee of any firm which, is engaged by the Corporation or any Affiliate to render consulting services. (f) "CORPORATION" shall mean QCS CORPORATION, a Delaware corporation. (g) "EMPLOYEE" shall mean any individual who is employed, within the meaning of Section 3401 of the Code and the regulations thereunder, by the Corporation or by any Affiliate. (h) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. (i) "EXERCISE PRICE" shall mean the price per Share at which the Stock Option may be exercised. (j) "FAIR MARKET VALUE" shall mean the value of one Share of Common Stock, determined as follows: (i) if the Shares are traded on an exchange or on the NASDAQ National Market System, the reported "closing price" on the date of valuation or if no trading occurred on such date, the next preceding day on which trading occurred; (ii) if the Shares are traded over-the-counter on the NASDAQ System (other than on the NASDAQ National Market System), the mean between the bid and the ask prices on said System at the close of business on the date of valuation or if no trading occurred on such date, the next preceding day on which trading occurred; and (iii) if neither (i) nor (ii) applies, the fair market value as determined by the Board in good faith. Such determination shall be conclusive and binding on all persons. (k) "OPTION" shall mean an option to purchase Common Stock granted pursuant to this Agreement. (l) "OPTIONEE" shall mean any person who holds this Stock Option. (m) "PURCHASE PRICE" shall mean at any particular time the Exercise Price times the number of Shares for which the Stock Option is being exercised. (n) "SHARE" shall mean one share of authorized Common Stock. 3. TERMS AND CONDITIONS OF OPTIONS. (a) VESTING. Optionee shall have the right to exercise the Stock Option in accordance with the following schedule: (i) The Stock Option may not be exercised in whole or part at any time prior to the end of the first 4 full calendar quarters following the Vesting Commencement Date. (ii) Optionee may exercise the Stock Option as to __________ of the Shares at the end of the 4th full calendar quarter following the Vesting Commencement Date. (iii) Optionee may exercise the Stock Option as to an additional __________ of the Shares at the end of each the 8th full calendar quarter following the Vesting Commencement Date. (iv) Optionee may exercise the Stock Option as to an additional __________ of the Shares at the end of each the 12th full calendar quarter following the Vesting Commencement Date. 2 (v) The right to exercise the Stock Option shall be cumulative. Optionee may buy all, or from time to time any part, of the maximum number of shares which are exercisable under the Stock Option, but in no case may Optionee exercise the Stock Option with regard to a fraction of a share, or for any share for which the Stock Option is not exercisable. (b) LAPSE OF OPTIONS. The Stock Option shall lapse and become unexercisable in part or in full on the earliest of the following events: (i) The tenth anniversary of the date of granting the Stock Option; (ii) The first anniversary of the Optionee's death; (iii) The first anniversary of the date the Optionee ceases to be an Employee due to total and permanent disability, within the meaning of Section 22(e)(3) of the Code; (iv) On the date provided in Section 3(e)(i), unless the Board otherwise extends such period before the applicable expiration date; (v) On the date provided in Section 4 for a transaction described in such Section; (vi) The date the Optionee files or has filed against him or her a petition in bankruptcy; or (vii) The expiration date specified in Section 1 hereof. (c) MEDIUM AND TIME OF PAYMENT. The Purchase Price shall be payable in full in cash upon the exercise of the Stock Option but the Board may allow the Optionee to pay the Purchase Price: (i) by surrendering Shares in good form for transfer, owned by the Optionee and having a Fair Market Value on the date of exercise equal to the Purchase Price; (ii) by delivery of a full recourse promissory note ("Note") made by the Optionee in the amount of the Purchase Price, bearing interest, compounded semiannually, at a rate not less than the rate determined under Section 7872 of the Code to insure that no "foregone interest," as defined in such section, will accrue, together with the delivery of a duly executed standard form security agreement securing the Note by a pledge of the Shares purchased; or (iii) in any combination of such consideration or such other consideration and method of payment for the issuance of Shares to the extent permitted under applicable law Code as long as the sum of the cash so paid, the Fair Market Value of the Shares so surrendered, and the amount of any Note equals the Purchase Price. 3 The Board may prescribe requirements with respect to the exercise of the Stock Option, including the submission by the Optionee of such forms and documents as the Board may require and, the delivery by the Optionee of cash sufficient to satisfy applicable withholding requirements. The Board may vary the exercise requirements and procedures from time to time to facilitate, for example, the broker-assisted exercise of Options. (d) NONTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, the Stock Option shall be exercisable only by the Optionee or the Optionee's conservator or legal representative and shall not be assignable or transferable except pursuant to a qualified domestic relations order as defined by the Code. In the event of the Optionee's death, the Stock Option shall not be transferable by the Optionee other than by will or the laws of descent and distribution. (e) TERMINATION OF EMPLOYMENT OTHER THAN BY DEATH OR DISABILITY. (i) If the Optionee ceases to be an Employee for any reason other than his or her death or disability, the Optionee shall have the right, subject to the provisions of this Section, to exercise any portion of this Stock Option held by the Optionee at any time within ninety (90) days after his or her termination of employment, but not beyond the otherwise applicable term of the Stock Option and only to the extent that on such date of termination of employment the Optionee's right to exercise the Stock Option had vested. (ii) For purposes of this Section, the employment relationship shall be treated as continuing intact while the Optionee is an active employee of the Corporation or any Affiliate, or is on military leave, sick leave, or other bona fide leave of absence to be determined in the sole discretion of the Board. (f) DEATH OF OPTIONEE. If the Optionee dies while an Employee, or after ceasing to be an Employee but during the period while he or she could have exercised the Stock Option under Section 3(e), the Stock Option granted to the Optionee may be exercised, to the extent it had vested at the time of death, at any time within 12 months after the Optionee's death, by the executors or administrators of his or her estate or by any person or persons who acquire the Stock Option by will or the laws of descent and distribution, but not beyond the otherwise applicable term of the Stock Option. (g) DISABILITY OF OPTIONEE. If an Optionee ceases to be an Employee due to becoming totally and permanently disabled within the meaning of Section 22(e)(3) of the Code, the Stock Option granted to the Optionee may be exercised to the extent it had vested at the time of cessation and at any time within 12 months after the Optionee's termination of employment, but not beyond the otherwise applicable term of the Stock Option. 4 (h) RIGHTS AS A SHAREHOLDER. The Optionee, or a transferee of an Optionee, shall have no rights as a shareholder of the Corporation with respect to any Shares for which this Stock Option is exercisable until the date of the issuance of a stock certificate for such Shares. No adjustment shall be made for dividends, ordinary or extraordinary or whether in currency, securities, or other property, distributions, or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 4 hereof. 4. RECAPITALIZATION, TAKEOVERS, AND LIQUIDATIONS. (a) REORGANIZATIONS. The number of Shares for which this Stock Option is exercisable shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from the payment of a Common Stock dividend, a stock split, a reverse stock split or any other event which results in an increase or decrease in the number of issued Shares effected without receipt of consideration by the Corporation, and the Exercise Price shall be proportionately increased in the event the number of Shares subject to this Stock Option are decreased and shall be proportionately decreased in the event the number of Shares subject to this Stock Option are increased. For the purposes of this paragraph, conversion of any convertible securities of the Corporation shall not be deemed to have been "effected without receipt of consideration." Adjustments shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Corporation of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to this Stock Option. (b) LIQUIDATION. In the event of the dissolution or liquidation of the Corporation, this Stock Option shall terminate immediately prior to the consummation of such action. The Board shall notify the Optionee not less than fifteen (15) days prior to the proposed consummation of a pending dissolution or liquidation, and this Stock Option shall be exercisable as to all Shares which are vested prior to expiration until immediately prior to the consummation of such action. (c) MERGER. In the event of (i) a proposed merger of the Corporation with or into another corporation, as a result of which the Corporation is not the surviving corporation and (ii) this Stock Option is not assumed or an equivalent option substituted by the successor corporation or a parent or subsidiary of the successor corporation, then in such case this Stock Option shall terminate immediately prior to the consummation of such transaction. The Board shall notify the Optionee not less than fifteen (15) days prior to the proposed consummation of such transaction, and this Stock Option shall be exercisable as to all Shares which are vested prior to expiration and until immediately prior to the consummation of such transaction. 5 (d) DETERMINATION BY BOARD. All adjustments described in this Section 4 shall be made by the Board, whose determination shall be conclusive and binding on the Optionee. (e) LIMITATION ON RIGHTS OF OPTIONEE. Except as expressly provided in this Section 4, the Optionee shall not have any rights by reason of any payment of any stock dividend, stock split or reverse stock split or any other increase or decrease in the number of shares of stock of any class, or by reason of any reorganization, consolidation, dissolution, liquidation, merger, exchange, split-up or reverse split-up, or spin-off of assets or stock of another corporation. Any issuance by the Corporation of Shares, Options or securities convertible into Shares or Options shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of the Shares for which this Stock Option is exercisable. Notwithstanding the foregoing, if the Corporation shall enter into a transaction affecting the Corporation's capital stock or distributions to the holders of its capital stock for which a revision in the terms of this Stock Option is not required pursuant to this Section 4, the Board shall have the right, but not the obligation, to revise the terms of this Stock Option in a manner the Board, in its sole discretion, deems fair and reasonable given the transaction involved. If necessary or appropriate in connection with such transaction, the Board may declare that this Stock Option shall terminate as of a date fixed by the Board and give the Optionee the right to exercise this Stock Option in whole or in part, including exercise as to Shares to which the Stock Option would not otherwise be exercisable. (f) NO RESTRICTION ON RIGHTS OF CORPORATION. The grant of this Stock Option shall not affect or restrict in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure, or to merge or consolidate, or to dissolve, liquidate, sell, or transfer all or any part of its business or assets. 5. SECURITIES LAW REQUIREMENTS. (a) REGISTRATION. The Corporation shall not be under any obligation to issue any Shares upon the exercise of this Stock Option unless and until the Corporation has determined that: (i) it and the Optionee have taken all actions required to register the Shares under the Securities Act of 1933, or to perfect an exemption from the registration requirements thereof; (ii) any applicable listing requirement of any stock exchange on which the Common Stock is listed has been satisfied; and (iii) all other applicable provisions of state and Federal law have been satisfied. (b) MARKET STANDOFF AGREEMENT. By acceptance of this Option, Optionee agrees that if so requested by the Corporation or any representative of the underwriters in connection with any registration of any securities of the Corporation under the Act, Optionee shall not sell or otherwise transfer any of the Shares or other securities of the Corporation during the period requested by the Corporation or the 6 representative of the underwriters, as the case may be. Optionee agrees that the Corporation may impose stop-transfer instructions with respect to the securities subject to the foregoing restrictions. 6. EXERCISE OF UNVESTED OPTIONS. The Board may grant the Optionee the right to exercise this Stock Option prior to the complete vesting of such Stock Option. Without limiting the generality of the foregoing, the Board may provide that if this Stock Option is exercised prior to having completely vested, the Shares issued upon such exercise shall remain subject to vesting at the same rate as under the Stock Option so exercised and shall be subject to a right, but not an obligation, of repurchase by the Corporation with respect to all unvested Shares if the Optionee ceases to be an Employee for any reason. For the purposes of facilitating the enforcement of any such right of repurchase, at the request of the Board, the Optionee shall enter into the Joint Escrow Instructions with the Corporation and deliver every certificate for his or her unvested Shares with a stock power executed in blank by the Optionee and by the Optionee's spouse, if required for transfer. 7. WITHHOLDING OF TAXES. In the event the Corporation or a Affiliate determines that it is required to withhold Federal, state, or local taxes in connection with the exercise of an Option or the disposition of Shares issued pursuant to the exercise of an Option, the Optionee or any person succeeding to the rights of the Optionee, as a condition to such exercise or disposition, may be required to make arrangements satisfactory to the Corporation or the Affiliate to enable it to satisfy such withholding requirements. 8. RIGHTS AS AN EMPLOYEE. Neither the Plan nor any Option granted pursuant thereto shall be construed to give any person the right to remain in the employ of the Corporation or any Affiliate, or to affect the right of the Corporation or any Affiliate to terminate such individual's employment at any time with or without cause. The grant of an Option shall not entitle the Optionee to, or disqualify the Optionee from, participation in the grant of any other Option under the Plan or participation in any other benefit plan maintained by the Corporation or any Affiliate. 9. DISAVOWAL OF REPRESENTATIONS, UNDERTAKINGS OR CREATION OF IMPLIED RIGHTS. In adopting and maintaining this Plan and granting options hereunder, neither the Corporation nor any Affiliate makes any representations or undertakings with respect to the initial qualification or treatment of Options under federal or state tax or securities laws. The Corporation and each Affiliate expressly disavows the creation of any rights in Employees, Optionees, or beneficiaries of any obligations on the part of the Corporation, any Affiliate or the Board, except as expressly provided herein. 10. INFORMATION TO OPTIONEE. Each Optionee shall be provided with such information regarding the Corporation as the Board from time to time deems necessary or appropriate; provided however, that each Optionee shall at all times be provided with such information as is required to be provided from time to time 7 pursuant to applicable regulatory requirements, including, but not limited to, any applicable requirements of the Securities and Exchange Commission, the California Department of Corporations and other state securities agencies. IN WITNESS WHEREOF, each of the parties hereto has executed this Stock Option Agreement, in the case of the Corporation by its duly authorized officer, as of the date and year written above. OPTIONEE QCS CORPORATION By: - ---------------------------------- ---------------------------------- (signature) (signature) Its: - ---------------------------------- ---------------------------------- (Type or Print Name) 8 EX-10.7 15 EX-10.7 Exhibit 10.7 AMENDMENT #1 TO QCS CORPORATION 1997 STOCK OPTION PLAN 1. PURPOSE. This Stock Option Plan (this "Plan") is intended to provide to officers, directors, key Employees and Consultants of the Corporation an opportunity to acquire a proprietary interest in the Corporation, to encourage such key individuals to remain in the employ of or to contract with the Corporation, and to attract and retain new officers, directors, Employees and Consultants with outstanding qualifications. Pursuant to the Plan, the Corporation may grant to officers, directors, Consultants and key Employees of the Corporation options to purchase shares of Common Stock upon such terms and conditions as provided herein. 2. DEFINITIONS. (a) "AFFILIATE" shall mean any corporation (other than the Corporation) in an unbroken chain of corporations that includes the Corporation if each of such corporations, other than the last corporation in the chain, owns at least 50% of the total voting power of one of the other corporations. (b) "BOARD" shall mean the Board of Directors of the Corporation. (c) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" shall mean the committee appointed by the Board to administer the Plan (as further described in Section 3 hereof), or if no such committee is appointed, the Board. (e) "COMMON STOCK" shall mean the voting common stock of the Corporation. (f) "CONSULTANT" shall mean any person who, or any employee of any firm which, is engaged by the Company or any Affiliate to render consulting services and is compensated for such consulting services, and any Non-employee Director of the Company whether compensated for such services or not. (g) "CORPORATION" shall mean QCS Corporation, a Delaware corporation. (h) "EFFECTIVE DATE" shall mean December 1, 1997. (i) "EMPLOYEE" shall mean any individual who is employed, within the meaning of Section 3401 of the Code and the regulations thereunder, by the Corporation or by 25 any Affiliate. For purposes of the Plan and only for purposes of the Plan, and in regard to Non-statutory Stock Options but not for Incentive Stock Options, a Consultant or director of the Corporation or any Affiliate shall be deemed to be an Employee, and service as a Consultant or director with the Corporation or any Affiliate shall be deemed to be employment, but no Incentive Stock Option shall be granted to a Consultant or director who is not an employee of the Corporation or any Affiliate within the meaning of Section 3401 of the Code and the regulations thereunder. In the case of a Non-employee Director or Consultant, the provisions governing when a termination of employment has occurred for purposes of the Plan shall be set forth in the written stock option agreement between the Optionee and the Corporation, or, if not so set forth, the Committee shall have the discretion to determine when a termination of "employment" has occurred for purposes of the Plan. (j) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. (k) "EXERCISE PRICE" shall mean the price per Share at which an Option may be exercised, as determined by the Committee and as specified in the Optionee's stock option agreement. (l) "FAIR MARKET VALUE" shall mean the value of one Share of Common Stock, determined as follows: (i) if the Shares are traded on an exchange or on the NASDAQ National Market System, the reported "closing price" on the date of valuation or if no trading occurred on such date, the next preceding day on which trading occurred; (ii) if the Shares are traded over-the-counter on the NASDAQ System (other than on the NASDAQ National Market System), the mean between the bid and the ask prices on said System at the close of business on the date of valuation or if no trading occurred on such date, the next preceding day on which trading occurred; and (iii) if neither (i) nor (ii) applies, the fair market value as determined by the Committee in good faith. Such determination shall be conclusive and binding on all persons. (m) "INCENTIVE STOCK OPTION" shall mean an Option of the type described in Section 422(b) of the Code. (n) "JOINT ESCROW INSTRUCTIONS" means joint escrow instructions entered into between an Optionee and the Corporation in such form as may be approved by the Committee from time to time. (o) "NON-EMPLOYEE DIRECTOR" shall mean a member of the Board who (i) is not currently an officer or Employee of the Corporation or a parent or Subsidiary of the Corporation, (ii) has not received compensation for serving as a Consultant or in any other non-director capacity or had an interest in any transaction with the Corporation or a parent or Subsidiary of the Corporation that would exceed the $60,000 threshold for which disclosure would be required under Item 404(a) of Regulation S-K, or (iii) has not been engaged through another party in a business relationship with the Corporation which would be disclosable under Item 404(b) of Regulation S-K. If the Board determines that compliance with Section 162(m) of the Code is desirable, then the term "Non-employee Director" shall also be interpreted to satisfy the 26 definition of "outside director" under Section 162(m) and applicable regulations issued pursuant thereto. (p) "NON-STATUTORY STOCK OPTION" shall mean an Option of the type not described in Section 422(b) or 423(b) of the Code. (q) "OPTION" shall mean an option to purchase shares of Common Stock granted pursuant to the Plan. (r) "OPTIONEE" shall mean any person who holds an Option pursuant to the Plan. (s) "OUTSIDE DIRECTOR" shall mean a member of the Board who qualifies as an "outside director" pursuant to Internal Revenue Code Section 162(m) and the Regulations promulgated thereunder. (t) "PLAN" shall mean this stock option plan, as amended from time to time. (u) "PURCHASE PRICE" shall mean at any particular time the Exercise Price times the number of Shares for which an Option is being exercised. (v) "SHARE" shall mean one share of authorized Common Stock. 3. ADMINISTRATION. (a) THE COMMITTEE. The Plan shall be administered by the Committee. The Committee shall consist only of Non-employee Directors of the Corporation who are also Outside Directors, and shall have at least two members. The Committee shall meet such other requirements as may be established from time to time by the Securities and Exchange Commission for plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act. The Board may appoint a separate committee of the Board, composed of one or more directors of the Corporation who need not be Non-employee Directors, who may administer the Plan with respect to Employees or Consultants who are not officers or directors of the Corporation or incoming new directors of the Corporation, may grant Options under the Plan to such persons and may determine the timing, number of Shares subject to such Options and other terms of such grants. (b) POWERS OF THE COMMITTEE. Subject to the provisions of the Plan, the Committee shall have the authority, in its discretion and on behalf of the Corporation: 27 (i) to grant Options; (ii) to determine the Exercise Price per Share of Options to be granted; (iii) to determine the Employees to whom, and the time or times at which, Options shall be granted and the number of Shares for which an Option will be exercisable; (iv) to interpret the Plan; (v) to prescribe, amend, and rescind rules and regulations relating to the Plan; (vi) to determine the terms and provisions of each Option granted and, with the consent of the holder thereof, modify or amend each Option; (vii) to accelerate or defer, with the consent of the Optionee, the exercise date of any Option; (viii) to authorize any person to execute on behalf of the Corporation any instrument required to effectuate the grant of an Option previously granted by the Committee; (ix) with the consent of the Optionee, to re-price, cancel and re-grant, or otherwise adjust the Exercise Price of an Option previously granted by the Committee; and (x) to make all other determinations deemed necessary or advisable for the administration of the Plan. (c) BOARD'S DETERMINATION OF FAIR MARKET VALUE. The Board shall have the authority to determine, upon review of relevant information, the Fair Market Value of the Common Stock, subject to the provisions of the Plan and irrespective of whether the Board has appointed a Committee to administer the Plan. The Board may delegate this authority to the Committee. (d) COMMITTEE'S INTERPRETATION OF THE PLAN. The interpretation and construction by the Committee of any provision of the Plan or of any Option granted hereunder shall be final and binding on all parties claiming an interest in an Option granted under the Plan. No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option. (e) COMMITTEE PROCEDURES. The Committee shall designate one of its members as chairman. The Committee 28 may hold meetings at such times and places as it shall determine. The acts of a majority of the Committee's members present at meetings at which a quorum exists, or acts reduced to or approved in writing by all of the Committee's members, shall be valid acts of the Committee. 4. PARTICIPATION. (a) ELIGIBILITY. The Optionees shall be such persons as the Committee may select from among the Employees, provided that Consultants are not eligible to receive Incentive Stock Options. (b) TEN PERCENT STOCKHOLDERS. Any Employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Corporation or any Affiliate shall not be eligible to receive an Option unless: (i) the Exercise Price of the Shares subject to such Option when granted is at least 110% of the Fair Market Value of such Shares, and (ii) such Option by its terms is not exercisable after the expiration of five years from the date of grant. (c) STOCK OWNERSHIP. For purposes of Section 4(b), in determining stock ownership, an Employee shall be considered as owning the stock owned, directly or indirectly, by or for his or her brothers and sisters, spouse, ancestors, and lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its stockholders, partners, or beneficiaries, respectively. Stock with respect to which such Employee holds an Option will be counted in the determination of stock ownership for purposes of the above Section 4(b). (d) OUTSTANDING STOCK. For purposes of Section 4(b), the term "outstanding stock" shall include all stock actually issued and outstanding immediately after the grant of the Option to the Optionee but shall not include any share for which an Option is exercisable by any person. 5. STOCK. (a) SHARES SUBJECT TO THE PLAN. 29 The aggregate number of Shares which may be issued upon exercise of Options under the Plan shall not exceed Four Million (4,000,000) shares of Common Stock, subject to adjustment pursuant to Section 9 hereof. (b) OPTIONS NOT TO EXCEED SHARES AVAILABLE. The number of Shares for which an Option is exercisable at any time shall not exceed the number of Shares remaining available for issuance under the Plan. If any Option expires or is terminated, the number of Shares for which such Option was exercisable may be made exercisable pursuant to other Options under the Plan. The limitations established by this Section 5(b) shall be subject to adjustment in the manner provided in Section 9 hereof upon the occurrence of an event specified therein. 6. TERMS AND CONDITIONS OF OPTIONS. (a) STOCK OPTION AGREEMENTS. Options shall be evidenced by a written stock option agreement between the Optionee and the Corporation either in the form of a Non-statutory Stock Option Agreement (attached hereto as EXHIBIT A), in the form of an Incentive Stock Option Agreement (attached hereto as EXHIBIT B) or in such other form as the Committee shall from time to time determine. No Option or purported Option shall be a valid and binding obligation of the Corporation unless so evidenced in writing. (b) NUMBER OF SHARES. Each stock option agreement shall state the number of Shares for which the Option is exercisable and shall provide for the adjustment thereof in accordance with Section 9 hereof. Each stock option agreement will also specify whether the option is a Non-statutory Stock Option or an Incentive Stock Option. The maximum number of shares with respect to which options may be granted to any one Optionee, in the aggregate in any calendar year, shall not exceed One Million (1,000,000) Shares. 30 (c) VESTING. An Optionee may not exercise his or her Option for any Shares until the Option, in regard to such Shares, has vested. Each stock option agreement shall include a vesting schedule which shall show when the Option becomes exercisable, subject only to the requirement that each Option granted under this Plan must vest at a rate of not less than 20% per year (with the first 20% vesting not later than the first anniversary of the date on which the Options in question were first granted (the "Grant Date"), and the last 20% vesting not later than the fifth anniversary of said Grant Date). The vesting schedule shall not impose upon the Corporation or any Affiliate any obligation to retain the Optionee in its employ or under contract for any period or otherwise change the employment-at-will status of an Optionee who is an Employee. (d) LAPSE OF OPTIONS. Each stock option agreement shall state the time or times when the Option covered thereby lapses and becomes unexercisable in part or in full. An Option shall lapse on the earliest of the following events (unless otherwise determined by the Committee and reflected in an option agreement): (i) The tenth anniversary of the date of grant of the Option; (ii) The first anniversary of the Optionee's death; (iii) The first anniversary of the date when the Optionee ceases to be an Employee due to total and permanent disability, within the meaning of Section 22(e)(3) of the Code; (iv) On the date provided in Section 6(h)(i), unless with respect to a Non-statutory Stock Option, the Committee otherwise extends such period before the applicable expiration date; (v) On the date provided in Section 9 for a transaction described in such Section; (vi) The date the Optionee files or has filed against him or her a petition in bankruptcy; or (vii) The expiration date specified in the Optionee's stock option agreement. (e) EXERCISE PRICE. Each stock option agreement shall state the Exercise Price for the Shares for which the Option is exercisable. Subject to Section 4(b), the Exercise Price of an Incentive Stock Option and a Non-statutory Stock Option shall, when granted, be not less than 100% and 31 85% of the Fair Market Value of the Shares for which the Option is exercisable, respectively, and not less than the par value of the Shares. (f) MEDIUM AND TIME OF PAYMENT. The Purchase Price shall be payable in full in cash upon the exercise of an Option, provided, however, that the Committee may instead allow the Optionee to pay the Purchase Price: (i) by surrendering Shares in good form for transfer, owned by the Optionee for more than 12 months, and having a Fair Market Value on the date of exercise equal to the Purchase Price; or (ii) by delivery of a full recourse promissory note ("Note") made by the Optionee in the amount of the Purchase Price, bearing interest, compounded semiannually, at a rate not less than the rate determined under Section 7872 of the Code to insure that no "foregone interest", as defined in such section, will accrue, together with the delivery of a duly executed standard form security agreement securing the Note by a pledge of the Shares purchased; or (iii) in any combination of such consideration, or such other consideration and method of payment for the issuance of Shares permitted under applicable law, so long as the Fair Market Value of the consideration so paid is not less than the Purchase Price. The Committee or a stock option agreement may prescribe requirements with respect to the exercise of Options, including the submission by the Optionee of such forms and documents as the Committee may require and the delivery by the Optionee of cash sufficient to satisfy applicable withholding requirements. The Committee may vary the exercise requirements and procedures from time to time to facilitate, for example, the broker-assisted exercise of Options. (g) NON-TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee or the Optionee's conservator or legal representative and shall not be assignable or transferable except pursuant to a qualified domestic relations order as defined by the Code. In the event of the Optionee's death, the Option shall not be transferable by the Optionee other than by will or the laws of descent and distribution. (h) TERMINATION OF EMPLOYMENT OTHER THAN BY DEATH OR DISABILITY. (i) If an Optionee ceases to be an Employee for any reason other than his or her death or disability, the Optionee shall have the right, subject to the provisions of this Section 6, to exercise any Option held by the Optionee at any time within ninety (90) days after his or her termination of employment, but not beyond the otherwise applicable term of the 32 Option and only to the extent that on such date of termination of employment the Optionee's right to exercise such Option had vested. (ii) For purposes of this Section 6(h), the employment relationship shall be treated as continuing intact while the Optionee is an active employee of the Corporation or any Affiliate, or is on military leave, sick leave, or other bona fide leave of absence to be determined in the sole discretion of the Committee. The preceding sentence notwithstanding, in the case of an Incentive Stock Option, employment shall be deemed to terminate on the date that the Optionee ceases active employment with the Corporation or any Affiliate, unless the Optionee's reemployment rights are guaranteed by statute or contract. (i) DEATH OF OPTIONEE. If an Optionee dies while an Employee, or after ceasing to be an Employee but during the period while he or she could have exercised an Option under Section 6(h), any Option granted to the Optionee may be exercised, to the extent it had vested at the time of death and subject to the Plan, at any time within 12 months after the Optionee's death, by the executors or administrators of his or her estate or by any person or persons who acquire the Option by will or the laws of descent and distribution, but not beyond the otherwise applicable term of the Option. (j) DISABILITY OF OPTIONEE. If an Optionee ceases to be an Employee due to becoming totally and permanently disabled within the meaning of Section 22(e)(3) of the Code, any Option granted to the Optionee may be exercised to the extent it had vested at the time of cessation and, subject to the Plan, at any time within 12 months after the Optionee's termination of employment, but not beyond the otherwise applicable term of the Option. (k) RIGHTS AS A STOCKHOLDER. An Optionee, or a transferee of an Optionee, shall have no rights as a stockholder of the Corporation with respect to any Shares for which his or her Option is exercisable until the date of the issuance of a stock certificate for such Shares. No adjustment shall be made for dividends, ordinary or extraordinary or whether in currency, securities, or other property, distributions, or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 9 hereof. (l) MODIFICATION, EXTENSION, AND RENEWAL OF OPTIONS. Within the limitations of the Plan, the Committee may modify, extend or renew outstanding Options or accept the cancellation of outstanding Options for the granting of new Options in substitution therefor. Notwithstanding the preceding sentence, no modification of an Option shall, without the consent of the Optionee, alter or impair any rights or obligations under any Option previously granted. 33 (m) RULE 16b-3. Options granted to persons who are subject to Section 16 of the Exchange Act shall comply with the applicable provisions of Rule 16b-3 promulgated thereunder and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to the Plan's transactions; provided, however, that this provision shall not apply if, at the time of such option grant, the Plan, as it relates to such grant, is not administered by a Committee consisting solely of Non-employee Directors. (n) OTHER PROVISIONS. The stock option agreements authorized under the Plan may contain such other provisions which are not inconsistent with the terms of the Plan, including, without limitation, restrictions upon the exercise of the Option, as the Committee shall deem advisable. 7. $100,000 PER YEAR LIMITATION ON VESTING OF ISOs. To the extent that the Fair Market Value of Shares (determined for each Share as of the date of grant of the Option covering such Share) subject to Options granted under the Plan (or any other plan of the Corporation or any Affiliate) which are designated as Incentive Stock Options and which become exercisable by an Optionee for the first time during a single calendar year exceeds $100,000, the Option(s) (or portion thereof) covering such Shares shall be re-characterized (to the extent of such excess over $100,000) as a Non-statutory Stock Option. In determining which Option(s) shall be treated as Non-statutory Stock Options under the preceding sentence, the Options shall be taken into account in the order granted, with the result that a later granted Option shall be re-characterized as a Non-statutory Stock Option prior to such re-characterization of a previously granted Option. 8. TERM OF PLAN. Options may be granted pursuant to the Plan until a date no later than ten years following the Effective Date, and all Options which are outstanding on such date shall remain in effect until they are exercised or expire by their respective terms. The Plan shall expire for all purposes on the date that is 20 years following the Effective Date. 34 9. RECAPITALIZATION, TAKEOVERS, AND LIQUIDATIONS. (a) REORGANIZATIONS. The number of Shares covered by the Plan, as provided in Section 5 hereof, and the number of Shares for which each Option is exercisable shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, a reverse stock split, the payment of a stock dividend, re-capitalization, combination or reclassification of the Corporation's stock or any other event which results in an increase or decrease in the number of issued Shares effected without receipt of consideration by the Corporation, and the Exercise Price shall be proportionately increased in the event the number of Shares subject to such Option are decreased and shall be proportionately decreased in the event the number of Shares subject to such Option are increased. For the purposes of this Section 9(a), the conversion of any convertible securities of the Corporation shall not be deemed to have been "effected without receipt of consideration." Adjustments shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Corporation of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option. (b) LIQUIDATION. In the event of the dissolution or liquidation of the Corporation, each Option shall terminate immediately prior to the consummation of such action. The Committee shall notify the Optionee not less than 15 days prior to the proposed consummation of a pending dissolution or liquidation, and such Option shall be exercisable as to all Shares which are vested prior to expiration until immediately prior to the consummation of such action. (c) MERGER. In the event of (i) a proposed merger of the Corporation with or into another corporation, as a result of which the Corporation is not the surviving corporation and (ii) the Option is not assumed or an equivalent option substituted by the successor corporation or a parent or subsidiary of the successor corporation, then in such case the Option shall terminate immediately prior to the consummation of such transaction. The Committee shall notify the Optionee not less than 15 days prior to the proposed consummation of such transaction, and the Option shall be exercisable as to all Shares which are vested prior to expiration and until immediately prior to the consummation of such transaction. (d) DETERMINATION BY COMMITTEE. All adjustments described in this Section 9 shall be made by the Committee, whose determination shall be conclusive and binding on all persons. 35 (e) LIMITATION ON RIGHTS OF OPTIONEE. Except as expressly provided in this Section 9, no Optionee shall have any rights by reason of any payment of any stock dividend, stock split or reverse stock split or any other increase or decrease in the number of shares of stock of any class, or by reason of any reorganization, consolidation, dissolution, liquidation, merger, exchange, split-up or reverse split-up, or spin-off of assets or stock of another corporation. Any issuance by the Corporation of Shares, Options or securities convertible into Shares or Options shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of the Shares for which an Option is exercisable. Notwithstanding the foregoing, if the Corporation enters into a transaction affecting the Corporation's capital stock or distributions to the holders of its capital stock for which a revision in the terms of each Option is not required pursuant to this Section 9, the Committee shall have the right, but not the obligation, to revise the terms of each Option in a manner that the Committee, in its sole discretion, deems fair and reasonable given the transaction involved. If necessary or appropriate in connection with such transaction, the Committee may declare that any Option shall terminate as of a date fixed by the Committee and give each Optionee the right to exercise his or her Option in whole or in part, including exercise as to Shares to which the Option would not otherwise be exercisable. (f) NO RESTRICTION ON RIGHTS OF CORPORATION. The grant of an Option shall not affect or restrict in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure, or to merge or consolidate, or to dissolve, liquidate, sell, or transfer all or any part of its business or assets. 10. SECURITIES LAW REQUIREMENTS. (a) LEGALITY OF ISSUANCE. No Shares shall be issued upon the exercise of any Option unless and until the Corporation has determined that: (i) the Corporation and the Optionee have taken all actions required to exempt the issuance of the Shares from the registration requirements under the Securities Act of 1933, as amended (the "Act"), or the Corporation and the Optionee will determine that the registration requirements of the Act do not apply to such exercise or issuance; (ii) any applicable listing requirement of any stock exchange on which the Common Stock is listed has been satisfied; and (iii) any other applicable provision of state or Federal law has been satisfied. 36 (b) RESTRICTIONS ON TRANSFER; REPRESENTATIONS OF OPTIONEE; LEGENDS. Regardless of whether the offering and sale of Shares has been registered under the Act or has been registered or qualified under the securities laws of any state, the Corporation may impose restrictions upon the sale, pledge, or other transfer of such Shares, including the placement of appropriate legends on stock certificates, if, in the judgment of the Corporation and its counsel, such restrictions are necessary or desirable in order to achieve compliance with the provisions of the Act, the securities laws of any state, or any other law. If the sale of Shares is not registered under the Act and the Corporation will determine that the registration requirements of the Act apply to such sale, but an exemption is available which requires an investment representation or other representation, the Optionee will be required, as a condition to purchasing Shares by exercise of his or her Option, to represent that such Shares are being acquired for investment, and not with a view to the sale or distribution thereof, except in compliance with the Act, and to make such other representations as are deemed necessary or appropriate by the Corporation and its counsel. Stock certificates evidencing Shares acquired pursuant to an unregistered transaction to which the Act applies will bear a restrictive legend substantially in the following form and such other restrictive legends as are required or deemed advisable under the Plan or the provisions of any applicable law. "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE. THESE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF, AND MAY NOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION UNDER THE ACT AND/OR QUALIFICATION UNDER ANY APPLICABLE STATE SECURITIES LAWS, OR WITHOUT AN OPINION OF COUNSEL ACCEPTABLE TO THE CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION OR QUALIFICATION IS NOT REQUIRED." Any determination by the Corporation and its counsel in connection with any of the matters set forth in this Section 10 will be conclusive and binding on all persons: (c) REGISTRATION OR QUALIFICATION OF SECURITIES. The Corporation may, but will not be obligated to, register or qualify the sale of Shares under the Act or any other applicable law. In connection with any such registration or qualification, the Corporation will provide each Optionee with such information required pursuant to all applicable laws and regulations. (d) EXCHANGE OF CERTIFICATES. If, in the opinion of the Corporation and its counsel, any legend placed on a stock certificate representing Shares issued hereunder is no longer required, the Optionee or the holder of such certificate will be entitled to exchange such certificate for a certificate 37 representing the same number of Shares but without such legend. (e) MARKET STANDOFF AGREEMENT. By acceptance of an Option, each Optionee agrees that if so requested by the Corporation or any representative of the underwriters in connection with any registration of any securities of the Corporation under the Act, Optionee shall not sell or otherwise transfer any of the Shares or other securities of the Corporation during the period requested by the Corporation or the representative of the underwriters, as the case may be. Each Optionee agrees that the Corporation may impose stop-transfer instructions with respect to the securities subject to the foregoing restrictions. 11. EXERCISE OF UNVESTED OPTIONS. The Committee may grant to any Optionee the right to exercise any Option prior to the complete vesting of such Option. Without limiting the generality of the foregoing, the Committee may provide that if an Option is exercised prior to having completely vested, the Shares issued upon such exercise shall remain subject to vesting at the same rate as under the Option so exercised and shall be subject to a right, but not an obligation, of repurchase by the Corporation with respect to all unvested Shares if the Optionee ceases to be an Employee for any reason. For the purposes of facilitating the enforcement of any such right of repurchase, at the request of the Committee, the Optionee shall enter into the Joint Escrow Instructions with the Corporation and deliver every certificate for his or her unvested Shares with a stock power executed in blank by the Optionee and by the Optionee's spouse, if required for transfer. 12. AMENDMENT OF THE PLAN. The Board or the Committee may, from time to time, terminate, suspend or discontinue the Plan, in whole or in part, or revise or amend the Plan in any respect whatsoever including, but not limited to, the adoption of any amendment(s) deemed necessary or advisable to qualify the Options under rules and regulations promulgated by the Securities and Exchange Commission with respect to Employees who are subject to the provisions of Section 16 of the Exchange Act or to correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Option granted thereunder, without approval of the stockholders of the Corporation, but without the approval of the Corporation's stockholders, no such revision or amendment shall: (a) Increase the number of Shares subject to the Plan, other than any increase pursuant to Section 9; (b) Materially modify the requirements as to eligibility for participation in the Plan; 38 (c) Materially increase the benefits accruing to Optionees under the Plan; (d) Extend the term of the Plan; or (e) Amend this Section to defeat its purpose. No amendment, termination or modification of the Plan shall affect any Option theretofore granted in any material adverse way without the consent of the Optionee. 13. APPLICATION OF FUNDS. The proceeds received by the Corporation from the sale of Common Stock pursuant to the exercise of an Option shall be used for general corporate purposes. 14. APPROVAL OF STOCKHOLDERS. The Plan shall be subject to approval by the affirmative vote of the holders of a majority of all classes of the outstanding shares present and entitled to vote at the first meeting of stockholders of the Corporation following the adoption of the Plan or by written consent, and in no event later than one (1) year following the Effective Date. Prior to such approval, Options may be granted but shall not be exercisable. Any amendment described in Section 12(a) to (d) shall also be subject to approval by the Corporation's stockholders. 15. WITHHOLDING OF TAXES. In the event the Corporation or an Affiliate determines that it is required to withhold Federal, state, or local taxes in connection with the exercise of an Option or the disposition of Shares issued pursuant to the exercise of an Option, the Optionee or any person succeeding to the rights of the Optionee, as a condition to such exercise or disposition, may be required to make arrangements satisfactory to the Corporation or the Affiliate to enable it to satisfy such withholding requirements. Alternatively, the Corporation may issue or transfer Shares net of the number of Shares sufficient to satisfy withholding tax requirements. For withholding tax purposes, the Shares will be valued on the date the withholding obligation is incurred. 39 16. RIGHTS AS AN EMPLOYEE. Neither the Plan nor any Option granted pursuant thereto shall be construed to give any person the right to remain in the employ of the Corporation or any Affiliate, or to affect the right of the Corporation or any Affiliate to terminate such individual's employment at any time with or without cause. The grant of an Option shall not entitle the Optionee to, or disqualify the Optionee from, participation in the grant of any other Option under the Plan or participation in any other benefit plan maintained by the Corporation or any Affiliate. 17. DISAVOWAL OF REPRESENTATIONS, UNDERTAKINGS OR CREATION OF IMPLIED RIGHTS. In adopting and maintaining the Plan and granting options hereunder, neither the Corporation nor any Affiliate makes any representations or undertakings with respect to the initial qualification or treatment of Options under Federal or state tax or securities laws. The Corporation and each Affiliate expressly disavows the creation of any rights in Employees, Optionees, or beneficiaries of any obligations on the part of the Corporation, any Affiliate or the Committee, except as expressly provided herein. 18. INSPECTION OF RECORDS. Copies of the Plan, records reflecting each Optionee's Option, and any other documents and records which an Optionee is entitled by law to inspect shall be open to inspection by the Optionee and his or her duly authorized representative at the office of the Committee at any reasonable business hour. 19. INFORMATION TO OPTIONEES. Each Optionee shall be provided with such information regarding the Corporation as the Committee from time to time deems necessary or appropriate; provided, however, that each Optionee shall at all times be provided with such information as is required to be provided from time to time pursuant to applicable regulatory requirements, including, but not limited to, any applicable requirements of the Securities and Exchange Commission, the California Department of Corporations and other state securities agencies. 40 EX-10.8 16 EX-10.8 Exhibit 10.8 EXHIBIT B THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. INCENTIVE STOCK OPTION AGREEMENT This Stock Option Agreement is made and entered into this ____ day of ________, 199__, pursuant to the QCS CORPORATION 1997 Stock Option Plan (the "Plan"). Any terms not defined in this agreement will have the meanings ascribed to such terms in the Plan. The Committee administering the Plan has selected __________________ ("the Optionee") to receive the following grant of an incentive stock option ("Stock Option") to purchase shares of the common stock of QCS CORPORATION, a Delaware corporation (the "Corporation"), on the terms and conditions set forth below to which Optionee accepts and agrees: 1. Stock Options Granted:
No. of Shares Subject to Option . . . . . . . . . . ___________ Date of Grant . . . . . . . . . . . . . . . . . . . ___________ Vesting Commencement Date . . . . . . . . . . . . . ___________ Exercise Price Per Share. . . . . . . . . . . . . . ___________ Expiration Date . . . . . . . . . . . . . . . . . . ___________
2. The Stock Option is granted pursuant to the Plan to purchase the number of shares of authorized but unissued common stock of the Corporation specified in Section 1 hereof (the "Shares"). The Stock Option shall expire, and all rights to exercise it shall terminate on the Expiration Date, except that the Stock Option may expire earlier as provided in the Plan. The number of shares subject to the Stock Option granted hereunder shall be adjusted as provided in the Plan. 3. The Stock Option shall be exercisable in all respects in accordance with the terms of the Plan which are incorporated herein by this reference. Optionee acknowledges having received and read a copy of the Plan. 4. Optionee shall have the right to exercise the Stock Option in accordance with the following schedule: (a) The Stock Option may not be exercised in whole or in part at any time prior to the end of the first (four) 4 full calendar quarters following the Vesting Commencement Date. (b) Optionee may exercise the Stock Option as to one fourth of the Shares at the end of the 4th full calendar quarter following the Vesting Commencement Date. (c) Optionee may exercise the Stock Option as to an additional 1/16th of the Shares at the end of each of the full calendar quarter commencing with the 5th full calendar quarter following the Vesting Commencement Date. (d) The right to exercise the Stock Option shall be cumulative. Optionee may buy all, or from time to time any part, of the maximum number of shares which are exercisable under the Stock Option, but in no case may Optionee exercise the Stock Option with regard to a fraction of a share, or for any share for which the Stock Option is not exercisable. 5. The Optionee agrees to comply with all laws, rules, and regulations applicable to the grant and exercise of the Stock Option and the sale or other disposition of the common stock of the Corporation received pursuant to the exercise of such Stock Option. 6. The Stock Option shall not become exercisable unless and until the Corporation has determined that: (a) it and Optionee have taken all actions required to register such shares under the Securities Act, or to perfect an exemption from the registration requirements thereof; (b) any applicable listing requirement of any stock exchange on which such shares are listed has been satisfied; and (c) all other applicable provisions of state and Federal law have been satisfied. IN WITNESS WHEREOF, each of the parties hereto has executed this Stock Option Agreement, in the case of the Corporation by its duly authorized officer, as of the date and year written above. OPTIONEE QCS CORPORATION By: - ---------------------------------- ---------------------------------- (signature) (signature) Its: - ---------------------------------- ---------------------------------- (Type or Print Name) Address: ------------------------- - ---------------------------------- EX-10.9 17 EX-10.9 Exhibit 10.9 EXHIBIT A THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. NON-STATUTORY STOCK OPTION AGREEMENT This Stock Option Agreement is made and entered into this ______ day of _________, 199__, pursuant to the QCS CORPORATION 1997 Stock Option Plan (the "Plan"). Any terms not defined in this agreement will have the meanings ascribed to such terms in the Plan. The Committee administering the Plan has selected __________________ ("the Optionee") to receive the following grant of a non-statutory stock option ("Stock Option") to purchase shares of the common stock of QCS CORPORATION, a Delaware corporation (the "Corporation"), on the terms and conditions set forth below to which Optionee accepts and agrees: 1. Stock Options Granted:
No. of Shares Subject to Option . . . . . . . . . . ___________ Date of Grant . . . . . . . . . . . . . . . . . . . ___________ Vesting Commencement Date . . . . . . . . . . . . . ___________ Exercise Price Per Share. . . . . . . . . . . . . . ___________ Expiration Date . . . . . . . . . . . . . . . . . . ___________
2. The Stock Option is granted pursuant to the Plan to purchase the number of shares of authorized but unissued common stock of the Corporation specified in Section 1 hereof (the "Shares"). The Stock Option shall expire, and all rights to exercise it shall terminate on the Expiration Date, except that the Stock Option may expire earlier as provided in the Plan. The number of shares subject to the Stock Option granted hereunder shall be adjusted as provided in the Plan. This Stock Option is intended by the Corporation and the Optionee to be a Non-statutory Stock Option and does not qualify for any special tax benefits to the Optionee and is not subject to Section 7 of the Plan. 3. The Stock Option shall be exercisable in all respects in accordance with the terms of the Plan which are incorporated herein by this reference. Optionee acknowledges having received and read a copy of the Plan. 4. Optionee shall have the right to exercise the Stock Option in accordance with the following schedule: (a) The Stock Option may not be exercised in whole or in part at any time prior to the end of the first 4 full calendar quarters following the Vesting Commencement Date. (b) Optionee may exercise the Stock Option as to one fourth of the Shares at the end of the 4th full calendar quarter following the Vesting Commencement Date. (c) Optionee may exercise the Stock Option as to an additional 1/16th of the Shares at the end of each of the full calendar quarter commencing with the 5th full calendar quarter following the Vesting Commencement Date. (d) The right to exercise the Stock Option shall be cumulative. Optionee may buy all, or from time to time any part, of the maximum number of shares which are exercisable under the Stock Option, but in no case may Optionee exercise the Stock Option with regard to a fraction of a share, or for any share for which the Stock Option is not exercisable. 5. The Optionee agrees to comply with all laws, rules, and regulations applicable to the grant and exercise of the Stock Option and the sale or other disposition of the common stock of the Corporation received pursuant to the exercise of such Stock Option. 6. The Stock Option shall not become exercisable unless and until the Corporation has determined that: (a) it and Optionee have taken all actions required to register such shares under the Securities Act, or to perfect an exemption from the registration requirements thereof; (b) any applicable listing requirement of any stock exchange on which such shares are listed has been satisfied; and (c) all other applicable provisions of state and Federal law have been satisfied. IN WITNESS WHEREOF, each of the parties hereto has executed this Stock Option Agreement, in the case of the Corporation by its duly authorized officer, as of the date and year written above. OPTIONEE QCS CORPORATION By: - ---------------------------------- ---------------------------------- (signature) (signature) Its: - ---------------------------------- ---------------------------------- (Type or Print Name) Address: ------------------------- - ---------------------------------- EX-10.10 18 EX-10.10 Exhibit 10.10 QCS.NET CORPORATION INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is entered into as of the ____ day of _______, 1999, by and between QCS.net Corporation, a Delaware corporation (the "Company") and the Indemnitee identified on the signature page hereto (the "Indemnitee"). R E C I T A L S The Company and Indemnitee recognize the continued difficulty in obtaining liability insurance for its directors, officers, employees, agents and fiduciaries, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance. The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited. Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and other directors, officers, employees, agents and fiduciaries of the Company may not be willing to continue to serve in such capacities without additional protection. The Company (i) desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve the Company and, in part, in order to induce Indemnitee to continue to provide services to the Company and (ii) wishes to provide for the indemnification and advancing of expenses to each Indemnitee to the maximum extent permitted by law. In view of the considerations set forth above, the Company desires that Indemnitee be indemnified by the Company as set forth herein. NOW, THEREFORE, the Company and Indemnitee hereby agree as follows: 1. INDEMNIFICATION. (a) INDEMNIFICATION OF EXPENSES. The Company shall indemnify and hold harmless Indemnitee (including its partners, employees and agents) to the fullest extent permitted by law if Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, 1 administrative, investigative or other (hereinafter a "Claim") by reason of (or arising in part out of) any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, controlling person, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, controlling person, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity including, without limitation, any and all losses, claims, damages, expenses and liabilities, joint or several (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit proceeding or any claim asserted) under the Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act") or other federal or state statutory law or regulation, at common law or otherwise, which relate directly or indirectly to the registration, purchase, sale or ownership of any securities of the Company or to any fiduciary obligation owed with respect thereto (hereinafter an "Indemnification Event") against any and all expenses (including attorneys' fees and all other costs, expenses and obligations incurredin connection with investigating, defending a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in, any such action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation), judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) of such Claim and any federal, state, local or foreign taxes imposed on Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement (collectively, hereinafter "Expenses"), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses. Such payment of Expenses shall be made by the Company as soon as practicable but in any event no later than five days after written demand by the Indemnitee therefor is presented to the Company. (b) CONTRIBUTION. If the indemnification provided for in Section 1(a) above for any reason is held by a court of competent jurisdiction to be unavailable to an Indemnitee in respect of any losses, claims, damages, expenses or liabilities referred to therein, then the Company, in lieu of indemnifying Indemnitee thereunder, shall contribute to the amount paid or payable by Indemnitee as a result of such losses, claims, damages, expenses or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Indemnitee, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Indemnitee in connection with the action or inaction which resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. In connection with the registration of the Company's securities, the relative benefits received by the Company and the Indemnitee shall be deemed to be in the same respective proportions that the net proceeds from the offering (before deducting expenses) received by the Company and the Indemnitee, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the securities so offered. The relative fault of the Company and the Indemnitee shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Indemnitee and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. 2 The Company and the Indemnitee agree that it would not be just and equitable if contribution pursuant to this Section 1(b) were determined by pro rata or per capita allocation or by securities, in no event shall an Indemnitee be required to contribute any amount under this Section 1(b) in excess of the lesser of (i) that proportion of the total of such losses, claims, damages or liabilities indemnified against equal to the proportion of the total securities sold under such registration statement which is being sold by such Indemnitee or (ii) the proceeds received by Indemnitee from its sale of securities under such registration statement. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation. (c) SURVIVAL REGARDLESS OF INVESTIGATION. The indemnification and contribution provided for in this Section 1 will remain in full force and effect regardless of any investigation made by or on behalf of the Indemnitee or any officer, director, employee, agent or controlling person of the Indemnitee. (d) CHANGE IN CONTROL. The Company agrees that if there is a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control) then, with respect to all matters thereafter arising concerning the rights of Indemnitee to payments of Expenses under this Agreement or any other agreement or under the Company's Certificate of Incorporation or Bylaws as now or hereafter in effect, Independent Legal Counsel (as defined in Section 10(d) hereof) shall be selected by the Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under applicable law. The Company agrees to abide by such opinion and to pay the reasonable fees of the Independent Legal Counsel referred to above and to fully indemnify such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. (e) MANDATORY PAYMENT OF EXPENSES. Notwithstanding any other provision of this Agreement other than Section 9 hereof, to the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in the defense of any action, suit, proceeding, inquiry or investigation referred to in Section (1)(a) hereof or in the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection therewith. 2. EXPENSES; INDEMNIFICATION PROCEDURE. (a) ADVANCEMENT OF EXPENSES. The Company shall advance all Expenses incurred by Indemnitee. The advances to be made hereunder shall be paid by the Company to Indemnitee as soon as practicable but in any event no later than five days after written demand by Indemnitee therefor to the Company. (b) NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall, as a condition precedent to Indemnitee's right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification 3 will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (c) NO PRESUMPTIONS; BURDEN OF PROOF. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of NOLO CONTENDERE, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. In connection with any determination as to whether Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. (d) NOTICE TO INSURERS. If, at the time of the receipt by the Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such action, suit, proceeding, inquiry or investigation in accordance with the terms of such policies. (e) SELECTION OF COUNSEL. In the event the Company shall be obligated hereunder to pay the Expenses of any Claim, the Company shall be entitled to assume the defense of such Claim, with counsel approved by the Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by the Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Claim; provided that, (i) the Indemnitee shall have the right to employ Indemnitee's counsel in any such Claim at the Indemnitee's expense and (ii) if (A) the employment of counsel by the Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there is a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of the Indemnitee's counsel shall be at the expense of the Company. The Company shall have the right to conduct such defense as it sees fit in its sole discretion, including the right to settle any claim against Indemnitee without the consent of such Indemnitee. 3. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY. (a) SCOPE. The Company hereby agrees to indemnify Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its Board of Directors or an officer, employee, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. 4 In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its Board of Directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 8(a) hereof. (b) NONEXCLUSIVITY. The indemnification provided by this Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested directors, the Delaware General Corporation Law or otherwise. The indemnification provided under this Agreement shall continue as to Indemnitee for any action Indemnitee took or did not take while serving in an indemnified capacity even though the Indemnitee may have ceased to serve in such capacity. 4. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent such Indemnitee has otherwise actually received payment (under any insurance policy, Certificate of Incorporation, Bylaw or otherwise) of the amounts otherwise indemnifiable hereunder. 5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for any portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled. 6. MUTUAL ACKNOWLEDGEMENT. The Company and Indemnitee acknowledge that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, employees, agents or fiduciaries under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's rights under public policy to indemnify the Indemnitee. 7. LIABILITY INSURANCE. To the extent the Company maintains liability insurance applicable to directors, officers, employees, control persons, agents or fiduciaries, Indemnitee shall be covered by such policies in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director, or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee is not an officer or director but is a key employee, agent, control person, or fiduciary. 8. EXCEPTIONS. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of the this Agreement: (a) EXCLUDED ACTION OR OMISSIONS. To indemnify Indemnitee for Indemnitee's acts, omissions or transactions from which the Indemnitee may not be relieved of liability under 5 applicable law; (b) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance expenses to Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee and not by way of defense, except (i) with respect to actions or proceedings to establish or enforce a right to indemnify under this Agreement or any other agreement or insurance policy or under the Company's Certificate of Incorporation or Bylaws now or hereafter in effect relating to Claims for Indemnifiable Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under Section 145 of the Delaware General Corporation Law, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be; (c) LACK OF GOOD FAITH. To indemnify Indemnitee for any expenses incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; or (d) CLAIMS UNDER SECTION 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended or any similar successor statute. 9. PERIOD OF LIMITATIONS. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; PROVIDED, HOWEVER, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. 10. CONSTRUCTION OF CERTAIN PHRASES. (a) For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify is directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent, control person, or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, control person, agent or fiduciary or another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, each Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, office, employee, agent or fiduciary of the 6 Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. (c) For purposes of this Agreement a "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term in used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, (A) who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding Voting Securities, increases his beneficial ownership of such securities by 5% or more over the percentage so owned by such person, or (B) becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 20% of the total voting power represented by the Company's then outstanding Voting Securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of transactions) all or substantially all of the Company's assets. (d) For purposes of this Agreement, "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 1(d) hereof, who shall not have otherwise performed services for the Company or Indemnitee within the last three years (other than with respect to matters concerning the right of Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements). (e) For purposes of this Agreement, "Voting Securities" shall mean any securities of the Company that vote generally in the election of directors. 11. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 12. BINDING EFFECT; SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon 7 and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company, spouses, heirs, and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect with respect to Claims relating to Indemnifiable Events regardless of whether Indemnitee continues to serve as a director, officer, employee, agent, controlling person, or fiduciary of the Company or of any other enterprise at the Company's request. 13. ATTORNEYS' FEES. In the event that any action is instituted by Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, any Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee with respect to such action, regardless of whether Indemnitee is ultimately successful in such action, and shall be entitled to the advancement of Expenses with respect to such action, unless, as a part of such action, a court of competent jurisdiction over such action determines that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, the Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee in defense of such action (including costs and expenses incurred with respect to Indemnitee counterclaims and cross-claims made in such action), and shall be entitled to the advancement of Expenses with respect to such action, unless, as a part of such action, a court having jurisdiction over such action determines that each of Indemnitee's material defenses to such action was made in bad faith or was frivolous. 14. NOTICE. All notices and other communications required or permitted hereunder shall be in writing, shall be effective when given, and shall in any event be deemed to be given (a) five (5) days after deposit with the U.S. Postal Service or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day after the business day of deposited with Federal Express or similar overnight courier, freight prepaid, or (d) one day after the business day of delivery by facsimile transmission, if deliverable by facsimile transmission, with copy by first class mail, postage prepaid, and shall be addressed if to Indemnitee, at Indemnitee's address as set forth beneath the Indemnitee's signature to this Agreement and if to the Company at the address of its principal corporate offices (attention: Secretary) or at such other address as such party may designate by ten days' advance written notice to the other party hereto. 15. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of California for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the Superior Court of the State of California in and for Orange County, which shall be the exclusive and only proper forum for adjudicating such a claim. 8 16. SEVERABILITY. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitations, each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 17. CHOICE OF LAW. This Agreement shall be governed by and its provisions construed and enforced in accordance with the laws of the State of Delaware as applied to contracts between Delaware residents, entered into and to be performed entirely within the State of Delaware without regard to the conflict of laws principles thereof. 18. SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suite to enforce such rights. 19. AMENDMENT AND TERMINATION. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by all parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 20. INTEGRATION AND ENTIRE AGREEMENT. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. 21. NO CONSTRUCTION AS EMPLOYMENT AGREEMENT. Nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. COMPANY QCS.NET CORPORATION a Delaware corporation By: Sean Maloy, President/CEO 9 Address: INDEMNITEE Address: _____________________________ _____________________________ 10 EX-10.11 19 EX-10.11 Exhibit 10.11 CITY CENTRE OFFICE LEASE BY AND BETWEEN EAGLE SQUARE PARTNERS, A CALIFORNIA LIMITED PARTNERSHIP AND QCS CORPORATION, A DELAWARE CORPORATION TABLE OF CONTENTS
Page 1. SUMMARY OF LEASE PROVISIONS . . . . . . . . . . . . . . . . . . . . . . 1 a. Tenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 b. Landlord . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 c. Date of Lease (for reference purposes only) . . . . . . . . . . . 1 d. Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 e. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 f. Commencement Date . . . . . . . . . . . . . . . . . . . . . . . . 1 g. Lease Termination . . . . . . . . . . . . . . . . . . . . . . . . 1 h. Base Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 i. Security Deposit . . . . . . . . . . . . . . . . . . . . . . . . . 1 j. Estimated Office Project Taxes and Operating Expenses. . . . . . . 1 k. Tenant's Percentage Share of Office Project. . . . . . . . . . . . 1 l. Parking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 m. Addresses for Notices . . . . . . . . . . . . . . . . . . . . . . 2 n. Broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 o. Reimbursable Expense Maximum on Relocation . . . . . . . . . . . . 2 p. Geographic Area . . . . . . . . . . . . . . . . . . . . . . . . . 2 q. Summary Provisions in General . . . . . . . . . . . . . . . . . . 2 2. PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3. TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4. POSSESSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 a. Construction of Improvements/Delay in Possession . . . . . . . . . 3 b. Early Possession . . . . . . . . . . . . . . . . . . . . . . . . . 4 c. Certificates and Licenses . . . . . . . . . . . . . . . . . . . . 4 d. Tenant to Physically Occupy . . . . . . . . . . . . . . . . . . . 4 5. RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 a. Base Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 b. Cost of Living Adjustment . . . . . . . . . . . . . . . . . . . . 4 6. SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 7. OPERATING EXPENSES AND PROJECT TAXES . . . . . . . . . . . . . . . . . . 5 a. Office Project Taxes and Operating Expenses. . . . . . . . . . . . 5 b. Defined. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (2) Tenant's Percentage Shine. . . . . . . . . . . . . . . . . 5 b. Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . 6 (1) Retail Operating Expenses. . . . . . . . . . . . . . . . . 7 (2) Office Operating Expenses. . . . . . . . . . . . . . . . . . 7 (3) Shared Operating Expenses. . . . . . . . . . . . . . . . . . 7 c. Project Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 d. Other Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 8. CONDUCT OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . 8 9. COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . 9 10. ALTERATIONS AND ADDITIONS. . . . . . . . . . . . . . . . . . . . . . . . 9 a. Tenant's Alterations . . . . . . . . . . . . . . . . . . . . . . . 9 b. Removal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 c. Alterations Required by Law. . . . . . . . . . . . . . . . . . . .10 d. Landlord's Improvements. . . . . . . . . . . . . . . . . . . . . .10 11. REPAIRS . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 a. By Tenant. . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 b. By Landlord. . . . . . . . . . . . . . . . . . . . . . . . . . . .11 -i- 12. LIENS . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 13. ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . . . . . . . .11 a. Prohibitions in General. . . . . . . . . . . . . . . . . . . . . .11 b. Collection of Rent . . . . . . . . . . . . . . . . . . . . . . . .12 c. Assumption Agreement . . . . . . . . . . . . . . . . . . . . . . .12 d. Request for Transfer . . . . . . . . . . . . . . . . . . . . . . .12 e. No Bonus Value . . . . . . . . . . . . . . . . . . . . . . . . . .12 f. Conditional Consent . . . . . . . . . . . . . . . . . . . . . . .12 g. Corporations and Partnerships . . . . . . . . . . . . . . . . . .13 h. Attorneys' Fees and Costs . . . . . . . . . . . . . . . . . . . .13 i. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . .13 j. Reasonable Provisions . . . . . . . . . . . . . . . . . . . . . .13 14. HOLD HARMLESS .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 15. SUBROGATION . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 16. INSURANCE . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 a. Liability Insurance . . . . . . . . . . . . . . . . . . . . . . .14 b. Property Insurance . . . . . . . . . . . . . . . . . . . . . . . .14 c. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . .15 d. Increase Coverage . . . . . . . . . . . . . . . . . . . . . . . .15 17. SERVICES AND UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . .15 18. RULES AND REGULATIONS . . . . . . . . . . . . . . . . . . . . . . . . .16 19. HOLDING OVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 20. ENTRY BY LANDLORD . . . . . . . . . . . . . . . . . . . . . . . . . . .16 21. RECONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 22. DEFAULT . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 23. REMEDIES UPON DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . .18 a. Termination of Lease . . . . . . . . . . . . . . . . . . . . . . .18 b. Continuation of Lease . . . . . . . . . . . . . . . . . . . . . .19 c. Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . .19 d. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 24. EMINENT DOMAIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 25. OFFSET STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 26. PARKING . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 27. AUTHORITY . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 28. SURRENDER OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . . .21 a. Condition of Premises . . . . . . . . . . . . . . . . . . . . . .21 b. Removal of Personal Property . . . . . . . . . . . . . . . . . . .21 29. LANDLORD DEFAULT AHD MORTGAGEE PROTECTION . . . . . . . . . . . . . . .21 30. RIGHTS RESERVED BY LANDLORD . . . . . . . . . . . . . . . . . . . . . .21 31. PLATS AND RIDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 32. WAIVER. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 33. NOTICES . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 34. JOINT OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . .22 35. MARGINAL HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . .22 36. TIME. . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 -ii- 37. SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . . . . . . . . . .22 38. RECORDATION . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 39. QUIET POSSESSION . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 40. LATE CHARGES; ADDITIONAL RENT AND INTEREST . . . . . . . . . . . . . . .22 a. Late Charges . . . . . . . . . . . . . . . . . . . . . . . . . . .22 b. Additional Rent and Interest . . . . . . . . . . . . . . . . . . .23 41. PRIOR AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 42. INABILITY TO PERFORM . . . . . . . . . . . . . . . . . . . . . . . . . .23 43. ATTORNEYS' FEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 44. SALE OF PREMISES BY LANDLORD/LIMITATION OF LIABILITY . . . . . . . . . .23 45. SUBORDINATION/ATTORNMENT . . . . . . . . . . . . . . . . . . . . . . . .23 46. NAME. . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 47. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 48. CUMULATIVE REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . .24 49. CHOICE OF LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 50. SIGNS . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 51. GENDER AND NUMBER. . . . . . . . . . . . . . . . . . . . . . . . . . . .24 52. LICENSES. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 53. BROKERS . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 54. SUBSURFACE AND AIRSPACE . . . . . . . . . . . . . . . . . . . . . . . .24 55. COMMON AREA . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 a. Retail Common Area . . . . . . . . . . . . . . . . . . . . . . . .25 b. Office Common Area . . . . . . . . . . . . . . . . . . . . . . . .25 c. Shared Common Area . . . . . . . . . . . . . . . . . . . . . . . .25 d. Exterior Common Area . . . . . . . . . . . . . . . . . . . . . . .25 56. LABOR DISPUTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 57. CONDITIONS. . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 58. TENANTS FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . .25 59. LANDLORD NOF A TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . .25 60. MERGER. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 62. NO PARTNERSHIP OR JOINT VENTURE . . . . . . . . . . . . . . . . . . . .25 62. LANDLORD'S RIGHT TO PERFORM TENANTS COVENANTS . . . . . . . . . . . . .26 63. PLANS . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 64. RELOCATION. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 a. Relocation Prior to Possession . . . . . . . . . . . . . . . . . .26 b. Relocation After Possession . . . . . . . . . . . . . . . . . . .26 c. New Premises . . . . . . . . . . . . . . . . . . . . . . . . . . .27 Addenda to Lease Exhibit A -- Project Exhibit B -- Premises Exhibit C -- Work Letter Exhibit C-1 -- Addendum to Work Letter Exhibit D -- Rules and Regulations
-iii- CITY CENTER OFFICE LEASE For and in consideration of the rentals, covenants, and conditions hereafter set forth, Landlord hereby leases to Tenant, and Tenant hereby rents from Landlord, the herein described Premises for the term, at the rental and subject to and upon all of the terms, covenants and agreements set forth in this lease (Lease"): 1. SUMMARY OF LEASE PROVISIONS. a. TENANT: QCS CORPORATION (A DELAWARE CORPORATION) ("Tenant") b. LANDLORD: EAGLE SQUARE PARTNERS, A CALIFORNIA LIMITED PARTNERSHIP ("Landlord") c. DATE OF LEASE (for reference purposes only): JULY 20, 1995 d. PREMISES: That certain space commonly known as 650 Castro Street, Suite 210, Mountain View, California, and shown cross- hatched on the floor plan attached hereto as Exhibit "B", consisting of approximately TWO THOUSAND ONE HUNDRED FORTY- EIGHT (2,148) gross leasable square feet (defined in Article 7a.) with a fourteen percent (14%) load factor for approximately TWO THOUSAND FOUR HUNDRED FOUR-NINE (2,449) rentable square feet, subject to expansion pursuant to the terms of this Lease if an option to expand the leased premises is expressly granted elsewhere in this Lease ("Premises". (ARTICLE 2) e. TERM: FIVE (5) years subject to extension pursuant to the terms of this Lease if an option to extend the terms is expressly granted elsewhere in this Lease. (ARTICLE 3) f. COMMENCEMENT DATE: SEPTEMBER 15, 1995 (ARTICLE 3) g. LEASE TERMINATION: SEPTEMBER 14, 2000 ("Expiration Date"), unless sooner terminated pursuant to the terms of this Lease. (ARTICLE 3) h. BASE RENT: Monthly Base rent shall be as set forth below (hereinafter referred to as "Base Rent"): 09/5/95 thru 09/14/96 $1.60 $3,918.40 09/5/96 thru 09/14/97 $1.65 $4,040.85 09/5/97 thru 09/14/98 $1.70 $4,163.30 09/5/98 thru 09/14/99 $1.75 $4,285.75 09/5/99 thru 09/14/00 $1.80 $4,408.20 COST OF LIVING ADJUSTMENT DATES: Beginning in the 13th month and every twelve (12) months thereafter during the Term of this Lease and Option Period, if any. ("Adjustment Dates"). MINIMUM BASE RENT ADJUSTMENT: One Hundred THREE percent (103%) of the Base Rent in effect immediately prior to an Adjustment Date. MAXIMUM BASE RENT ADJUSTMENT: One Hundred FIVE (105%) of the Base Rent in effect immediately prior to an Adjustment Date. (ARTICLE 5) i. SECURITY DEPOSIT: Three Thousand Nine Hundred Eighteen and 40/100ths Dollars ($3,918.40) (ARTICLE 6) j. ESTIMATED OFFICE PROJECT TAXES AND OPERATING EXPENSES: Approximately SEVEN AND 55/100THS DOLLARS ($7.55 ) per gross leasable square foot per year. ARTICLE 7) k. TENANT'S PERCENTAGE SHARE OF OFFICE PROJECT TAXES AND OPERATING EXPENSES: TWO AND 69/100THS percent (2.69%). (ARTICLE 7) l. PARKING: Nonexclusive right to use no more than EIGHT (8) parking spaces within the Underground Parking Structure. (ARTICLE 26). 1 m. Addresses for Notices: To Landlord: 2600 CAMPUS DRIVE SAN MATEO, CA 94403 ATTN: SANFORD DILLER To Tenant: To the Premises and a courtesy copy to: n/a n. BROKER: Cornish & Carey Commercial (ARTICLE 53) o. REIMBURSABLE EXPENSE MAXIMUM ON RELOCATION: TWO THOUSAND ONE HUNDRED FORTY EIGHT AND 00/100THS dollars ($2,148.00). (ARTICLE 64) p. GEOGRAPHIC AREA: Palo Alto and Mountain View, California (ARTICLE 16) q. Summary Provisions in General. Parenthetical references in this Article 1 to other Articles in this Lease are for convenience of reference, and designate some of the other Lease Articles where applicable provisions are set forth. All of the terms and conditions of each such referenced Articles shall be construed to be incorporated within and made a part of each of the above referred to Summary of Leas Provisions. If any conflict exists between any Summary of Lease Provision as set forth above and the balance of the Lease, the latter shall control. 2. PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises described in Article 1d., subject, nevertheless, to all of the terms and conditions of this Lease. Calculation of the actual Rentable Area of the Premises and Building shall be performed by Landlord's architect, which calculation shall be conclusive and binding upon Landlord and Tenant. Except as used in Sections 9, 11(b), 20, 21, 44, 46 and 64, the term "Building" shall mean the structure in which the Premises are located. Tenant acknowledges that Landlord is contemplating constructing, although is not obligated to construct, buildings and improvements on the Parcel in addition to the Building in which the Premises are located. Landlord reserves the right to construct such additional buildings and improvements, if any, in phases, and to modify the design, size, location, and use of such additional buildings and improvements. As used in this Lease, the term "Parcel" shall beam the parcel of land described on Exhibit "B" annexed hereto, as the same may be subdivided from time to time, in which event "Parcel" shall mean all of the subdivided parcels. Landlord reserves the right to subdivide the Parcel from time to time into two (2) more parcels in such manner as Landlord determines. For purposes of references, a site plan (the "Site Plan") is attached hereto as Exhibit "B", showing the general location of the land upon which the Building containing the Premises is located, the location of the Exterior Common Area, and the remainder of the Parcel. The land comprising that portion of the Parcel on which the Building containing the Premises is located is depicted on the Site Plan, and is hereinafter referred to, as the "Phase I Pad". The portion of the Parcel other than the Phase I Pad and the Exterior Common Area is depicted on the Site Plan, and is hereinafter referred to, as the "Phase II Pad". The Parcel, building and all other improvements now or hereafter located on the Parcel, if any, are herein sometimes referred to as the "Project". Tenant acknowledges that as currently contemplated by Landlord, the first floor of the Building will be devoted to retail use and the second through fifth floors of the Building will be devoted to office use; provided, however, that nothing in this Lease shall be deemed to require Landlord to utilize the Building at any time during the term of this Lease as currently contemplated by Landlord. As used in this Lease, the term "Retail Space" shall refer to that portion of the Building leased to, or intended to lease to, retail tenants from time to time, and the term "Office Space" shall mean and refer to that portion of the Building leased to, or intended to be leased to, office tenants from time to time. Tenant acknowledges that Landlord may from time to time reconfigure the location of buildings, driveways, landscaped areas and other improvements within the Project. "Exterior Common Area" is defined in Article 55. This Lease is subject to all of the terms, covenants and conditions set forth in this Lease. Tenant covenants as a material part of the consideration for this Lease to keep and perform each and all of said terms, covenants and conditions to be kept by Tenant under the Lease. 3. TERM. The term of this Lease shall be for the period designated in Article 1e., commencing on the Commencement Date set forth in Article 1f and ending on the Expiration 2 Date set forth in Article lg., unless sooner terminated pursuant to this Lease ("Term"). The expiration or sooner termination of the Lease is hereinafter referred to as "Lease Termination". 4. POSSESSION. a. CONSTRUCTION OF IMPROVEMENTS/DELAY IN POSSESSION. Landlord and Tenant agree to the provisions set forth in the work letter attached hereto as Exhibit "C" ("Work Letter"). Landlord agrees to construct within the Premises the improvements described in said work letter as "Landlord's Work" ("Tenant Improvements"), upon and subject to the provisions thereof. Tenant agrees to construct within the Premises the improvements described in said work letter as "Tenant's Work," upon and subject to the provisions thereof. If Landlord, for any reason whatsoever, cannot deliver possession of the Premises to Tenant on the Commencement Date, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom, nor shall the Commencement Date or Expiration Date be extended. Notwithstanding Article 42, if delivery of possession of the Premises is delayed beyond the Commencement Date, all Rentals (defined in Article 40b.) shall be abated beginning on the Commencement Date for a period equal to the period of delay, unless delay in possession of the Premises was caused or contributed to by Tenant or Tenant's agents, officers, employees, contractors, servants, invitees or guests (collectively "Tenant's Agents"). Landlord shall be deemed to have delivered possession to Tenant on the earlier of (i) the date that Landlord gives notice to Tenant that the Tenant Improvements are substantially completed as evidenced by a certificate of Landlord's architect, and that the Premises arc available for occupancy by Tenant subject only to punch list items which do not prevent Tenant from using the Premises for its intended use, (ii) the date oil which the Tenant Improvements would have been substantially completed but for delays caused by Tenant or Tenant's Agents, including without limitation, change orders requested by Tenant or required because of any errors or omissions in plans submitted by Tenant, or (iii) the date upon which Tenant actually occupies or commences operation from the Premises. b. Early Possession. If Landlord permits Tenant to occupy the Premises prior to the Commencement Date for any reason, such occupancy shall be subject to all the provisions of this Lease, including the obligation to pay Rentals. Said early possession shall not advance the Expiration Date. c. Certificates and Licenses. Prior to occupancy, Tenant shall provide to Landlord the certificate(s) of insurance required in Article 16 and a copy of all licenses and authorizations that may be required for the lawful operation of Tenant's business upon the Premises, including any City business licenses as may be required. d. Tenant to Physically Occupy. Tenant shall physically occupy the Premises and open the Premises for business in no event later than thirty (30) days after possession of the Premises is delivered to Tenant; provided, however, that the date of Tenant's physical occupancy of the Premises shall in no event extend the Commencement Date, the Expiration Date or the date the payment of Rentals hereunder commences. Time is of the essence. 5. RENT. a. BASE RENT. Tenant agrees to pay to Landlord as rental for the Premises, without offset, deduction, prior notice or demand, the monthly Base Rent designated in Article 1h., as the same may be adjusted from time to time pursuant to Article 5b. below. Base Rent shall be payable in advance on or before the first day of the first full calendar month of the term hereof and a like sum, adjusted as aforesaid, on or before the first day of each and every successive calendar month thereafter during the Term, except that a full month's Base Rent shall be paid upon the execution hereof and the prorated Base Rent payable for the period, if any, prior to the first full calendar month of the Term shall be paid on the first day of said first full calendar month. Base Rent for any period during the Term which is for less than one (1) month shall be prorated based upon a thirty (30) day month. b. COST OF LIVING ADJUSTMENT. Base Rent shall be adjusted on the Adjustment Dates described in Article 1h., and the Base Rent as adjusted shall be payable monthly pursuant to the terms of Article 5a. above. As of any Adjustment Date, Base Rent shall be increased to a Sum equal to the product obtained by multiplying the then current Base Rent by a fraction, the numerator of which is the New Index and the denominator of which is the Initial index. For the purposes of adjusting Base Rent as provided in this Article 5b., the following definitions shall apply: (i) "Index" means the Consumer Price Index (all items) for All Urban Consumers as published by the United States Department of Labor, Bureau of Labor Statistics, for the San Francisco-Oakland-San Jose, California Area (1982-84 = 100 base year); (ii) "Initial Index" means in regard to the first adjustment pursuant to this Article 5b., the Index published for the month nearest but prior to the Commencement Date, 3 and in regard to all subsequent adjustments, the Index published nearest but prior to the immediately preceding Adjustment Date; (iii) "New Index" means the Index published nearest but prior to the applicable Adjustment Date. If, at any time when Base Rent is to be adjusted as provided above, the Index is changed so that the base year differs from the base year used for the Initial Index, the Index shall be converted in accordance with the conversion factor published by the United States Department of Labor, Bureau of Labor Statistics. If the Index is otherwise changed or discontinued during the Term, the most nearly comparable official price index of the United States government or other computation (as determined in Landlord's sole reasonable discretion) shall be used for computing the adjustments to Base Rent in order to obtain substantially the same result as would be obtained if the Index had not been changed or discontinued. Notwithstanding the foregoing, in no event shall Base Rent as of any Adjustment Date be less than the Minimum Base Rent Adjustment nor more than the Maximum Base Rent Adjustment set forth in Article 1h. above. 6. SECURITY DEPOSIT. Tenant has deposited with Landlord the sum set forth in Article l i. as the security deposit ("Security Deposit"). The Security Deposit 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 during the Term. If Tenant defaults with respect to any provision of this Lease, including, but not limited to the provisions relating to the payment of Rentals or the condition of the Premises at Lease Termination, Landlord may (but shall not be required to) use, apply or retain all or any part of the Security Deposit for the payment of any Rental 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 of the Security Deposit is so used or applied, Tenant shall within five (5) days after written demand therefore, deposit cash with Landlord in 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. Landlord shall not be required to keep the Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on the Security Deposit. Landlord is not a trustee of the Security Deposit and may use it in ordinary business, transfer it or assign it, or use it in any combination of such ways. If Tenant fully and faithfully performs every provision of this Lease to be performed by it, the remaining portion of the Security Deposit shall be returned to Tenant (or, at Landlord's option, to the last assignee of Tenant's interests hereunder) within two (2) weeks after Lease Termination and vacation of the Premises by Tenant or its last assignee; provided, however if any portion of the Security Deposit is to be applied to repair damages to the Premises caused by Tenant or Tenant's Agents or to clean the Premises, then the balance of the Security Deposit shall be returned to Tenant (or, at Landlord's option to the last assignee of Tenant's interest hereunder) no later than thirty (30) days after the date Landlord receives possession of the Premises. Tenant shall not transfer or encumber the Security Deposit nor shall Landlord be bound by Tenant's attempt to do so. If Landlord's interest in this Lease is terminated, Landlord shall transfer the Security Deposit to Landlord's successor in interest, and upon such transfer Landlord shall be released from any liability to Tenant with respect to the Security Deposit and Tenant shall look only to the transferee for any return of the Security Deposit to which Tenant may be entitled. 7. OPERATING EXPENSES AND PROJECT TAXES. a. OFFICE PROJECT TAXES AND OPERATING EXPENSES. (1) DEFINED. As used in this Least the term "Office Project Taxes and Operating Expenses" shall mean the aggregate of the following: (a) One hundred percent (100%) of the Office Operating Expenses (defined in Article 7b.); plus (b) A percentage of the Shared Operating Expenses (defined in Article 7b.), which percentage shall be determined by dividing (i) the total gross leasable square feet of the Office Space ("Office Gross Leasable Area") plus the gross leasable square feet of any Office Common Area (defined in Article 55) located within the Building by (ii) the Building Gross Leasable Area, as set forth herein. Gross leasable square feet shall be measured from the exterior faces of exterior walls and store-fronts, and the center lines of party walls and common partitions. In measuring gross leasable square feet, no deduction or exclusion shall be made by reason of columns, stairs, elevators, escalators, shafts or other interior construction. As used in this Lease, "Building Gross Leasable Area" shall mean the sum of the gross leasable square feet of the Retail Space, the Office Gross Leasable Area and the gross leasable square feet of those portions of the Building constituting Retail Common Area and Office Common Area; plus (c) A percentage of the Project Taxes (defined in Article 7c.), which percentage shall be determined by dividing (i) the total Office Gross Leasable Area plus the 4 gross leasable square feet of any Office Common Area located within the Building by (ii) the total Building Gross Leasable Area, as set forth herein. (2) TENANT'S PERCENTAGE SHARE. During the Lease Term, Tenant shall pay to Landlord as additional rent and without deduction or offset, an amount equal to Tenant's percentage share, determined as set forth below ("Tenant's Percentage Share"), of the Office Project Taxes and Operating Expenses, defined below. Office Project Taxes and Operating Expenses in the aggregate first calendar year are estimated in the amount set forth in Article 1j. above. Tenant acknowledges, however, that said sum is all estimate only, and is not binding upon Landlord. Landlord does not represent or warrant that the actual Office Project Taxes and Operating Expenses will not exceed such estimate. Payment of Office Project Taxes and Operating Expenses shall be based on Landlord's estimate of same, as adjusted from time to time. Tenant's Percentage Share of Office Project Taxes and Operating Expenses shall be determined by dividing the total Rentable Area of the Premises by ninety-five percent (95%) of the total Rentable Area of the Office Space. Tenant's Percentage Share of such Office Project Taxes and Operating Expenses shall be the percentage set forth in Article 1k. above, subject to an equitable adjustment in the event of a condemnation, sale by Landlord of part of the Project, reconstruction after damage or destruction or expansion or reduction of the areas within the Project designated by Landlord as Retail Space and Office Space from time to time. Tenant's Percentage Share of the Office Project Taxes and Operating Expenses shall be payable during the Lease Term in monthly installments on the first day of each month in advance, without deduction, offset or prior demand as follows: An amount equal to one-twelfth (1/12) of Tenant's Percentage Share of the estimated Office Project Taxes and Operating Expenses shall be payable monthly by Tenant as aforesaid, commencing on the Commencement Date and continuing until receipt of any notice of adjustment from Landlord given pursuant to this paragraph. Until notice of the estimated Office Project Taxes and Operating Expenses for a subsequent calendar year is delivered to Tenant, Tenant shall continue to pay its Percentage Share of Office Project Taxes and Operating Expenses on the basis of the prior estimate. Landlord may at any time during the Term adjust estimates of the Office Project Taxes and Operating Expenses to reflect current expenditures and following Landlord's written notice to Tenant of such revised estimate, subsequent payments of Tenant shall be based upon such revised estimate. If the Commencement Date is on a date other than the first day of the calendar year, the amount of the Office Project Taxes and Operating Expenses payable by Tenant in such calendar year shall be prorated on the basis which the number of days from the Commencement Date to the end of the calendar year in which the Commencement Date falls bears to three hundred and sixty (360). Within ninety (90) days after the end of each calendar year during the Term and within ninety (90) days after the Expiration Date, or as soon thereafter as practicable, Landlord will furnish to Tenant a statement ("Landlord's Statement") of the actual Office Project Taxes and Operating Expenses paid or incurred by Landlord during the preceding year, and thereupon within ten (10) days an adjustment will be made by Tenant's payment to Landlord or credit to Tenant by Landlord against the Office Project Taxes and Operating Expenses next becoming due from Tenant, as the case may require, to the end that Landlord shall receive the entire amount of Tenant's Percentage Share of Office Project Taxes and Operating Expenses for such calendar year and no more. If based on Landlord's Statement a payment from Tenant is required, Tenant shall not have the right to withhold or defer such payment pending a review of Landlord's books and records pursuant to the following paragraph or to the resolution of any dispute relating to Office Project Taxes and Operating Expenses. If the Expiration Date is on a day other than the last day of a calendar year, the amount of Office Project Taxes and Operating Expenses payable to Tenant for the calendar year in which the Expiration Date falls shall be prorated on the basis which the number of days from the commencement of such calendar year to and including such Expiration Date bears to three hundred sixty (360). The early termination of this Lease shall not affect the obligations of Landlord and Tenant pursuant to this Article 7. Within sixty (60) days after Tenant receives a statement of actual Office Project Taxes and Operating Expenses paid or incurred for a calendar year, Tenant shall have the right, upon written demand and reasonable notice, to inspect Landlord's books and records relating to such Office Project Taxes and Operating Expenses for the calendar year covered by Landlord's Statement for the purpose of verifying the amount set forth in such statement. Such inspection shall be made during Landlord's normal business hours, at the place where such books and records arc customarily maintained by Landlord. Unless Tenant asserts in writing a specific error within ninety (90) days following Tenant's receipt of Landlord's Statement, the amounts set forth in Landlord's statement shall be conclusively deemed correct and binding on Tenant. Notwithstanding anything contained in this Article 7 to the contrary, express or implied, Rentals payable by Tenant shall in no event be less than the Base Rent specified in Article 5a., as adjusted from time to time pursuant to this Lease. b. OPERATING EXPENSES. As used in this Lease, "Operating Expenses" shall mean all costs of operation, maintenance, repair and management of every portion of the Project as 5 determined by standard accounting practices. Operating Expenses shall include, without limitation, all sums expended in connection with all maintenance and repairs, resurfacing, painting, restriping, cleaning, sweeping and janitorial services; maintenance and repair of sidewalks, curbs, signs and other Common Areas (defined in Article 55); maintenance and repair of sprinkler systems, planting and landscaping; trash removal; sewage; electricity, gas, water and any other utilities (including any temporary or permanent utility surcharge or other exaction whether now or hereafter imposed); maintenance and repair of directional signs and other markers and bumpers; maintenance and repair of any fire protection systems, elevator systems, lighting systems, storm drainage systems, HVAC, and other utility systems; any governmental imposition or surcharge imposed upon Landlord or assessed against the Project; all costs and expenses pertaining to a security alarm system and security guard for the Project if Landlord deems necessary in Landlord's reasonable discretion; materials; supplies; tools; depreciation on maintenance and operating machinery and equipment (if owned) and rental paid for such machinery and equipment (if rented); service agreements on equipment; maintenance and repair of parking areas and parking structures, if any; repair and routine and preventative maintenance of the roof (including repair of leaks and resurfacing); repair and maintenance of the exterior surfaces of all improvements (including painting); maintenance and repair of structural parts (including foundation, floor slabs and load bearing walls); replacement of Common Area carpets and window coverings, the cost of which shall be amortized over the useful life of such items as determined by standard accounting practices; window cleaning; elevator or escalator services; material handling; fees for licenses and permits relating to the Project; the cost of complying with rules, regulations and orders of governmental authorities; accounting and lega fees; Project office rent or rental value; the cost of contesting the validity or applicability of any governmental enactments which may affect Operating Expenses or Project Taxes; personnel to implement such services; public liability, property damage and fire and extended coverage insurance on the Project (in such amounts and providing such coverage as determined in Landlord's reasonable discretion and which may include without limitation liability, all risk property, lessor's risk liability, war risk, vandalism, malicious mischief, sprinkler leakage, boiler and machinery, rental income, flood and worker's compensation insurance, and, if available at commercially reasonable rates or required by the lender of any loan affecting all or any portion of the Project, earthquake); compensation and fringe benefits payable to all persons employed by Landlord in connection with the operation, maintenance, repair, and management of the Project; and all annual assessments and special assessments levied against the Project and/or Landlord pertaining to the Project pursuant to any declaration of covenants, conditions and restrictions affecting the Project. Landlord may cause any or all of said services to be provided by an independent contractor or contractors, or they may be rendered by Landlord. If such services are provided by Landlord, the cost of such services which are included in Operating Expenses shall be reasonable, based upon the prevailing market prices for such services, if Landlord makes capital improvements which have the effect of reducing Operating Expenses, Landlord may amortize its investment in said improvements as an Operating Expense in accordance with standard accounting practices provided that such amortization is not at a rate greater than the anticipated savings in Operating Expenses. It is the intent of the parties hereto that Operating Expenses shall include every cost paid or incurred by Landlord in connection with the operation, maintenance, repair and management of the Project and the specificexamples of Operating Expenses stated in this Section 7b. are in no way intended to, and shall not limit the costs comprising Operating Expenses, nor shall such examples be deemed to obligate Landlord to incur such costs or to provide such services or to take such actions except as Landlord may be expressly required in other portions of this Lease, or except as Landlord, in its reasonable discretion, may elect. The maintenance of the Project shall be at the reasonable discretion of Landlord and all costs incurred by Landlord reasonably and in good faith shall be deemed conclusively binding on Tenant. If less than one hundred (100%) percent of the Project is occupied during any calendar year, all Operating Expenses on the statements provided by Landlord shall be adjusted for each calendar year to equal Landlord's reasonable estimate of Operating Expenses had one hundred percent (100%) of the Project been occupied. Operating Expenses shall be comprised of Retail Operating Expenses, Office Operating Expenses and Shared Operating Expenses. (1) RETAIL OPERATING EXPENSES. As used in this Lease, "Retail Operating Expenses" shall mean those Operating Expenses attributable to the Retail Space and the Retail Common Area (defined in Article 55) as reasonably determined by the Landlord from time to time, including, without limitation, the cost of all gas, electricity and other utilities attributable to the Retail Space and not separately metered to any other tenant; Landlord's advertising and promotional costs for the Project; the cost of all electricity supplied to the parking areas within the Project during such hours as are reasonably determined by Landlord from time to time to be of primary benefit to the Retail Space; the cost of a service maintenance agreement on all heating, ventilating and air conditioning equipment ("HVAC") servicing the Retail Space and the cost of any HVAC maintenance and repairs; and a management fee equal to ten percent (10%) of Common Area Expenses. (2) OFFICE OPERATING EXPENSES. As used in this Lease, "Office Operating Expenses" shall mean those Operating Expenses attributable to the Office Space and the Office Common Area, as reasonably determined by Landlord from time to time; and a management fee equal to five percent (5%) of Landlord's gross receipts from the Project including all Rentals. 6 (3) SHARED OPERATING EXPENSES. As used in this Lease, "Shared Operating Expenses" shall mean all Operating Expenses other than Retail Operating Expenses and Office Operating Expenses. c. PROJECT TAXES. The term "Project Taxes" as used in this Lease shall collectively mean (to the extent any of the following are not paid by Tenant pursuant to Article 7d. below) all: real estate taxes and general or special assessments (including, without limitation, assessments for public improvements or benefits); personal property taxes; taxes based on vehicles utilizing parking areas within the Project; taxes computed or based on rental income (including without limitation any municipal business tax but excluding federal, state and municipal net income taxes); Environmental Surcharges (defined below); excise taxes; gross receipts taxes; sales and/or use taxes; employee taxes; water and sewer taxes, levies, assessments and other charges in the nature of taxes or assessments (including, but not limited to, assessments for public improvements or benefit); and all other governmental, quasi-governmental or special district impositions of any kind and nature whatsoever; regardless of whether now customary or within the contemplation of the parties hereto and regardless of whether resulting from increased rate and/or valuation, or whether extraordinary or ordinary, general or special, unforeseen or foreseen, or similar or dissimilar to any of the foregoing which during the Term are laid, levied, assessed or imposed upon Landlord and/or become a lien upon or chargeable against any portions of the Project under or by virtue of any present or future laws, statutes, ordinances, regulations, or other requirements of any governmental authority or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessments whatsoever. "Environmental Surcharges" shall include any and all expenses, taxes, charges or penalties imposed by any local, state or federal governmental agency or entity now or hereafter vested with the power to impose taxes, assessments or other types of surcharges as a means of controlling or abating environmental pollution or the use of energy in regard to the use, operation or occupancy of the Project. "Taxes" shall include (to the extent the same are not paid by Tenant pursuant to Article 7d. below), without limitation: the cost to Landlord of contesting the amount or validity or applicability of any Project Taxes; and all taxes, assessments, levies, fees, impositions or charges relating to the use, possession, occupancy, leasing, operation or management of the Project or in lieu of or equivalent to any Project Taxes described in this Article 7c. If at any time during the Term, Project Taxes are under-assessed by the taxing authorities so that they are not computed on a fully completed and occupied basis in accordance with the then applicable taxing authority of the governmental entities having jurisdiction, Landlord shall have the right, but not the obligation, to adjust Project Taxes to reflect the amount that Project Taxes would be if the Project were assessed on a fully completed and occupied basis, as determined in Landlord's reasonable discretion. If at any time during the Term Project Taxes are under-assessed by the taxing authority so that they are not computed on a fully completed and occupied basis, and after Lease Termination the taxing authority increases the Project Taxes attributable to any period during the Term by recomputing Project Taxes on a fully completed and occupied basis, Tenant shall pay to Landlord, upon demand, Tenant's Percentage Share of that portion of such increase in Project Taxes includable in Office Project Taxes and Operating Expenses, notwithstanding that the Lease has expired or terminated. Tenant's obligation to pay its share of the increase in Project Taxes shall survive Lease Termination. d. OTHER TAXES. Tenant shall pay the following: (1) Tenant shall pay (or reimburse Landlord as additional rent if Landlord is assessed), before delinquency, any and all taxes levied or assessed, and which become payable for or in connection with any period during the Term, upon all of the following (collectively, "Leasehold Improvements and Personal Property"): Tenant's leasehold improvements, the Tenant Improvements, equipment, furniture, furnishings, fixtures, merchandise, inventory, machinery, appliances and other personal property located in the Premises; except only that which has been paid for by Landlord and is the standard of the Office Space in the Building in which the Premises are located. Tenant hereby acknowledges receipt of a copy of a schedule setting forth the improvements comprising the standard of the Office Space in the Building in which the Premises are located. If any or all of the Leasehold Improvements and Personal Property are assessed and taxed with the Project, Tenant shall pay to Landlord such amounts within ten (10) days after delivery to Tenant by Landlord of a statement in writing setting forth the amount applicable to the Leasehold Improvements and Personal Property. If the Leasehold Improvements and Personal Property are not separately assessed on the tax statement or bill, Landlord's good faith determination of the amount of such taxes applicable to the Leasehold Improvements and Personal Property shall be a conclusive determination of Tenant's obligation to pay such amount so as determined by Landlord. (2) Tenant shall pay (or reimburse Landlord if Landlord is assessed, as additional rent), prior to delinquency or within ten (10) days after receipt of a statement thereof, any and all other taxes, levies, assessments, or surcharges payable by Landlord or Tenant and relating to this Lease, the Premises or Tenant's activities in the Premises (other than Landlord's net income, succession, transfer, gift, franchise, estate, or inheritance taxes), whether or not now customary or within the contemplation of the parties hereto, now in force or which may hereafter become effective, including but not limited to taxes: (i) upon, allocable to, or measured by the area 7 of the Premises or on the Rentals payable hereunder, including without limitation any gross income, gross receipts, excise, or other tax levied by the state, any political subdivision thereof, city or federal government with respect to the receipt of such Rentals; (ii) upon or with respect to the use, possession, occupancy, leasing, operation and management of the Premises or any portion thereof; (iii) upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises; or (iv) imposed as a means of controlling or abating environmental pollution or the use of energy, including, without limitation, any parking taxes, levies or charges or vehicular regulations imposed by any governmental agency. Tenant shall also pay, prior to delinquency, all privilege, sales, excise, use, business, occupation, or other taxes, assessments, license fees, or charges levied, assessed, or imposed upon Tenant's business operations conducted at the Premises. If any such taxes are payable by Landlord and it shall not be lawful for Tenant to reimburse Landlord for such taxes, then the Rentals payable hereunder shall be increased to net Landlord the net Rental after imposition of any such tax upon Landlord as would have been payable to Landlord prior to the imposition of any such tax. 8. CONDUCT OF BUSINESS. a. In no event shall Tenant use or permit the use of the Premises for any purpose other than general office use. Landlord and Tenant hereby acknowledge and agree that the foregoing use restriction is an absolute prohibition against a change in use of the Premises as contemplated under California Civil Code section 1997.230. Tenant hereby acknowledges and agrees that Landlord has carefully selected Tenant in order to produce a mix of Tenant uses within the Project compatible and consistent with the design of the Building, with other uses of the Building, and with the operation of a profitable and successful mixed-use office/retail project; provided, however, that the selection of project tenants shall be in Landlord's sole discretion and Landlord, in making such selection, shall not be deemed to be warranting that any use of the Building made by any such tenant is or will be compatible or consistent with the design of the Building, with other uses of the Building, or will result in the operation of a profitable and successful mixed-use office/retail project. Tenant shall not do or permit anything to be done in or about the Premises nor bring or keep anything therein which will in any way increase the existing rate of or affect any fire or other insurance upon the Building or the Project or any of its contents, or cause cancellation of any insurance policy coveting the Building or the Project or any part thereof or any of its contents. Tenant shall not, without prior consent of Landlord, bring into the Building or the Premises or use or incorporate in the Premises any apparatus, equipment or supplies that may cause substantial noise, odor or vibration or overload the Premises or the Building or any of its utility or elevator systems or jeopardize the structural integrity of the Building or any part thereof. Tenant and Tenant's Agents shall not use, store or dispose, or allow the use, storage or disposal of, any Hazardous Materials (defined below) on any portion of the Project. Tenant shall indemnify, defend with counsel acceptable to Landlord, and hold Landlord and Landlord's employees, agents, partners, officers, directors and shareholders harmless from and against any and all claims, actions, suits, proceedings, orders, judgment, losses, costs, damages, liabilities, penalties or expenses (including, without limitation, attorneys' fees) arising in connection with the breach of the obligations described in the previous sentence. As used in this paragraph, Hazardous Material means any chemical, substance or material which has been determined or is hereafter determined by any federal, state or local governmental authority to be capable of posing risk of injury to health or safety, including, without limitation, petroleum, asbestos, polychlorinaled biphenyls, radioactive materials and radon gas. 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 the Project or injure or annoy them or use or allow the Premises to b used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. Tenant and Tenant's Agents shall comply with the provisions of any declaration of covenants, conditions and restrictions affecting the Premises. b. EFFECT OF USE RESTRICTION. Landlord and Tenant hereby acknowledge and agree that the use restriction set forth in Paragraph 8.a. above shall be deemed reasonable in all respects and under all circumstances. Landlord and Tenant further acknowledge and agree that, notwithstanding any provision of this Lease to the contrary, (i) in the event Tenant requests Landlord's consent to a proposed assignment of this Lease or subletting of the Premises, Landlord shall be deemed reasonable in withholding its consent to such assignment or subletting if the proposed assignee or subtenant desires to use the Premises for any purpose other than as expressly provided in Paragraph 8.a. above, and (ii) in the event of a default by Tenant under the Lease, the enforcement of the use restriction set forth in Paragraph 8.a. above shall be deemed reasonable for purposes of computing the rental loss that could be or could have been reasonably avoided by Landlord pursuant to California Civil Code section 1951.2 and in connection with the exercise of Landlord's remedies under California Civil Code section 1951.4. Notwithstanding the preceding to the contrary, if Landlord withholds its consent to an assignment of the Lease or subletting of the Premises based upon the desire of the proposed assignee or subtenant to use the Premises for any purpose other than as expressly provided in Paragraph 8.a. above, or if Tenant is in default under this Lease, then, prior to commencing or pursuing any claim or defense against Landlord based upon the unreasonableness of the use 8 restriction set forth in Paragraph 8.a. above, Tenant shall provide Landlord with written notice (by certified mail, postage prepaid and return receipt requested) setting forth Tenant's objections to the enforcement of the use restriction in such instance, the basis upon which Tenant intends to demonstrate that the enforcement of such use restriction would be unreasonable in such instance, and the use(s) which Tenant believes Landlord should allow Tenant or its proposed assignee or subtenant, as the case may be, to make of the Premises. Within thirty (30) days of Landlord's receipt of Tenant's written notice of objection, Landlord shall provide Tenant with written notice of Landlord's election to either (A) enforce the use restriction set forth in Paragraph 8.a. above, or (B) permit a change in the use of the Premises, provided that such proposed use shall in no event (1) require the use, storage or disposal of Hazardous Materials on or about the Premises or the Project, (2) increase or affect any fire or other insurance covering the Building or the Project, (3) interfere with the rights of other tenants of the Building or Project, including, without limitation, any exclusive use rights of such tenants, (4) be in violation of application federal, state or local laws, rules, regulations, codes or ordinances, or (5) require Landlord to construct or install, or to provide any allowance for the construction or installation of, any tenant improvements in the Premises. Notwithstanding the preceding to the contrary, in no event shall Landlord have any obligation to allow a change in the use of the Premises, it being expressly understood by the parties that the use restriction set forth in Paragraph 8.a. above is an absolute prohibition against a change in use of the Premises. In the event Landlord fails to provide Tenant with written notice of its election to either enforce the use restriction or allow a change in use of the Premises within said thirty (30) day period, Landlord shall be deemed to have elected to enforce the use restriction. In the event Landlord elects or is deemed to have elected to enforce the use restriction as provided hereinabove, Tenant shall have the right to pursue such valid claims or defenses against Landlord as may be permitted under California Civil Code section 1997.040 and which Tenant is able to prove. 9. COMPLIANCE WITH LAWS. Tenant shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with or violate any law, statute, ordinance, order or governmental rule or regulation or requirement of duly constituted public authorities or quasi-public authorities now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances, orders and governmental or quasi-governmental rules, regulations or requirements now in force or which may hereafter be in force and with all recorded documents which relate to or affect the condition, use or occupancy of the Premises, and with the requirements of any board of fire insurance underwriters or other similar bodies now or hereafter constituted, relating to, or affecting the condition, use or occupancy of the Premises, excluding structural changes not related to or affected by Tenant's improvements, acts or use or occupancy of the Premises. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any law, statute, ordinance, or governmental or quasi-governmental rule, regulation or requirement, shall be conclusive of that fact as between the Landlord and Tenant. Tenant shall obtain, prior to taking possession of the Premises, all permits, licenses, or other authorizations for the lawful operation of its business at the Premises. Tenant shall indemnify, defend with counsel acceptable to Landlord and hold Landlord and Landlord's employees, agents, partners, officers, directors and shareholders harmless from and against any claim, action, suit, proceeding, order, judgment, liability, penalty or expense (including, without limitation, attorneys' fees) arising out of the failure of Tenant to comply with any applicable law, statute, ordinance, order, rule, regulation, requirement or recorded document. Tenant acknowledges that Tenant has independently investigated and is satisfied that the Premises are suitable for Tenant's intended use and that the Building and Premises meet all governmental and quasi-governmental requirements for such intended use. Landlord and Tenant acknowledge that, in accordance with the provisions of the Americans with Disabilities Act (the "ADA"), responsibility for compliance with the terms and conditions of Title III of the ADA may be allocated as between Landlord and Tenant. In this regard and notwithstanding anything to the contrary contained in the Lease, Landlord and Tenant agree that the responsibility for compliance with the ADA (including, without limitation, the removal of architectural and communications barriers and the provision of auxiliary aids and services to the extent required) shall be allocated as follows: (i) Tenant shall be responsible for compliance with the provisions of Title I of the ADA, and of Title II and Title III of the ADA as Titles II and III relate to any construction, renovations, alterations and repairs made within the Premises if such construction, renovations, alterations and repairs are made by Tenant, at its expense without the assistance of Landlord; (ii) Landlord shall be responsible for compliance with the provisions of Title II and III of the ADA for all construction, renovations, alterations and repairs which Landlord is required, under this Lease, to make within the Premises, whether (pursuant to the relevant provisions of the Lease) at Landlord's or Tenant's expense; and (iii) Landlord shall be responsible for compliance with the previsions of Title III of the ADA for all exterior and interior areas of the Building not included within the Premises. Landlord agrees to indemnify and hold Tenant harmless from and against any claims, damages, costs and liabilities arising out of Landlord's failure, or alleged failure, as the case may be, to comply with the ADA, to the extent such compliance has been allocated to Landlord herein, which indemnification obligation shall survive the expiration or termination of the Lease if the Lease has not been terminated by reason of a default by Tenant. Tenant agrees to indemnify and hold Landlord harmless from and against any 9 claims, damages, costs and liabilities arising out of Tenant's failure, or alleged failure, as the case may be, to comply with the ADA to the extent such compliance has been allocated to Tenant herein, which indemnification obligation shall survive the expiration or termination of this Lease. Landlord and Tenant each agree that the allocation of responsibility for ADA compliance shall not require Landlord or Tenant to supervise, monitor or otherwise review the compliance activities of the other with respect to its assumed responsibility for ADA compliance as set forth in this paragraph. Landlord shall, in complying with the ADA (to the extent such compliance has been allocated to Landlord herein), be entitled to rely upon representations made to, or information given to Landlord by Tenant in regard to Tenant's use of the Premises, Tenant's employees, and other matters pertinent to compliance with the ADA. The indemnity of Tenant set forth above shall apply as to any liability arising against Landlord by reasons of any misrepresentations or misinformation given by Tenant to Landlord. The allocation of responsibility for ADA compliance between Landlord and Tenant, and the obligations of Landlord and Tenant established by such allocations, shall supersede any other provisions of the Lease that may contradict or otherwise differ from the requirements of this paragraph. 10. ALTERATIONS AND ADDITIONS. a. TENANT'S ALTERATIONS. Tenant shall not make or suffer to be made any alterations, additions, changes or improvements (collectively, "Alterations") to or of the Premises, or any part thereof without Landlord's prior Written consent, which consent shall not, except as otherwise expressly provided in this Lease, be unreasonably withheld. Landlord may impose, as a condition to the aforesaid consent, such requirements as Landlord may deem necessary in its reasonable discretion, including, without limitation: the manner in which the work is done; a right of approval of the contractor by whom the work is to be performed; that all work be performed with union labor; the times during which such work is to be accomplished; the requirement that Tenant post a completion bond in an amount and form satisfactory to Landlord; the requirement that Tenant reimburse Landlord, as additional rent, for Landlord's reasonable costs incurred in reviewing any proposed Alterations, whether or not Landlord's consent is granted; and the requirement that at Lease Termination, either (i) Tenant, at its expense, will remove any and all such Alterations installed by Tenant and shall, at its cost, promptly repair all damages to the Project caused by such removal, or (ii) the Alterations made by Tenant shall remain with the Premises, be a part of the realty, and belong to Landlord. If Landlord consents to any Alterations to the Premises by Tenant, the same shall be made by Tenant at Tenant's sole cost and expense in accordance with plans and specifications approved by Landlord. Any such Alterations made by Tenant shall be performed in accordance with all applicable laws, ordinances and codes and in a first class workmanlike manner, and shall not weaken or impair the structural strength or lessen the value of the Building, shall not invalidate, diminish, or adversely affect any warranty applicable to the Building or any other improvements located within the Project, including any equipment therein, and shall be performed in a manner causing Landlord and Landlord's agets and other tenants of the Building the least interference and inconvenience practicable under the circumstances. In making any such Alterations, Tenant shall, at Tenant's sole cost and expense: (i) File for and secure any necessary permits or approvals from all governmental departments or authorities having jurisdiction, and any utility company having an interest therein; (ii) Notify Landlord in writing at least fifteen (15) days prior to the commencement of work on any Alteration, so that Landlord can post and record appropriate notices of nonresponsibility; and (iii) Provide copies of all drawings and specifications prior to commencement of construction of any Alterations. In no event shall Tenant make or suffer to be made any Alteration to the mechanical or utility systems of the Building, to the Common Area or to the structural portions of the Building or any part thereof without Landlord's prior written consent, which consent may be withheld in Landlord's sole discretion. b. REMOVAL. Upon Lease Termination, Tenant shall, upon written demand by Landlord at Tenant's sole cost and expense, forthwith and with all due diligence remove any alterations made by Tenant, which is then designated by Landlord to be removed and Tenant shall, forthwith and with all due diligence at its sole cost and expense, repair any damage to the Premises or Project caused by such removal. Tenant may also, upon Lease Termination and provided that Tenant is not then in default hereunder, remove Tenant's movable equipment, furnishings, trade fixtures and other personal property (excluding any Alterations made by Tenant not specifically designated by Landlord to be removed), provided that Tenant shall, forthwith and with all due diligence at its sole cost and expense, repair any damages to the Premises or the Project caused by such removal. Unless Landlord elects to have Tenant remove any such Alterations, all such Alterations except for movable equipment, furnishings and trade fixtures of Tenant not affixed to the Premises, shall become the property of Landlord upon Lease Termination (without any payment therefor) and remain upon and be surrendered with the Premises. 10 c. ALTERATIONS REQUIRED BY LAW. Tenant shall pay to Landlord as additional rent, the cost of any structural or nonstructural alteration, addition or change to the Building and/or at Landlord's election, shall promptly make, at Tenant's sole expense and in accordance with the provisions of Article 10a. above, any structural or nonstructural alteration, addition or change to the Premises required to comply with laws, regulations, ordinances or orders of any public agencies, whether now existing or hereinafter promulgated, where such alterations, additions or changes are required by reason of: Tenant's or Tenant's Agents' acts; Tenant's use or change of use of the Premises; alterations or improvements to the Premises made by or for Tenant; or Tenant's application for any permit or governmental approval. d. LANDLORD'S IMPROVEMENTS. All fixtures, improvements or equipment which are installed, constructed on or attached to the Premises, or any part of the Project by Landlord at its expense shall be a part of the realty and belong to Landlord. 11. REPAIRS. a. BY TENANT. By taking possession of the Premises, Tenant shall be deemed to have accepted the Premises as being in good and sanitary order, condition and repair and to have accepted the Premises in their condition existing as of the date of such possession, subject to all applicable laws, covenants, conditions, restrictions, easements, and other matters of public record and the Rules and Regulations from time to time promulgated by Landlord governing the use of any portion of the Project. Tenant shall further be deemed to have accepted the Tenant improvements constructed by Landlord, if any, as being completed in accordance with the plans and specifications for such improvements, excluding only the punch list items referred to in Article 4a. above. Tenant shall at Tenant's sole cost and expense, keep every part of the Premises in good condition and repair, ordinary wear and tear excepted. If Tenant fails to maintain the Premises as required by this Lease, Landlord may give Tenant notice to do such acts as are reasonably required to so maintain the Premises and if Tenant fails to commence such work immediately in an emergency or where immediate action is required to protect the Premises or any portion of the Project, or within ten (10) days after such notice is given under other circumstances, and diligently prosecute it to completion, then Landlord or Landlord's agents, in addition to all of the rights and remedies available hereunder or by law and without waiving any alternative remedies, shall have the right to enter the Premises and to do such acts and expend such funds at the expense of Tenant as are reasonably required to perform such work. Any amount so expended by Landlord shall be paid by Tenant to Landlord as additional rent, upon demand. With respect to any work performed by Landlord pursuant to this Article 11.a., Landlord shall be liable to Tenant only for physical damage caused to Tenant's personal property located within the Premises to the extent such damage is caused by Landlord's active negligence or willfulmisconduct and such damage is neither insured against nor required to be insured against by Tenant pursuant to this Lease. In no event shall Landlord have any liability to Tenant for any other damages, or for any inconvenience or interference with the use of the Premises by Tenant, or for any consequential damages, including lost profits, as a result of performing any such work. Except as specifically provided in an addendum, if any, to this Lease, Landlord shall have no obligation whatsoever to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof and the panics hereto affirm that Landlord has made no representations or warranty to Tenant respecting the condition of the Premises or any part of the Project except as specifically set forth in this Lease. b. BY LANDLORD. The costs of repairs and maintenance which are the obligation of Landlord hereunder or which Landlord elects to perform hereunder shall be an Operating Expense and Tenant shall pay, as additional rent, a portion of such costs to Landlord as provided in Article 7. 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, unless such maintenance or repairs are caused in part or in whole by the act, neglect, fault or omission of any duty by the Tenant or Tenant's Agents, in which case Tenant shall pay to Landlord the reasonable cost of such maintenance or repairs as additional rent. Landlord shall not be liable for any failure to make any repairs or to perform any maintenance for which Landlord is responsible as provided above unless Landlord fails to commence such work for a period of more than thirty (30) days after written notice of the need of such repairs or maintenance is given to Landlord by Tenant and the failure is due solely to causes within Landlord's reasonable control. Except as provided in Article 21 of this Lease, there shall be no abatement of Rentals, and in any event there shall be 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 Project or in or to fixtures, appurtenances and equipment therein. Tenant waives the benefits of any statute now or hereafter in effect (including, without limitation, the provisions of subsection I of Section 1932, Section 1941 and Section 1942 of the California Civil Code and any similar or dissimilar law, statute or ordinance now or hereafter in effect) which would otherwise afford Tenant the right to make repairs at Landlord's expense (or to deduct the cost of such repairs from Rentals due hereunder) or to terminate this Lease because of Landlord's failure to keep the Premises in good and sanitary order. 12 LIENS. Tenant shall keep the Premises and every portion of the Project free from any and all mechanics', materialmen's and other liens, and claims thereof, arising out of any work performed, materials furnished or obligations incurred by or for Tenant. Landlord may 11 require, at Landlord's sole option, that Tenant provide to Landlord at Tenant's sole cost and expense a payment and performance bond, or its equivalent, in an amount equal to one and one half (1-1/2) times any and all estimated costs of any Alterations to the Premises, to insure Landlord against any liability for mechanics' and materialmen's liens and to insure completion of the work. Tenant shall indemnify, defend with counsel acceptable to Landlord and hold Landlord harmless from and against any liens, demands, claims, actions, suits, proceedings, orders, losses, costs, damages, liabilities, penalties, expenses, judgments or encumbrances (including, without limitation, attorneys' fees) arising out of any work or services performed or materials furnished by or at the direction of Tenant or Tenant's Agents or any contractor employed by Tenant with respect to the Premises. Landlord shall have the right, at all times, to post and keep posted on the Premises, any notices permitted or required by law, or which Landlord shall deem proper, for the protection of Landlord, the Project, and any other party having an interest therein, from mechanics' and materialmen's liens, including without limitation a notice of non-responsibility. Tenant shall give written notice to Landlord fifteen (15) days prior to employing any laborer or contractor to perform services related to, or receiving materials for use upon the Premises, and prior to the commencement of any work of improvement on the Premises. Should any claims of lien relating to work performed, materials furnished or obligations incurred by Tenant be filed against, or any action be commenced affecting the Premises, any part of the Project, and/or Tenant's interest therein, Tenant shall give Landlord notice of such lien or action within three (3) days after Tenant receives notice of the filing of the lien or the commencement of the action. If Tenant does not, within twenty (20) days following the imposition of any such lien, cause such lien to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but not the obligation, to cause the same to be released by such means as it shall deem proper, including by payment of the claim giving rise to such lien or by posting a proper bond, or by requiring Tenant to post for Landlord's benefit a bond, surety, or cash amount equal to one and one-half (1-1/2) times the amount of lien and sufficient to release the Premises and Project from the lien. All sums paid by Landlord pursuant to this Article 12 and all expenses incurred by it in connection therewith including attorneys' fees and costs shall be payable to Landlord by Tenant as additional rent on demand. 13. ASSIGNMENT AND SUBLETTING. a. PROHIBITIONS IN GENERAL. Tenant shall not (whether voluntarily, involuntarily, or by operation of law) assign this Lease or allow all or any part of the Premises to be sublet without Landlord's prior written consent in each instance, which consent shall not be unreasonably withheld, subject, nevertheless, to the provisions of this Article 13. Except for an allowed assignment or subletting pursuant to the previous sentence, Tenant shall not (whether voluntarily, involuntarily, or by operation of law) (i) allow all or any part of the Premises to be occupied or used by any person or entity other than Tenant, (ii) transfer any right appurtenant to this Lease or the Premises, (iii) mortgage, hypothecate or encumber the Lease or Tenant's interest in the Lease or Premises (or otherwise use the Lease as a security device) in any manner, or (iv) permit any person to assume or succeed to any interest whatsoever in this Lease, without Landlord's prior written consent in each instance, which consent may be withheld in Landlord's sole and absolute discretion. Any assignment, sublease, hypothecation, encumbrance, or transfer (collectively, "Transfer") without Landlord's consent shall constitute a default by Tenant and shall be voidable. Landlord's consent to any one Transfer shall not constitute a waiver of the provisions of this Article 13 as to any subsequent Transfer nor a consent to any subsequent Transfer. The provisions of this Article 13a. expressly apply to all heirs, successors, sublessees, assigns and transferees of Tenant. If Landlord consents to a proposed Transfer, such Transfer shall be valid and the transferee shall have the right to take possession of the Premises only if the Assumption Agreement described in Article 13c. below is executed and delivered to Landlord, Tenant has paid the costs and fees described in Article 13h. below, and an executed counterpart of the assignment, sublease or other document evidencing the Transfer is delivered to Landlord and such transfer document contains the same terms and conditions as stated in Tenant's notice given to Landlord pursuant to Article 13d. below, except for any such modifications Landlord has consented to in writing. The acceptance of Rentals by Landlord from any person or entity other than Tenant shall not be deemed to be a waiver by Landlord of any provision of this Lease or to be a consent to any Transfer. b. COLLECTION OF RENT. Tenant irrevocably assigns to Landlord, as security for Tenant's obligations under this Lease, all rent not otherwise payable to Landlord by reason of any Transfer of all or any part of the Premises or this Lease. Landlord, as assignee of Tenant, or a receiver for Tenant appointed on Landlord's application, may collect such rent and apply it toward Tenant's obligations under this Lease; provided, however, that until the occurrence of any default by Tenant or except as provided by the provisions of Article 13f. below, Tenant shall have the right to collect such rent. c. Assumption Agreement. As a condition to Landlord's consent to any Transfer of Tenant's interest in this Lease or the Premises, Tenant and Tenant's assignee, sublessee, encumbrancer, secured party as a result of a hypothecation, or transferee (collectively "Transferee"), shall execute a written Assumption Agreement, in a form approved by Landlord, which Agreement shall include a provision that Tenant's Transferee shall expressly assume all 12 obligations of Tenant under this Lease to the extent of the interest transferred, and shall be and remain, jointly and severally liable with Tenant for the performance of all conditions, covenants, and obligations under this Lease to the extent of the interest transferred from the effective date of the Transfer. In no event shall Landlord have any obligation to materially amend or modify this Lease in connection with any proposed Transfer, including, without limitation, amending or modifying the use restriction set forth in Paragraph 8.a. above. d. REQUEST FOR TRANSFER. Tenant shall give Landlord at least forty-five (45) days prior written notice of any desired Transfer and of the proposed terms of such Transfer, including but not limited to: the name and legal composition of the proposed Transferee; an audited financial statement of the proposed Transferee prepared in accordance with generally accepted accounting principles within one year prior to the proposed effective date of the Transfer, the nature of the proposed Transferee's business to be carried on in the Premises; the payment to be made or other consideration to be given on account of the Transfer; and other such pertinent information as may be requested by Landlord, all in sufficient detail to enable Landlord to evaluate the proposed Transfer and the prospective Transferee. Tenant's notice shall not be deemed to have been served or given until such time as Tenant has provided Landlord with all information specified above and all additional information requested by Landlord pursuant to this Article 13d. Tenant shall immediately notify Landlord of any modification to the proposed terms of such transfer. e. NO BONUS VALUE. It is the intent of the parties hereto that this Lease shall confer upon Tenant only the right to use and occupy the Premises, and to exercise such other rights as are conferred upon Tenant by this Lease. The parties agree that this Lease is not intended to have a bonus value, nor to serve as a vehicle whereby Tenant may profit by a future Transfer of this Lease or the right to use or occupy the Premises as a result of any favorable terms contained herein or any future changes in the market for leased space. It is the intent of the parties that any such bonus value that may attach to this Lease shall be and remain the exclusive property of Landlord. f. CONDITIONAL CONSENT. Without otherwise limiting the criteria upon which Landlord may withhold its consent to any proposed Transfer, if Landlord withholds its consent where the proposed Transferee's net worth (according to generally accepted accounting principles) is less than the greater of: (A) the net worth of Tenant immediately prior to the Transfer; or (B) the net worth of Tenant at the time this Lease is executed, such withholding of consent shall be presumptively reasonable. It shall also be presumptively reasonable for Landlord to require, as a condition to its consent that: (i) Any and all rent to be paid by a Transferee, including, but not limited to, any rent in excess of the Rentals to be paid under this Lease (prorated in the event that a sublease is of less than the entire Premises), shall be paid by Tenant directly to Landlord at the time and place specified in this Lease. For the purposes of this Article 13, the term "rent" shall include any consideration of any kind received, or to be received, by Tenant from a Transferee, if such sums are related to Tenant's interest in this Lease or in the Premises, including, but not limited to, key money, bonus money, and payments (in excess of the fair market value thereof) for Tenant's assets, fixtures, trade fixtures, inventory, accounts, goodwill, equipment, furniture, general intangibles, and any capital stock or other equity ownership interest of Tenant; and/or (ii) Either Tenant or the proposed Transferee cure, on or before the proposed effective date of such Transfer, any and all uncured defaults hereunder; provided, however, in no event shall Landlord's failure to condition its consent upon such cure be deemed to be a waiver of any such default or Landlord's rights and remedies under this Lease, at law, or in equity in regard thereto. If Landlord has elected to impose such cure as a condition to its consent and such condition is not satisfied by the effective date of the Transfer, the Transfer shall be voidable at Landlord's option. g. CORPORATIONS AND PARTNERSHIPS. If Tenant is a partnership, a withdrawal or substitution (whether voluntary, involuntary, or by operation of law and whether occurring at one time or over a period of time) of any partner(s) owning twenty-five percent (25%) or more of the partnership, any assignment(s) of twenty-five percent (25%) or more (cumulatively) of any interest in the capital or profits of the partnership, or the dissolution of the partnership shall be deemed a Transfer of this Lease. If Tenant is a corporation, any dissolution, merger, consolidation or other reorganization of Tenant, any sale or transfer (or cumulative sales or transfers) of the capital stock of Tenant in excess of twenty-five percent (25%), or any sale (or, cumulative sales) of more than fifty percent (50%) of the value of the assets of Tenant shall be deemed a Transfer of this Lease. This Article 13g. shall not apply to corporations the capital stock of which is publicly traded. h. ATTORNEYS' FEES AND COSTS. Tenant shall pay, as additional rent, Landlord's actual costs and attorneys' fees incurred for reviewing, investigating, processing and/or documenting any requested Transfer, whether or not Landlord's consent is granted. Notwithstanding the foregoing, no Landlord consent shall be required for any affiliate or subsidiary of the Tenant hereinafter referred to as "Exempt Transfer". i. MISCELLANEOUS. Regardless of Landlord's consent, no Transfer shall release Tenant of Tenants obligations under the Lease or alter the primary liability of Tenant to pay 13 the Rentals and to perform all other obligations to be performed by Tenant hereunder. The acceptance of Rentals by Landlord from airy other person shall not be deemed to be a waiver by Landlord of any provision hereof. Upon breach or default by any assignee of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against said assignee or successor. Landlord may consent to subsequent assignments or subletting of this Lease or amendments or modifications to this Lease with any assignee of Tenant, without notifying Tenant, or any successor of Tenant, and without obtaining its or their consent thereto and such action shall not relieve Tenant of liability under this Lease. j. REASONABLE PROVISIONS. Tenant acknowledges and agrees that Landlord has a special interest in preserving a specific tenant mix in the Project in order to maintain and create a balance of business interests and to promote the successful and profitable operation of the Project. Accordingly, the parties agree that for all purposes including the purposes of the Federal Bankruptcy Code, Landlord may rightfully withhold its consent to a proposed Transfer if the proposed Transferee is unable to provide to Landlord adequate assurances of future performance of the Lease, including, without limitation, adequate assurance (i) of the source of Rentals or other consideration due under the Lease, (ii) that the Transfer will not breach any provision in this Lease or any other lease affecting the Project such as a location, use or exclusivity provision, or any financing agreement or document creating an interest in the Project superior or prior to that of Tenant relating to the Project, (iii) that any proposed Transferee will use the Premises for the specific purpose stated herein and (iv) that the Transfer will not disrupt the tenant mix or balance in the Project. Tenant acknowledges that, but for Tenant's identity, financial condition and ability to perform the obligations of Tenant under the Lease, Landlord would not have entered into this Lease nor demised the Premises to Tenant and that, in entering into this Lease, Landlord has relied specifically on Tenant's identity, financial condition, responsibility and capability of performing the obligations of Tenant under the Lease. Tenant acknowledges that Landlord's rights under this Article 13, including the right to withhold consent to certain Transfers in Landlord's sole and absolute discretion, are reasonable, agreed upon and bargained for rights of Landlord and that the Rentals set forth in the Lease have taken into consideration such rights. Tenant expressly agrees that the provisions of this Article 13 are not unreasonable standards or conditions for purposes of Section 1951.4(b)(2) of the Caliornia Civil Code, as amended from time to time or for any other purpose. 14. HOLD HARMLESS. Tenant shall, to the fullest extent permitted by law, indemnify, defend with counsel acceptable to Landlord, and hold Landlord and Landlord's employees, agents, partners, officers, directors and shareholders harmless from and against any and all claims, damages, losses, liabilities, penalties, judgments, and costs and expenses (including, without limitation, attorneys' fees) and any suit, action or proceeding brought pursuant thereto (collectively, "Claims"), including Claims brought pursuant thereto (collectively, "Claims"), including Claims for property damage, or personal injury including death, arising out of (i) Tenant's use of the Premises or any part thereof, or any activity, work or other thing done or about the Premises, (ii) any activity, work or other thing done, permitted or suffered by the Tenant in or about the Project, or any purl thereof, (iii) any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease, or (iv) any act or negligence of the Tenant or Tenant's Agents, and in each case from and against any and all damages, losses, liabilities, penalties, judgments, and costs and expenses (including, without limitation, a failure to maintain insurance as provided in Section 1.6 ), or (iv) any act or negligence or Tenant's Agent's. Landlord shall indemnify and hold harmless Tenant from any liability for injury to or death of any person, including any employee of Landlord, or damage to any property, including any property of Landlord, occurring on the Premises, in the Building, on the Project, or on the Master Project, excepting therefrom, however liability for any such injury, death or damage as is caused by, or arises out of or in any way connected with the negligence of Tenant: breach of Tenant's duty to repair, any condition in the Premises concerning which Landlord has no obligation to repair or maintain under Article 11 hereof. The indemnity herein shall extend to the costs and expenses incurred by Landlord for administrative expenses, consultant fees, expert costs, investigation expenses, consultant fees, expert costs, investigation expenses and costs incurred in settling indemnified claims, whether such costs occurred before or after any litigation is commenced. The indemnity herein shall survive the termination of this Lease and shall continue in effect until any and all claims, actions or causes of action with respect to any of applicable statue of limitations. In no event shall any of insurance provisions set forth in Section 16 of this Lease be construed as any limitation on the scope of indemnification set forth herein. Tenant as a material part of the consideration to Landlord hereby assumes all risk of damage or loss to property or injury or death to persons in, upon or about all portions of the Project from any cause, except to the extent caused by the active negligence or willful misconduct of Landlord or Landlord's agents, and Tenant hereby waives all claims in respect thereof against Landlord. Landlord or its agents shall not be liable for any damage or loss to properly entrusted to employees of any part of the Project nor for loss or damage to any property by theft or otherwise, nor for any injury or death of or damage or loss to persons or property resulting from any accident, casualty or condition occurring in or about any portion of the Project, or to any equipment, appliances or fixtures therein, or from any other cause whatsoever, except to the extent caused by the active negligence or willful misconduct of Landlord or Landlord's agents where such loss is neither 14 insured against nor required to be insured against by Tenant pursuant to this Lease. Landlord or its agents shall not be liable for interference with the light or other incorporeal hereditaments, nor shall Landlord be liable for any latent defect in the Premises or in the Building. Notwithstanding any other provision of this Lease, in no event shall Landlord have any liability for 15 loss of business (including, without limitation, lost profits) by Tenant. Tenant shall give prompt written notice to Landlord in case of fire or accidents in the Premises or in the Building or of defects therein or in the fixtures or equipment. If, by reason of any act or omission of Tenant or Tenant's Agents, Landlord is made a party defendant to any litigation concerning this Lease or any part of the Project, Tenant shall indemnify, defend with counsel acceptable to Landlord and hold Landlord harmless from any liability and damages incurred by (or threatened against) Landlord as a party defendant, including without limitation all damages, costs and expenses, including attorneys' fees. 15. SUBROGATION. Landlord releases Tenant and Tenant's officers, directors, agents, employees, partners and shareholders from any and all claims or demands for damages, loss, expense or injury arising out of any perils to the extent covered by insurance carried by Landlord, whether due to the negligence of Tenant or Tenant's officers, directors, agents, employees, partners and shareholders and regardless of cost or origin, to the extent such waiver is permitted by Landlord's insurers and does not prejudice the insurance required to be carried by Landlord under this Lease. Tenant releases Landlord and Landlord's officers, directors, agents employees, .partners. and shareholders from any and all claims or demands for damages, loss, expense or injury arising out of any perils which are insured or required to be insured against, under any insurance carried by Tenant or required to be carried, whether due to the negligence of Landlord or its officers, directors, agents, employees, partners and shareholders and regardless of cost or origin, to the extent such waiver is permitted by Tenant's insurers and does not prejudice the insurance required to be carried by Tenant under this Lease. 16. INSURANCE. a. LIABILITY INSURANCE. Tenant shall, at Tenant's expense, obtain and keep in force during the Term a policy of comprehensive general liability insurance, including the broad form endorsement, insuring Landlord and Tenant against any liability arising out of the ownership, use, occupancy, maintenance, repair or improvement of the Premises and all areas appurtenant thereto. Such insurance shall provide single limit liability coverage of not less than Five Million Dollars ($5,000,000) per occurrence for bodily injury or death and property damage. Such insurance shall include Landlord as an additional insured, shall provide that Landlord, although an additional insured, may recover for any loss suffered by Landlord or Landlord's agents by reason of Tenant's or Tenant's Agent's negligence. All such insurance shall specifically insure Tenant's performance of fire indemnify and hold harmless agreements contained in Article 14 above although Tenant's obligations pursuant to Article 14 shall not be limited to the amount of any insurance required of or carried by Tenant under this Article 16 and Tenant is responsible for ensuring that the amount of liability insurance carried by Tenant is sufficient for Tenant's purposes. Tenant may carry said insurance under a blanket policy, provided that said insurance by Tenant shall name Landlord as an additional insured. b. PROPERLY INSURANCE. Tenant acknowledges and agrees that insurance coverage carried by Landlord will not cover Tenant's property within the Premises or within the Building. Tenant shall, at Tenant's expense, obtain and keep in force during the Term a policy of "All Risk" properly insurance, including without limitation, coverage for earthquake and flood; boiler and machinery (if applicable); sprinkler damage; vandalism; malicious mischief; and demolition, increased cost of construction and contingent liability from changes in building laws on all leasehold improvements installed in the Premises at Tenant's expense (if any), and on all equipment, trade fixtures, inventory, fixtures and personal property located on or in fire Premises, including improvements or fixtures hereafter constructed or installed on the Premises. Such insurance shall be in an amount equal to the full replacement cost of the aggregate of the foregoing and shall provide coverage comparable to the coverage in the Standard ISO All Risk form, when such form is supplemented with the coverages required above. c. MISCELLANEOUS. If Tenant fails to procure and maintain any insurance required to be procured and maintained by Tenant pursuant to this Lease, Landlord may, but shall not be required to, procure and maintain all or any portion of the same, at the expense of Tenant. Landlord's election pursuant to this Article 16c. to procure and maintain all or any portion of the insurance which Tenant fails to procure and maintains acknowledged by Tenant to be for Landlord's sole benefit. Tenant acknowledges that any insurance procured and maintained by Landlord pursuant to this Article 16c. may not be sufficient to adequately protect Tenant. Any personal property insurance procured and maintained by Landlord for Tenant's equipment, trade fixtures, inventory, fixtures and personal properly located on or in the Premises, including improvements or fixtures hereafter constructed or installed on the Premises, may not sufficiently cover the replacement cost thereof. Any insurance procured and maintained by Landlord pursuant to this Article 16c. may provide for less coverage than is required to be maintained by Tenant pursuant to this Lease. Tenant acknowledges and agrees that Tenant is and shall remain solely responsible for procuring insurance sufficient for Tenant's purposes, notwithstanding the fact that Landlord has procured or maintained any insurance pursuant to this Article 16(:. Any insurance required to be maintained by Tenant hereunder shall be in companies rated A X or better in "Best's Insurance Guide". Prior to occupancy of the Premises, Tenant shall deliver to Landlord copies of the policies of insurance required to be kept by Tenant hereunder, or certificates evidencing 15 the existence and amount of such insurance, with evidence satisfactory to Landlord of payment of premiums. No policy shall be cancellable or subject to reduction of coverage except after thirty (30) days prior written notice to Landlord. Tenant shall obtain a waiver of subrogation rights from all insurers providing insurance to Tenant whereby such insurers waive their right of recovery against Landlord and Landlord's officers, directors, agents, employees, partners and shareholders for loss or damage arising out of or incident to any insured perils, whether due to the negligence of any indemnified party and regardless of cause or origin. d. INCREASED COVERAGE. Not more frequently than once every year, Tenant shall increase the amounts of insurance as follows: (i) as recommended by Landlord's insurance broker provided that the amount of insurance recommended by such broker shall not exceed the amount customarily required of tenants in comparable projects located within the geographic area identified in Article 1p., or (ii) as required by Landlord's lender. Any limits set forth in this Lease on the amount or type of coverage required by Tenant's insurance shall not limit the liability of Tenant under this Lease. 17. SERVICES AND UTILITIES. Tenant shall pay during the Lease Term (and prior to delinquency) all charges for water, gas, light, heat and air conditioning, power, electricity, telephone, janitorial service, trash pick-up, sewer and all oilier services supplied to or consumed on the Premises. To the extent not separately metered to the Premises, or not arranged and paid for by Tenant, the cost of such services shall be an Operating Expense and Tenant shall pay, as additional rent, a portion of such cost to Landlord as provided in Article 7. Tenant shall arrange and pay for all gas and electricity to the extent they are separately metered to the Premises. Janitorial services for the Premises and telephone services required by Tenant shall also be arranged and paid for by Tenant. To the extent that gas or electricity is not separately metered to the Premises, and provided that Tenant is not in default hereunder, Landlord agrees to furnish to the Premises during reasonable hours of generally recognized business days, to be determined by Landlord in its sole discretion ("Business Hours"), and subject to the rules and regulations of the Building of which the Premises arc a part, Building Standard (defined in Exhibit "g") electricity for normal lighting and fractional horsepower office machines, heat and air conditioning required in Landlord's judgment for the comfortable use and occupation of the Premises. Landlord shall also maintain and keep lighted during Business Hours the common stairs, common entries and toilet rooms in the Building. The lack of shortage of any service or utility described in this Article due to any cause whatsoever shall not affect Tenant's obligations hereunder, and Tenant shall faithfully keep and observe all of the terms, conditions and covenants of this Lease and pay all Rentals due hereunder without diminution, credit or deduction. Landlord shall not be liable under any circumstances for injury to or death of or loss or damage to persons or property or damage to Tenant's business, however occurring, through or in connection with or incidental to failure to furnish any of the foregoing. Wherever heat generating machines or equipment are used in the Premises which affect the temperature otherwise maintaine by the heating, ventilating and air conditioning system servicing the Premises, Landlord reserves the right to install supplementary air conditioning units in the Premises and the costs thereof, including the cost of installation and the cost of operation and maintenance thereof, shall be paid by Tenant to Landlord upon demand by Landlord as additional rent, and not as an Operating Expense. The entire cost of electricity, water, heat, air conditioning, elevator service, janitorial service and other services and utilities provided to the Premises in excess of Building Standard shall be paid for by Tenant upon demand by Landlord as additional rent, and not as an Operating Expense. Tenant shall not connect or permit connection with electric current, gas or water supply lines, except through existing electrical outlets, gas lines or water lines, respectively, servicing the Premises, any apparatus or device for the purpose of using gas, electric current or water. If Tenant should require additional water, gas and/or electric current, to the extent not separately metered to the Premises, Tenant shall first procure the written consent of Landlord, which Landlord may refuse for any reason, to the use thereof and Landlord may cause a water, gas meter or electric current meter to be installed in the Premises so as to measure the amount of water, gas and electric current consumed for any such use. The cost of any such meters and of installation, maintenance and repair thereof shall be paid for by the Tenant and Tenant agrees to pay Landlord, as additional rent promptly upon demand therefor by Landlord, for all such water, gas and electric current consumed as shown by said meters, at the rates charged for such services by the local public utility furnishing the same, plus any additional expense incurred in keeping account of the water, gas and electric current so consumed. If a separate meter is not installed, such excess cost for such water, gas and electric current will be conclusively established by an estimate made by a utility company or electrical engineer selected by Landlord. Tenant shall not, without Landlord's prior written consent, use any machines or equipment which can exceed the capacity of any utility facilities now located within the Premises or the Building. If Tenant requires additional capacity, Tenant shall request Landlord to provide such capacity, which request Landlord may refuse in Landlord's sole discretion. If additional capacity is furnished, Tenant shall pay on demand and as additional rent the costs thereof, including without limitation installation, operation, repair and maintenance costs. 18. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with the Rules and Regulations that Landlord shall from time to time promulgate for the Building and the Project, including without limitation rules and regulations relating to parking and, use of the Common Areas (the "Rules and Regulations"). Landlord reserves the right from time to 16 time to make all reasonable modifications to said Rules and Regulations. The additions and modifications to these Rules and Regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant. Landlord shall not be responsible to Tenant for the nonperformance of any said Rules and Regulations by any other tenants or occupants. The current Rules and Regulations arc attached hereto as "Exhibit D". 19. HOLDING OVER. If Tenant remains in possession of the Premises or any part thereof after the expiration of the Term, with the express written consent of Landlord, such occupancy shall be a tenancy from month to month at a Base Rent in the amount of one hundred fifty percent (150%) of the Base Rent in effect immediately preceding such expiration, plus all Rentals and other charges payable hereunder, and upon all the terms hereof applicable to a month to month tenancy. In such case, either party may thereafter terminate this Lease at any time upon giving not less than thirty (30) days written notice to the other party. For any possession of the Premises after the Lease expiration without Landlord's consent, Tenant shall be liable for all detriment proximately caused by Tenant's possession, including without limitation, attorneys' fees, costs and expenses, claims of any succeeding tenant founded on Tenant's failure to vacate and for payment to Landlord of the fair market rental value for the Base Rent for the Premises, together with such other Rentals provided in this Lease to the date Tenant actually vacates the Premises, and such other remedies as are provided by law, in equity or under this Lease, including without limitation punitive damages recoverable under California Code of Civil Procedure Section 1174. 20. ENTRY BY LANDLORD. Landlord reserves and shall at any and all reasonable times have the right to enter the Premises, inspect the same, supply any service to be provided by Landlord to Tenant hereunder, to submit said Premises to prospective purchasers, mortgagees, lenders or tenants, to post notices of nonresponsibility, and to alter, improve or repair the Premises and any portion of the Building that Landlord may deem necessary or desirable, without any abatement of Rentals, and may for such purposes erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, provided that in a non-emergency situation the entrance to the Premises shall not be unreasonably blocked thereby and the business of the Tenant shall not be interfered with unreasonably. The Premises shall be shown to prospective tenants during the last six (6) months of the lease term or if Tenant provides Landlord with notice at any time during the notice period as stated in Addendum No. 2. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which of the doors in, upon and about the Premises, excluding Tenant's vaults, safes and files, and Landlord shall have the right to use any and all means which Landlord may deem proper to open said doors in an emergency in order to obtain entry to the Premises, without liability to Tenant except as otherwise expressly provided elsewhere in this Article. Any entry to the Premises obtained by Landlord by any of said means or otherwise shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises or any portion thereof. If Tenant has removed substantially all of Tenant's property from the Premises, Landlord may, without abatement of Rentals, enter the Premises for alteration, renovation or decoration during the last thirty (30) days of the Tenn. With respect to any entry by Landlord into the Premises, Landlord shall be liable to Tenant solely for physical damage caused to Tenant's personal properly located within the Premises to the extent such damage is caused by Landlord's active negligence or willful misconduct and such damage is neither insured against nor required to be insured against by Tenant pursuant to this Lease, and only with respect to an entry in a non-emergency situation. In no event shall Landlord have any liability to Tenant for any other damages caused by Landlord's entry into the Premises. Tenant hereby waives any claim for damages or for injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and any other damage or loss occasioned thereby. 21. RECONSTRUCTION. If the Premises are damaged and rendered substantially untenantable, or if the Building is damaged (regardless of damage to the Premises) or destroyed, Landlord may, within ninety (90) days after the casually, notify Tenant of Landlord's election not to repair, in which event this Lease shall terminate at the expiration of the ninetieth (90th) day. If Landlord elects to repair the damage or destruction, this Lease shall remain in effect and the then current Base Rent and Tenant's Percentage Share of Office Project Taxes and Operating Expenses shall be proportionately reduced during the period of repair. The reduction shall be based upon the extent to which the making of repairs interferes with Tenant's business conducted in the Premises, as reasonably determined by Landlord. All other Rentals due hereunder shall continue unaffected, and Tenant shall have no claim against Landlord for compensation for inconvenience or loss of business during any period of repair or reconstruction. Tenant shall continue the operation of its business on the Premises during any period of reconstruction or repair to the extent reasonably practicable from the standpoint of prudent business management. Upon Landlord's election to repair, Landlord shall diligently repair the damage to the extent of insurance proceeds available to Landlord. Landlord shall not be required to repair or replace, whether injured or damaged by fire or other cause, any items required to be insured by Tenant under this Lease including Tenants fixtures, equipment, merchandise, personal property, inventory, panels, decoration, furniture, railings, floor covering, partitions or any other improvements, alterations, additions, or property made or installed by Tenant to the Premises, and Tenant shall be obligated to promptly rebuild or restore the same to the same condition as they were in immediately before the casualty. Tenant hereby waives all claims for loss or damage to the foregoing. Tenant waives any rights to terminate this Lease if the Premises are damaged or 17 destroyed, including without limitation any rights pursuant to the provisions of Subdivision 2 of Section 1932 and Subdivision 4 of Section 1933 of the Civil Code of California, as amended from time to time, and the provisions of any similar law hereafter enacted. If the Lease is terminated by Landlord pursuant to this Article 21, the unused balance of the Security Deposit and any Rentals unearned as of the effective date of termination shall be refunded to Tenant. Tenant shall pay to Landlord any Rentals or other charges due Landlord under the Lease, prorated as of the effective date of termination. Notwithstanding anything to the contrary in this Lease, if the damage is due to the fault or neglect of Tenant or Tenant's Agents, there shall be no abatement of Base Rent or any other Rentals. Notwithstanding the foregoing, if less than thirty-three percent (33%) of the Rentable Area of the Building is damaged from an insured casualty and the insurance proceeds actually available to Landlord for reconstruction (net of costs to recover such proceeds and after all claimants thereto including lienholders have been satisfied or waive their respective claims) ("Net Insurance Proceeds") are sufficient to completely restore the Building, Landlord agrees to make such repairs and continue this Lease in effect. If, upon damage of less than thirty-three percent (33%) of the Rentable Area of the Building them arc not sufficient insurance proceeds actually available to allow Landlord to completely restore the Building, Landlord shall not be obligated to repair the Building and the provisions of the first paragraph of this Article 21 shall control. Tenants shall not be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the Premises, or for any damage to Tenant's business, or any inconvenience or annoyance occasioned by such damage, or by any repair, reconstruction or restoration by Landlord, or by any failure of Landlord to make any repairs, reconstruction or restoration under this Article or any other provision of this Lease. 22. DEFAULT. The occurrence of any one or more of the following events shall constitute a material default and breach of this Lease by Tenant: a. Tenant's failure to pay when due Base Rent, or any other Rentals or other sums payable hereunder; b. Tenant's failure to occupy and use the Premises for thirty (30) consecutive days, which failure shall be deemed an abandonment of the Premises by Tenant. c. Commencement, and continuation for at least thirty (30) days, of any case, action, or proceeding by, against, or concerning Tenant, or any guarantor of Tenant's obligations under this Lease ("Guarantor"), under any federal or state bankruptcy, insolvency, or other debtor's relief law, including without limitation, (i) a case under Title 11 of the United States Code concerning Tenant or Guarantor, whether under Chapter 7, 11, or 13 of such Title or under any other Chapter, or (ii) a case, action, or proceeding seeking Tenant's or a Guarantor's financial reorganization or an arrangement with any of Tenant's or a Guarantors creditors; d. Voluntary or involuntary appointment of a receiver, trustee, keeper, or other person who takes possession for more than thirty (30) days of substantially all of Tenant's or a Guarantor's assets, or of any asset used in Tenant's business on the Premises, regardless of whether such appointment is as a result of insolvency or any other cause; e. Execution of an assignment for the benefit of creditors of substantially all assets of Tenant or a Guarantor available by law for the satisfaction of judgment creditors; f. Commencement of proceedings for winding up or dissolving (whether voluntary or involuntary) the entity of Tenant or a Guarantor, if Tenant or such Guarantor is a corporation or a partnership; g. Levy of a writ of attachment or execution on Tenant's interest under this Lease, if such writ continues for a period of ten (10) days; h. Any Transfer or attempted Transfer of this Lease by Tenant contrary to the provisions of Article 13 above; i. With respect to any report that Tenant is required to submit hereunder, the submission by Tenant of any false report; j. The use or occupancy of the Premises for any use or purpose not specifically allowed by the terms of this Lease; or k. Breach by Tenant of any term, covenant, condition, warranty, or provision contained in this Lease or of any other obligation owing or due to Landlord other than as described in subsections 22a., b., c., d., e., f., g., h., i., or j. of this Article 22, where such failure shall continue for the period specified in this Lease or if no such period is specified, for a period of thirty (30) days after written notice thereof by Landlord to Tenant; provided, however, that if the nature of Tenant's default is such that more than thirty (30) days are reasonably required for its 18 cure, Tenant shall not be deemed to be in default if Tenant commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion, and if Tenant provides Landlord with such security as Landlord may require to fully compensate Landlord for any loss or liability to which Landlord might be exposed. 23. REMEDIES UPON DEFAULT. Upon any default or breach by Tenant, or at any time thereafter, with or without notice or demand, and without limiting Landlord in the exercise of any right or remedy which Landlord may have hereunder or otherwise at law or in equity by reason of such default or breach Landlord may do the following: a. TERMINATION OF LEASE. Landlord may terminate this Lease or Tenant's right to possession of the Premises by notice to Tenant or any other lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. In such event Landlord shall be entitled to recover from Tenant: (i) The worth at the time of award of the unpaid Rentals which had been earned at the time of termination; (ii) The worth at the time of award of the amount by which the unpaid Rentals which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (iii) The worth at the time of award (computed by discounting at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent) of the amount by which the unpaid Rentals for the balance of the Term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; and (iv) Any other amounts necessary to compensate Landlord for detriment proximately caused by the default by Tenant or which in the ordinary course of events would likely result, including without limitation the reasonable costs and expense incurred by Landlord for: (A) Retaking possession of the Premises; (B) Cleaning and making repairs and alterations (including installation of leasehold improvements, whether or not the same shall be funded by a reduction of rent, direct payment or otherwise) necessary to return the Premises to good condition and preparing the Premises for reletting; (C) Removing, transporting, and storing any of Tenant's property left at the Premises (although Landlord shall have no obligation to remove, transport, or store any of the property); (D) Reletting the Premises, including without limitation, brokerage commissions, advertising costs, and attorneys' fees; (E) Attorneys' fees, expert witness fees and court costs; (F) Any unamortized real estate brokerage commissions paid in connection with this Lease; and (G) Costs of carrying the Premises, such as repairs, maintenance, taxes and insurance premiums, utilities and security precautions, if any. The "worth at the time of award" of the amounts referred to in Articles 23a.(i) and 23a.(ii) is computed by allowing interest at an annual rate equal to the greater of: ten percent (10%); or five percent (5%) plus the rate established by the Federal Reserve Bank of San Francisco, as of the 25th day of the month immediately preceding the default by Tenant, on advances to member banks under Sections 13 and 13(a) of the Federal Reserve Act, as now in effect or hereafter from time to time amended (the "Stipulated Rate"). The computation of the amount of rental loss that could be or could have been reasonably avoided by Landlord pursuant to California Civil Code section 1951.2 shall take into account the use restrictions set forth in Paragraph 8.a. above except to the extent that Tenant proves that under all circumstances that enforcement of the use restriction would be unreasonable. b. CONTINUATION OF LEASE. Landlord may continue this Lease in full force and effect, and the Lease shall continue in effect as long as Landlord does not terminate Tenant's right to possession, and Landlord shall have the right to enforce all rights and remedies under this Lease including the right to collect all Rentals when due. During the period Tenant is in default, Landlord can enter the Premises and relet them, or any part of them, to third parties for Tenant's account. Tenant shall be liable immediately to Landlord for all costs Landlord incurs in reletting the Premises, including without limitation, those items outlined in Article 23a. (i) through a. (iv), and other like costs. Reletting can be for a period shorter or longer than the remaining 19 Term. Tenant shall pay to Landlord all Rentals due under this Lease on the date the Rentals are due, less the rent Landlord receives from any reletting. No act by Landlord allowed by this paragraph shall terminate this Lease unless Landlord notifies Tenant that Landlord elects to terminate this Lease. The use restriction provided in Paragraph 8.a. above shall apply to Landlord's remedies under California Civil Code section 1951.4 except to the extent that Tenant proves that under all circumstances enforcement of the use restriction would be unreasonable. c. OTHER REMEDIES. Landlord may pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the State in which the Premises are located. d. GENERAL. The following shall apply to Landlord's remedies: (i) No entry upon or taking of possession of the Premises or any part thereof by Landlord, nor any letting or subletting thereof by Landlord for Tenant, nor any appointment of a receiver, nor any other act of Landlord, whether acceptance of keys to the Premises or otherwise, shall constitute or be construed as an election by Landlord to terminate this Lease or Tenant's right to possession of the Premises unless a written notice of such election be given to Tenant by Landlord. (ii) If Landlord elects to terminate this Lease or Tenant's right to possession hereunder, Tenant shall surrender and vacate the Premises in broom clean condition, and Landlord may re-enter and take possession of the Premises and may eject all parties in possession or eject some and not others or eject none. Any personal property of or under the control of Tenant remaining on the Premises at the time of such re-entry may be considered and treated by Landlord as abandoned. (iii) Termination of this Lease or Tenant's right to possession by Landlord shall not relieve Tenant from any liability to Landlord under any provision of this Lease providing for any indemnification of Landlord by Tenant. Tenant shall indemnify Landlord for all personal injuries and property damage arising out of Tenant's use or occupancy of the Premises or any acts or omissions of Tenant or Tenant's Agents. 24. EMINENT DOMAIN. If more than twenty-five percent (25%) of the Premises is taken for any public or quasi-public use under the power of eminent domain (including without limitation a voluntary sale or transfer in lieu thereof), either party hereto shall have the right, at its option, to terminate this Lease by written notice to the other party given within ten (10) days of the date of such taking, and Landlord shall be entitled to any and all income, rent, award, or any interest therein whatsoever which may be paid or made (the "Award") in connection with such taking, and Tenant shall have no claim against Landlord for the value of any unexpired term of this Lease. If any part of the Building or the Project oilier than the Premises is so taken, Landlord shall have the right to its option to terminate this Lease, find in any such event Landlord shall be entitled to the entire Award whether or not this Lease is terminated. If this Lease is terminated as provided above: (i) the termination shall be effective as of the date upon which title to the Premises, the Building, the Project, or a portion thereof, passes to and vests in the condemnor or the effective date of any order for possession if issued prior to the date title vests in the condemnor, (ii) Landlord shall refund to Tenant any prepaid but unearned Rentals and the unused balance of the Security Deposit; and (iii) Tenant shall pay to Landlord any Rentals or other charges due Landlord under the Lease, prorated as of the date of taking. If twenty-five percent (25%) or less than twenty-five percent (25%) of the Premises is taken, or more than twenty-five percent (25%) thereof is so taken and neither party elects to terminate as herein provided, (i) Tenant shall receive from the Award that portion of the Award attributable to trade fixtures of Tenant located in the portion of the Premises taken which would otherwise have been removable by Tenant hereunder, to the extent the Award is not payable to the beneficiary or mortgagee of a deed of trust or mortgage affecting the Building and Landlord shall receive the balance of the Award; and (ii) the Base Rent thereafter to be paid hereunder for the Premises shall be reduced in the same ratio that the percentage of the Premises so taken bears to the aggregate rentable square feet in the Project immediately prior to the taking. In addition, if any portion of the Building is so taken and this Lease is not terminated by Landlord, Tenant's Percentage Share of Office Project Taxes and Operating Expenses shall be adjusted pursuant to Article 7. Notwithstanding this Article 24 above, upon a temporary taking of all or any portion of the Premises, the Lease shall remain in effect and Tenant shall continue to pay and be liable for all Rentals under this Lease. Upon such temporary taking, Tenant shall be entitled to any Award for the temporary use of the portion of the Premises taken which is attributable to the period prior to the date of Lease Termination, and Landlord shall be entitled to any portion of the Award for such use attributable to the period after Lease Termination. As used in this paragraph, a temporary taking shall mean a taking for a period of one year or less and does not include a taking which is to 20 last for an indefinite period and/or which will terminate only upon the happening of a specified event unless it can be determined at the time of the taking when such event will occur. 25. OFFSET STATEMENT. Tenant shall at any time and from time to time within ten (10) days following request from Landlord execute, acknowledge and deliver to Landlord a statement in writing, (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease as so modified is in full force and effect); (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of the Landlord hereunder, or specifying such defaults if any are claimed; (iii) certifying the date Tenant entered into occupancy of the Premises and that Tenant is open and conducting business at the Premises; (iv) certifying the date to which Rentals and other charges are paid in advance, if any; (v) certifying the current amount of Base Rent due under the Lease; (vi) evidencing the status of this Lease as may be required either by a lender making a loan affecting or a purchaser of the Premises or any part of the Project from Landlord; (vii) warranting that if any beneficiary of any security instrument encumbering the Premises forecloses on the security instrument, such beneficiary shall not be liable for the Security Deposit; (viii) certifying that all improvements to be constructed on the Premises by Landlord are substantially completed, except for any punch list items which do not prevent Tenant from using the Premises for its intended use, and (ix) certifying such other mailers relating to this Lease and/or the Premises as may be requested by a lender making a loan to Landlord or a purchaser of the Premises or any part of the Project from Landlord. Any such statement may be relied upon by any prospective purchaser or encumbrancer of all or any portion of the Project or any interest therein. Tenant shall, within ten (10) days following request of Landlord, deliver such other documents including Tenant's financial statements as are reasonably requested in connection with the sale of, or loan to be secured by, any portion of the Project or any interest therein. 26. PARKING. Tenant shall have the right to use the number of nonexclusive parking spaces located within the Project designated in Article 1 (1.), subject to Landlord's right to relocate such parking area from time to time. Use of all parking spaces shall be subject to the Rules and Regulations established by Landlord which may be altered at any time and from time to time during the Term. Landlord reserves the right from time to time to make changes in the size, shape, location, amount, and extent of the Common Area (including but not limited to the parking areas) provided Tenant's access to the Premises is not materially impaired or precluded. Neither Tenant nor Tenant's Agents shall at any time use more parking spaces than the number so allocated to Tenant or park or permit the parking of their vehicles in any portion of the Project not designated by Landlord as a nonexclusive parking area. Tenant and Tenant's Agents shall not have the exclusive right to use any specific parking space. Notwithstanding the number of parking spaces designated for Tenant's nonexclusive use, if by reason of any rule, regulation, order, law, statute or ordinance of any governmental or quasi-governmental authority relating to or affecting parking on the Parcel, or any cause beyond Landlord's reasonable control, Landlord is required to reduce the number of parking spaces on the Parcel, Landlord shall have the right to proportionately reduce the number of Tenant's parking spaces and the nonexclusive parking spaces of other tenants of the Building. Landlord reserves the right in its absolute discretion: to determine whether parking facilities are becoming overcrowded and in such event to re-allocate parking spaces among Tenant and other tenants of the Project; to have any vehicles owned by Tenant or Tenant's Agents which are parked in violation of the provisions of this Article 26 or Landlord's Rules and Regulations relating to parking, towed away at Tenant's cost. If Landlord elects or is required by any law to limit or control parking in the Project, by validation of parking tickets or any other method, Tenant agrees to participate in such validation or other program under such reasonable Rules and Regulations as are from time to time established by Landlord. Landlord shall have the right to close all or any portion of the parking areas at reasonable times for any purpose, including, without limitation, the prevention of a dedication thereof, or the accrual of rights in any person or the public therein. Employees of Tenant shall be required to park in areas designated for employee parking, if any. The parking areas shall not be used by Tenant or Tenant's Agents for any purpose other than the parking of motor vehicles and the ingress and egress of pedestrians and motor vehicles. 27. AUTHORITY. If Tenant is a corporation (or partnership), each individual executing this Lease on behalf of said corporation (or partnership) represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the By-Laws of said corporation (or on behalf of said partnership in accordance with the partnership agreement of such partnership) and that this Lease is binding upon said corporation (or partnership) in accordance with its terms. If Tenant is a corporation, Tenant shall, upon execution of this Lease, deliver to Landlord a certified copy of a resolution of the Board of Directors of said corporation authorizing or ratifying the execution of this Lease. If Tenant fails to deliver such resolution to Landlord upon execution of this Lease, Landlord shall not be deemed to have waived its right to require delivery of such resolution, and at any time during the Term Landlord may request Tenant to deliver the same, and Tenant agrees it shall thereafter promptly deliver such resolution to Landlord. If Tenant is a corporation, Tenant hereby represents, warrants, and covenants that (i) Tenant is a valid and existing corporation; (ii) Tenant is qualified to do business in California; (iii) all fees and all franchise and corporate taxes of Tenant are paid to date, and will be paid when due; (iv) all required forms and reports will be filed when due; and (v) the signers of 21 this Lease are properly authorized to execute this Lease on behalf of Tenant and to bind Tenant hereto. 28. SURRENDER OF PREMISES. a. CONDITION OF PREMISES. Tenant shall, upon Lease Termination surrender the Premises broom clean, trash free, and in good condition, reasonable wear and tear, and insured casualties to the extent of Net Insurance Proceeds recovered by Landlord, alone excepted. By written notice to Tenant, Landlord may elect to cause Tenant to remove from the Premises or cause to be removed, at Tenant's expense, any logos, signs, notices, advertisements or displays placed on the Premises by Tenant. If the Premises are not surrendered as required by this Article 28, Tenant shall indemnify Landlord from any loss or liability resulting from Tenant's failure to comply with the provisions of this Article 28, including, without limitation, any claims made by any succeeding tenant or losses to Landlord due to lost opportunities to lease to succeeding tenants. b. REMOVAL OF PERSONAL PROPERTY. Tenant shall remove all its personal properly from the Premises upon Lease Termination, and shall immediately repair all damage to the Premises, Building and Common Area caused by such removal. Any personal property remaining on the Premises after the Lease Termination may be packed, transported, and stored at a public warehouse at Tenant's expense. If after Lease Termination and, within ten (10) days after written demand by Landlord, Tenant fails to remove Tenant's personal property or, if removed by Landlord, fails to pay the removal expenses, the personal property may be deemed abandoned property by Landlord and may be disposed of as Landlord deems appropriate. Tenant shall repair any damage to the Premises caused by or in connection with the removal of any personal property, including without limitation, the floor, and patch and paint the walls, when required by Landlord, to Landlord's reasonable satisfaction, all at Tenant's sole cost and expense. The provisions of this Article 28 shall survive Lease Termination. 29. LANDLORD DEFAULT AND MORTGAGEE PROTECTION. Landlord shall not be in default under this Lease unless Tenant shall have given Landlord written notice of the breach, and, within thirty (30) days after notice, Landlord has not cured the breach or, if the breach is such that it cannot reasonably be cured under the circumstances within thirty (30) days, has not commenced diligently to prosecute the cure to completion. Any money judgment obtained by Tenant based upon Landlord's breach of this Lease shall be satisfied only out of the proceeds of the sale or disposition of Landlord's interest in the Building (whether by Landlord or by execution of judgment). Upon any default by Landlord under this Lease, Tenant shall give notice by registered mail to any beneficiary or mortgagee of a deed of trust or mortgage encumbering the Premises and/or any portion of the Project, whose address shall have been furnished to it, and shall offer such beneficiary or mortgagee a reasonable opportunity to cure the default, including time to obtain possession of the Premises and/or Project by power of sale or judicial foreclosure, if such should prove necessary to effect a cure. 30. RIGHTS RESERVED BY LANDLORD. Landlord shall have the exclusive right in its sole discretion, without abatement of Rentals and without limiting Landlord's other rights under this Lease, to (i) designate the name, address, or other designation of the Building and/or Project, without notice or liability to Tenant; (ii) close entrances, doors corridors, elevators, escalators or other Building facilities or temporarily abate their operation, provided same do not unreasonable interfere with the operation of Tenants business, or use by Tenant of Premises. (iii) change or revise the Business Hours of the Building; and/or (iv) expand, suspend, close, eliminate, adjust, or replace any portion of any Project or any services within any portion of the Project. 31. PLATS AND RIDERS. Clauses, plats and riders, if any, signed by the Landlord and the Tenant and endorsed on or affixed to this Lease are a part hereof. 32 WAIVER. No covenant, term or condition in this Lease or the breach thereof shall be deemed waived, except by written consent of the party against whom the waiver is claimed. Any waiver of the breach of any covenant, term or condition herein shall not be deemed be a waiver of any preceding or succeeding breach of the same or any other covenant, term or condition. Acceptance by Landlord of any performance by Tenant after the time the same shall have become due shall not constitute a waiver by Landlord of the breach or default of any covenant, term or condition unless otherwise expressly agreed to by Landlord in writing. The acceptance by Landlord of any sum less than that which is required to be paid by Tenant shall be deemed to have been received only on account of the obligation for which it is paid (or for which it is allocated by Landlord, in Landlord's absolute discretion, if Tenant does not designate the obligation as to which the payment should be credited), and shall not be deemed an accord and satisfaction notwithstanding any provisions to the contrary written on any check or contained in a letter of transmittal. Landlord's efforts to mitigate damages caused by any default by Tenant shall not constitute a waiver of Landlord's right to recover damages for any default by Tenant. No custom or practice which may arise between the parties hereto in the administration of the terms hereof shall be construed as a waiver or diminution of Landlord's right to demand performance by Tenant in strict accordance with the terms of this Lease. 22 33. NOTICES. All notices, consents and demands which may or are to be required or permitted t0 be given by either party to the other hereunder shall be in writing. All notices, consents and demands by Landlord to Tenant shall be personally delivered or sent by United States Mail, postage prepaid, addressed to Tenant as designated in Article 1m., or to such other place as Tenant may from time to time designate in a notice to Landlord pursuant to this Article 33. All notices and demands by Tenant to Landlord shall be personally delivered or sent by United States Mail, postage prepaid, addressed to Landlord as designated in Article lm., or to such other person or place as Landlord may from time to time designate in a notice to Tenant pursuant to this Article 33. Mailed notices shall be deemed delivered twenty-four (24) hours after deposit in the United States mail as required by this Article 33. Notwithstanding the foregoing, any legal notices required to be sent one party to the other (including, without limitation, a notice pursuant to California Code of Civil Procedure Section 1161) shall be delivered in the manner required by law. 34. JOINT OBLIGATIONS. If Tenant consists of more than one person or entity, the obligations of each Tenant under this Lease shall be joint and several. 35. MARGINAL HEADINGS. The captions of paragraphs and articles of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. 36. TIME Time is of the essence of this Lease and each and all of its provisions in which performance is a factor except as to the delivery of possession of the Premises to Tenant. 37. SUCCESSORS AND ASSIGNS. The covenants and conditions herein contained, subject to the provisions of Article 13, apply to and bind the heirs, successors, executors, administrators, legal representatives and assigns of the parties hereto. 38. RECORDATION. Upon request by Landlord, Tenant shall execute and acknowledge a short form of this Lease in form for recording which may be recorded at Landlord's election. Tenant shall not record this Lease or a short form or memorandum hereof without the prior written consent of Landlord. 39. QUIET POSSESSION. Upon Tenant paying the Rentals reserved hereunder and observing and performing all of the covenants, conditions and provisions on Tenant's part to be observed and performed hereunder, Tenant shall have quiet possession of the Premises for the entire Term, subject to all the provisions of this Lease and subject to any ground or underlying leases, mortgages or deeds of trust now or hereafter affecting the Premises or the Building and the rights reserved by Landlord hereunder. 40. LATE CHARGES: ADDITIONAL RENT AND INTEREST. a. LATE CHARGES. Tenant acknowledges that late payment, by Tenant to Landlord of Rentals or other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which are impracticable or extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and !ate charges which may be imposed upon Landlord by the terms of any mortgage or trust deed covering the Premises or any part of the Project. Accordingly, if any installment of Rentals or any other sum due from Tenant is not received by Landlord or Landlord's designee within three (3) business days after the due date, then Tenant shall pay to Landlord, in each case, a late charge equal to ten percent (10%) of such overdue amount. The parties agree that such late charge represents a fair and reasonable estimate of the cost and damages that Landlord will incur by reason of late payment by Tenant. Acceptance of any late charges by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of its other rights and remedies under this Lease. b. ADDITIONAL RENT AND INTEREST. All taxes, charges, costs, expenses and other amounts which Tenant is required to pay hereunder, including without limitation Tenant's Percentage Share of Office Project Taxes and Operating Expenses, and all interest and charges (including late charges) that may accrue thereon upon Tenant's failure to pay the same and all damages, costs and expenses which Landlord may incur by reason of any default by Tenant shall be deemed to be additional rent hereunder. Upon nonpayment by Tenant of any additional rent, Landlord shall have all the rights and remedies with respect thereto as Landlord has for the nonpayment of Base Rent. The term "Rentals" as used in this Lease is defined as Base Rent and all additional rent. Any payment due from Tenant to Landlord, including but not limited to Base Rent and all additional rent shall bear interest from the thirtieth (30th) day after the same is due until paid, at the Stipulated Rate. Payment of such interest shall not excuse or cure any default by Tenant. In addition, Tenant shall pay all costs and attorneys' fees incurred by Landlord in collection of such amounts. All Rentals and other monies due under this Lease shall survive Lease Termination. Interest on Rentals past due as provided herein shall be in addition to the late charges levied pursuant to Article 40a. above. All Rentals shall be paid to Landlord, in lawful money of the United States of America which shall be legal tender at the time of payment, at the address of Landlord as provided herein, or to such other person or at such other place as Landlord may from 23 time to time designate in writing. If at any time during the Term Tenant pays any Rentals due hereunder by check, which check is dishonored or is returned for insufficient funds, Landlord shall have the right, in addition to any other rights or remedies Landlord may have hereunder, to require that Rentals thereafter be paid in cash or by cashier's or certified check. 41. PRIOR AGREEMENTS. This Lease contains all of the agreements of the parties hereto with respect to the Premises, this Lease or any matter covered or mentioned in this Lease, and no prior agreements or understanding pertaining to any such matters shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. This Lease shall not be effective or binding on Landlord until fully executed by Landlord. 42. INABILITY TO PERFORM. This Lease and the obligations of the Tenant hereunder shall not be affected or impaired because the Landlord is unable to fulfill any of its obligations hereunder or is delayed in doing so, if such inability or delay is caused by reason of strike, labor troubles, Acts of God, or any other cause, similar or dissimilar, beyond the reasonable control of the Landlord. 43. ATTORNEYS' FEES. If either party to this Lease shall bring an action to interpret or enforce this agreement or for any relief against the other, including, but not limited to, declaratory relief or a proceeding in arbitration, the losing party shall pay to the prevailing party a reasonable sum for attorney's fees, expert witness fees and other costs incurred in such action or proceeding. Additionally, the prevailing party shall be entitled to all additional attorney's fees and costs in enforcing and collecting any such judgement or award. Any judgement or order entered in such action shall contain a specific provision providing for the recovery of attorney's fees and costs incurred in enforcing such award or judgement. 44. SALE OF PREMISES BY LANDLORD/LIMITATION OF LIABILITY Upon a sale or conveyance by the Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor) of Landlord's interest in the Building other than a transfer for security purposes only, the Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor) shall be relieved, from and after the date of such transfer, of all obligations and liabilities accruing thereafter on the part of Landlord, provided that any funds in the hands of Landlord or the then grantor at the time of transfer and in which Tenant has an interest, less any deductions permitted by law or this Lease, shall be delivered to Landlord's successor. Following such sale or conveyance by Landlord or the then grantor, Tenant agrees to look solely to the responsibility of the successor-in-interest of Landlord in and to this Lease. This Lease shall not be affected by any such sale or conveyance and Tenant agrees to attorn to the purchaser or assignee. If the Landlord herein is a partnership, it is understood and agreed that any claim by Tenant on Landlord shall be limited as described in Article 29, and furthermore, Tenant expressly waives any and all rights to proceed against the individual partners or the officers, directors or shareholders of any corporate partner. 45. SUBORDINATION/ATTORNMENT. This Lease, at Landlord's option, shall be subject and subordinate to all ground or underlying leases which now exist or may hereafter be executed affecting any portion of the Project and to the lien of any mortgages or deeds of trust (including all advances thereunder, renewals, replacements, modifications, supplements, consolidations, and extensions thereof) in any amount or amounts whatsoever now or hereafter placed on or against any portion of the Project or on or against Landlord's interest or estate therein, or on or against any ground or underlying lease, without the necessity of the execution and delivery of any further instruments on the part of Tenant to effectuate such subordination. Tenant covenants and agrees to execute and deliver upon demand and without charge therefor, such further instruments evidencing the subordination of this Lease to such ground or underlying leases and/or to the lien of any such mortgages or deeds of trusts as may be required by Landlord or a lender making a loan affecting the Project; provided that if Tenant attorns as required below, then with respect to any ground or underlying leases, mortgages or deeds of trust not existing as of the date this Lease is signed by Landlord and Tenant, the lessor, mortgagee or beneficiary, as applicable, under such mortgage or deed of trust or lessor under such ground or underlying lease shall agree in writing that so long as Tenant is not in default under this Lease, this Lease shall not be terminated upon any foreclosure or any termination of the underlying lease (other than a termination due to its natural expiration). Failure of Tenant to execute such instruments evidencing subordination of this Lease shall constitute a default by Tenant under this Lease. If any mortgagee, beneficiary or lessor elects to have this Lease prior to the lien of its mortgage, deed of trust or lease, and shall give written notice thereof to Tenant, this Lease shall be deemed prior to such mortgage, deed of trust or lease, whether this Lease is dated prior orsubsequent to the date of said mortgage, deed of trust or lease or the date of the recording thereof. If any proceedings are brought to terminate any ground or underlying leases or for foreclosure, or upon the exercise of the power of sale, under any mortgage or deed of trust covering any portion of the Project, Tenant shall attorn to the lessor or purchaser upon any such termination, foreclosure or sale and recognize such lessor or purchaser as the Landlord under this Lease provided that such lessor or purchaser agrees that so long as Tenant is not in default 24 hereunder and attorns as required above, this Lease shall remain in full force and effect for the full term hereof after any such termination, foreclosure or sale. 46. NAME. Tenant shall not use any name, picture or representation of the Building or Project for any purpose other than as an address of the business to be conducted by the Tenant in the Premises. 47. SEVERABILITY. Any provision of this Lease which proves to be invalid, void or illegal shall in no way affect, impair or invalidate any other provision of this Lease and all such other provisions shall remain in full force and effect; however, if Tenant's obligation to pay the Rentals is determined to be invalid or unenforceable, this Lease shall terminate at the option of Landlord. 48. CUMULATIVE REMEDIES. Except as otherwise expressly provided in this Lease, no remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 49. CHOICE OF LAW. This Lease shall be governed by the laws of the State in which the Premises are located. 50. SIGNS. Tenant shall not inscribe, paint, affix or place any sign, awning, canopy, advertising matter, decoration or lettering upon any portion of the Premises, including, without limitation, any exterior door, window or wail, without Landlord's prior written consent. 51. GENDER AND NUMBER. Wherever the context so requires, each gender shall include any other gender, and the singular number shall include the plural and vice-versa. 52. CONSENTS. Whenever the consent of Landlord is required herein, the giving or withholding of such consent in any one or any number of instances shall not limit or waive the need for such consent in any other or future instances. Any consent given by Landlord shall not be binding upon Landlord unless in writing and signed by Landlord or Landlord's agents. Except with respect to consent required in connection with an assignment or subletting pursuant to Article 13 (which assignment or subletting shall be governed by Article 13), but notwithstanding any other provision of this Lease, where Tenant is required to obtain the consent of Landlord to do any act, or to refrain from the performance of any act, Tenant agrees that if Tenant is in default with respect to any term, condition, covenant or provision of this Lease, then Landlord shall be deemed to have acted reasonably in withholding its consent if said consent is, in fact, withheld. 53. BROKERS. Tenant warrants that it has had no dealing with any real estate broker or agents in connection with the negotiation of this lease excepting only the broker or agent designated in Article 1n., and that it knows of no other real estate broker or agent who is entitled to or can claim a commission in connection with this Lease. Tenant warrants that with respect to the broker or agent designated in Article 1n., Tenant has not incurred any obligation for the payment of any real estate brokerage commissions which would be earned or due and payable by reason of the execution of the Lease. Tenant agrees to indemnify and hold Landlord harmless from and against any and all claims, demands, losses, liabilities, lawsuits, judgments, and costs and expenses (including without limitation reasonable attorney's fees) with respect to any alleged leasing commission or equivalent compensation alleged to be owing on account of Tenant's dealings with any real estate broker or agent. Landlord warrants that it will pay the brokerage commission by separated agreement. 54. SUBSURFACE AND AIRSPACE. This Lease confers on Tenant no rights either with respect to the subsurface of the Parcel or with regard to airspace above the top of the Building or above any paved or landscaped areas on the Parcel or Common Area and Landlord expressly reserves the right to use such subsurface and airspace areas, including without limitation, the right to perform construction work thereon and in regard thereto. Any diminution or shutting off of light, air or view by any structure which may be erected by Landlord on those portions of the Parcel, Common Area and/or Building reserved by Landlord shall in no way affect this Lease or impose any liability on Landlord. Landlord shall have the exclusive right to use all or any portion of the roof, side and rear walls of the Premises and Building for any purpose. Tenant shall have no right whatsoever to the exterior of exterior walls or the roof of the Premises or any portion of the Project outside the Premises except as provided in Article 55 of this Lease. 55. COMMON AREA. As used in this Lease, "Common Area" shall mean that portion of the Building, Project and Parcel and all those facilities within the Property boundary of Parcel and within the Building designated by Landlord for the nonexclusive use of Tenant in common with other authorized users, including, but not limited to, vehicle parking areas, driveways, sidewalks, landscaped areas, toilets and lavatories, entrances, lobbies, halls, atriums, corridors, stairways, passenger elevators and service areas (collectively the '"Common Area"). Landlord hereby grants to Tenant and Tenant's Agents the nonexclusive right to use the Common Area in common with Landlord, Landlord's agents, tenants of the Building and the Project, other authorized users and their agents, subject to the provisions of this Lease. This right to use the 25 Common Area shall terminate upon Lease Termination. As used in this Lease, "Common Area" shall collectively mean the following: a. RETAIL COMMON AREA. "Retail Common Area" shall mean that portion of the Common Area reasonably determined by Landlord from time to time to be of primary benefit to the Retail Space; b. OFFICE COMMON AREA. "Office Common Area" shall mean that portion of the Common Area reasonably determined by Landlord from time to time to be of primary benefit to the Office Space; and c. SHARED COMMON AREA. "Shared Common Area" shall mean that portion of the Common Area which is neither Retail Common Area nor Office Common Area. d. EXTERIOR COMMON AREA. "Exterior Common Area" shall mean that portion of the Common Area within the Project that is not located within the Building. 56. LABOR DISPUTES. If Tenant becomes involved in or is the object of a labor dispute which subjects the Premises or any part of the Project to any picketing, work stoppage, or other concerted activity which in the reasonable opinion of Landlord Is m any manner detrimental to the operation of any part of the Project or its tenants, Landlord shall have the right to require Tenant, at Tenant's own expense and within a reasonable period of time specified by Landlord, to use Tenant's best efforts to either resolve such labor dispute or terminate or control any such picketing, work stoppage or other concerted activity to the extent necessary to eliminate any interference with the operation of the Project or its tenants. To the extent such labor dispute interferes with the performance of Landlord's duties hereunder, Landlord shall be excused from the performance of such duties and Tenant hereby waives any and all claims against Landlord for damages or losses in regard to such duties. Nothing contained in this Article 56 shall be construed as placing Landlord in an employer-employee relationship with any of Tenant's employees or with any other employees who may be involved in such labor dispute. Tenant shall hold Landlord harmless and indemnify Landlord from any liability (including attorneys' fees) arising from any labor dispute in which Tenant is involved and which affects the Premises or any pan of the Project. 57. CONDITIONS. All agreements by Tenant contained in this Lease, whether expressed as covenants or conditions, shall be construed to be both covenants and conditions, conferring upon Landlord, upon a breach thereof, the right to terminate this Lease. 58. TENANT'S FINANCIAL STATEMENTS. Tenant hereby warrants that all financial statements delivered by Tenant to Landlord prior to the execution of this Lease by Tenant, or that shall be delivered in accordance with the terms hereof, are or shall be at the time delivered true, correct, and complete, and prepared in accordance with generally accepted accounting principles. Tenant acknowledges and agrees that Landlord is relying on such financial statements in accepting this Lease, and that a breach of Tenant's warranty as to such financial statements shall constitute a default by Tenant. 59. LANDLORD NOT A TRUSTEE. Landlord shall not be deemed to be a trustee of any funds paid to Landlord by Tenant (or held by Landlord for Tenant) pursuant to this Lease. Landlord shall not be required to keep any such funds separate from Landlord's general funds or segregated from any funds paid to Landlord by (or held by Landlord for) other tenants of the Building. Any funds held by Landlord pursuant to this Lease shall not bear interest. 60. MERGER. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Landlord, terminate all or any existing subleases or subtenancies, or may, at the option of Landlord, operate as an assignment to it of any or all such subleases or subtenancies. 61. NO PARTNERSHIP OR JOINT VENTURE. Nothing in this Lease shall be construed as creating a partnership or joint venture between Landlord, Tenant, or any other party, or cause Landlord to be responsible for the debts or obligations of Tenant or any other party. 62. LANDLORD'S RIGHT TO PERFORM TENANT'S COVENANTS. Except as otherwise expressly provided herein, if Tenant at any time fails to make any payment or perform any other act on its pan to be made or performed under this Lease, Landlord may upon ten (10) days written notice to Tenant, but shall not be obligated to, and without waiving or releasing Tenant from any obligation under this Lease, make such payment or perform such other act to the extent that Landlord may deem desirable, and in connection therewith, pay expenses and employ counsel. All SUMS so paid by Landlord and all penalties, interest and costs m connection therewith shall be due and payable by Tenant to Landlord as additional rent upon demand. 63. PLANS. Tenant acknowledges that any plan of the Project which may have been displayed or furnished to Tenant or which may be a part of Exhibit "A" or Exhibit "B-1" is tentative; Landlord may from time to time change the shape, size, location, number, and extent of 26 the improvements shown on any such plan and eliminate or add any improvements to the Project in Landlord's sole discretion. 64. RELOCATION. a. RELOCATION PRIOR TO POSSESSION. Prior to delivery of possession of the Premises to Tenant pursuant to Article 4a., the Landlord shall have the right to elect to relocate the a Premises to another part of the Building in accordance with the following: (i) The relocated Premises shall be substantially the same in size, dimensions, configuration, decor, and nature as the Premises described in this Lease, and shall be placed in that condition at Landlord's cost. (ii) The physical relocation of the Premises shall be accomplished at Landlord's cost. (iii) Landlord shall give Tenant at least fifteen (15) days notice of Landlord's intention to relocate the Premises. (iv) If the relocation has not been completed as of the Commencement Date set forth in Article 3, Rentals shall be abated beginning on the Commencement Date and continuing until the date that the relocated Premises are delivered to Tenant. (v) All reasonable costs incurred by Tenant which are directly related to the relocation, including but not limited to the costs of reasonable quantities of new stationery and business cards for which address changes are required, customary advertising then in use, and the cost of address changes to directories and similar items in which tenant is customarily and actually advertising at the date of Landlord's notice to Tenant of the proposed relocation, shall be paid by Landlord in a sum not-to-exceed in the aggregate the amount designated in Article 1o. (vi) If the relocated Premises are smaller or larger than the Premises as they existed before the relocation, Base Rent shall be adjusted to a sum computed by multiplying the Base Rent by a fraction, the numerator of which shall be the Rentable Area in the relocated Premises, and the denominator of which shall be the Rentable Area in the Premises before relocation. (vii) Tenant may not terminate this Lease as a result of Landlord's election to relocate the Premises pursuant to this Article 64a. b. RELOCATION AFTER POSSESSION. At any time after delivery of possession of the Premises to Tenant pursuant to Article 4a., Landlord shall have the right to relocate the Premises to another part of the Building in the same manner and upon the same terms and conditions set forth in Section 64a. except: (i) Landlord shall give Tenant sixty (60) days notice of Landlord's intention to relocate the Premises. (ii) Within said sixty (60) day period Tenant shall have the right to accept or reject the proposed relocation. (iii) If Tenant rejects the proposed relocation or fails to unequivocally accept, in writing, the proposed relocation within said sixty (60) day period, Landlord shall have the right, exercisable by written notice to Tenant within thirty (30) days after the expiration of said sixty (60) day period, to cancel and terminate this Lease; such termination to be effective as of any date chosen by Landlord and specified in Landlord's notice of termination but not less than sixty (60) days after the date of Landlord's notice of termination. If Landlord does not deliver its notice of termination within said thirty (30) day period, this Lease shall remain in full force and effect for the balance of the Term remaining hereunder as to the Premises then occupied by Tenant and Tenant shall not be required to relocate. c. NEW PREMISES. Upon any relocation pursuant to Articles 64a. or 64b., the relocated Premises shall become the Premises leased by Tenant hereunder and all references in this Lease to the "Premises" shall refer thereto. 65. WAIVER OF JURY TRIAL. LANDLORD AND TENANT HEREBY WAIVE THEIR RESPECTIVE RIGHT TO TRIAL BY JURY ON ANY CAUSE OF ACTION, CLAM, COUNTER-CLAIM OR CROSS-COMPLAINT IN ANY ACTION, PROCEEDING AND/OR HEARING BROUGHT BY EITHER LANDLORD AGAINST TENANT OR TENANT AGAINST LANDLORD ON ANY MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS AGREEMENT. 66. MISCELLANEOUS. In order to accommodate the specialized equipment, improvements, systems, and/or components (collectively, "Specialized Improvements") of another 27 tenant or tenants of the Building, Landlord shall from time to time, have rise right to recapture those portions of the Premises which are, as Landlord reasonably determines, necessary for the installation of such Specialized Improvements, which right shall be subject to the following: a. Landlord shall provide Tenant with thirty (30) days prior written notice of Landlord's intent to install any Specialized Improvements, within the Premises; b. The recaptured area of the Premises shall not exceed more than five percent (5%) of the Premises; c. The recaptured area of the Premises shall be located such that it will not unreasonably interfere with Tenant or Tenant's business within the Premises; d. The installation and operation of any Specialized Improvements shall be carried out in a manner so as to provide the least interference with Tenant's use and enjoyment of the Premises; e. The installation of the Specialized improvements shall be completed at Landlord's cost; and Landlord shall, subject to Article 20, have the right to enter upon the Premises to install and maintain any Specialized improvements; and f. Upon any recapture as provided herein, Base Rent and Tenant's Percentage Share of office Project Taxes and Operating Expenses shall be proportionately reduced based upon the adjusted rentable square footage of the Premises. 67. JOINT PARTICIPATION. Landlord and Tenant hereby acknowledge that both parties have been represented by counsel in connection with this Lease and that both panics have participated in the negotiation and drafting of all of the terms and provisions hereof. By reason of this joint participation, no term or provision of this Lease will be construed against either party as the "drafter" thereof, which terms and provisions shall include, without limitation, Section 14 hereof. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE LANDLORD OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTIONS RELATING THERETO. "LANDLORD": EAGLE SQUARE PARTNERS, A CALIFORNIA LIMITED PARTNERSHIP BY: SUNSET RIDGE DEVELOPMENT CO., INC. A CALIFORNIA CORPORATION, ITS GENERAL PARTNER By: PROM Management Group, Inc., a California corporation as Agent for Owner By: ------------------------------------------ Vicki R. Mullins ADDRESS: Its Chief Financial Officer 2600 CAMPUS DRIVE SUITE 200 SAN MATEO, CA 94403 "TENANT" QCS CORPORATION, A DELAWARE CORPORATION By: ----------------------------------- Title: -------------------------------- ADDRESS: 650 CASTRO STREET SUITE 210 MOUNTAIN VIEW, CA 94041 Dated: ------------------------------------ 28 EXHIBIT "A" [MAP] "EXHIBIT B" [MAP] "EXHIBIT C" FINISH ALLOWANCE OFFICE WORK LETTER CITY CENTRE 650 CASTRO STREET MOUNTAIN VIEW, CALIFORNIA Date: July 20, 1995 Gentlemen: The undersigned (hereinafter referred to as "Landlord") and you (hereinafter referred to as "Tenant") have executed that certain office lease covering the premises known as City Centre, 650 Castro Street, Suite 210 Mountain View, California (hereinafter referred to as the "Premises"). The purpose of this Work Letter is to set forth our mutual obligations with regard to the alteration and improvement of the Premises. 1. PLANS AND SPECIFICATIONS. Within ten (10) days from the execution hereof, Tenant shall furnish to Landlord an approved space drawing, including any such changes therein, and any other information which Landlord's architect may require for the preparation of working drawings and specifications relating to the improvements to be constructed or installed upon the Premises to adopt them for use by Tenant. Upon receipt by Landlord of such information, Landlord shall cause to be prepared drawings and specifications for the improvement and alteration of the Premises. Upon completion of said drawings and specifications, Landlord shall furnish a copy thereof to Tenant. Any improvements or changes beyond the approved working drawings and specifications shall be at the sole cost and expense of the Tenant. 2. TENANT IMPROVEMENT ALLOWANCE. Landlord will provide to Tenant improvements as per Addendum #1 of the Addenda to Lease. 3. SUBSTITUTIONS AND ADDITIONAL IMPROVEMENTS. Tenant shall pay Landlord any and all additional costs resulting from the selection of different or additional materials not covered in the Tenant Improvement Allowance, or requirements of improvements in excess of the Tenant Improvement Allowance. The additional costs established by Landlord are to include supervision and overhead. Any and all costs for working drawings shall be included in the Tenant Improvement Allowance. Any changes to the working drawings for specifications requested by Tenant alter it has been approved by both parties as described in paragraph I above, shall be paid for by the Tenant. No changes shall be made in any work or materials until Landlord has submitted an estimate to Tenant in writing of fire increased cost thereof, and Landlord and Tenant have agreed in writing on the increased cost of such different work or materials in excess of the cost of the Tenant Improvement Allowance. If Tenant shall fail to approve such estimate in writing within seven (7) days after the submission thereof, such failure is to be deemed a disapproval thereof and Landlord's contractor shall neither proceed with the proposed change or additional work nor with the work affected thereby. Tenant acknowledges that the provisions of Paragraph 4 apply to all delays resulting from Tenant's request for different work or materials, failure to approve the cost thereof and such other causes all as more particularly set forth in Paragraph 4 above. All amounts payable by Tenant to Landlord or to Landlord's space planner pursuant to rids Paragraph 3 shall be paid by Tenant promptly. Landlord may require entire payment before work commences or materials and supplies are ordered; progress payments during performance and/or furnishing and installation of materials; or any combination thereof as Landlord may elect. Landlord may discontinue performance of all work and installation of all materials if Tenant fails to make any payments promptly after requested by Landlord but in any event within ten (10) days after the rendering of bills therefor by Landlord or its contractor or space planner to Tenant. All improvements shall be surrendered by Tenant to Landlord at the end of the initial or their expiration of the term of the Lease. No credit shall be granted for the omission of materials where no replacement in kind is made. All amounts payable by Tenant to Landlord or to Landlord's architect pursuant to this Paragraph 3 shall be paid by Tenant promptly. Landlord may require progress payments during performance and/or furnishing and installation or materials; or any combination thereof as Landlord may elect. Landlord may discontinue performance of all work and installation of all materials if Tenant fails to make any payments promptly after requested by Landlord but in any event within ten (10) days after the rendering of bills therfor by Landlord or its contractor or space planner to Tenant. All improvements shall be surrendered by Tenant to Landlord at the end of the initial pr other expiration of the term of the Lease. No credit shall be granted for the omission of materials where no replacement kind is made. 4. COMPLETION AND RENTAL COMMENCEMENT DATE If delivery of possession of the Premises to Tenant is delayed as a result of delays in completion of the improvements to the Premises for any of the following reasons: (a) Tenant's failure to furnish the information specified if Paragraph 1 hereof in a timely fashion; or (b) Tenant's request for substitution or additional improvements or changes in materials, finished or installations non-building standards items requiring long lead time or installation; or (c) Tenant's changes in the final drawings and specifications; or (d) A delay in performance of building standard work as a result of Tenant's failure to approve written estimates of the cost of non- building work in accordance with Paragraph 3 hereof; or (e) Tenant's failure to make any payments required to be made by Tenant, pursuant to Paragraph 3 hereof, then, Tenant shall pay to Landlord one day's pro rata Base Rent for each day Tenant causes delay in delivery of possession beyond the Commencement Date and one day's pro rata Base Rent for each day caused for by the impact of such delay. In no event shall the expiration date of the Lease be excluded. If Landlord shall be obstructed or delayed in the commencement of completion of the work by flood or inclement weather, fire, earthquake, acts of God, war, strike, picketing, boycott or lockouts, governmental or legal intervention or other causes beyond the control of Landlord, then the date for delivering possessions and/or for completion of the work, as the case may be, shall be extended for that period of time necessary to make up for the construction time loss for reason of any or all of the causes aforesaid and Landlord shall have no liability of any kind whatsoever to Tenant as a result of such delay. If the foregoing correctly sets forth our understanding, kindly execute and return one of the enclosed copies hereof. "LANDLORD": EAGLE SQUARE PARTNERS, A California Limited Partnership By: Sunset Ridge Development Co., Inc. a California corporation, its general partner By: PROM Management Group, Inc., a California corporation as Agent for Owner By: ---------------------------------------- Vicki R. Mullins Address: Its Chief Financial Officer 2600 Campus Drive Suite 200 San Mateo, CA 94403 "TENANT": QCS CORPORATION, a Delaware corporation Address: 650 Castro Street By: Suite 210 ---------------------------------- Mountain View, CA 94041 Title: ------------------------------- EXHIBIT "D" CITY CENTRE RULES AND REGULATIONS 1. No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed or printed or affixed on or to any part of the outside or inside of the Building with out prior written consent of Landlord. Landlord shall have the right to remove any such sign, placard, advertisement, name or notice without notice to and at the expense of the Tenant. All approved signs or lettering on doors shall be printed, painted, affixed or inscribed at the expense of the Tenant by person approved of by Landlord. Tenant shall not place anything or allow anything to be placed near the glass of any window, door, partition or wall which may appear unsightly from outside the Premises; covering at all exterior windows, Tenant shall not, without prior written consent of Landlord cover or otherwise sunscreen any window. 2. The sidewalks, halls, passages, exits, entrances, elevators and stairways shall not be obstructed by any of the tenants or used by them for any purpose other than for ingress or egress for their respective Premises. 3. Tenant shall return all keys issued for the Premises. Tenant shall pay Landlord the cost of rekeying the Premises if all keys are not returned. Tenant shall not alter any lock or install any new or additional locks or any bolts on any doors or windows of the Premises. 4. The toilet rooms, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein and the expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose agents, officers, employees, contractors, servants, invitees or guests, shall have caused it. 5. Tenant shall not overload the floor of the Premises or in any way deface the Premises or any part thereof. 6. No furniture, freight or equipment of any kind shall be brought into the Building without prior notice to Landlord and all moving of the same into or out of the Building shall be done at such time and in such manner as Landlord shall designate. Landlord shall have the right to prescribe the weight, size, and position of all safes and other heavy equipment brought into the Building. Safes and other heavy objects shall, if considered necessary by Landlord, stand on supports if such thickness as is necessary to properly distribute the weight, Landlord will not be responsible for loss or damage of any such safe or property from any cause, and all damage done to the Building by moving or maintaining and such safe or other property shall be repaired at the expense of Tenant. 7. Tenant shall not use, keep or permit to be used or kept, any foul or noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to the Landlord and other occupants of the Building by reason of noise, odors and/or vibrations, or interference in any way with other tenants or those having business therein, not shall any animals or birds be brought in or about the Premises or Building. 8. No cooking shall be done or permitted, except with a microwave oven, by any Tenant on the Premises, nor shall the Premises be used for the storage of merchandise, for washing clothes, for lodging, or for any improper, objectionable or immoral purpose. 9. Tenant shall not use or keep in the Premises or the Building any kerosene, gasoline or inflammable or combustible fluid or material, or any method of heating or air conditioning other than supplied by Landlord. 10. Landlord will direct electricians as to where and how telephone and telegraph wires are to be introduced. No boring or cutting for the wires will be allowed without the consent of the Landlord. The location of telephones, call boxes and other office equipment affixed to the Premises shall be subject to the approval of Landlord. 11. Tenant shall not install any wiring above the ceiling tiles that does not comply with the fire codes. Any such wiring shall be removed immediately at the expense of Tenant . 12. On Saturdays, Sundays and legal holidays, and on other days between the hours of 6:00 PM and 8:00 AM the following day, access to the Building, or the halls, corridors, elevators or stairways in the Building, or the Premises may be refused unless the person seeking access is known to the person or employee of the Building in charge and has a pass or is properly identified. The Landlord shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. In case of invasion, mob, riot, public excitement, or other commotion, the Landlord reserves the right to prevent access to the Building during the continuance of the same by closing the doors or otherwise, for the safety of the tenants and protection of the Building and of property in the Building. 13. Landlord reserves the right to exclude or expel from the Building any person who, in the judgement of the Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of the rules and regulations of the Building. 14. No vending machine or machines of any description shall be installed, maintained or operated upon the Premises without the written consent of the Landlord. 15. Landlord shall have the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building of which the Premises are a part. 16. Tenant shall not disturb, solicit, or canvass any occupant of the Building and shall cooperate to prevent the same. 17. Without the written consent of Landlord, Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant except at Tenant's address. 18. Landlord shall have the right to control and operate the public portions of the Building, and the public facilities, and heating and air conditioning, as well as facilities furnished for the common use of the tenants, in such manner as it deems best for the benefit of the tenants generally. 19. All entrance doors in the Premises shall be left locked when the Premises are not is use, and all doors opening to public corridors shall be kept closed except for normal ingress or egress from the Premises. 20. Tenant shall place pads under all desk chairs, or have carpet coasters to protect carpet. 21. Landlord shall approve, in writing, the method of attachment of any objects affixed to walls, ceilings or doors. ADDENDA TO LEASE This Addendum to Lease is made on July 20, 1995, between EAGLE SQUARE PARTNERS, a California limited partnership ("Landlord") who address is 2600 Campus Drive, Suite 200, San Mateo, California 94403 and QCS CORPORATION, a Delaware Corporation, whose address is 650 Castro Street, Suite 210, Mountain View, California, who agree as follows: ADDENDUM NO. 1 Landlord at his sole cost and expense shall construct the following improvements: a. Carpet throughout entire suite, color to be chosen by Tenant. b. Paint walls throughout entire suite, color to be chosen by Tenant. c. Replace all broken or damaged ceiling tiles. d. Blinds for all interior and exterior windows. e. Construct four private offices with two foot wide sidelights. f. Install glass wall to the existing conference room. Except for the improvements set forth above (a. through f.), the Premises shall be accepted in its "as is" condition. ADDENDUM NO. 2 OPTION TO EXTEND TERM. Tenant is given the option to extend the term on all provisions contained in this Lease, except for the "monthly rental value" (more specifically defined as Base Rent, Project Taxes and Operating Expenses) for a period of five (5) years ("Extended Term") following expiration of the initial term, by giving notice of exercise of the option ("Option Notice") to Landlord at least six (6) months but no more than one (1) year before the expiration of the term. Such monthly rental value shall be at ninety-five percent (95 %) of the then current market rate for comparable space in the Mountain View City Centre at the time of the commencement of the Extended Term. Provided that, if Tenant is in default on the date of giving the Option Notice, the Option Notice shall be totally ineffective, or if Tenant is in default on the date the Extended Term is to commence, at the option of Landlord, the Extended Term shall not commence and this Lease shall expire at the end of the initial term. The parties shall have thirty (30) days after Landlord receives the Option Notice in which to agree on the monthly rental value during the Extended Term with an additional thirty (30) days upon mutual agreement of Landlord and Tenant. If the parties agree on the monthly rental value for the Extended Term during that period, they shall immediately execute an amendment to this Lease stating the monthly rental value effective upon the expiration of the original lease term. If the parties are unable to agree on the monthly rental value for the Extended Term within that period, the Option Notice shall be of no effect or force and this Lease shall expire at the end of the initial term. Neither party to this Lease shall have the right to have a court or other third party set the monthly rental value. Tenant shall have no other right to extend the term beyond the initial term. ADDENDUM NO. 3 AMERICANS WITH DISABILITIES ACT COMPLIANCE. Landlord and Tenant acknowledge that, in accordance with the provisions of the Americans with Disabilities Act (the "ADA"), responsibility for compliance with the terms and conditions of Title III of the ADA may be allocated as between Landlord and Tenant. In this regard and notwithstanding anything to the contrary contained in the Lease, Landlord and Tenant agree that the responsibility for compliance with the ADA (including, without limitation, the removal of architectural and communications barriers and the provision of auxiliary aids and services to the extent required) shall be allocated as follows: (i) Tenant shall be responsible for compliance with the provisions of Title I of the ADA, and of Title II and Title III of the ADA as Titles II and III relate to any construction, renovations, alterations and repairs made within the Premises if such construction, alterations and repairs are made by Tenant, at its expense without the assistance of Landlord; (ii) Landlord shall be responsible for compliance with the provisions of Title II and Title III of the ADA for all construction, renovations, alterations and repairs which Landlord is required, under this Lease, to make within the Premises, whether (pursuant to the relevant provisions of the Lease) at Landlord's or Tenant's expense; and (iii) Landlord shall be responsible for compliance with the provisions of Title III of the ADA for all exterior and interior areas of the Building not included within the Premises. Landlord agrees to indemnify and hold Tenant harmless from and against any claims, damages, costs and liabilities arising out of Landlord's failure, or alleged failure, as the case may be, to comply with the ADA, to the extent such compliance has been allocated to Landlord herein, which indemnification obligation shall survive the expiration or termination of this Lease if the Lease has not been terminated by reason of a default by Tenant. Tenant agrees to indemnify and hold Landlord harmless from and against any claims, damages, costs and liabilities arising out of Tenant's failure, or alleged failure, as the case may be, to comply with the ADA to the extent such compliance has been allocated to Tenant herein, which indemnification obligation shall survive the expiration or termination of this Lease. Landlord and Tenant each agree that the allocation of responsibility for ADA compliance shall not require Landlord or Tenant to supervise, monitor or otherwise review the compliance activities of the other with respect to its assumed responsibilities for ADA compliance as set forth in this paragraph. Landlord shall, in complying with the ADA (to the extent such compliance has been allocated to Landlord herein), be entitled to rely upon representations made to, or information given to Landlord by Tenant in regard to Tenant's use ofthe Premises, Tenant's employees, and other matters pertinent to compliance with the ADA. The indemnity of Tenant set forth above shall apply as to any liability arising against Landlord by reason of any misrepresentations or misinformation given by Tenant to Landlord. The allocation of responsibility for ADA compliance between Landlord and Tenant, and the obligations of Landlord and Tenant established by such allocations, shall supersede any other provisions of the Lease that may contradict or otherwise differ from the requirements of this paragraph. EX-10.12 20 EX-10.12 IBM/QCS Confidential Exhibit 10.12 SERVICES AGREEMENT BETWEEN INTERNATIONAL BUSINESS MACHINES CORPORATION AND QCS CORPORATION NOVEMBER 23, 1996 Services Agreement between IBM and QCS Page 1 of 12 11/22/96 IBM/QCS Confidential This Services Agreement is by and between International Business Mechines Corporation ("IBM"), a New York corporation having an office at 500 Columbus Avenue, Thornwood, New York 10594, and QCS Corporation ("QCS"), a Delaware corporation, having a principal place of business at 650 Castro Street, Suite 210, Mountain View, California 94041. Certain IBM or its suppliers Services, custom solutions, and revenue based payment provisions are described in the applicable Attachments and Transaction Documents to this Agreement. This Agreement and its applicable Attachments and Transaction Documents are the complete agreement regarding this transaction, and replaces any prior oral or written communications between us. By signing below for our respective Enterprises, each of us agrees to the terms of this Agreement. Once signed, 1) any reproduction of this Agreement, an Attachment, or Transaction Document made by reliable means (for example, photocopy or facsimile) is considered an orginal and 2) all Services and Products you order under this Agreement are subject to it. AGREED TO: QCS CORPORATION AGREED TO: IBM CORPORATION BY: /s/ [illegible] BY: /s/ [illegible] --------------------------- --------------------------- QCS AUTHORIZED SIGNATURE AUTHORIZED SIGNATURE NAME (PRINT): [illegible] NAME (PRINT): [illegible] ------------------ ------------------ DATE: 11/23/96 DATE: 10:27AM 11/23/96 After signing, please return a copy of this Agreement to the following address: IBM Corporation 500 Columbus Avenue Thornwood, NY 10594 Services Agreement between IBM and QCS Page 2 of 12 11/22/96 IBM/QCS Confidential TABLE OF CONTENTS
Section Title Page ------- ----- ---- Part 1 - General 4 1.1 Definitions 4 1.2 Agreement Structure 5 1.3 Electronic Communications 5 1.4 Prices and Price Changes 5 1.5 Invoicing, Payment, and Audit 5 1.6 Patents and Copyrights 6 1.7 Limitation of Liability 6 1.8 Your Additional Rights 7 1.9 Changes to and Termination of Services 7 1.10 Changes to the Agreement Terms 7 1.11 Agreement Termination 7 1.12 Geographic Scope 8 1.13 Governing Law 8 1.14 Notice 8 Part 2 - Responsibilities of the Parties 8 2.1 Mutual Responsibilities 9 2.2 Our Responsibilities 9 2.3 Your Other Responsibilities 9 Part 3 - Warranties 10 3.1 The IBM Warranties 10 3.2 Extent of Warranty 10 3.3 Items Not Covered by Warranty 10 Part 4 - Equipment Provided by IBM 10 Part 5 - Customer Transmitted Data 11
Services Agreement between IBM and QCS Page 3 of 12 11/22/96 IBM/QCS Confidential QCS has a Lotus Notes-based multimedia software product which links Retailers with their Suppliers in many locations offering a "business to business" retail services network. IBM has an extensive worldwide marketing base which includes Retailers, and the ability to provide networking services through the IBM InterConnect Service for Lotus Notes. QCS and IBM have decided therefore to work together as provided in this Agreement in order to deliver a service which links Retailers with their Suppliers worldwide, and have agreed to the following: PART 1 - GENERAL 1.1 DEFINITIONS "AGREEMENT" shall mean this Agreement, together with any applicable Attachments and/or Transaction Documents. "END USER" is any party whom you authorize, by any means, for example, a USER IDENTIFICATION, to access the Service. It also means any party whom you authorize to access programs, data, or equipment within the Service. "ENTERPRISE" is any legal entity (such as a corporation) and the subsidiaries it owns by more than 50 percent. "EQUIPMENT" is a machine, its features, conversions, upgrades, elements, or accessories, or any combination of them. The term "Equipment" includes IBM Equpiment and any non-IBM Equipment we may provide to you. "MATERIALS" are work product (such as programs, program listings, programming tools, documentation, reports, and drawings) that we may deliver to you during a project. The term MATERIALS does not include Programs. "PRODUCT" is a Program or Equipment. "PROGRAM" is the following, including features and any whole or partial copies: 1. machine-readable instructions; 2. a collection of machine-readable data, such as a database; and 3. related licensed materials, including documentation and listings, in any form. The term PROGRAM includes an IBM Program and any non-IBM Program that we may provide to you. The term does not include licensed internal code or MATERIALS. "SERVICES" are described in the applicable Transaction Documents and include access to, and use of, Equipment, Programs, networking facilities, and associated enhanced communication and support services. Except for the right to use programs that we authorize you to access through the Services, we grant no other rights to those programs to you or End Users. Initially, the "IBM InterConnect for Lotus Notes" Service described in the Exhibit 01 hereto is made part of this Agreement. "START DATE" of a Service is the day on which we make it available to you. "SYSTEM" is the Services and Products we provide together under this Agreement that we identify to you as a "System." Services Agreement between IBM and QCS Page 4 of 12 11/22/96 IBM/QCS Confidential 1.2 AGREEMENT STRUCTURE ATTACHMENTS Some Services and Products have terms in addition to those we specify in this Agreement. We provide the additional terms in documents called "ATTACHMENTS," which are also part of this Agreement. For example, we may describe the additional terms for Programs in an Attachment. We make the Attachments available to you for signature. TRANSACTION DOCUMENTS For each business transaction, we will provide to you the appropriate "TRANSACTION DOCUMENT(S)" that confirm the details of the transaction. Some Transaction Documents require signature, and others do not. Supplements are an example of Transaction Documents that must be signed by both of us. Supplements may contain descriptions of custom solutions and associated special charges or descriptions of project schedules, responsibilities, and associated charges. Exhibits and Fee Schedules are unsigned Transaction Documents that explain in detail standard Services, Programs, and associated charges. Initially Supplement 01 and Exhibit 01 are made a part of this Agreement. CONFLICTING TERMS If there is a conflict among the terms in the various documents, those of an Attachment prevail over those of this Agreement. The terms of a Transaction Document prevail over those of both of these documents. 1.3 ELECTRONIC COMMUNICATIONS Each of us may communicate with the other by electronic means, such as IBM; Mail Exchange and Information Exchange. Each of us agrees to the following for all electronic communications: 1. a User Identification contained in an electronic document is legally sufficient to verify the sender's identity and the document's authenticity; 2. an electronic document that contains a User Identification is a signed writing; and 3. an electronic document, or any computer printout of it, is an original when maintained in the normal course of business. 1.4 PRICES AND PRICE CHANGES The payment terms and conditions described in: (i) Section 3, entitled "Set-up Costs and Frame Relay Surcharges" of Exhibit 01; and (ii) Section 2, entitled "Revenue Based Payments" of Supplement 01 sets forth our payment and price terms and are made part of this Agreement. 1.5 INVOICING, PAYMENT AND AUDIT Payments shall be made monthly and shall be deemed to be made on the date of electronic funds transfer to the following IBM account of amounts due. Account information such as account number, identification codes and address, will be provided with 30 days after the Effective Date. QCS will maintain relevant records to support payments made to IBM and to demonstrate to IBM that QCS has otherwise complied with this Agreement. QCS will retain and make available such records for three (3) years from the date of the related transaction or payments. If IBM requests, QCS will make financial records available to an independent auditor chosen and compensated by IBM. IBM's requests will be in writing and will not occur more than twice each year. The auditor will sign a confidentiality agreement and will only disclose to IBM any amounts due and payable for the period examined. Services Agreement between IBM and QCS Page 5 of 12 11/22/96 IBM/QCS Confidential If an audit discovers that QCS underpaid IBM, QCS will pay the amount due plus interest. Interest accrues from the payment due date. The interest rate is the lower of two percent (2%) per month or the highest interest rate allowed by law. If QCS underpaid IBM by more than five percent (5%). QCS will immediately reimburse IBM for all expenses associated with the audit. IBM may also have other remedies under the law and this Agreement. 1.6 PATENTS AND COPYRIGHTS For purposes of this Section only, the term "Product" includes Materials alone or in combination with Products we provide to you as a System. If a third party claims that a Product we provide to you infringes that party's patent or copyright, we will defend you against that claim at our expense and pay all costs, damages, and attorney's fees that a court finally awards, provided that you: 1. promptly notify us in writing of the claim; and 2. allow us to control, and cooperate with us in, the defense and any related settlement negotiations. If such a claim is made or appears likely to be made, you agree to permit us to enable you to continue to use the Product, or to modify it, or replace it with one that is at least functionally equivalent. If we determine that none of these alternatives is reasonably available, you agree to return the Product to us on our written request and we may terminate the affected Service. This is our entire obligation to you regarding any claim of infringement. NOTICE OF INFRINGEMENT All notices of patent or copyright infringement permitted or required by this Agreement will be in writing, will be sent to the following address, and will take effect upon receipt. IBM Corporation Internet Division Counsel Route 100, Box 100 Somers, NY 10589 CLAIMS FOR WHICH WE ARE NOT RESPONSIBLE We have no obligation regarding any claim based on any of the following: 1. your modification of a Product, or a Program's use with equipment and programs other than the Equipment and Programs with which the Program is designed to operate; 2. the combination, operation, or use of a Product with any product, data, or apparatus that we did not provide; or 3. infringement by a non-IBM Product alone, as opposed to its combination with Products we provide to you as a System. 1.7 LIMITATION OF LIABILITY Circumstances may arise where, because of a default on our part or other liability, you are entitled to recover damages from us. In each such instance, regardless of the basis on which you are entitled to claim damages from us, we are liable only for: 1. payments referred to in our patent and copyright terms described above; 2. bodily injury (including death), and damage to real property and tangible personal property; and 3. the amount of any other actual loss or damage, up to the greater of $100,000 or the charges (if recurring or usage, 12 months' charges apply) for the Service or Product that is the subject of the claim. Services Agreement between IBM and QCS Page 6 of 12 11/22/96 IBM/QCS Confidential This limit also applies to any of our subcontractors and Program developers. It is the maximum for which we are collectively responsible. ITEMS FOR WHICH WE ARE NOT LIABLE Under no circumstances are we, our subcontractors, or Program developers liable for any of the following: 1. third-party claims against you for losses or damages (other than those under the first two items listed above); 2. loss of, or damage to, your records or data; or 3. economic consequential damages (including lost profits or savings) or incidental damages, even if we are informed of their possibility. 1.8 YOUR ADDITIONAL RIGHTS You may have additional rights under certain laws (such as consumer laws) which do not allow the exclusion of implied warranties, or the exclusion or limitation of certain damages. If these laws apply, our exclusions or limitations may not apply to you. 1.9 CHANGES TO AND TERMINATION OF SERVICES We will give you three months' written notice if we increase Service charges or change invoicing procedures, or when a planned change would substantially alter a Service from its current description. We will give you 12 months' written notice if we terminate a Service (or if we change this 12-month notice period). However, if a third party claims that a Product we provide as part of a Service infringes a patent or copyright, we reserve the right to terminate the Service effective immediately. 1.10 CHANGES TO THE AGREEMENT TERMS In order to maintain flexibility in our Services, Products, and options, we may change the terms of IBM's standard Services Agreement by giving you three months' written notice. However, these changes are not retroactive. They apply, as of the effective date we specify in the notice, only to new orders (those we receive on or after the date of the notice) and to on-going transactions, such as licenses and Services. Otherwise, for a change to be valid, both of us must sign it. Additional or different terms in any order or written communication from you are void. 1.11 AGREEMENT TERMINATION Subject to the next sentence, either party may, for its convenience, terminate this Agreement upon ninety (90) days' written notice to the other party. However, IBM will give you 12 months' written notice if such termination for convenience is based on the termination of the Service (or if we change this 12-month notice period). This Agreement will terminate either on the date specified in the notice, which shall be in compliance with the time periods for notice contained in this Section, or at a later date specified in the notice. Upon the receipt of notice of termination, the parties will stop work under this Agreement in an orderly manner and return the other's property in its possession, less one (1) archival copy of any Code delivered to the other party, including QCS Software solely for dispute resolution and internal account record purposes for a period not to exceed three (3) years, and which will be treated as confidential information pursuant to the terms of our Agreement for Exchange of Confidential Information for the entire period of such use. Services Agreement between IBM and QCS Page 7 of 12 11/22/96 IBM/QCS Confidential Notwithstanding the foregoing, if QCS terminates, QCS' obligations contained in the "Revenue Based Payments" Section of Supplement 01, shall survive and continue, as provided in that Section. If IBM terminates for convenience, IBM will receive no share of Revenue earned after the date of termination, and QCS will pay IBM 100% of its share of the revenue through the date of termination. Either party may terminate this Agreement for cause, effective on receipt of notice to the other party, when that other party: a) becomes insolvent; b) becomes the subject of any proceedings seeking relief, reorganization, receivership or rearrangement under any laws relating to insolvency; c) makes an assignment for the benefit of creditors; d) begins the liquidation, dissolution or winding up of its business; e) consolidates, merges, sells, leases, exchanges or transfers 50% or more of its assets or otherwise changes control without IBM's consent which shall not be unreasonably withheld unless such a change of control involves an entity engaged in similar activities as IBM's contemplated activities under by this Agreement, in which case, IBM's consent shall be in IBM's sole and absolute discretion; f) commits a material breach which is not remedied within 30 days after notice, such as continued failure to make payment or knowing violation of intellectual property rights. The parties will promptly apprise each other if any such cause appears imminent. Termination of this Agreement does not affect previously granted paid-up rights and licenses to Retailers and Suppliers authorized by this Agreement. Any terms of this Agreement that by their nature extend beyond its termination (for example, with respect to Revenue, Intellectual Property, Indemnification, Limitation of Liability and Term and Termination) will survive. These terms will apply to either party's successors and assigns. 1.12 GEOGRAPHIC SCOPE All your rights, all our obligations, and all obligations are valid only in the country in which the transaction is performed or, if we agree, the country where the Product is placed in productive use, except that all licenses are valid as specifically granted. 1.13 GOVERNING LAW The laws of the State of New York govern this Agreement. The parties hereby expressly waive any right to a jury trial and agree that any action to resolve disputes relating to this Agreement shall be tried by a judge without a jury and that any proceeding, counterclaim or action arising out of or from this Agreement shall be commenced in the state of New York. The United Nations' Convention on International Sale of Goods does not apply. 1.14 NOTICE All notices permitted or required by this Agreement, except for notices of patent and copyright infringement which will be sent to the address specified in section 1.6, "Patents and Copyrights," will be sent to the following address and will take effect upon receipt: IBM Corporation Internet Division Counsel Route 100, Box 100 Somers, NY 10589 PART 2 - RESPONSIBILITIES OF THE PARTIES Services Agreement between IBM and QCS Page 8 of 12 11/22/96 IBM/QCS Confidential 2.1 MUTUAL RESPONSIBILITIES Each of us agrees that under this Agreement: 1. neither of us grants the other the right to use its trademarks, trade names, or other designation in any promotion or publication, other than as provided in this Agreement or in the Transaction Documents; 2. all information exchanged by both of us is nonconfidential unless covered by a signed confidentiality agreement or as otherwise provided in this Agreement or in the Transaction Documents. Part 5 of this Agreement describes our responsibilities for handling data and information you transmit using the Services; 3. each is free to enter into similar agreements with others provided no conflict exists between such agreements and this Agreement; 4. each grants the other only the licenses specified. No other licenses (including licenses under patents) are granted; 5. each will promptly notify the other if it becomes aware of any unsafe conditions or hazardous materials to which the other's personnel would be exposed at any of its facilities; 6. neither of us will bring a legal action more than two years after the cause of action arose; and 7. neither of us is responsible for failure to fulfill its obligations due to causes beyond its control. 2.2 OUR RESPONSIBILITIES We will: 1. inform you of Service descriptions, charges, discounts, allowances, and other terms in Transaction Documents; 2. provide to you necessary User Identifications to enable access to the Services and; 3. perform in accordance with the obligations set forth in the Transaction Documents. 2.3 YOUR OTHER RESPONSIBILITIES You agree: 1. not to assign, or otherwise transfer, this Agreement or your rights under it, delegate your obligations, or resell any Service, without prior written consent. Any attempt to do so is void; 2. to allow us to install mandatory engineering changes (such as those required for safety) on Equipment; 3. that you are responsible for the results obtained from the use of the Services and Products; 4. to provide us with sufficient, free, and safe access to your facilities for us to fulfill our obligations; 5. to control and be responsible for User Identifications and their distribution to End Users; 6. to obtain, install, and maintain suitable equipment as necessary to access the Services; 7. to comply with all applicable laws, regulations, or conventions including those related to data privacy, international communications, and exportation of technical or personal data. You are responsible for obtaining all necessary governmental, regulatory, or statutory approvals for your use of the Services; 8. to obtain all required permissions if you use a Service to copy, download, display, distribute, or execute programs or perform other works; 9. to be responsible for data, programs, or other material that you provide for use with a Service, and ensure that 1) we do not violate anyone's rights in providing the Service, and 2) the disclosure or use of the material through the Service does not breach any contractual relationship; 10. to inform, in writing, those whom you authorize to access a Service, of the applicable terms of the Agreement and that we have no liability to them. You may use the name "IBM" when informing them that your products are available through the Services; and Services Agreement between IBM and QCS Page 9 of 12 11/22/96 IBM/QCS Confidential 11. to authorize us to include your name, contact information, and other mutually-agreed-to information in a directory of IBM customers, unless you notify us otherwise in writing within one month of your first order for the Services. PART 3 - WARRANTIES 3.1 THE IBM WARRANTIES Warranty for IBM Services For each IBM Service, we warrant that we perform it: 1. in a workmanlike manner; and 2. according to its current description contained in this Agreement, an Attachment, or a Transaction Document. Warranty for IBM Programs We specify the warranty for warranted IBM Programs in an Attachment. Warranty for Systems Where we provide a System (for example, when we provide Services, Equipment, and Programs according to our marketing proposal), we warrant that its components are compatible and will operate with one another. This warranty is in addition to our other applicable warranties. 3.2 EXTENT OF WARRANTY Misuse, accident, modification, unsuitable physical or operating environment, operation with equipment and programs other than the Equipment and Programs with which a Program is designed to operate, improper maintenance by you, or failure caused by a product for which we are not responsible, may void the warranties. THESE WARRANTIES REPLACE ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 3.3 ITEMS NOT COVERED BY WARRANTY We do not warrant uninterrupted or error-free operation of a Service or Product. We will identify IBM Services and Products that we do not warrant. Unless we specify otherwise, we provide Materials, non-IBM Services and non-IBM Products on an "AS IS" basis. However, non-IBM manufacturers, suppliers, or publishers may provide their own warranties to you. PART 4 - EQUIPMENT PROVIDED BY IBM We may provide Equipment to be installed on your premises for the purpose of providing a Service. The Equipment is and will remain the asset of IBM or its lessor and will not become a fixture or realty. Certain Equipment may contain licensed internal code. We will identify this Equipment to you. No right, title, or interest in or to the Equipment, or licensed internal code associated with it, or any related planning information, is passed to you. However, we will use such Equipment to provide Services to you. Services Agreement between IBM and QCS Page 10 of 12 11/22/96 IBM/QCS Confidential As appropriate, we will provide you physical planning information for the Equipment. You agree to comply with that information in order to provide an environment meeting our specifications. OUR RESPONSIBILITIES We will: 1. install the Equipment we provide at your site unless we specify otherwise; 2. maintain the Equipment; and 3. be responsible for all return, removal, and shipping charges for the Equipment. YOUR RESPONSIBILITIES You agree to: 1. provide and pay for the physical space and electrical power for the Equipment at your site; 2. be responsible for loss of or damage to the Equipment caused by your or your employees' or your agents' intentional acts or negligence; 3. provide us or our designee with all assistance reasonably necessary to permit us access to your site to perform inspection, installation, preparation for return, or maintenance as is appropriate; 4. provide at no cost to us, adequate security to protect the Equipment from theft, loss, damage, or misuse; 5. return to us, or permit us or our designee to remove at our discretion, the Equipment, any licensed internal code associated with it, and physical planning documentation at the expiration or termination of the Service; 6. not alter the Equipment in any manner, not move it to other locations, and not transfer it to anyone else without our prior written approval; 7. keep the Equipment free from all liens, charges, or encumbrances; and 8. affix and keep in a prominent place on the Equipment any marking or label we require. PART 5 - CUSTOMER TRANSMITTED DATA We agree not to disclose your confidential information, including programs and data, transmitted using the Services. However, we have no obligation of confidentiality relating to your information, including programs and data, which is not confidential. Information that is not confidential includes information which is: 1. either currently publicly available or becomes publicly available in the future without our breach of any obligation or responsibility described in this Agreement; 2. rightfully received by either of us from a third party, where the information was received without any obligation of confidentiality associated with it; 3. already in our possession without an obligation of confidentiality; 4. independently developed by us; 5. approved for disclosure by you; or 6. treated by you as nonconfidential. We also have no liability for any disclosure of information that occurs as the result of our delivery of your information, at your direction and to a recipient you designate, when the delivery is made in the normal course of Service provision (for example, to an incorrect delivery address provided by you to us). We may disclose information to the extent required by law. Services Agreement between IBM and QCS Page 11 of 12 11/22/96 IBM/QCS Confidential Handling of your information You are responsible for selection and use of the security facilities and options that we provide. You are responsible to develop and maintain procedures (apart from the Services) to protect your information. You are responsible for backup and restoration of your information. For the purposes of operation and maintenance we may use, copy, display, store, and distribute internally your information. We agree not to reverse assemble or reverse compile your information. We do not guarantee that these procedures will prevent the loss of, alteration of, or improper access to, your information. You agree that access to your information will not prohibit or prevent us from developing or marketing any Service or Product. For transmission carried over interexchange carriers' and local exchange carriers' facilities, IBM is not responsible for transmission errors, or corruption or security of data. We reassign to other customers data storage that you return to us. We do not erase data storage and, in some cases, the next customer accessing a disk may be able to read residual data. We are not responsible for your failure to erase sensitive data from disk space returned to us. Working Contract 11/23 Services Agreement between IBM and QCS Page 12 of 12 IBM/QCS Confidential EXHIBIT 01 TO THE SERVICE AGREEMENT BETWEEN IBM CORPORATION AND QCS CORPORATION DATED NOVEMBER 23, 1996 IBM INTERCONNECT FOR LOTUS NOTES EXHIBIT THE TERMS OF THE AGREEMENT APPLY TO THIS EXHIBIT 1. BACKGROUND Under the terms of this Exhibit, we provide to you the "Basic Offer" version of IBM InterConnect for Lotus Notes Service (the "Service"). As part of this Service, IBM Corporation, or its suppliers ("we" or "us") will provide QCS Corporation ("you") space on our premises where your Lotus Notes applications and data bases will be resident and can be accessed by both you and users within your enterprise that you authorize. Additionally, the Service provides your authorized users with the capability to perform selected Lotus Notes functions. We provide you the use of the facilities under this Service, including those for loading, replicating and maintaining your applications and data bases, through a dial connection to the Service in the United States. We restrict the use of the facilities under this Service to your Lotus Notes administrator and to Lotus Notes client IDs and users whom your administrator has certified (and to whom your administrator has provided the appropriate network connection scripts). Access to this Service is available through selected networks that are interconnected to the Service. Network interconnect access availability is subject to change without prior notice. If either party terminates this Service, we will return to you your information and data content. We reserve the right to maintain one copy for archival purposes only, solely for dispute resolution and internal account record purposes for a period not to exceed three (3) years, and which will be treated as confidential information pursuant to the terms of our Agreement for Exchange of Confidential Information for the entire period of such use. Both of us agree that neither party is a legal representative, partner, joint venturer, franchisee, or agent for any purpose of the other, unless both parties have signed a separate written business partner agreement. Other than as specified in this Exhibit or the Agreement, neither party makes any representations, or assumes or creates any obligations, on behalf of the other. OUR RESPONSIBILITIES We provide the hardware and software on our premises and the network connectivity, and are responsible for maintaining the Service and its operational status in support of your applications and data bases that are resident on our premises. We are responsible for licensing the software that we provide. We, in our sole judgment, provide the hardware, software and network connectivity we deem appropriate. We are responsible for maintaining the network interconnect access, which is subject to change without prior notice. We will provide you a list of current interconnected networks upon request. We will provide you with an "800" number for help desk support solely related to the Service. YOUR RESPONSIBILITIES You are responsible for the evaluation, selection, authorization, use and results obtained from the Lotus Notes security facilities and security procedures provided under this Service. You are responsible for providing your own servers and/or workstations on your premises and for licensing, installing and maintaining on your servers and/or workstations the Lotus Notes program. Services Agreement between IBM and QCS - Exhibit 01 Page 1 of 7 11/22/96 IBM/QCS Confidential Your are responsible for invoicing and collecting any fees which you charge to users that access your information and data content. You shall not use this Service to send or receive any information in the form of text, graphics, or programs (whether or not provided by IBM) which infringes any patent, copyright, trademark, trade secret, or other intellectual property right, or any privacy or similar right of another. Immediately upon written notice we may terminate your authorization to maintain your information and data on our facilities if you infringe any intellectual property right, copyright, patent, trademark, privacy right, or similar right of another in conjunction with the information and data content you provide. You are responsible for promptly notifying us of any event or circumstance, and will provide all information relating to such event or circumstance if requested by us, related to this Service or your information and data which could lead to a claim or demand against us by any third party. You are solely responsible for the accuracy of all your information and data content, including but not limited to the applications and data bases you place or have placed on the Service. You are responsible for ensuring that your information and data content does not violate any law or regulation. You will: 1. be solely responsible for those who you permit to make modifications to your information and data, and any content contained therein, including but not limited to the accuracy and availability of the information and data content you provide to your users; and 2. provide assistance to those who access your information and data content regarding its use. INDEMNIFICATION You shall defend, indemnify, and hold us harmless against any liabilities arising out of: a) any injury to persons or property caused by any item sold or advertised in connection with your information and data, b) any claim that any item sold or advertised in connection with your information and data does not comply with all local and international safety and labeling requirements and all other relevant local and international laws, treaties, regulations, ordinances, and the like, c) any defamatory, libelous or illegal, or allegedly defamatory, libelous or illegal material contained within your information and data, d) any material infringing or allegedly infringing on the proprietary rights (including but not limited to intellectual property rights) of a third party, e) any third party claim arising out of third party access or use of your information and data, and f) any claim by you that your data was compromised because of a failure to provide adequate security. THIRD PARTY SOFTWARE All third party software used to provide this Service is provided "as is." Notwithstanding Section 1.6, "Patents and Copyrights," of the Agreement, we do not provide you with any patent or copyright indemnification with regard to such third party software. AVAILABILITY Our objective is to make this Service available 24 hours per day 7 days per week except for scheduled maintenance. Maintenance is currently scheduled daily. However, access to the Service may be dependent upon resources not under the control of IBM. We reserve the right to interrupt the Service to perform emergency maintenance as needed. 2. INTERCONNECT BASIC OFFER - SERVICE: DETAILED DESCRIPTION The Service provided to you hereunder is the "Basic Offer" of the IBM InterConnect for Lotus Notes Service only and is made up of the following components, each of which is discussed in detail below: - - Transport Services Agreement between IBM and QCS - Exhibit 01 Page 2 of 7 11/22/96 IBM/QCS Confidential - - Network and Server Management - - Performance Management - - Security - - Mail & Replication Services - - Implementation Support - - Help Desk Support - - Administrator Registration - - Set-up Costs and Frame Relay Surcharges TRANSPORT FLEXIBLE ACCESS OPTIONS: Access to the Service is available through a variety of IBM options. IBM will help QCS determine the best access method for each specific location. DIAL-UP ACCESS: Dial-up access to the Service is available through a Global X.25 network. IBM provides a local dial node or 800 number by which a customer can establish a dialed modem connection. The network works with all modem manufacturers at a variety of speeds. The current maximum supported rate is [*] . QCS will provide its own analog phone line and modem to access the network. Note: Mobile or remote endpoints running Notes release 3.X typically use the X.PC protocol provided in Lotus Notes to connect with the Service's server complex. DEDICATED ACCESS: Customers may also select a dedicated frame relay connection from the IBM frame relay service. This service provides greater bandwidth, with speeds of up to [*] SLIP/PPP (IP) ACCESS: IBM will also offer PPP and SLIP dial in the future. The release 3.X client of Lotus Notes requires an external utility to establish the PPP connection, but this feature is built into Lotus Notes Release 4. NETWORK MANAGEMENT TWENTY-FOUR HOUR NETWORK SURVEILLANCE: IBM provides 7x24 coverage of the Service's access facilities to ensure maximum availability of the Service's environment. Network services are proactively monitored for alarms (faults). NETWORK LOAD BALANCING: IBM will analyze the Service's network configuration to assure maximum utilization of access facilities. NETWORK REDUNDANCY: The Service utilizes "the best of breed" Global X.25 and Frame Relay networks available. The redundant routing and intelligent networking built into these networks ensures the highest availability and quality. NETWORK CAPACITY MANAGEMENT: IBM proactively monitors network utilization to ensure that appropriate capacity is available for QCS' networking needs. If deficiencies are detected, IBM will contact QCS and take appropriate steps to remedy the situation. SERVER MANAGEMENT STORAGE: IBM provides customers with 500 megabytes in the basic offer and options in increments of 1 gigabyte of disk space for storage of QCS' information. MIRRORED DISKS: IBM utilizes mirrored disks to assure the integrity of QCS' data and to prevent loss of information. NIGHTLY BACKUPS: IBM performs regularly scheduled nightly backups of QCS' data to provide a recovery source in case of data corruption. [*] CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION Services Agreement between IBM and QCS - Exhibit 01 Page 3 of 7 11/22/96 IBM/QCS Confidential SERVER CAPACITY MANAGEMENT: IBM proactively monitors the Service's servers to help assure that adequate disk space and simultaneous user capacity is available to support the QCS' data requirements. LOAD BALANCING: IBM provides proactive monitoring of the Service's server environment. Additional servers may be added to ensure appropriate application performance. SURVEILLANCE AND MAINTENANCE: IBM provides proactive, 7 x 24 surveillance and maintenance of the Service's server environment. This includes monitoring server tasks and alarms to assure smooth and efficient operations. SECURITY MANAGEMENT DIAL-UP LOG-IN AND PASSWORD: The Service users who access the service via dial-up connection use a pre-scripted log-in, password and user authentication for security purposes. This dial-up security supplements the security inherent in Lotus Notes that is, Access Control Lists (ACLs), user authentification and RSA encryption. APPLICATION FILTERING: Customers who access the Service via frame relay have the option of added security of specially administered routers that filter non-Notes messages. Such filters exclude non-Notes messages or data (such as Telent or FTP) from the Service's network. SECURE IBM SERVER COMPLEX: IBM takes several measures to help keep its server complex as physically secure as possible. The Service's server complex is located in a data center in which access is restricted to operational personnel. MAIL & REPLICATION SERVICES MAIL: Intra and Inter-domain Notes mail is managed via the Service's server environment. IBM provides the transport, directory and server environment to support intra-domain mail and inter-domain Notes mail. INTER- AND INTRA-DOMAIN REPLICATION: The Service provides a secure environment for replication between and among domains. The replication schedule, domain environment and communications (if required) are managed by IBM. Inter-domain replication is available. MAIL GATEWAY: Mail can be sent to the Internet through a SMTP (Simplified Mail Transfer Protocol) gateway. Binary attachments to mail are supported through MIME (Multi-purpose Internet Mail Extension). HELP DESK SUPPORT NOTES END USER SUPPORT: IBM provides multinational and multilingual support for Lotus Notes End Users. Domestic support is provided on a 24x7 basis. International support is available during business hours in the following languages: French, German, Italian and Spanish. NETWORK TROUBLE HOTLINE: IBM provides a toll-free hotline for server complex-related problem resolution. All network or server complex problems are solved free-of-charge. NOTES ADMINISTRATOR SUPPORT VIA PHONE: IBM provides Notes and network technical support via phone seven days per week, 24 hours per day. TROUBLE TICKET SYSTEM: The IBM Trouble Ticket System allows customer problems to be tracked from initial report through satisfactory resolution. As IBM staff works to resolve problems, current status is updated in the Trouble Ticket System. This allows IBM staff to discuss ticket history with customers if required. FAULT ISOLATION AND PROBLEM RESOLUTION: Fault isolation involves coordination among network operations and technical staff. Depending on the QCS' specific configuration, line testing and router reconfiguration may be used. The IBM staff works to pinpoint problems, track repair progress and resolve problems. INTERNATIONAL SUPPORT Services Agreement between IBM and QCS - Exhibit 01 Page 4 of 7 11/22/96 IBM/QCS Confidential Access numbers, hours of availability and native language support will vary based on geography. In all cases, an option will be available after hours to call into the domestic support center for support in English.
LOCATION LANGUAGE TELEPHONE # SUPPORT HOURS International English 617-251-6881 7 x 24 Canada English 617-251-6881 7 x 24 France French 33-1-3067-2995 9:00AM-6:00PM M-Th 9:00AM- 5:30PM F Germany German 49-89-4513-4950 8:30AM-5:30PM M-F Italy Italian 33-1-3067-2995 9:00AM-6:00PM M-Th 9:00AM- 5:30PM F Latin America Spanish 617-251-6881 8:30AM-5:30PM M-F 7 x 24 English South America Spanish 617-251-6881 8:30AM-5:30PM M-F 7 x 24 English Spain Spanish 33-1-3067-2995 9:00AM-6:00PM M-Th 9:00AM- 5:30PM F UK English 44-181-4790050 9:00AM-5:30PM M-F USA English 800-820-2336 7 x 24
IMPLEMENTATION SUPPORT IMPLEMENTATION SUPPORT SERVICE The InterConnect Implementation Support Service helps to assure that each End Point is registered and successfully connects to QCS' InterConnect application. It facilitates rapid deployment of the customers IBM-based solution. ENDPOINT IMPLEMENTATION SUPPORT: The End Point enablement service provides customers with the basic support necessary to get End Points registered on the Service. IBM provides direct End Point support via phone to assure the first successful connection and replication to QCS' IBM-based application. The End Point enablement is offered on a 24x7 basis and is free of charge. QCS is responsible for contacting each Retailer endpoint to assess each End Point's interest and readiness to engage in the Service. QCS is responsible for sending InterConnect Registration and Welcome Kit materials to each Retailer endpoint. QCS is also responsible for providing any necessary hardware, software or analog phone services necessary to bring the End Point up on InterConnect. IBM is responsible for contacting each Supplier endpoint to assess each End Point's interest and readiness to engage in the Service. IBM is responsible for sending InterConnect Registration and Welcome Kit materials to each Supplier endpoint. IBM is also responsible for providing any necessary hardware, software or analog phone services necessary to bring the End Point up on InterConnect. ADMINISTRATOR REGISTRATION INSTALLATION MANAGEMENT: IBM will work with QCS' designated InterConnect administrator to assure that initial implementation of QCS' IBM InterConnect for Lotus Notes server and transport meets scheduled due dates. QCS' IBM InterConnect for Lotus Notes server will be provisioned, databases loaded and transport ordered and provisioned according to QCS' specifications. QCS will be notified if dates are in jeopardy. Services Agreement between IBM and QCS - Exhibit 01 Page 5 of 7 11/22/96 IBM/QCS Confidential ADMINISTRATOR REGISTRATION: IBM will work with QCS' designated InterConnect administrator to assure proper cross certification and registration. QCS' designated InterConnect administrator is responsible for registering all other administrators and End Points. QCS' designated InterConnect administrator is required to have a Lotus Notes workstation and access to the network in order to perform InterConnect registration duties. COORDINATE INITIAL TEST AND TURN-UP: IBM will work with QCS' designated InterConnect administrator to ensure successful access to and connection with the Service once registration has been completed. QCS' designated InterConnect administrator is responsible for working with each additional administrator to assure successful test and turn-up. PROVIDE WELCOME KITS: IBM will provide two versions of IBM InterConnect for Lotus Notes Welcome Kits to QCS' designated InterConnect administrator; an administrator version and an End Point version. It is the responsibility of QCS' designated InterConnect administrator to distribute End Point welcome kits. Welcome kits contain dial-up connect scripts and safe IDs. ADMINISTRATOR TRAINING CALL: IBM conducts one free IBM InterConnect for Lotus Notes administrator training call per customer. The purpose of this call is to give QCS' administrator the training necessary to act as a central point of contact for all customer registration and initial connectivity needs. It is assumed that QCS' designated InterConnect administrator has attended the Lotus Notes Systems Administration I and II courses provided by Lotus and/or its designated training providers. AUTOMATED REGISTRATION TOOL: IBM provides tools for QCS' administrator which will enable him/her to add or delete the Service's End Points; to create, delete or modify the Service's Group Lists; to add another administrator; and to add and delete databases from the Service. 3. SET-UP COSTS AND FRAME RELAY SURCHARGES A. In addition to payments and price terms as may be specified elsewhere in the Agreement, QCS shall make the following payments to IBM in the first billing month after the Effective Date: Set up fee - which includes server installation, End Point enablement, domain registration and help desk registration.
COMPONENT ONE TIME COST Enterprise setup fee [*]
B. QCS shall also pay IBM additional "Frame Relay Surcharges" as specified in invoices or similar documents, as follows:
SPEED MONTHLY COST [*]
Frame Relay Network Charges - based on bandwidth and distance from Point of Presence [*] CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION Services Agreement between IBM and QCS - Exhibit 01 Page 6 of 7 11/22/96 IBM/QCS Confidential You will initially be provided with 500 megabytes of storage capacity as part of the Service. Additional units of storage will be made available to you in increments of 1 gigabyte (GB) for an additional charge of [*] . Requests for additional storage will require a minimum of thirty (30) days written notice and are subject to availability. IBM is a registered trademark of the International Business Machines Corporation. Lotus and Lotus Notes are registered trademarks of the Lotus Development Corporation. Exhibit 1 11/23 [*] CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION Services Agreement between IBM and QCS - Exhibit 01 Page 7 of 7 11/22/96 IBM/QCS Confidential SUPPLEMENT 01 TO THE SERVICE AGREEMENT BETWEEN IBM CORPORATION AND QCS CORPORATION DATED NOVEMBER 23, 1996 (THE "AGREEMENT") The Parties agree that for good and valuable consideration, the sufficiency of which the parties hereby acknowledge, the following terms and conditions shall apply to the Agreement. 1) DEFINITIONS a) "CONSUMER" is a member of the public who purchases goods and/or services from a Retailer. "EFFECTIVE DATE" is the later date on which both IBM and QCS have signed this Agreement or December 2, 1996. "END POINT" is the point of contact with the IBM network (it may be a workstation with a single user, a mobile workstation or a server on a LAN with many users behind it). End Points run__________ QCS Lotus Notes based software. "END USER" is an individual who employs the QCS Lotus Notes based software for his or her business purposes. "EXISTING SUPPLIERS" are those Suppliers which have licensed the QCS Lotus Notes based software and are connected to the QCS server as of the Effective Date. "NETWORK SERVICE PROVIDER" is the IGN network service provided by IBM or "Other" network services provided by SITA and/or AT&T. "RETAILER" is an entity that sells goods and/or services to Consumers. This definition includes the associated units of a Retailer. A Retailer is not a government agency. "SUPPLIER" is an entity that primarily sells goods to a Retailer and/or to another Supplier. A Supplier is not a government agency. "SUPPLIER LEVEL" shall mean a number of Suppliers equal to one hundred fifty percent (150%) of the Existing Suppliers. "QCS SOFTWARE" is QCS' Lotus Notes-based multimedia software provided to IBM under this agreement. QCS Software may be Supplier, Retailer, or other End-User designated, or may be that which QCS provides to IBM for installation on the Service. b) The following terms shall be used to describe QCS' revenue sources which are the basis for revenue based payments under the Agreement: [*] [*] CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION Services Agreement between IBM and QCS - Supplement 01 Page 1 of 5 11/22/96 IBM/QCS Confidential [*] 2) REVENUE BASED PAYMENTS REVENUE BASED PAYMENTS FORMULA: In exchange for providing the Service specified in Exhibit 01, and for the mutual obligations set forth in the Agreement as of the Effective Date, QCS shall make payments to IBM as follows:
NETWORK PAYMENT REVENUE SERVICE TO SOURCE PROVIDER IBM SPECIAL RULES [*]
*percentages shall be of contracted revenue collected by or for QCS for the applicable Revenue Source Effective at the time when the parties have connected a number of Suppliers equal to one hundred fifty percent (150%) of the number of Existing Suppliers ("Supplier Level") IBM will share in the revenue from the Existing Suppliers Subscription Revenue. Notwithstanding the above, IBM's share of the Retailer Usage Revenue will in no event be less than twenty-nine dollars ($29.00) per End Point and eight dollars ($8.00) plus international surcharges per megabyte transmitted for each Retailer per month if the Retailer has migrated to the IBM service. Prior to the time when the Supplier Level has been achieved, QCS will pay IBM twenty-nine dollars ($29.00) per End Point and eight dollars ($8.00) plus international surcharges per megabyte transmitted for each Existing Supplier per month if the Existing Supplier has migrated to the IBM Service. QCS will pay IBM twenty-nine dollars ($29.00) per End Point and eight dollars ($8.00) plus [*] CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION Services Agreement between IBM and QCS - Supplement 01 Page 2 of 5 11/22/96 IBM/QCS Confidential international surcharges per megabyte transmitted for each QCS End Point used by QCS employees, QCS' service providers and QCS' business partners. Periodically the parties may elect to revise the End Point rate and the base per megabyte rate subject to a separate written agreement and signed by both parties. Other than as specified in this Agreement, no other transfers of revenue, shipping costs, taxes, tariffs, duties and the like will occur between the parties, and each party will bear its own expenses necessary to perform its obligations under this Agreement. 3) TERMINATION If QCS terminates for convenience or, if IBM terminates for cause (as provided in the Agreement). QCS will continue to make payments to IBM as provided in this Supplement for five (5) years from the termination date, based on the following schedule: ("Years" are defined as the periods commencing on the termination date and each anniversary thereafter) Year1 = 100%; Year 2 = 80%; Year 3 = 60%; Year 4 = 40%; and Year 5 = 20% 4) INTELLECTUAL PROPERTY QCS hereby grants to IBM the irrevocable right and license to use the trademarks, service marks or trade names ("Marks") of QCS for marketing and related purposes in order to market and conduct the activities necessary or advisable under and for the duration of this Agreement. Unless expressly stated otherwise in this Agreement or in an identified separate agreement: a) IBM does not grant QCS any licenses to IBM trademarks, service marks, copyrights, patents or other intellectual property in the Service, Products or Materials under this Agreement; b) IBM does not grant QCS' Retailers or Suppliers any license under other IBM patents; and For any materials (including code, documentation and related materials) which QCS provides to IBM hereunder, you hereby grant to IBM a non-exclusive, worldwide, irrevocable, license to use, reproduce, display, prepare derivative works and distribute all of the foregoing QCS Software in order to market and conduct the activities necessary or advisable under and for the duration of this Agreement. 5) FREEDOM OF ACTION a) Each party may have similar agreements with others. Each party may design, develop, manufacture, acquire or market competitive products and services and conduct its business in whatever way it chooses provided there is no conflict with this Agreement. IBM does not guarantee the success of its marketing efforts or the availability of any information through or performance of the Service. Each party will independently establish prices for its products and services. b) This Agreement shall not be construed to limit either party's right to obtain services or software programs from other sources, to prohibit or restrict either party from independently developing or acquiring materials competitive with those items developed or licensed hereunder, to restrict either party from making, having made, using, leasing, licensing, selling or otherwise disposing of any products or services whatsoever, nor to limit either party's right to deal with other vendors, suppliers, contractors or customers. 6) IBM AND QCS RESPONSIBILITIES a) IBM RESPONSIBILITIES Services Agreement between IBM and QCS - Supplement 01 Page 3 of 5 11/22/96 IBM/QCS Confidential IBM will: a) install the QCS Software on the Service no later than ninety (90) days following the Effective Date; b) in IBM's sole and absolute discretion, market and install the QCS Software to Suppliers worldwide; c) in IBM's sole and absolute discretion, assist QCS in marketing to Retailers; d) assume responsibility for the acquiring the contents of, and packaging of the QCS Supplier Installation kit, which may include items such as digital camera, image-edit software, modem, and other hardware and software, no later than six (6) months after the Effective Date. During this transition period, IBM will refund QCS the expenses incurred for providing this service. e) provide telephone support maintenance for Lotus Notes and QCS software to Suppliers; f) regularly, but at least weekly, update the supplier customer database; b) QCS RESPONSIBILITIES QCS will: a) within two (2) business days following the Effective Date, deliver to IBM a complete list of Existing Suppliers comprising the pertinent information related to each Existing Supplier including, but not limited to, their names and addresses; b) for each Retailer that licenses the QCS Software prior to the Effective Date or anytime thereafter, provide to IBM current and timely pertinent information related to such Retailer's Suppliers including, but not limited to, their names and addresses; c) deliver to IBM, in an agreed to format(s) (i.e. tape, diskettes, CD-ROM or electronically) copies of the QCS Software sufficient to enable IBM to perform its obligations hereunder; d) at mutually agreed to times and locations, provide training and education to IBM personnel and IBM business partners related to the QCS Software to enable such personnel to train and educate third parties ("teach the teachers program"); e) for a minimum of six (6) months following the Effective Date, maintain its existing sales, marketing, and technical personnel force to assist, support and educate IBM personnel in the sales and marketing of the QCS Supplier Software; f) provide to IBM a written or electronic monthly report containing all End User and other Customer escalations and complaints related to any products, offerings or services provided hereunder which QCS becomes aware of; g) continue acquiring the contents of, and packaging of the QCS Supplier Installation kit for a period up to six (6) months after the Effective Date; h) provide to mutually agreed to IBM Personnel, unlimited, twenty-four (24) hours, seven (7) days per week access to all the Lotus Notes based monitoring tools of those Retailers and Suppliers that are connected to the Service for network usage and revenue tracking purposes; and i) be responsible for all billing and collection activity associated with any products, Offerings or services provided hereunder and remit to IBM, in a timely manner any payments due to IBM in accordance with the Agreement. c) IBM AND QCS RESPONSIBILITIES IBM and QCS agree to use best efforts to: a) cooperate and migrate the QCS Software and related databases from QCS servers located at QCS facilities in Mountain View, California and London, England ("QCS Servers") to IBM servers located in facilities chosen by IBM in its sole discretion ("IBM Servers"); b) within thirty (30) days following the Effective Date, form a Review Committee consisting of individuals representing each party, which will be responsible for setting the strategic Services Agreement between IBM and QCS - Supplement 01 Page 4 of 5 11/22/96 IBM/QCS Confidential direction of the overall project under this Agreement, making policy, setting targets and reviewing performance, obtaining the approval of the respective parties for press releases, publicity, advertising and other significant marketing activities; and c) create a plan and cooperate in its execution to migrate Existing Suppliers and Retailers to the Service. Supplement 1 11/23 Services Agreement between IBM and QCS - Supplement 01 Page 5 of 5 11/22/96 EX-21.1 21 EX-21.1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT The Company's wholly-owned subsidiary is as follows: QCS Development Company S.A. BP 037 06901 Sophia Antipolis Cedex France EX-23.1 22 EX-23.1 EXHIBIT 23.1 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To The Board of Directors and Stockholders of QCS.net Corporation (dba SourcingLink.net): Our report on the consolidated financial statements of QCS.net Corporation is included on page F-1 of this Form 10-KSB. In connection with our audits of such financial statements, we have also audited the related financial statement schedule on page F-21 of this Form 10-KSB. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. PricewaterhouseCoopers LLP San Jose, California May 21, 1999 EX-27 23 EX-27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENTS FROM THE NINE MONTH FISCAL YEAR ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS MAR-31-1999 JUL-01-1998 MAR-31-1999 1,267 0 258 (35) 0 1,497 328 (143) 1,695 750 0 0 4 23 918 1,695 0 741 0 462 1,789 0 (18) (1,492) 0 0 0 0 0 (1,492) (.07) (.07)
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