-----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, CZsGMaiqH0gDUav9uet1HUXrogS8qu7pN/oUrbDdZyovIxJO7mDafIKfmE/APZsK T9eG0/PaMlF2JykX4YSymA== 0000893816-05-000014.txt : 20050316 0000893816-05-000014.hdr.sgml : 20050316 20050316172241 ACCESSION NUMBER: 0000893816-05-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 25 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050316 DATE AS OF CHANGE: 20050316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INFOCROSSING INC CENTRAL INDEX KEY: 0000893816 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 133252333 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20824 FILM NUMBER: 05686578 BUSINESS ADDRESS: STREET 1: 2 CHRISTIE HEIGHTS STREET CITY: LEONIA STATE: NJ ZIP: 07605 BUSINESS PHONE: 2018404700 MAIL ADDRESS: STREET 1: 2 CHRISTIE HEIGHTS STREET CITY: LEONIA STATE: NJ ZIP: 07605 FORMER COMPANY: FORMER CONFORMED NAME: COMPUTER OUTSOURCING SERVICES INC DATE OF NAME CHANGE: 19930328 10-K 1 k10_04.txt ANNUAL REPORT FOR DECEMBER 31, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 2004 ------------------------------------------------------ or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR the transition period from to ----------------------- ----------------------- Commission file number: 0-20824 ------------------------------------------------------- INFOCROSSING, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-3252333 - -------------------------------------------------------------------------------- State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 2 CHRISTIE HEIGHTS STREET LEONIA, NJ 07605 - -------------------------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (201) 840-4700 --------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------------------------ ----------------------------------------- - ------------------------------------ ----------------------------------------- Securities registered pursuant to Section 12(g) of the Exchange Act: COMMON STOCK, $0.01 PAR VALUE PER SHARE - -------------------------------------------------------------------------------- (Title of Class) - -------------------------------------------------------------------------------- (Title of Class) Page 1 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: [X] Yes [ ] No. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in a definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act): [X] Yes [ ] No. On June 30, 2004, the last day of the registrant's most recently completed second quarter, the aggregate market value of the outstanding shares of voting stock held by non-affiliates of the registrant was approximately $225,840,000. On March 14, 2005, there were 20,182,612 shares of the registrant's Common Stock, $0.01 par value, outstanding. Part III, Items 10-14 of this document are incorporated by reference from a Definitive Proxy Statement to be filed by the Company on or before May 2, 2005. Page 2 FORWARD LOOKING STATEMENTS Statements made in this Annual Report, including the accompanying financial statements and notes, other than statements of historical fact, are forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance, including statements relating to products, customers, suppliers, business prospects and effects of acquisitions. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "expect," "anticipate," "intend," "plan," "believe," "estimate," "potential," or "continue," the negative of these terms or other comparable terminology. These statements involve a number of risks and uncertainties and as such, final results could differ from estimates or expectations due to a number of factors including, without limitation: incomplete or preliminary information; changes in government regulations and policies; continued acceptance of our products and services in the marketplace; competitive factors; new products; technological changes; our dependence on third party suppliers; intellectual property rights; difficulties with the integration of acquisitions including Verizon Information Technologies Inc., now known as Infocrossing Healthcare Services, Inc.; and other risks and uncertainties including those set forth in this Report that could cause actual events or results to differ materially from any forward-looking statement. For any of these factors, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K and are based on information currently and reasonably known to us. We undertake no obligation to release any revisions to or update these forward-looking statements to reflect events or circumstances that occur after the date of this Annual Report on Form 10-K or to reflect the occurrence or effect of anticipated or unanticipated events. PART I ITEM 1. DESCRIPTION OF BUSINESS. GENERAL Unless stated otherwise, references in this report to "Infocrossing," "Company," "we," "our" or "us" refer to Infocrossing, Inc., a Delaware corporation, and its subsidiaries. Each trademark, trade name or service mark of any other company appearing in this Annual Report on Form 10-K belongs to its holder. We are a national provider of selective information technology ("IT") outsourcing and business processing solutions to large and medium size commercial and government enterprises. Leveraging its data center infrastructure, Infocrossing takes over and manages all or part of customers' IT mainframe and non-mainframe operations. Customers utilize our IT systems, personnel and processing expertise in order to reduce their operational and capital expenses, improve service delivery, scale their IT operations or implement new technologies. By selectively outsourcing well-defined IT operations that are often too costly or inefficient to maintain in-house, customers can redirect valuable IT resources to other business priorities. Generally, our customer contracts are long-term - typically ranging from two to seven years with an average between three and four years - and require fixed monthly fees. Accordingly, we believe that our revenue stream is predictable and stable. We were organized as a New York corporation in October 1984 and reincorporated in Delaware as of August 31, 1999. On June 5, 2000, we changed our name from Computer Outsourcing Services, Inc. to highlight our expanded business base. We have grown through acquisitions as well as through internal growth. Page 3 MARKET OVERVIEW We believe that the move toward IT outsourcing is a trend, with companies focusing on their strengths and choosing to outsource select IT operations to service providers with specialized expertise. As a result, we believe the IT outsourcing market will continue to grow for the following reasons: o The need for companies to reduce costs and improve operating margins; o A general slowdown in capital spending on existing IT infrastructure; o The increasing complexity of IT systems and the need to connect electronically with customers, suppliers and other internal systems; o The increasing requirements for rapid processing of information and the instantaneous communication of large amounts of data to multiple locations; o The desire of business and government organizations to focus on their core competencies; o The desire by business and government organizations to take advantage of the latest advances in technology without the cost and resource commitment required to maintain an in-house system; o The need to provide alternative or back-up locations for mission critical information; and o The proliferation of web-based and wireless technologies. BUSINESS STRATEGY Our long-term business strategy is focused on the following: SUPERIOR CUSTOMER SERVICE--We believe close attention to customer service and support is vital to our business success and is a key competitive differentiator. Customers are served by a dedicated Account Management team who ensure consistent and responsive customer service; a highly experienced Technical Services staff who plan and execute migrations across multiple platforms; and an Operations Production group who manage our secure, state-of-the art facilities. MAXIMIZE LEVERAGED BUSINESS MODEL--By leveraging data centers in New Jersey, Georgia, and California and our highly skilled IT operations staff, we are able to support multiple customers with different computing platforms and operating systems with different processes and different requirements. Additional operating efficiencies are achieved by establishing consistent processes throughout the organization and by using proprietary software tools that enable us to efficiently manage customers' systems regardless of its location. Sharing technology and staff across our broad customer base reduces our operating costs, streamlines service delivery and presents us with attractive margin opportunities. Once a customer migrates its IT operations to us, we can maximize profitability by automating processes and tasks as well as taking full advantage of underutilized hardware and processing capacity. DEPLOY NEW PRODUCTS AND SERVICES--We maintain an extensive infrastructure that serves as the underlying foundation across various IT solutions and continuously is refined to encompass new computing platforms. Development of new service offerings is focused on applying our expertise in infrastructure and systems management to evolving hardware and software environments. New products and services are developed or acquired in order to be replicated across multiple customers, and augment our portfolio of recurring revenue services. PURSUE ACQUISITION OPPORTUNITIES--Strategic acquisitions are an integral component of our long-term growth strategy as we seek to add complementary IT outsourcing services that augment our current service offerings. We look for accretive acquisitions to leverage our data center infrastructure. Typical candidates have a history of customer or transaction volume growth and mirror our business model of revenue predictability. Page 4 VALUE PROPOSITION Selective IT outsourcing is an option considered by many business and government organizations that want to reduce their IT operating costs without the risk and loss of control associated with outsourcing their entire IT function. We believe that we differentiate ourselves in the market by providing higher levels of customer service and flexibility than our competitors. We have more than two decades of experience managing mission-critical IT systems, assuring the optimal performance, reliability, and scalability of our customer's mainframe and non-mainframe environments. We believe that when considering wholesale outsourcing or maintaining an in-house infrastructure our potential customers consider the following factors: LOWER IT COSTS--We believe our customers realize significant savings by using our services over their current internal IT costs. By leveraging our IT infrastructure, personnel, processes, and proprietary tools across multiple customers, we believe our economies of scale translate into reduced costs for our customers. IMPROVED SERVICE DELIVERY--We believe our experience and resources result in more efficient services than if our customers continued to perform the operations tasks in-house. Our customers benefit from the operational leverage we enjoy by allocating our resources over multiple customers. Because of economies of scale, we believe that our customers may enjoy greater access to resources otherwise uneconomical on a standalone basis. ACCESS TO NEW TECHNOLOGIES--We believe outsourcing with us enables our customers to take advantage of new technologies and best practices while minimizing the capital investment and risks associated with implementing these solutions in-house. RE-DEPLOY RESOURCES--By turning over select IT operations to us, we believe that our customers can concentrate on their core business. INCREASED FLEXIBILITY--We believe that outsourcing enables our customers to respond rapidly to changing markets, mergers and acquisitions, and major organizational changes by providing a flexible, multi-platform infrastructure that can scale or transition to accommodate change. IT OPERATIONS INFRASTRUCTURE DATA CENTER INFRASTRUCTURE--Delivering high-availability IT outsourcing solutions to enterprise customers requires a significant investment in a secure data center infrastructure. Our fully constructed facilities have been designed to meet the stringent environmental and security requirements of enterprise and government customers: raised-floor facilities feature state-of-the-art physical components and redundant network offerings, including high standards for security and reliability; fully redundant power supply systems; redundant ingress and egress Internet access across multiple providers' multiple power feeds; N+1 fire suppression systems and 24-hour security services. TECHNOLOGY INFRASTRUCTURE--We have fully deployed mainframe, mid-range, open system processing; data storage systems; printing equipment; and networking hardware across our facilities. Our skilled operations team manages the scheduling and production of customers' processing via a centralized command center. We utilize technologies such as IBM's Virtual Tape Subsystem (VTS) to reduce operational overhead by automating processes. The VTS is a system of hardware and software licensed from IBM that eliminates the need for personnel to manually load and unload tapes containing customer data. Page 5 IT PROFESSIONAL STAFF --Supporting a 24 x 7 computing environment requires significant operational resources skilled across a number of technology areas including operating systems, computing, networking, and applications. Few companies have the financial and human resources to support a 24-hour, multi-platform computing environment. Our operations team is a highly skilled, process driven organization that brings technical expertise across multiple computing platforms and operating systems. As a result of our technical competency and broad customer base, we believe our labor costs per customer typically are lower than the costs our customers would incur by having internal IT departments deliver the same service levels. Most of our computer hardware is manufactured by IBM. We also rely heavily on system software licensed from IBM or Computer Associates. MANAGEMENT TOOLS--With the growth of networking as a low-cost method for transmitting information, we have developed a proprietary suite of management tools that enables us to monitor and manage customers' systems and components from our facilities, at a customer's site, or at a third-party facility. These tools enable us to grow our data-center infrastructure without having to replicate the network operations center at each customer site. PRODUCTS AND SERVICES Our services are organized into two primary solution areas: Mainframe Outsourcing Services and Non-Mainframe Services. MAINFRAME OUTSOURCING--Our mainframe outsourcing solutions provide customers with a cost-effective, operationally superior alternative to running and managing a mainframe infrastructure in-house. We combine the scalability and reliability of mainframe systems with the world-class management of, and access to, hardware, systems software, and communications. We offer the latest technologies, including Virtual Tape Subsystems, IBM's zSeries technology and Linux on the mainframe, to provide greater uptime and more efficiency for our customers. We have experience in operating multiple computer systems running on different operating and complex enterprise environments and provide high capacity in processing speed, connectivity, and storage management solutions. NON-MAINFRAME SERVICES AND SOLUTIONS o MID-RANGE SYSTEMS MANAGEMENT--We provide specialized support and outsourcing resources for customers that rely on AS/400 and iSeries computer systems. We operate, administer, and maintain midrange systems and have the expertise and flexibility to manage systems the way the customer chooses to have it managed. o OPEN SYSTEMS MANAGEMENT--We provide on-site hosting and remote management of customers' hardware and software running on Linux, Unix and Windows servers for both Internet based and other applications. Customers can choose from a wide range of options for their open systems - starting with basic on-site hosting all the way up to fully customized, fully managed services. This highly flexible approach makes it easy to support a variety of systems from a simple website or database application, to a full-scale, multinational Enterprise Resource Plan system. o BUSINESS PROCESS OUTSOURCING--Business process outsourcing involves customers contracting with us to perform functions that support their business, but are not their core competency. These functions, commonly called "back-office" processes, include services such as healthcare claims processing, payroll, accounts receivable management, payment processing, logistics, data entry and customer care services. Back-office processes are often supported by an extensive IT infrastructure. We provide a variety of customized IT services, including the development of proprietary software to meet the IT processing requirements of particular customers. We manage the software application and retain ownership of the software we develop. o EMAIL SECURITY SERVICES--Our email security service provides customers spam blocking; virus scanning, identification, cleansing, and content filtering. The entire process is transparent to end users and creates an effective boundary around a customers' email infrastructure that blocks unwanted email and viruses from entering or leaving their corporate network thus ensuring compliance with corporate email policies. Page 6 o BUSINESS CONTINUITY--Our business continuity solutions help assure customers that their operations can proceed in the face of disaster. We offer 24 x 7, high-availability services, including disaster-planning assistance. We provide a full alternate office site, including desktop workstations, phone systems, and conventional office infrastructure such as fax and copier machines, networked printers and conferencing facilities. SALES AND MARKETING Our direct sales, business development and marketing organizations target a broad range of large and medium-size commercial and government enterprises. Although we have developed specific expertise in several industries, including financial services, publishing, manufacturing, consumer products, and healthcare, we believe our reputation for technical expertise and service quality extends across all industries. o DIRECT SALES--A quota-carrying direct sales channel of senior sales executives contacts prospective customers and uses its strong industry and business relationships to identify new business opportunities. o INDIRECT CHANNELS--We maintain marketing relationships with indirect sales channels. Industry advisers and consultants play an important lead generation role for qualified new business. Hardware and software vendors also represent a highly qualified source of new business opportunities. o CUSTOMER SERVICE REPRESENTATIVES--As a result of its frequent customer contact, the Account Management organization identifies potential new business opportunities with current customers. o CUSTOMER REFERRALS--Current customers are an excellent source of referrals for potential new business. For the years ended December 31, 2004 and 2003, one client, ADT Security Services, Inc., accounted for in excess of 10% of our consolidated revenues. For the year ended December 31, 2002, clients accounting for in excess of 10% of our consolidated revenues were ADT Security Services, Inc. and Alicomp, a division of Alicare, Inc. ("Alicomp"). We also have had a joint marketing agreement with Alicomp throughout the foregoing periods. COMPETITION We operate in a highly competitive market. Our current and potential competitors include other independent computer service companies and divisions of diversified enterprises, as well as the internal IT departments of existing and potential customers. Among the most significant of our competitors are IBM Corporation; Electronic Data Systems Corporation; Affiliated Computer Services, Inc.; Computer Sciences Corp.; and SunGard Data Systems, Inc. In general, the outsourcing services industry is fragmented, with numerous companies offering services in limited geographic areas, vertical markets, or product categories. Many of our larger competitors have substantially greater financial and other resources than we do. We compete on the basis of a number of factors, including price, quality of service, technological innovation, breadth of services offered and responsiveness. While our larger competitors seek to outsource entire IT departments, we generally selectively target core IT functions such as computer processing and storage solutions. In doing so, we position ourselves as a partner of the customer's IT organization, rather than as a competitive threat. We believe that our services are particularly attractive to mid-tier companies that need substantial infrastructure to support their business environment, but are considered "small" compared to the multi-billion dollar engagements signed by our largest competitors. Many mid-market companies perceive, we believe, larger outsourcers as "inflexible" and "unresponsive" to their smaller-scale requirements. We believe that selective outsourcing enables them to maintain overall control over their IT environment, while benefiting from the scale and efficiency of an outsourcing provider. Page 7 We cannot be sure that we will be able to compete successfully against our competitors in the future. If we fail to compete successfully against our current or future competitors with respect to these or other factors, our business, financial condition, and results of operations will be materially and adversely affected. TECHNOLOGICAL CHANGES Although we are not aware of any pending or prospective technological changes that would adversely affect our business, new developments in technology could have a material adverse effect on the development or sales of some or all of our services or could render our services noncompetitive or obsolete. There can be no assurance that we will be able to develop or acquire new and improved services or systems that may be required in order for it to remain competitive. We believe, however, that technological changes do not present a material risk to our business because we expect to be able to adapt to and acquire any new technology more easily than our existing and potential customers. In addition, technological change increases the risk of obsolescence to potential customers that might otherwise choose to maintain in-house systems rather than use our services, thus potentially creating selling opportunities for us. INTELLECTUAL PROPERTY MATTERS Due to the rapid pace of technological change in the computer industry, we believe that copyright and other forms of intellectual property protection are of less significance than factors such as the knowledge and experience of management and other personnel, and our ability to develop, enhance, market, and acquire new systems and services. As a result, our systems and processes are not protected by patents or by registered copyrights, trademarks, trade names, or service marks. To protect our proprietary services and software from illegal reproduction, we rely on certain mechanical techniques in addition to trade secret laws, restrictions in certain of our customer agreements with respect to use of our services and disclosure to third parties, and internal non-disclosure safeguards, including confidentiality restrictions with certain employees. Despite these efforts, it may be possible for our competitors or customers to copy aspects of our trade secrets. We are experienced in handling confidential and sensitive information for our customers, and we maintain numerous security procedures to help ensure that the confidentiality of our customer's data is maintained. COMPLIANCE WITH ENVIRONMENTAL LAWS We have not incurred any significant expense in our compliance with Federal, state, and local environmental laws. EMPLOYEES As of December 31, 2004, we had 547 full-time and 6 part-time employees. None of our employees is represented by a labor organization and we are not aware of any activities seeking such organization. We consider our relationship with our employees to be satisfactory. INSURANCE We maintain insurance coverage which we believe is reasonable, including errors and omissions coverage, business interruption, and directors and officers insurance to fund our operations in the event of catastrophic damage to any of our operations centers, and insurance for the loss and reconstruction of our computer systems. We also maintain extensive data backup procedures to protect our data and our customer's data. FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS Substantially all of our revenues are derived from U.S. sources. Page 8 AVAILABLE INFORMATION We maintain a website with the address www.infocrossing.com. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available, free of charge, through a link from our website to the EDGAR database at www.sec.gov our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, and amendments to such reports, as soon as reasonably practicable after we file such material with the Securities and Exchange Commission. ITEM 2. DESCRIPTION OF PROPERTY. We lease a facility of approximately 67,000 square feet in Leonia, NJ for our headquarters and data center operations. The lease expires on December 31, 2019. We lease 30,600 square feet in a building located in the Atlanta metropolitan area for data center operations. The lease expires on July 31, 2015. We lease 5,700 square feet of office space in New York, NY. The lease expires on December 31, 2009. We lease space in buildings (the "Buckhead Facility") owned by the former owner of Infocrossing Southeast, Inc. ("IFOX SE"). At the date of the acquisition, we occupied approximately 33,400 square feet. Our lease agreement permits us to return space to the lessor without penalty for a pro-rata reduction in rent. We have moved most of the operations of IFOX SE to our facility in the Atlanta metropolitan area, however we continue to provide open systems and AS400 systems management services to certain clients (including the lessor) from the Buckhead facility. We occupy approximately 11,100 square feet in the Buckhead Facility as of December 31, 2004. This lease agreement expires on January 31, 2006, unless we reduce our use of the space to zero at an earlier date. With the purchase of ITO Acquisition Corporation d/b/a Systems Management Specialists on April 2, 2004, we acquired a lease on a building consisting of approximately 68,800 square feet in Brea, California for data center operations. The lease expires on December 31, 2014. We subleased approximately 12,000 square feet of this facility through December 31, 2005. With the purchase of Verizon Information Technologies Inc. on October 1, 2004, we acquired a lease on a building consisting of approximately 16,080 square feet in Jefferson City, MO for general office use. The lease expires on November 15, 2007. The staff at this location provides Medicaid claims processing services to the State of Missouri Department of Social Services, Division of Medical Services. We generally lease our equipment under standard commercial leases; in most instances the leases are structured as capital leases with bargain purchase options. Our equipment is generally covered by standard commercial maintenance agreements. We believe our facilities are in good condition and are adequate to accommodate our current volume of business as well as anticipated increases. Page 9 ITEM 3. LEGAL PROCEEDINGS. Corcoran and Tallas v. Cortens, Dolan, ITO Acquisition Corporation d/b/a Systems - -------------------------------------------------------------------------------- Management Specialists, and Does 1 through 50 - --------------------------------------------- On November 1, 2004, we were served with a summons and complaint in a lawsuit commenced by two former employees of ITO Acquisition Corporation d/b/a Systems Management Specialists, now known as Infocrossing West, Inc. ("West") filed in the Superior Court of California, Orange County (Case No. 04CC10709). Plaintiffs assert that they had been induced to join West in 2002 based on promises of receiving equity interests and options to acquire additional equity in West. Plaintiffs assert that on numerous occasions they had received verbal assurance of receiving the foregoing equity interests in West. We had acquired West on April 2, 2004. Plaintiffs' employment with West terminated shortly after our acquisition of West. Plaintiffs maintain that they are entitled to direct damages of at least $15 million plus punitive damages, costs, attorneys' fees, and other relief as the court may award. In addition, one of the plaintiffs also asserted a claim for unpaid commissions of approximately $30,000. On November 30, 2005, West filed an answer denying all of plaintiffs' allegations. Discovery commenced recently. West is indemnified pursuant to the Stock Purchase Agreement between us and ITO Holdings, LLC ("Holdings") dated as of March 3, 2004 (the "SPA") for breaches of numerous representations and warranties contained in the SPA. Holdings represented and warranted to us, among other things, that it owned all of West's capital stock and there were no other equity interests or commitments relating to West's capital stock. Holdings has confirmed its indemnification obligations with respect to the claims asserted by plaintiffs. If, however, discovery reveals that the commissions at issue were earned after March 3, 2004 or, if earned prior to such date, they were properly accrued, we agreed to cooperate with Holdings to determine the appropriate amount of commissions, if any, which would be due and owing from West. West believes it is in its best interest to resolve the commissions issue early in the litigation to avoid needless and protracted proceedings and expenses relating to such a minor dispute. Accordingly, Holdings has agreed that West will not be responsible for, or asked to contribute to, attorney's fees and costs associated with the resolution of the commissions claim. It is premature to give a proper evaluation of the probability of a favorable or unfavorable outcome. While it is again premature to give a proper evaluation of the potential liability, we believe that the above matters will be resolved without any material adverse impact on our financial position, results of operations, or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. Page 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Our common stock is traded on the NASDAQ Stock Market under the symbol IFOX. For the periods reported below, the following table sets forth the high and low bid quotations for the common stock as reported by NASDAQ-NMS. BID HIGH LOW FOR THE YEAR ENDED DECEMBER 31, 2003: 1st Quarter ended March 31, 2003 7.150 5.890 2nd Quarter ended June 30, 2003 7.300 6.220 3rd Quarter ended September 30, 2003 8.500 7.040 4th Quarter ended December 31, 2003 12.130 7.280 FOR THE YEAR ENDED DECEMBER 31, 2004: 1st Quarter ended March 31, 2004 13.750 10.020 2nd Quarter ended June 30, 2004 14.780 9.880 3rd Quarter ended September 30, 2004 15.830 10.800 4th Quarter ended December 31, 2004 18.200 12.570 The closing price of our common stock on NASDAQ-NMS on March 11, 2005 was $18.04 per share. We have approximately 125 stockholders of record. In addition, we believe that there are approximately 500 beneficial owners holding their shares in "street name." DIVIDENDS We have not paid dividends to holders of our common stock since inception. Certain provisions of a non-revolving loan facility agreement to which we are a party do not permit us to pay cash dividends on our common stock. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS The following table presents information regarding securities authorized for issuance under equity compensation plans approved September 1992 and June 2002.
NUMBER OF SECURITIES TO WEIGHTED AVERAGE NUMBER OF SECURITIES BE ISSUED UPON EXERCISE EXERCISE PRICE OF REMAINING AVAILABLE FOR OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS FUTURE ISSUANCE ------------------------- -------------------------- -------------------------- Two qualified Stock Option Plans - previously approved by stockholders 3,012,605 $12.10 903,794
For a complete discussion of these plans, please see Note 9 of the Notes to Financial Statements accompanying this report. Page 11 SECURITIES AUTHORIZED FOR ISSUANCE UNDER OUTSTANDING WARRANTS At December 31, 2004, we have reserved 3,055,095 common shares for issuance upon exercise of the following warrants: (i) 1,062,500 shares exercisable at $5.86 per share expiring January 31, 2007; (ii) 65,000 shares exercisable at $18.00 per share expiring September 16, 2010; (iii) 50,000 shares exercisable at $15.00 per share expiring January 13, 2009; and (iv) 1,877,595 shares exercisable at $7.86 per share expiring October 20, 2008. RECENT ISSUANCES OF UNREGISTERED SECURITIES Common Stock Sold On March 31, 2004, we sold 2,917,000 shares of our common stock to accredited investors in a private placement at an aggregate offering price of $30,628,500. This transaction is exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. Roth Capital Partners acted as placement agent for this offering. Total fees and expenses of the offering were approximately $2,388,500. The following is a listing of the investors that purchased shares in the offering.
NAME OF INVESTOR INVESTMENT Baron Small Cap Fund, a series of Baron Asset Fund $2,530,500 Baron iOpportunity Fund, a series of Baron Asset Fund 514,500 Bear Stearns Security Corp, Custodian FBO J. Steven Emerson - IRA Rollover II 1,732,500 Bear Stearns Security Corp, Custodian FBO J. Steven Emerson - Roth IRA 1,312,500 Brookbend & Co., nominee for Janus Capital Management LLC 4,200,000 Corsair Capital Investors, Ltd. 157,500 Corsair Capital Partners 100, L.P. 52,500 Corsair Capital Partners, L.P. 315,000 Crestview Capital Master, LLC 682,500 FlyLine Holdings, Ltd. 210,000 JLF Offshore Fund, Ltd. 4,620,000 JLF Partners I, L.P. 2,677,500 JLF Partners II, L.P. 210,000 LB I Group Inc. c/o Lehman Brothers Inc. 4,935,000 Leaf Investment Partners, L.P. c/o S Squared Technology Group 2,770,950 Leaf Offshore Investment Fund, Ltd. c/o S Squared Technology Group 746,550 SF Capital Partners, Ltd. 1,018,500 SRG Capital, LLC 105,000 Topaz Partners c/o Jemmco Capital Corp 525,000 Trustman c/o Arthur Vining Davis Foundation 24,150 Trustman c/o STI Classic Small Cap Growth Fund 1,281,000 Trustman c/o TUA Sandra Brooks 2,100 Trustman c/o TUA Troyal Brooks 5,250
Page 12 On June 10, 2004, a Registration Statement on Form S-3, filed by us on behalf of the private placement investors and others as selling shareholders, was declared effective. We will not receive any proceeds from any sales of stock under this registration statement. Convertible Notes Sold On June 30, 2004, we completed a private offering of $60 million aggregate principal amount of 4.0% Convertible Senior Notes due July 15, 2024 (the "Notes"). On July 6, 2004, the initial purchaser exercised its option in full to purchase an additional $12 million of the Notes. The Notes were offered and sold only to qualified institutional buyers in compliance with Rule 144A of the Securities Act of 1933. Total fees, discount, and expenses of the offering were approximately $3,111,000. Lehman Brothers Inc. was the initial purchaser. The Notes are convertible, in certain instances, into shares of our common stock. The initial number of shares into which the Notes may be converted is 4,687,500, viz., approximately 65.1042 shares of common stock per $1,000 principal amount. The following is a listing of the investors that purchased Notes in the offering.
NAME OF INVESTOR INVESTMENT AG Offshore Convertibles, Ltd. $4,200,000 AG Domestic Convertibles, Ltd. 1,800,000 Basso Multi-Strategy Holding Fund Ltd. 2,000,000 Goldman Sachs & Co. Profit Sharing Master Trust 68,000 Highbridge International, LLC 15,000,000 LB I Group, Inc. 10,000,000 Lehman Brothers Inc. 14,000,000 OZ Mac 13 Ltd. 49,000 OZ Master Fund, Ltd. 3,883,000 Portside Growth and Opportunity Fund 4,000,000 SF Capital Partners Ltd. 3,000,000 Satellite Strategic Finance Associates, LLC 5,000,000 Silverback Master, Ltd. 6,000,000 Suttonbrook Capital Portfolio LP 3,000,000
Common Stock Issued for a Portion of Acquisition Price On April 2, 2004, in connection with the acquisition of ITO Acquisition Corporation, doing business as Systems Management Specialists, from ITO Holdings, LLC ("Holdings"), Holdings was issued 135,892 shares of the common stock of the Company as a portion of the purchase price. This transaction is exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. On July 31, 2004, in connection with the acquisition of MailWatch, an e-mail security business, from EasyLink Services Corporation ("EasyLink"), EasyLink was issued 123,193 restricted shares of the common stock of the Company as a portion of the purchase price. This transaction is exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. Page 13 ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS) The selected balance sheet data as of December 31, 2004 and 2003 and the selected statement of operations data for the years ended December 31, 2004, 2003, and 2002 have been derived from our audited financial statements included elsewhere herein. The selected balance sheet data as of December 31, 2002, 2001, 2000, and October 31, 2000 and the statement of operations data for the years ended December 31, 2001 and 2000, the fiscal year ended October 31, 2000 and the two month period ended December 31, 2000 have been derived from our audited financial statements not included herein. You should read these selected financial data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", our financial statements and the notes to those statements included elsewhere herein.
STATEMENT OF OPERATIONS DATA ================================================================================================================================ FISCAL YEAR TWO MONTH YEARS ENDED DECEMBER 31, ENDED PERIOD ENDED ------------------------------------------------------------ OCTOBER DECEMBER 2004 2003 2002 2001 (A) 31, 2000 31, 2000 ------------- ----------- ------------ ------------ ------------- -------------- Revenues $ 104,949 $ 55,228 $ 50,774 $ 26,987 $ 24,471 $ 3,521 --------- -------- -------- --------- ---------- ----------- Net income (loss) from continuing operations 19,963 1,356 1,137 (36,524) (14,983) (4,440) --------- -------- -------- --------- ---------- ----------- Accretion and dividends on redeemable preferred stock (b) - (6,877) (9,293) (8,524) (3,836) (1,350) --------- -------- -------- --------- ---------- ----------- Net income (loss) to common stockholders $ 19,963 $ (5,521) $ (8,156) $ (45,048) $ (18,819) $ (5,790) ========= ======== ======== ========= ========== =========== Net income (loss) to common stockholders per diluted common share $ 0.95 $ (0.76) $ (1.52) $ (7.77) $ (3.58) $ (0.98) ========= ======== ======== ========= ========== ===========
BALANCE SHEET DATA ================================================================================================================================= AS OF DECEMBER 31, ---------------------------------------------------------------------------- AS OF OCTOBER 2004 2003 2002 2001 2000 31, 2000 ------------- ----------- ------------ ------------ ------------ -------------- Total assets $ 216,650 $ 67,138 $ 65,495 $ 58,774 $ 78,844 $ 78,449 ========= ======== ======== ========= ========= =========== Notes payable, long term debt,and capitalized lease obligations, net of current portion (including, from May 2000 through October 2003, redeemable preferred stock) $ 100,432 $ 25,732 $ 64,066 $ 47,593 $ 34,146 $ 38,214 ========= ======== ======== ========= ========= =========== Common stockholders' equity (deficit) $ 91,237 $ 30,801 $ (12,205) $ (6,036) $ 31,640 $ 36,874 ========= ======== ======== ========= ========= ===========
No cash dividends have been declared (See Item 5, above). Page 14 (a) Included in the net loss to common stockholders in 2001 was $9,823,000 in amortization of a restricted stock award and a $5,650,000 loss on leased facilities and office closings. (b) In May 2000, we raised $60 million through a private placement of redeemable preferred stock and warrants to purchase 2.7 million shares of common stock. The redeemable preferred stock was initially recorded net of a discount representing that portion of the proceeds assigned to the warrants. The difference between the face value and the book value of the redeemable preferred stock was being accreted over a seven-year period through a charge to retained earnings. In addition, dividends accrued on the redeemable preferred stock at an 8% annual rate, compounded quarterly. On October 21, 2003, we exchanged all outstanding redeemable preferred stock (including the rights to all unpaid dividends) and warrants issued in the May 2000 private placement for $55 million in cash and notes payable for $25 million. We obtained the cash for this transaction from a private offering of 9.7 million shares of common stock and warrants to purchase 3.4 million shares of common stock that also closed on October 21, 2003. The redemption of the redeemable preferred stock ended the accretion and accrual of dividends as of the redemption date. Had the redemption not taken place, accretion and the accrual of dividends would have been approximately $10.1 million in 2003. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Management believes that we are a leading provider of information technology, or IT, and business process outsourcing services to enterprise clients. We deliver a full suite of outsourced solutions that enable clients to leverage our infrastructure and process expertise to improve their efficiency and reduce their operating costs. During our nearly twenty year history, we have developed expertise in managing complex computing environments, beginning with traditional data center outsourcing services and evolving to a comprehensive set of managed solutions. We support a variety of clients, and assure the optimal performance, security, reliability, and scalability of our clients' mainframes, distributed servers, and networks, irrespective of where the systems' components are located. Strategic acquisitions have contributed significantly to our historical growth and remain an integral component of our long-term growth strategy. On April 2, 2004, we acquired all of the outstanding capital stock of ITO Acquisition Corporation, a California corporation doing business as Systems Management Specialists ("SMS"), from ITO Holdings, LLC ("Holdings") for a total purchase price of approximately $37,572,000 including related acquisition costs of $1,224,000 and 135,892 shares of our common stock valued at $1,439,000 (the "SMS Acquisition"). In June 2004, the name of this subsidiary was changed to Infocrossing West, Inc. In connection with an acquisition by SMS prior to April 2004, the Company may have to pay contingent consideration for a period of up to four years. Through December 31, 2004, such contingent consideration totaled $281,000 that was recorded as additional goodwill. SMS, headquartered in Orange County, California, provides computing operations, business process outsourcing and managed application services to clients primarily located in the western United States. On October 1, 2004, we acquired a segment of Verizon Information Technologies Inc. ("VITI") for a total purchase price of approximately $45,386,000 including related acquisition costs of $1,886,000 (the "IHS Acquisition"). Immediately after the acquisition we changed VITI's name to Infocrossing Healthcare Services, Inc. ("IHS"). During 2004 we used $7,090,000 in cash, incurred an estimated $116,000 of acquisition-related costs, and issued 123,193 shares of common stock valued at $1,500,000 for other acquisitions, including a business that offers e-mail security services. These acquisitions were accounted for using the purchase method of accounting. Page 15 The operations of IHS, SMS and the other acquisitions completed in 2004 are included in consolidated operations from the date of the respective acquisitions in 2004. The acquired businesses are being integrated into the Company so that the entire enterprise will benefit from operational leverage and consolidation. On February 5, 2002, we completed the acquisition of AmQUEST, Inc., an Atlanta-based IT outsourcing company, for approximately $20.2 million in cash after certain post-closing adjustments (the "AmQUEST Acquisition"). This acquisition combined two highly complementary businesses and enabled us to benefit from increased scale, enhanced services, and expanded geographic reach. This combination strengthened our position as one of the leading providers of IT outsourcing solutions for large and mid-size companies across a broad range of industries including financial services, security, publishing, healthcare, telecommunications and manufacturing. In June 2004, we changed AmQUEST, Inc.'s name to Infocrossing Southeast, Inc. The foregoing acquisitions were recorded as purchases in accordance with the Financial Accounting Standards Board, Statements of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS 141"), which requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. We tested goodwill and other intangible assets for impairment using processes described in SFAS 142 and SFAS 144, and had no impairment to record in 2004, 2003, or 2002. The Company and its subsidiaries operate in one reportable segment of providing information technology and business process outsourcing services. YEAR ENDED DECEMBER 31, 2004 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2003 Net income to common stockholders increased by $25,484,000 from a loss of $5,521,000 for 2003 to income of $19,963,000 for 2004 on 90.0% higher revenues. For 2004, the results of operations include SMS, IHS, and other acquisitions completed in 2004. For the year ended December 31, 2004 (the "Current Year"), revenues increased $49,721,000 (90.0%) to $104,949,000 from $55,228,000 for the year ended December 31, 2003 (the "Prior Year"). Approximately $40,630,000 of this growth is attributable to revenue from clients added as the result of acquisitions completed in 2004. The remainder of approximately $9,091,000 represents organic growth, of which $5,900,000 was the result of new customer contracts while the remaining increase resulted from increased revenues from existing clients. Costs of revenues increased by $34,705,000 (94.7%) to $71,368,000 during the Current Year compared with $36,663,000 for the Prior Year. The increase results from the expansion of revenues from both acquisitions and organic growth. Costs of revenues as a percentage of revenues increased to 68.0% in the Current Year from 66.4% in the Prior Year, reflecting a lower gross margin. We had expected our gross margin to decline after the SMS Acquisition until its operations could be consolidated into our existing operating infrastructure. The integration of SMS was completed in early March 2005. Gross margin improved from 30.0% in the third quarter ended September 30, 2004 to 35.3% in the fourth quarter ended December 31, 2004. This improvement reflects the inclusion of IHS, which contributed 43% of our fourth quarter gross margin. Our infrastructure provides a shared operating environment that enables us to effectively integrate new clients, including clients acquired through acquisitions. We expect our gross margin to improve as the integration of IHS progresses. Due to higher compensation costs in the Current Year, selling and promotion costs increased by $299,000 (10.0%) to $3,277,000 for the Current Year from $2,978,000 for the Prior Year, but decreased as a percentage of revenues to 3.1% for the Current Year from 5.4% for the Prior Year. Higher compensation costs reflect a larger sales staff in the Current Year than in the Prior Year. The reduction as a percentage of revenue reflects the benefits of integration of the acquired businesses. Page 16 General and administrative expenses increased by $3,157,000 (56.5%) to $8,744,000 for the Current Year from $5,587,000 for the Prior Year. General and administrative expenses declined as a percentage of revenue to 8.3% in the Current Year from 10.1% in the Prior Year, reflecting the benefits of operational leverage and consolidation of the acquired businesses. Approximately $1,938,000, or 61.4% of the total increase, was related to acquisitions completed in 2004. Approximately $700,000 (22.2% of the total increase) was due to professional fees relating to compliance costs with respect to the Sarbanes-Oxley Act of 2002. Also, an additional $200,000 of professional fees was incurred, and salary costs were approximately $100,000 higher than in the Prior Period. Depreciation and amortization of fixed assets and other intangibles increased $2,575,000 (42.2%) to $8,679,000 for the Current Year from $6,104,000 for the Prior Year. Of this increase, $1,457,000 of depreciation of fixed assets and amortization of other intangibles was related to acquisitions in the Current Year. The remainder of the increase of $1,118,000 resulted from new fixed asset additions totaling approximately $7,400,000 during the Current Year. Despite these increases, depreciation and amortization decreased as a percentage of revenues to 8.3% in the Current Year compared with 11.0% in the Prior Year. Net interest expense increased by $2,959,000 to $5,457,000 for the Current Year from $2,498,000 for the Prior Year. This net increase consists of $210,000 in additional interest income; $1,822,000 in additional interest expense; and $1,347,000 of deferred financing costs which were expensed upon the prepayment of term loans of approximately $40 million in June 2004. The increases in interest income and expense are due to larger average outstanding balances of both cash and outstanding debt, respectively, in the Current Year. Interest expense on the convertible debt in the Current Year, including amortization of deferred financing costs and discount, amounted to $1,509,000. A deferred tax benefit reflects future income tax savings realizable when tax credits, net operating loss carry-forwards, or other deductions based on temporary differences between taxable income and income before income taxes can be used to reduce income taxes. If there is uncertainty of realizing deferred tax benefits, a valuation allowance must be established. We had a deferred tax valuation allowance of $15,207,000 at the end of the Prior Year. For the Current Year, we recorded a tax benefit of $12,539,000 compared with a tax provision of $42,000, which represented estimated state income taxes, for the Prior Year. This change is due to a decrease of $12,550,000 in deferred tax assets during the fourth quarter ended December 31, 2004 to recognize deferred tax assets at amounts considered by management, more likely than not, to be realized. Based on our recent history of profitability and our forecasts for future periods, management has determined that it is more likely than not that the net operating loss carryforwards and other temporary differences will be realized. We have net operating loss carry-forwards of approximately $37,000,000 for Federal income tax purposes that begin to expire in 2019. The use of these net operating loss carry-forwards may be limited in amount in future years pursuant to Section 382 of the Internal Revenue Code. Due to a lack of SMS's history of generating taxable income, we recorded a valuation allowance equal to 100% of their net deferred tax assets. In the event that we are able to generate taxable earnings from SMS in the future and determine it is more likely than not that we can realize our deferred tax assets, an adjustment to the valuation allowance would be made which may increase goodwill in the period that such determination is made. We have net income of $19,963,000 for the Current Year compared with $1,356,000 for the Prior Year. Net loss to common stockholders after accretion and accrued dividends on preferred stock was $5,521,000 for the Prior Year. We redeemed the preferred stock in October 2003. The net loss to common stockholders included non-cash charges for accretion and accrued dividends on preferred stock of $6,877,000 in the Prior Year. In the Current Year, we had income per common share of $1.12 on a basic basis and $0.95 on a diluted basis, compared with a loss of $0.76 per share for the Prior Year, on both a basic and diluted basis. The number of weighted average shares increased to approximately 17,827,000 shares on a basic basis and approximately 21,932,000 shares on a diluted basis in the Current Year from approximately 7,280,000 shares on both a basic and diluted basis for the Prior Year. The increase in shares reflects (i) private placements of (a) 9,739,111 shares of common stock and warrants to purchase 3,408,689 shares of common stock in October 2003 and (b) 2,917,000 shares of common stock in March 2004; (ii) the potential conversion of $72,000,000 of 4% convertible notes due July 15, 2024, which were issued during 2004, into 4,687,500 shares of common stock; and (iii) the issuance of 259,085 shares of common stock for acquisitions during 2004. The shares and equivalents enumerated in the immediately preceding sentence are in absolute amounts, not weighted average amounts. Common stock equivalents are excluded in determining the net income or loss per share when the inclusion of such equivalents would be antidilutive. Page 17 YEAR ENDED DECEMBER 31, 2003 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 2002 Certain reclassifications were made to the 2003 and 2002 financial statements to conform to the current year presentation. For the year ended December 31, 2003 ("2003"), revenues increased $4,454,000 (8.8%) to $55,228,000 from $50,774,000 for the year ended December 31, 2002 ("2002"). Revenues from AmQUEST, which had only 11 months of operations in 2002, contributed $1,599,000 of this increase. Revenues grew by 8.5%, excluding growth contributed by AmQUEST. This organic revenue growth was net of a decline in the revenue from our largest client, ADT Security Services, Inc. Revenues from this significant customer were $14,977,000 in 2002 compared with $12,804,000 in 2003, representing 29.5% and 23.2% of total revenues in the respective periods. The decrease in revenue from this customer reflects the impact of special processing provided in 2002, but not in 2003. Other organic revenue growth totaled 27.0%. Costs of revenues increased $3,374,000 (10.1%) to $36,663,000 (66.4% of revenues) during 2003 compared with $33,289,000 (65.6% of revenues) for 2002. Costs of revenues in 2002 reflect the benefit from the settlement with a software licensor described below. Without the benefit of that settlement, costs of revenues in 2002 would have been $36,085,000 (71.1% of revenues). The improvement in margin is related to the successful integration of the AmQUEST operations. In January 2002, we settled a dispute of claims with a software licensor. Pursuant to the settlement, we received credits totaling $2,000,000 to be used toward future purchases (the "Credits"). The entire value of the Credits was recorded in 2002 and as of December 31, 2002, all the Credits had been applied against certain software license fees. Additionally, we reversed accrued expenses of $796,000 for software support and maintenance fees in 2002 in connection with the settlement of the dispute. Selling and promotion costs increased due to higher compensation costs by $192,000 (6.9%) to $2,978,000 for 2003 from $2,786,000 for 2002, but decreased as a percentage of revenues to 5.4% from 5.5% in 2002. General and administrative expenses decreased $527,000 (8.6%) to $5,587,000 for 2003 from $6,114,000 for 2002. Contributing to the improvement was a reduction of $269,000 in provision for bonuses and $195,000 in salary cost reductions, as well as a reduction of $51,000 in provision for doubtful accounts. Depreciation and amortization for fixed assets and other intangibles rose $123,000 (2.1%), to $6,104,000 for 2003 from $5,981,000 for 2002. We recorded net interest expense of $2,498,000 in 2003, compared with $1,965,000 in 2002. The net increase of $533,000 reflects (i) a decrease in interest income of $69,000 from a lower average balance of interest-earning assets during 2003 and, to a lesser extent, lower interest rates, and (ii) an increase of $464,000 in interest expense on a larger average outstanding debt balance than in 2002. In February 2002, we issued $10,000,000 of Senior Subordinated Debentures (the "Debentures") in connection with the AmQUEST Acquisition, bearing interest at an effective rate of 12.3%. We took advantage of a provision of the Debentures and paid the interest payments due July 2002, February 2003 and July 2003 by issuing a total of $1,190,000 in Additional Debentures, which bore the same effective interest rate. In October 2003 we repaid the Debentures and Additional Debentures from the proceeds of a private offering of common stock. Also in October 2003, in connection with the redemption of all outstanding Redeemable Preferred Stock, we issued $25,000,000 of five-year 9% term loans. Amortization of debt issuance costs and amortization of the Debenture discount also contributed to the increased interest expense in 2003. In 2003, we recorded income tax expense of $42,000 representing estimated state income taxes. In 2002, a net income tax benefit of $208,000 was recorded, representing the carryback of $250,000 of Federal income tax credits net of estimated state income tax expense of $42,000. Cumulative pre-tax losses that cannot be carried back can be carried forward for a period of 20 taxable years for Federal income tax purposes. We have net operating loss carry-forwards of approximately $37,000,000 for Federal income tax purposes that begin to expire in 2019. The use of these net operating loss carry-forwards may be limited in amount in future years pursuant to Section 382 of the Internal Revenue Code. The deferred tax asset associated with carrying forward cumulative pre-tax losses has been fully offset by a valuation allowance in 2003 due to the uncertainty of realizing such tax benefits. Page 18 We have net income of $1,356,000 for 2003 compared with $1,137,000 for 2002. Net loss to common stockholders after accretion and accrued dividends on preferred stock was $5,521,000 for 2003 compared with a net loss of $8,156,000 for 2002. The net loss to common stockholders included a decrease in non-cash charges for accretion and accrued dividends on preferred stock of $2,416,000 to $6,877,000 in 2003 from $9,293,000 in 2002. The loss per common share was $0.76 for 2003 compared with a loss per common share of $1.52 in 2002, on both a basic and diluted basis. Common stock equivalents were not included in determining the net loss per share for both periods, since the inclusion of such equivalents would be anti-dilutive. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $6,316,000 for the year ended December 31, 2004 (the "Current Year"). During the Current Year, we had $19,963,000 of net income, a non-cash income tax credit of $12,550,000; $8,679,000 of depreciation and amortization, and a charge of $1,097,000 to expense the unamortized balance of costs and expenses relating to the repayment of approximately $40,000,000 of 9.0% notes payable. Other significant working capital changes include an increase in accounts receivable of $23,115,000 of which $12,459,000 relates to accounts receivable acquired with the SMS and IHS Acquisitions. Accounts receivable also increased by $10,985,000 as a result of operating activity during 2004. This increase included $5,659,000 related to IHS, the collection of which was delayed due to the transition of accounts payable processing by certain of the IHS customers. These receivables were collected subsequent to year end. On April 2, 2004, we acquired all of the outstanding capital stock of ITO Acquisition Corporation, a California corporation doing business as Systems Management Specialists ("SMS"), from ITO Holdings, LLC ("Holdings") for approximately $36,133,000 in cash, including costs, and 135,892 shares of our common stock. As described below, the cash portion of the purchase price was funded with proceeds from a note payable and the issuance of common stock in a private placement. On October 1, 2004, we acquired a segment of Verizon Information Technologies Inc. , renamed Infocrossing Healthcare Services, Inc. ("IHS"). The purchase was structured as an acquisition of the common stock of IHS for approximately $45,386,000 in cash, including costs. As described below, a portion of the purchase price was financed by borrowing $24,375,000 from a non-revolving loan facility. Other investing activities during the Current Year include $1,456,000 for the purchase of fixed assets. During the Current Year, we also entered into capital leases having an aggregate carrying value of approximately $5,942,000; paid $7,206,000 of cash in connection with other acquisitions completed in 2004, and invested $367,000 in internally-developed software. In March 2004, we issued 2,917,000 shares of common stock in exchange for $28,240,000, net of fees and expenses. The shares were issued in a private placement to accredited investors in a transaction exempt from the registration requirements of the Securities Act of 1933. Approximately $20,000,000 of the proceeds of the private placement was used to fund the acquisition of SMS, discussed above. The remainder of the amount raised was used for working capital purposes and additional acquisitions. The shares of common stock issued in May 2004 may be resold pursuant to a registration statement on Form S-3 that became effective in June 2004. We will not receive any proceeds from any sales of common stock under this registration statement. On October 21, 2003, in connection with the redemption of our redeemable preferred stock, we issued $25,000,000 of senior secured notes payable maturing in October 2008. These notes payable were held by the prior holders of the redeemable preferred stock. On February 13, 2004, the notes payable were purchased by a financial institution. The terms and conditions of the notes payable were not materially altered. On April 2, 2004, the note payable agreement was amended and restated to provide an additional $15,000,000 used to fund a portion of the purchase price of SMS. On June 30, 2004, we repaid the outstanding balance on the notes payable. On June 30, 2004, we completed a private offering of $60,000,000 aggregate principal amount of 4.0% Convertible Senior Notes due July 15, 2024 (the "Notes"). Approximately $40,000,000 of the net proceeds from this offering was used to repay the 9.0% notes payable described in the previous paragraph. The remaining balance was used to fund acquisitions and for general corporate purposes. On July 6, 2004, the initial purchaser exercised its option in full to purchase an additional $12,000,000 of the Notes. Net proceeds after a discount of $2,520,000 and approximately $591,000 of costs and fees were approximately $68,889,000. Interest on the Notes is payable semi-annually in arrears beginning on January 15, 2005. Page 19 Offers and sales of the Notes were made only in the United States to qualified institutional buyers in transactions exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"). The notes were originally issued by us in a transaction exempt from the registration requirements of the Securities Act and were immediately resold by the initial purchaser in reliance on Rule 144A. The Notes and the shares of common stock into which they may be converted may be resold pursuant to a registration statement on Form S-3 that became effective in December 2004. We will not receive any proceeds from any sales of common stock under this registration statement. The Notes are convertible, subject to certain conditions, at the option of the holder prior to maturity, into shares of our common stock at a specified conversion price, subject to certain adjustments. The conversion price will be adjusted to reflect stock dividends, stock splits, issuances of rights to purchase shares of common stock and other events. Upon conversion, we will have the right to deliver to the holders, at our option, cash, shares of our common stock, or a combination thereof. At the initial conversion price of $15.36, the $72,000,000 of Notes would be convertible into 4,687,500 common shares. After the effective date of the Registration Statement and prior to the end of the 18th month thereafter, if the market price of our common stock is less than 68.23% ($10.48 initially, subject to adjustment) of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period, the conversion price shall immediately be reduced by 17.38% (to $12.69 initially, subject to adjustment); provided that (i) this adjustment shall only be applicable to Notes that have been sold or otherwise distributed pursuant to the registration statement referred to above or pursuant to Rule 144(k) under the Securities Act (and such adjustment shall apply to all such Notes, regardless of whether they are so sold or distributed before or after adjustment), and (ii) there shall be no more than one such reduction of the conversion price during the term of the Notes. The holders may convert their Notes into shares of our common stock, initially at the conversion price of $15.36 per share, equal to a conversion rate of approximately 65.1042 shares per $1,000 principal amount of Notes, prior to the close of business on their stated maturity date under any of the following circumstances: (1) during any fiscal quarter if the market price per share of our common stock for a period of at least 20 consecutive trading days during the 30 consecutive trading day period ending on the last day of the preceding fiscal quarter is more than 130% of the applicable conversion price; (2) on or before July 15, 2019, during the five business-day period following any 10 consecutive trading-day period in which the trading price for the Notes during such ten-day period was less than 98% of the applicable conversion value for the Notes during that period, subject to certain limitations; (3) if the Notes have been called for redemption; or (4) upon the occurrence of specified corporate transactions. The specified transactions include: (1) certain distributions to our common stockholders of rights to acquire shares of our common stock at a discount; (2) certain distributions to our common stockholders when the distribution has a per share value in excess of 5% of the market price of our common stock; and (3) a consolidation, merger or binding share exchange pursuant to which our common stock will be converted into cash, securities or other property. Upon a "change of control," as defined in the indenture, the holders can require us to repurchase all or part of the Notes for cash equal to 100% of principal plus accrued interest. A consolidation, merger, or binding exchange also may constitute a "change of control" in certain instances. If the "change of control" occurred prior to July 15, 2009, in certain instances, we may be required to pay a "make whole premium" when repurchasing the Notes. The amount of the "make whole premium" is set forth in the indenture. We have a call option, pursuant to which we may redeem the Notes, in part or in whole, for cash at any time on or after July 15, 2007 at a price equal to 100% of the principal amount of the Notes, plus accrued interest plus a "premium" if the redemption is prior to July 15, 2009, provided, however, the Notes are only redeemable prior to July 15, 2009 if the market price of our common stock has been at least 150% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period. The "premium" referred to in the preceding sentence shall be in an amount equal to $173.83 per $1,000 principal amount of Notes, less the amount of any interest actually paid on such Notes prior to the redemption date. The holders of the Notes may require that we purchase for cash all or a portion of the Notes on July 15, 2009, 2014, and 2019 at a repurchase price equal to 100% of the principal amount of the Notes plus any accrued interest. There are no financial covenants, other than a limitation on incurring of additional indebtedness, as defined in the indenture. We are not restricted from paying dividends, or issuing other securities, or repurchasing other securities issued by us under the terms of the indenture. Page 20 In July 2004, we established a $25,000,000, non-revolving loan facility, available for use in connection with the acquisition of complementary businesses. Advances can be made during the first three years of the term of the facility and interest will be payable monthly in arrears at prime plus 3.0%. The interest rate floor is 8.5%. Monthly principal payments equal to 2.5% of the outstanding balance will commence at the conclusion of the draw period and continue until March 2009 when any remaining balance will be due. Advances are subject to satisfying certain acquisition criteria and the approval of the lenders. We paid a 1.0% commitment fee at the closing of the loan and will pay an unused facility fee at the rate of 0.75% per annum until we borrow more than $10,000,000 on a cumulative basis. We may incur prepayment penalties if we terminate the facility during the first 18 months or prepay any advance prior to the one-year anniversary of the applicable borrowing date. As of September 30, 2004, there were no advances made under this facility. The facility and any loans made under the facility are guaranteed by all of our subsidiaries, and any such loans and the guarantees are secured by a first-priority interest on substantially all of our assets, including the capital stock and assets of the subsidiaries. The facility contains certain covenants including, but not limited to: a maximum leverage ratio; minimum consolidated earnings before interest, taxes, depreciation, and amortization; a minimum debt coverage ratio; and limitations on indebtedness, capital expenditures, investments, loans, mergers and acquisitions, stock issuances, and transactions with affiliates. In addition, the terms of the facility limit our ability to pay dividends. We were in compliance with such covenants at December 31, 2004. On October 1, 2004, we borrowed $24,375,000 from the non-revolving loan facility to pay a portion of the cost of the IHS acquisition. The amount borrowed represents the full loan availability under the line. The $625,000 balance must remain available in the event we are required to fund an Interest Reserve, as that term is defined in the loan agreement. Monthly principal payments of approximately $609,000 will begin on July 1, 2007, and a final payment of $11,578,000 is scheduled to be made on March 15, 2009. Aside from the repayment of approximately $40,000,000 in notes payable noted above, financing activities during the Current Year also include the repayment of approximately $3,764,000 of capital leases and the receipt of $8,159,000 from the exercise of warrants and employee stock options. The following table summarizes information about our contractual obligations as of December 31, 2004 and the periods in which payments are due. Certain of these amounts are not required to be included in our consolidated balance sheet:
PAYMENTS DUE BY PERIOD (IN THOUSANDS) ------------------------------------------------------------------------------------------------ CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1-3 4 - 5 AFTER 1 YEAR YEARS YEARS 5 YEARS --------------- -------------- --------------- -------------- --------------- Long-term debt $ 24,375 $ - $ 10,969 $ 13,406 $ - Convertible notes (1) 72,000 - - - 72,000 Interest on long-term debt 7,872 2,101 5,556 215 - Interest on convertible notes 57,720 3,000 8,640 5,760 40,320 Operating leases and software licenses 64,497 9,633 24,819 9,887 20,158 Operating contracts for disaster recovery services 3,444 1,573 1,871 - - Capital lease obligations 11,504 4,514 6,990 - - Other long-term liabilities reflected on the Company's balance sheet under GAAP (2) 150 - 150 - - --------------- -------------- --------------- -------------- --------------- Total contractual cash obligations $ 241,562 $ 20,821 $ 58,995 $ 29,268 $ 132,478 =============== ============== =============== ============== ===============
Page 21 (1) Excludes the provision whereby the holders of the convertible notes may require the Company to repurchase for cash all or a portion of the Notes on July 15, 2009, 2014, and 2019 at a repurchase price equal to 100% of the principal amount of the Notes plus any accrued interest. (2) Excludes Accrued Loss on Leased Facilities and Deferred Rent, as payments are included under Operating Leases. As of December 31, 2004, we had cash and equivalents of $26,311,000. On February 22, 2005, we filed a preliminary, or "shelf" registration statement with the Securities and Exchange Commission. This registration statement will permit us to sell equity or debt securities, in any combination, for up to $125,000,000. We intend to use the net proceeds we expect to receive from the sale of the securities to reduce our outstanding debt and to fund possible acquisitions and investments. The exact timing and terms of this financing will depend upon market conditions and other factors. There can be no assurance that such financing will occur. We believe that our cash and equivalents, current assets, and cash generated from future operating activities will provide adequate resources to fund our ongoing operating requirements for at least the next twelve months. We may need to obtain additional financing to fund significant acquisitions or other substantial investments. EBITDA EBITDA represents net income before interest, taxes, depreciation and amortization. We present EBITDA because we consider such information an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies with comparable market capitalization to us, many of which present EBITDA when reporting their results. We also use EBITDA as one of the factors used to determine the total amount of bonuses available to be awarded to executive officers and other employees. Our credit agreement uses EBITDA (with additional adjustments) to measure compliance with covenants such as interest coverage and debt incurred. EBITDA is also used by prospective and current lessors as well as potential lenders to evaluate potential transactions with us. In addition, EBITDA is also widely used by us and other buyers to evaluate and determine the price of potential acquisition candidates. For the year ended December 31, 2004, our EBITDA was $21,560,000 compared to $10,000,000 for the year ended December 31, 2003. EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. Generally Accepted Accounting Principles ("GAAP"). Some of these limitations are: (a) EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (b) EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; and (c) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and EBITDA does not reflect any cash requirements for such capital expenditures. Because of these limitations, EBITDA should not be considered as a principal indicator of our performance. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA only on a supplemental basis. Page 22 The following table reconciles EBITDA to net income for the Current and Prior Year. RECONCILIATION - IN THOUSANDS - ----------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------- 2004 2003 -------------------- -------------------- NET INCOME $ 19,963 $ 1,356 Add back (deduct): Tax expense (benefit) (12,539) 42 Interest expense 5,457 2,498 Depreciation and amortization 8,679 6,104 ---------------- ---------------- EBITDA $ 21,560 $ 10,000 ================ ================ EBITDA is a measure of our performance that is not required by, or presented in accordance with, GAAP. EBITDA is not a measurement of our financial performance under GAAP and should not be considered as an alternative to net income, income (loss) from operating activities or any other performance measures derived in accordance with GAAP. CRITICAL ACCOUNTING POLICIES AND ESTIMATES GENERAL Our Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles, which require the selection and application of significant accounting policies, and which require management to make significant estimates and assumptions. We believe that the following are some of the more critical judgment areas in the application of our accounting policies. REVENUE RECOGNITION Our services are provided under a combination of fixed monthly fees and time and materials billings. Contracts with customers typically range from two to seven years. Revenue is recognized (1) after we have obtained an executed service contract from the customer; (2) as the services are rendered; (3) when the price is fixed as per the service contract; and (4) when we believe that collectibility is reasonably assured, based on our credit risk policies and procedures that we employ. ALLOWANCE FOR DOUBTFUL ACCOUNTS We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In determining these allowances, we evaluate a number of factors, including the credit risk of customers, historical trends, and other relevant information. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. BUSINESS COMBINATIONS Our current acquisitions and future acquisitions of businesses that we will control will be accounted for under the purchase method of accounting. The amounts assigned to the identifiable assets acquired and liabilities assumed in connection with acquisitions will be based on estimated fair values as of the date of the acquisition, with the remainder, if any, to be recorded as goodwill. The fair values will be determined by our management, taking into consideration information supplied by the management of acquired entities and other relevant information. Such information will include valuations supplied by independent appraisal experts for significant business combinations. The valuations will generally be based upon future cash flow projections for the acquired assets, discounted to present value. The determination of fair values requires significant judgment both by management and by outside experts engaged to assist in this process. Page 23 GOODWILL, INTANGIBLE ASSETS AND PROPERTY AND EQUIPMENT Significant assets acquired in connection with our acquisitions include customer lists, customer relationships, property and equipment and goodwill. Goodwill represents the excess of the purchase price over the fair value of the assets acquired. Goodwill is not amortized. However, we are required to perform impairment reviews at least annually and more frequently in certain circumstances. The goodwill impairment test is a two-step process, which requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of our reporting unit based on a discounted cash flow model using revenue and profit forecasts and comparing those estimated fair values with the carrying values, which include the allocated goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an "implied fair value" of goodwill. The determination of a reporting unit's "implied fair value" of goodwill requires the allocation of the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any unallocated fair value represents the "implied fair value" of goodwill, which will then be compared to its corresponding carrying value. We cannot predict the occurrence of certain future events that might adversely affect the reported value of goodwill and/or intangible assets. Such events include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our customer base, and material negative change in relationship with significant customers. The "implied fair value" of reporting unit will be determined by our management and will generally be based upon future cash flow projections for the reporting unit, discounted to present value. We will use outside valuation experts when management considers that it would be appropriate to do so. Intangibles subject to amortization, including customer lists and customer relationships, are amortized over the estimated useful lives of the intangible asset after consideration of historical results and anticipated results based on our current plans. We take into consideration the history of contract renewals in determining our assessment of useful life and the corresponding amortization period. We analyze our customer lists on a case-by-case basis, with examination of the history of contract renewals as well as other factors, such as material changes to contract terms or significant new commitments where applicable. Such estimates are based on management's judgment of its current relationship with the relevant customers and its estimate of future economic. Changes to either of these factors could result in an impairment charge, which could have a material effect on our results of operation and financial condition. Customer relationships are essential to our business. In determining the value of these relationships, we discounted the expected returns for each contract using a discounted cash flow analysis over the remaining terms of the contract. We further estimate that it would be unlikely that a customer would terminate its contract, due to the quality of service currently provided as well as the lack of viable alternatives. Property and equipment are initially stated at cost. Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the property and equipment after consideration of historical results and anticipated results based on our current plans. Our estimated useful lives represent the period the asset is expected to remain in service assuming normal routine maintenance. We will review the estimated useful lives assigned to property and equipment when our business experience suggests that they may have changed from our initial assessment. Factors that lead to such a conclusion may include physical observation of asset usage, examination of realized gains and losses on asset disposals and consideration of market trends such as technological obsolescence or change in market demand. Page 24 We will perform impairment reviews of property and equipment and intangibles subject to amortization, when events or circumstances indicate that the value of the assets may be impaired. Indicators include operating or cash flow losses, significant decreases in market value or changes in the long-lived assets' physical condition. When indicators of impairment are present, management determines whether the sum of the undiscounted future cash flows estimated to be generated by those assets is less than the carrying amount of those assets. In this circumstance, the impairment charge is determined based upon the amount by which the carrying value of the assets exceeds their fair value. The estimates of both the undiscounted future cash flows and the fair values of assets require the use of complex models which require numerous highly sensitive assumptions and estimates. DEFERRED TAXES Our deferred tax assets are comprised primarily of net operating loss carryforwards. A tax valuation allowance is established, as needed, to reduce net deferred tax assets to the amount for which recovery is probable. Based on our profitability in 2004 and our forecasts, we have determined it is more likely than not that our net operating loss carry-forwards and other temporary differences will be realized. Accordingly, we released the full valuation allowance in the fourth quarter of 2004. Due to a lack of a history of generating taxable income on SMS, we recorded a valuation allowance equal to 100% of its net deferred tax assets. In the event that we are able to generate taxable earnings from SMS in the future and determine it is more likely than not that we can realize our deferred tax assets, an adjustment to the valuation allowance would be made which may increase goodwill in the period that such determination was made. STOCK-BASED COMPENSATION To date, we have accounted for stock-based compensation by using the intrinsic value based method in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO Employees, and related interpretations. Accordingly, we have only recorded compensation expense for any stock options granted with an exercise price that is less than the fair market value of the underlying stock at the date of grant. Refer to the section entitled "Recent Accounting Pronouncements" below for a discussion of the impact of the recently issued Statement of Financial Accounting Standards ("SFAS") No. 123(R), SHARE-BASED PAYMENT, on our recording of stock-based compensation for interim or annual reporting periods beginning on or after June 15, 2005. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF NONMONETARY ASSETS, which eliminated the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not believe the adoption of SFAS No. 153 will have a material impact on our operating results or financial position. In December 2004, the FASB issued SFAS No. 123 (R), SHARED-BASED PAYMENT, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25. SFAS 123(R) will be effective for interim or annual reporting periods beginning on or after June 15, 2005. Page 25 SFAS 123(R) permits public companies to adopt its requirements using one of the following two methods: 1. A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all shared based payments granted after the effective date and (b) based on the requirements of FASB 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date. 2. A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under FASB 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. We plan to adopt FASB 123(R) using the modified-prospective method. As permitted by FASB 123, we currently account for shared-based payments to employees using APB Opinion 25's intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123(R)'s fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of the adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of FASB 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to our consolidated financial statements. We have not determined what impact SFAS 123(R) might have on the nature of our shared-based compensation to employees in the future. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. INTEREST RATE RISK We are not significantly exposed to the impact of interest rate changes, foreign currency fluctuations, or changes in the market values of our investments. We primarily invest in money market mutual funds or certificates of deposit and commercial paper issued only by major corporations and financial institutions of recognized strength and security, and hold all such investments to term. We generally invest in instruments of no more than 30 days maturity. Our debt is at a fixed rate of interest, and the carrying amount of long-term debt approximates fair value based on interest rates that are currently available to us with similar terms and remaining maturities. MARKET RISK Our accounts receivable are subject, in the normal course of business, to collection risks. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of collection risks. As a result, we do not anticipate any material losses in this area. FOREIGN CURRENCY RISKS We have no significant foreign-source income, and bill foreign customers in U.S. dollars only. Page 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Consolidated Financial Statements and Notes thereto are set forth beginning at page F-1 of this Report. Also included is Schedule II, Valuation and Qualifying Accounts, which schedule is set forth at page S-1 of this report. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are inapplicable and therefore have been omitted. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. MANAGEMENT'S EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The term disclosure controls and procedures is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company's disclosure controls and procedures as of December 31, 2004. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2004. During the quarter ending on December 31, 2004, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2004. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. All internal control systems, no matter how well designed, have inherent limitations. Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Accordingly, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Page 27 Management performed an assessment of the effectiveness of the Company's internal controls over financial reporting as of December 31, 2004 using the criteria set forth in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. In conducting such assessment, management of the Company has excluded from its assessment of and conclusion on the effectiveness of internal control over financial reporting, the internal controls of ITO Acquisition Corporation doing business as Systems Management Specialists and a segment of Verizon Information Technologies Inc. now known as Infocrossing Healthcare Services, Inc. which are included in the 2004 consolidated financial statements of the Company and constituted approximately $107 million or 49% of total assets, including goodwill of approximately $66 million as of December 31, 2004, and approximately $42 million or 40% of revenues for the year then ended. Management did not assess the effectiveness of internal control over financial reporting at these entitles because the Company acquired these entities in 2004. Refer to Note 2 to the consolidated financial statements for further discussion of these acquisitions and their impact on Infocrossing's consolidated financial statements. Based on this assessment, management has determined that the Company's internal control over financial reporting as of December 31, 2004 is effective. Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2004 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM THE BOARD OF DIRECTORS AND STOCKHOLDERS OF INFOCROSSING, INC. AND SUBSIDIARIES We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that Infocrossing, Inc. and subsidiaries "(Infocrossing") maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Infocrossing's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Infocrossing's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Page 28 As indicated in the accompanying Management's Report on Internal Control Over Financial Reporting, Infocrossing has excluded from its assessment of and conclusion on the effectiveness of internal control over financial reporting as of December 31, 2004, the internal controls of ITO Acquisition Corporation doing business as Systems Management Specialists and a segment of Verizon Information Technologies Inc. now known as Infocrossing Healthcare Services, Inc. which are included in the 2004 consolidated financial statements of the Company and constituted approximately $107 million or 49 %of total assets, including goodwill of approximately $66 million as of December 31, 2004, and approximately $42 million or 40% of revenues for the year then ended. Our audit of internal control over financial reporting of Infocrossing also did not include an evaluation of the internal control over financial reporting of the entities referred to above. In our opinion, management's assessment that Infocrossing maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Infocrossing maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Infocrossing as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004 and our report dated March 14, 2005 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP New York, New York March 14, 2005 ITEM 9B. OTHER INFORMATION. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. ITEM 11. EXECUTIVE COMPENSATION. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information required by Item 201(d) of Regulation S-K is included above in Part II, Item 5 of this Annual Report on Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The contents of Items 10 through 14 are incorporated by reference to a Definitive Proxy Statement to be filed on or before May 2, 2005. Page 29 PART IV ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (a) 1. The financial statements and schedule required to be filed in satisfaction of Item 8 are listed in the Index to Consolidated Financial Statements and Schedule that appears as page F-1 of this report. Schedules not required have been omitted 2. The exhibits required to be filed as a part of this Annual Report are listed below. EXHIBIT NO. DESCRIPTION (a) Exhibits: 3.1A Company's Restated Certificate of Incorporation. 3.1B Certificate of Amendment to the Company's Certificate of Incorporation, filed May 8, 2000, to increase the authorized shares and to remove Article 11. , incorporated by reference to the Company's report on Form 10-Q for the period ended April 30, 2000. 3.1C Certificate of Amendment to the Company's Certificate of Incorporation, filed as of June 5, 2000, to change the name of the Company to Infocrossing, Inc. , incorporated by reference to the Company's report on Form 10-Q for the period ended April 30, 2000. 3.2 Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company's Form 10-Q/A filed May 17, 2004. 4.1 Indenture, dated as of June 30, 2004, between the Company as issuer and Wells Fargo Bank, National Association, as trustee; and form of 4.00% Convertible Senior Notes due 2024, incorporated by reference to Exhibit 4.2 to a Registration Statement No. 333-117340 on Form S-3 filed July 13, 2004. 4.2 Resale Rights Agreement, dated as of June 30, 2004, by and between the Company and Lehman Brothers, Inc. regarding the Company's 4.00% Convertible Senior Notes due 2024, incorporated by reference to Exhibit 4.4 to a Registration Statement No. 333-117340 on Form S-3 filed July 13, 2004. 4.3 Securities Purchase Agreement, dated as of March 24, 2004, by and among the Company and certain purchasers of the Company's common stock, incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed April 1, 2004. 4.4 Registration Rights Agreement, dated as of March 24, 2004, by and the Company and certain purchasers of the Company's common stock, incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed April 1, 2004. 4.5 Securities Purchase Agreement, dated as of October 16, 2003, by and among the Company and certain purchasers of common stock and warrants, incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed October 22, 2003. 4.6 Registration Rights Agreement, dated as of October 16, 2003, by and among the Company and certain purchasers of common stock and warrants, incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed October 22, 2003. 4.7 Exchange Agreement, dated as of October 16, 2003, by and among the Company and holders of series A preferred stock and series A warrants, incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed October 22, 2003. Page 30 EXHIBIT NO. DESCRIPTION 4.8 Second Amended and Restated Registration Rights Agreement, dated as of October 21, 2003, by and among the Company and certain stockholders of the Company, incorporated by reference to Exhibit 4.4 to the Company's Current Report on Form 8-K filed October 22, 2003. 4.9 Warrant Agreement dated as of February 1, 2002 by and between the Company and the Warrantholders party thereto, incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed February 5, 2002. 4.10 Warrant Agreement between the Company and the Warrantholders Party thereto. 10.1 Purchase and Sale Agreement, dated as of September 1, 2004 between Verizon Data Services, Inc. and the Company, incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed October 14, 2004 10.2 Stock Purchase Agreement between the Company and ITO Holdings, LLC, dated as of March 3, 2004, incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed April 7, 2004. 10.3 Stock Purchase Agreement dated as of February 5, 2002 by and between the Company and American Software, Inc., incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed February 5, 2002. 10.4A Acquisition Loan Agreement dated July 29, 2004 between the Company, various Lenders and CapitalSource Finance LLC as Agent for the Lenders ("Acquisition Loan Agreement"), incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2004. 10.4B Consent, Waiver and First Amendment to Acquisition Loan Agreement dated as of October 1, 2004, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed October 4, 2004. 10.4C Amended and Restated Consent, Waiver, and First Amendment to Acquisition Loan Agreement, dated as of October 6, 2004, incorporated by reference to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2004. 10.4D Second Amendment to Acquisition Loan Agreement and Other Documents, dated as of November 8, 2004, incorporated by reference to Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2004. 10.4E Third Amendment to Acquisition Loan Agreement and Other Documents, dated as of December 29, 2004. 10.5A Guaranty and Security Agreement dated as of July 29, 2004, between the Company and certain of the Company's subsidiaries and CapitalSource Finance LLC ("Security Agreement"), incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the period June 30, 2004. 10.5B Joinder to Security Agreement dated October 1, 2004. 10.6A Stock Pledge Agreement dated as of July 29, 2004, between the Company and certain of the Company's subsidiaries and CapitalSource Finance LLC ("Stock Pledge Agreement"), incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2004. 10.6B Addendum to Stock Pledge Agreement dated October 1, 2004. 10.7A Amended and Restated Term Loan Agreement, dated as of April 2, 2004 between the lenders named therein and the Company ("Amended and Restated Term Loan Agreement"), incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed April 7, 2004. Page 31 EXHIBIT NO. DESCRIPTION 10.7B First Amendment to Amended and Restated Term Loan Agreement, dated as of June 30, 2004, between the lenders named therein and the Company, incorporated by reference to Exhibit 4.5 to a Registration Statement No. 333-117340 on Form S-3 filed July 13, 2004. 10.7C Term Loan Agreement dated as of October 21, 2003 by and among the Company, Infocrossing Agent, Inc., and the lenders named therein, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed October 22, 2003. 10.7D First Amendment to Loan Agreement and other Loan Documents, dated as of February 13, 2004, by and among the Company, certain subsidiaries of the Company, certain lenders named therein, and CapitalSource Finance LLC. 10.7E Master Assignment and Assumption Agreement, dated as of February 13, 2004, by and among by and among the Company, as borrower; certain subsidiaries of the Company, as guarantors; Infocrossing Agent, Inc., as agent for assigning lenders named therein; assigning lenders named therein; and CapitalSource Finance LLC. 10.8A Guaranty and Security Agreement, dated as of April 2, 2004, between a subsidiary of the Company and CapitalSource, incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed April 7, 2004. 10.8B Guaranty and Security Agreement dated as of October 21, 2003 by and among the Company, Infocrossing Agent, Inc., and the Company's subsidiaries, incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed October 22, 2003. 10.9 Amended and Restated Stock Pledge Agreement, dated as of April 2, 2004, among the Company, a subsidiary of the Company, and CapitalSource, incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed April 7, 2004. 10.10 Employment Agreement between the Company and Zach Lonstein, dated as of January 1, 2005, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed January 5, 2005, superseding an Employment Agreement, dated as of November 1, 1999, incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q for the period ended July 31, 2000. 10.11 Employment Agreement between the Company and Robert Wallach, dated as of January 1, 2005, incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed January 5, 2005, superseding an Employment Agreement, dated as of November 1, 1999, incorporated by reference to Exhibit 10.5 to Infocrossing's Form 10-Q for the period ended July 31, 2000. 10.12A Employment Agreement, dated as of April 2, 2004, by and between the Company and Patrick A. Dolan, incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed April 7, 2004. 10.12B Settlement and Release Agreement dated as of October 15, 2004 by and among the Company and Patrick A. Dolan, incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K filed November 5, 2004. 10.13A Employment Agreement, dated as of April 2, 2004, by and between the Company and Jim Cortens, incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K filed April 7, 2004. 10.13B Settlement and Release Agreement dated as of October 15, 2004 by and among the Company and Jim Cortens. 10.14 Employment Agreement, dated as of October 1, 2004, by and between a subsidiary of the Company and Michael J. Luebke. Page 32 EXHIBIT NO. DESCRIPTION 10.15A Company's 2002 Stock Option and Stock Appreciation Rights Plan ("2002 Plan"), incorporated by reference to Appendix B to the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders held on June 25, 2002. 10.15B Amendment to 2002 Plan adopted by the Board of Directors on January 21, 2005. 10.15C Amendment to 2002 Plan approved at the Company's Annual Meeting of Stockholders held on June 15, 2004. 10.15D Amendment to 2002 Plan adopted by the Board of Directors on April 1, 2004. 10.16A Amended and Restated 1992 Stock Option and Stock Appreciation Rights Plan ("1992 Plan"), incorporated by reference to Appendix A to Company's Definitive Proxy Statement for the Annual Meeting of Stockholders held on May 8, 2000. 10.16B Amendment to 1992 Plan approved at the Company's Annual Meeting of Stockholders held on June 22, 2001. 10.17 Stock Option Agreement under the Company's 2002 Stock Option and Stock Appreciation Rights Plan, dated January 21, 2005, between the Company and Zach Lonstein, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed November 5, 2004. 10.18A Lease dated June 2, 1997 between the Company and Leonia Associates, LLC. 10.18B First Amendment of Lease between the Company and Leonia Associates, LLC, dated January 16, 1998. 10.18C Second Amendment of Lease between the Company and Leonia Associates, LLC, dated as of September 9, 1999. 10.18D Third Amendment of Lease between the Company and Leonia Associates, LLC, dated as of August 28, 2000, incorporated by reference to Exhibit 10.7D to the Company's 10-K for the fiscal year ended October 31, 2000. 10.18E Fourth Amendment of Lease between the Company and Leonia Associates, LLC, dated as of April 19, 2004. 10.19A Office Lease Agreement dated May 22, 2000 between the Company and Crocker Realty Trust, incorporated by reference to Exhibit 10.6 to the Company's Form 10-Q for the period ended July 31, 2000. 10.19B First Amendment to Lease dated as of April 1, 2002 by and between Crocker Realty Trust, L.P. and the Company, incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q for period ended March 31, 2002. 10.20A Lease Agreement between Birch Windell, LLC (Landlord) and ITO Acquisition Corp (Tenant) dated as of December 19, 2002 10.20B First Amendment to Lease between Global Brea, LLC and ITO Acquisition Corporation 10.21A Tenth Floor Option Agreement between the Company, G-H-G Realty Company ("GHG"), and RSL Com USA, Inc. ("RSL"), dated as of November 30, 1999, with related notice of exercise dated February 14, 2000, incorporated by reference to Exhibit 10.6A to the Company's Form 10-K for the fiscal year ended October 31, 2000. 10.21B Eleventh Floor Option Agreement between the Company, GHG, and RSL, dated as of November 30, 1999, with related notice of exercise dated December 2, 1999, incorporated by reference to Exhibit 10.6B to the Company's 10-K for the fiscal year ended October 31, 2000. 10.28A* Master Services Agreement dated as of May 24, 2001 among the Company, Alicomp, a Division of Alicare, Inc. and ADT Security Services, Inc., incorporated by reference to Exhibit 10.1A to a Registration Statement No. 333-110173 on Form S-3 filed February 6, 2004. 10.28B* Amendment to Master Services Agreement among the Company, Alicomp, a Division of Alicare, Inc. and ADT Security Services, Inc. dated as of January 11, 2002, incorporated by reference to Exhibit 10.1B to a Registration Statement No. 333-110173 on Form S-3 filed February 6, 2004. Page 33 EXHIBIT NO. DESCRIPTION 10.29* Computer Services Agreement dated as of March 21, 1997 by and between the Company and Alicomp, a Division of Alicare, Inc., incorporated by reference to Exhibit 10.2A to a Registration Statement No. 333-110173 on Form S-3 filed February 6, 2004. 10.30* Marketing Agreement dated as of March 21, 1997 by and between the Company and Alicomp, a Division of Alicare, Inc., incorporated by reference to Exhibit 10.2B to a Registration Statement No. 333-110173 on Form S-3 filed February 6, 2004. 10.31* Extension Agreement dated as of October 1, 2002 by and between the Company and Alicomp, a Division of Alicare, Inc., incorporated by reference to Exhibit 10.2C to a Registration Statement No. 333-110173 on Form S-3 filed February 6, 2004. 10.32* Extension Agreement dated as of December 30, 2003 by and between the Company and Alicomp, a Division of Alicare, Inc., incorporated by reference to Exhibit 10.2D to a Registration Statement No. 333-110173 on Form S-3 filed February 6, 2004. 14. Code of Ethics, incorporated by reference to Appendix B to the Company's Proxy Statement for the Annual Meeting of June 15, 2004. 31. Certifications required by Rule 13a-14(a) to be filed. 32 Certifications required by Rule 13a-14(b) to be furnished but not filed. * Portions of this exhibit have been omitted pursuant to a request for confidential treatment. (b) Reports on Form 8-K Pursuant to Item 1.01 of Form 8-K, on September 1, 2004 we announced we had entered into a Purchase and Sale Agreement (the "Purchase Agreement") with Verizon Data Services Inc. ("Seller"), to acquire for $43.5 million in cash a segment of the healthcare business of Verizon Information Technologies Inc., which is a wholly owned subsidiary of Seller and which provides managed care, Medicare and Medicaid processing services. Pursuant to Item 2.01 of Form 8-K, on October 4, 2003 we reported the completion on October 1, 2004 of the previously announced acquisition from Verizon Data Services, Inc. Pursuant to Item 7.01 of Form 8-K, on October 12, 2004 we announced that we would hold a conference call at 4:00 pm on that date to discuss the previously announced acquisition from Verizon Data Services, Inc. Pursuant to Item 5.02(b) and (c) of Form 8-K, on November 5, 2004 we announced the resignation of Patrick Dolan as Chief Executive Officer and the assumption of those duties by Robert Wallach. Pursuant to Item 5.02(d) of Form 8-K, on November 30, 2004 we announced the election of Jeremiah Healy to our Board of Directors. Pursuant to Item 2.01 of Form 8-K, on December 17, 2004 we amended Form 8-K as filed on October 4, 2004 to add financial statements and pro forma information. Page 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INFOCROSSING, INC. March 16, 2005 /s/ ZACH LONSTEIN --------------------------------------------- Zach Lonstein - Chief Executive Officer March 16, 2005 /s/ WILLIAM J. McHALE --------------------------------------------- William J. McHale - Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 16, 2005 /s/ ZACH LONSTEIN --------------------------------------------- Zach Lonstein - Chairman of the Board of Directors March 16, 2005 /s/ PETER J. DaPUZZO --------------------------------------------- Peter J. DaPuzzo - Director March 16, 2005 /s/ JEREMIAH M. HEALY --------------------------------------------- Jeremiah M. Healy - Director March 16, 2005 /s/ KATHLEEN A. PERONE --------------------------------------------- Kathleen A. Perone - Director March 16, 2005 /s/ MICHAEL B. TARGOFF --------------------------------------------- Michael B. Targoff - Director March 16, 2005 /s/ ROBERT B. WALLACH --------------------------------------------- Robert B. Wallach - Director March 16, 2005 /s/ HOWARD L. WALTMAN --------------------------------------------- Howard L. Waltman - Director Page 35 INFOCROSSING, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE Page No. ----------- Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets - December 31, 2004 and 2003 F-3 Consolidated Statements of Operations - Years ended December 31, 2004, 2003, and 2002 F-4 Consolidated Statements of Stockholders' Equity (Deficit) - Years ended December 31, 2004, 2003, and 2002 F-5 Consolidated Statements of Cash Flows - Years ended December 31, 2004, 2003, and 2002 F-6 Notes to Consolidated Financial Statements F-8 Schedule II: Valuation and Qualifying Accounts S-1 F - 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM THE BOARD OF DIRECTORS AND STOCKHOLDERS OF INFOCROSSING, INC. AND SUBSIDIARIES We have audited the accompanying consolidated balance sheets of Infocrossing, Inc. and subsidiaries (the "Company") as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15 (a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Infocrossing, Inc. and subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Infocrossing, Inc. and subsidiaries internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2005 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG, LLP New York, New York March 14, 2005 F - 2
INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA) DECEMBER 31, ---------------------------------- ASSETS 2004 2003 --------------- --------------- CURRENT ASSETS: Cash and equivalents $ 26,311 $ 10,073 Trade accounts receivable, net of allowances for doubtful accounts of $249 and $570, respectively 26,707 3,592 Due from related parties 238 226 Prepaid license fees 1,585 945 Deferred income taxes 1,260 - Other current assets 4,650 1,780 ------------ ------------ Total current assets 60,751 16,616 Property, equipment and purchased software 25,113 18,725 Deferred software, net 1,077 1,264 Goodwill 103,177 28,361 Other intangible assets, net 12,328 788 Deferred income taxes 11,715 - Security deposits and other non-current assets 2,489 1,384 ------------ ------------ TOTAL ASSETS $ 216,650 $ 67,138 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 9,041 $ 2,768 Current portion of long-term debt and capitalized lease obligations 3,683 2,559 Current portion of accrued loss on leased facilities 217 202 Accrued expenses 8,489 1,516 Income taxes payable 305 - Current deferred revenue 1,267 1,356 ------------ ------------ Total current liabilities 23,002 8,401 Notes payable, long-term debt and capitalized lease obligations, net of current portion 100,432 25,732 Accrued loss on leased facilities, net of current portion 505 732 Deferred revenue, net of current portion - 42 Other long-term liabilities 1,474 1,430 ------------ ------------ TOTAL LIABILITIES 125,413 36,337 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock; $0.01 par value; 3,000,000 shares authorized; none issued - - Common stock; $0.01 par value; 50,000,000 shares authorized; shares issued of 20,395,473 and 15,732,038 at December 31, 2004 and 2003, respectively 204 157 Additional paid-in capital 150,278 109,565 Accumulated deficit (56,107) (76,070) ------------ ------------ 94,375 33,652 Less 618,969 and 594,990 shares at December 31, 2004 and 2003, respectively, of common stock held in treasury, at cost (3,138) (2,851) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 91,237 30,801 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 216,650 $ 67,138 ============ ============
See Notes to Consolidated Financial Statements. F - 3
INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT NUMBER OF SHARES AND PER SHARE DATA) YEARS ENDED DECEMBER 31, ------------------------------------------------------- 2004 2003 2002 --------------- ---------------- ---------------- REVENUES $ 104,949 $ 55,228 $ 50,774 ----------- ------------ ------------- COSTS and EXPENSES: Costs of revenues, excluding depreciation shown below 71,368 36,663 33,289 Selling and promotion costs 3,277 2,978 2,786 General and administrative expenses 8,744 5,587 6,114 Leased facilities and office closings - - (290) Depreciation and amortization 8,679 6,104 5,981 ----------- ------------ ------------- 92,068 51,332 47,880 ----------- ------------ ------------- INCOME FROM OPERATIONS 12,881 3,896 2,894 ----------- ------------ ------------- Interest income (313) (103) (172) Fees related to loans repaid 1,347 - - Interest expense 4,423 2,601 2,137 ----------- ------------ ------------- 5,457 2,498 1,965 ----------- ------------ ------------- INCOME BEFORE 7,424 1,398 929 INCOME TAXES Income tax (benefit) expense (12,539) 42 (208) ----------- ------------ ------------- NET INCOME 19,963 1,356 1,137 Accretion and dividends on redeemable preferred stock - (6,877) (9,293) ----------- ------------ ------------- NET INCOME (LOSS) TO COMMON STOCKHOLDERS $ 19,963 $ (5,521) $ (8,156) =========== ============ ============= BASIC EARNINGS PER SHARE: Net income (loss) to common stockholders per share $ 1.12 $ (0.76) $ (1.52) =========== ============ ============= Weighted average number of common shares outstanding 17,827,006 7,279,786 5,352,757 =========== ============ ============= DILUTED EARNINGS PER SHARE: Net income (loss) to common stockholders per share $ 0.95 $ (0.76) $ (1.52) =========== ============ ============= Weighted average number of common share equivalents outstanding 21,931,982 7,279,786 5,352,757 =========== ============ =============
See Notes to Consolidated Financial Statements. F - 4
INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS) ADDITIONAL TREASURY COMMON PAID IN ACCUMULATED STOCK AT SHARES PAR VALUE CAPITAL DEFICIT COST TOTAL ---------- ------------ ------------- --------------- ------------- ------------- Balances, December 31, 2001 5,912 $ 59 $ 59,054 $ (62,393) $ (2,756) $ (6,036) Exercises of stock options 54 1 289 - (95) 195 Accretion and dividends on redeemable preferred stock - - - (9,293) - (9,293) Conversion of preferred stock and exercise of warrants 7 - 65 - - 65 Warrants issued - - 1,720 - - 1,720 Other - - 7 - - 7 Net income - - - 1,137 - 1,137 ---------- -------- ----------- ------------ ---------- ----------- Balances, December 31, 2002 5,973 $ 60 $ 61,135 $ (70,549) $ (2,851) $ (12,205) Exercises of stock options 20 - 106 - - 106 Accretion and dividends on redeemable preferred stock - - - (8,091) - (8,091) Vesting of a non-qualified stock option - - 40 - - 40 Private stock offering 9,739 97 69,845 - - 69,942 Recapitalization of preferred stock and warrants - - (20,755) 1,214 - (19,541) Cancellation of warrants on repayment of debentures - - (806) - - (806) Net income - - - 1,356 - 1,356 ---------- -------- ----------- ------------ ---------- ----------- Balances, December 31, 2003 15,732 $ 157 $ 109,565 $ (76,070) (2,851) $ 30,801 Exercises of stock options 346 4 1,952 - (287) 1,669 Exercises of warrants 1,141 11 6,479 - - 6,490 Vesting of a non-qualified stock option - - 31 - - 31 Warrants issued - - 137 - - 137 Private stock offering 2,917 29 28,211 - - 28,240 Stock issued in connection with acquisitions 259 3 2,936 - - 2,939 Tax credit for disqualifying disposition of stock options - - 967 - - 967 Net income - - - 19,963 - 19,963 ---------- -------- ----------- ------------ ---------- ----------- Balances, December 31, 2004 20,395 $ 204 $ 150,278 $ (56,107) (3,138) $ 91,237 ========== ======== =========== ============ ========== ===========
See Notes to Consolidated Financial Statements. F - 5
INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, --------------------------------------- -------------------- 2004 2003 2002 ------------------- ----------------- -------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 19,963 $ 1,356 $ 1,137 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 8,679 6,104 5,981 Accretion of discounted debt 62 422 491 Unamortized fees relating to loans repaid 1,097 - - Non-employee option issued for services 168 40 - Deferred income taxes (12,550) - - Reduction of accrued loss on leased facilities - - (290) Bad debt expense 329 144 228 Interest due on related party balances (12) (10) (11) Changes in operating assets and liabilities (net of effect of acquisitions: Decrease (increase) in: Trade accounts receivable (10,985) 633 (550) Prepaid license fees and other current assets (2,138) (590) (122) Security deposits and other non- current assets (165) 84 1,539 Increase (decrease) in: Accounts payable 4,242 (1,325) 2,179 Income taxes payable 437 (96) 96 Accrued expenses (2,057) (510) (5,956) Payments on accrued loss on leased facilities (156) (148) (3,257) Deferred revenue and other liabilities (598) (168) (221) --------------- -------------- ---------------- Net cash provided by operating activities 6,316 5,936 1,244 --------------- -------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (1,456) (1,419) (3,955) Purchase of businesses, net of cash acquired (88,593) (350) (19,896) Purchases of auction-rate securities (64,200) - - Redemptions of auction-rate securities 64,200 - - Increase in deferred software costs (367) (138) (135) --------------- -------------- ---------------- Net cash used in investing activities (90,416) (1,907) (23,986) --------------- -------------- ----------------
Continued on next page. F - 6
INFOCROSSING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, ---------------------------------------- ------------------ 2004 2003 2002 ------------------ ------------------ ------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from a private equity placement $ 28,240 $ 69,942 $ - Proceeds from issuance of Debentures - - 10,000 Proceeds from sale of convertible notes 69,480 Proceeds from debt financing 39,375 - - Redemption of preferred stock and warrants - (56,321) - Repayment of debentures and interest accrued - (12,227) - Repayments of debt and capitalized leases (43,764) (2,431) (4,726) Payment of costs related to debt financings (1,096) - - Exercises of stock options and warrants 8,159 106 202 --------------- -------------- --------------- Net cash provided by (used in) financing activities 100,394 (931) 5,476 --------------- -------------- --------------- Net cash provided by (used in) continuing operations 16,294 3,098 (17,266) CASH FLOWS FROM DISCONTINUED OPERATION: Payments on portion of accrued loss on leased facilities relating to discontinued operation (56) (51) (52) --------------- -------------- --------------- Net increase (decrease) in cash and equivalents 16,238 3,047 (17,318) Cash and equivalents, beginning of year 10,073 7,026 24,344 --------------- -------------- --------------- Cash and equivalents, end of year $ 26,311 $ 10,073 $ 7,026 =============== ============== =============== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 2,802 $ 981 $ 422 =============== ============== =============== Income taxes $ 169 $ 132 $ 22 =============== ============== =============== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Notes payable issued for a portion of the redemption of the preferred stock and warrants $ - $ 25,000 $ - =============== ============== =============== Common stock issued for a portion of purchase price on acquisitions $ 2,939 $ - $ - =============== ============== =============== Equipment acquired subject to a capital lease $ 5,942 $ 2,475 $ 1,278 =============== ============== =============== SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: Treasury shares received in payment of a stock option exercise 287 $ - $ 95 =============== ============== =============== Preferred shares converted to common - $ - $ 65 =============== ============== =============== Additional Debentures issued in lieu of a cash payment of interest - $ 1,310 $ 600 =============== ============== ===============
See Notes to Consolidated Financial Statements. F - 7 INFOCROSSING, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Business - Infocrossing, Inc. and its wholly-owned subsidiaries (collectively, the "Company") provides information technology and business process outsourcing services to companies, institutions, and government agencies. Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and significant intercompany transactions have been eliminated. Cash and Equivalents - Cash and equivalents include all cash, demand deposits, money market accounts, and debt instruments purchased with an original maturity of three months or less. Concentration of Credit Risk - Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of temporary cash investments and trade receivables. The Company restricts investment of temporary cash investments to financial institutions with high credit standing. Credit risk on trade receivables is minimized as a result of the large and diverse nature of the Company's customer base. The Company performs ongoing credit evaluations of customers' financial condition, and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded management's expectations. Property, Equipment and Software- Property and equipment is stated at cost except for assets acquired under capital leases, which are recorded at the net present value of the minimum lease commitments. Depreciation is provided using the straight-line method over the estimated useful lives. Leasehold improvements and assets acquired under capital leases are amortized over the shorter of the lease term or the estimated useful lives. Software that has been purchased is included in Property and Equipment and is amortized using the straight-line method over five years. The cost of internally developed software and product enhancements, not reimbursed by customers, is capitalized as Deferred Software Costs. Such assets are internal-use software, accounted for in accordance with Statement of Position 98-1, "Accounting of the Costs of Computer Software Developed or Obtained for Internal Use." The estimated useful lives of such assets vary between three and five years, based upon the estimated useful life of each particular software product. If the software has been developed for a particular client, the useful life equals the term of the related customer contract. Goodwill, Other Intangible and Long-Lived Assets - Goodwill is the excess of purchase price over the fair value of identified net assets of businesses acquired. Goodwill and intangible assets deemed to have indefinite lives are no longer amortized but instead are subject to annual impairment tests in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Long-Lived assets and intangible assets subject to amortization are reviewed for impairment in accordance with SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. Other intangible assets, primarily acquired customer lists, are amortized over their respective useful lives ranging from five to ten years and reviewed for impairment whenever events or changes in circumstances such as significant declines in revenues, earnings or cash flows or material adverse changes in the business climate indicate that the carrying amount of an asset may be impaired. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future estimated undiscounted net cash flows expected to be generated by the assets. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. As of December 31, 2004, no impairment has occurred. Revenue Recognition - The Company's services are provided under a combination of fixed monthly fees and time and materials billings. Contracts with clients range from two to seven years. Revenue is recognized (1) after the Company has obtained an executed service contract from the customer (2) as the services are rendered (3) when the price is fixed as per the service contract and (4) when the Company believes that collectibility is reasonably assured based on the credit risk policies and procedures that the Company employs. F - 8 Costs of Revenues - Costs of revenues include software licenses, operating hardware leases, hardware maintenance, telecommunication services, and the cost of customer service personnel, computer operators, programmers, and other technical personnel. Deferred Revenue - The Company records deferred revenue for amounts billed for which the services have not yet been provided. Deferred revenue amounts are recorded as revenue as the services are rendered. Income Taxes - The Company accounts for income taxes pursuant to the liability method whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Any deferred tax assets recognized for net operating loss carryforwards and other items are reduced by a valuation allowance when it is more likely than not that the benefits may not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. Earnings per Share - The Company computes earnings per share in accordance with SFAS No. 128, "EARNINGS PER SHARE." Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share adjusts basic earnings per share for the effects of convertible securities, stock options and warrants and other potentially dilutive financial instruments, only in the periods in which such effect is dilutive. For the year ended December 31, 2004, the weighted average number of shares used in calculating diluted earnings per share includes options and warrants to purchase common stock and the effects of convertible securities aggregating 4,104,976 shares. The calculation for 2004 also includes an increase to net earnings equal to interest expense relating to the convertible debt, adjusted for income taxes, of $906,000. The calculation of earnings per share for the year ended December 31, 2004 excludes 1,145,100 shares related to stock options and warrants because to include them in the calculation would be antidilutive. Earnings per share for the years ended December 31, 2003 and 2002 excluded weighted average shares related to stock options and warrants of 594,026 and 2,921,972, respectively, because to include them in the calculations for those years would have been antidilutive. Comprehensive Income - SFAS No. 130, REPORTING COMPREHENSIVE INCOME establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. The Company's comprehensive net income (loss) is equal to its net income (loss) for all periods presented. Segments - The Company and its subsidiaries operate in one reportable segment of providing information technology and business process outsourcing services. Derivatives - The Company does not invest in derivatives for trading purposes nor does it use derivative financial instruments to manage risks associated with fluctuating interest rates. Fair Value of Financial Instruments - At December 31, 2004 and 2003, the carrying amounts of cash and equivalents, trade accounts receivable, accounts payable, accrued expenses, accrued loss on leased facilities, customer deposits, deferred revenue and other current liabilities approximate fair value due to the short-term nature of these instruments. The carrying amounts of long-term debt approximate fair value based on interest rates that are currently available to the Company with similar terms and remaining maturities. Use of Estimates - The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the periods. Actual results could differ from those estimates. Interim results are not necessarily indicative of results for a full year. Reclassifications - Certain reclassifications were made to the prior years' financial statements to conform to the current year presentation. F - 9 Major Customers - For the years ended December 31, 2004, 2003 and 2002, one client accounted for 13%, 23%, and 29%, respectively, of the Company's total revenues. Also, for the year ended December 31, 2002, another client accounted for 11% of the Company's total revenues. Recently Issued Accounting Pronouncements - In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF NONMONETARY ASSETS, which eliminated the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 153 will have a material impact on its operating results or financial position. In December 2004, the FASB issued SFAS No. 123(R), SHARE-BASED PAYMENT, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic method previously allowable under APB Opinion No. 25. SFAS 123(R) will be effective for interim or annual reporting periods beginning on or after June 15, 2005. SFAS 123(R) permits public companies to adopt its requirements using one of the following two methods: 1. A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date. 2. A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all periods presented or (b) prior interim periods of the year of adoption. The Company plans to adopt SFAS 123(R) using the modified prospective method. As permitted by SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION", the Company currently accounts for share-based payments to employees using APB Opinion 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123(R)'s fair value method will have a significant impact on its results of operations, although it will have no impact on its overall financial position. The impact of the adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income (loss) and earnings (loss) per share below. The Company has not determined what impact SFAS 123(R) might have on the nature of its share-based compensation to employees in the future. F - 10 Had compensation cost been determined in accordance with SFAS No. 123, the Company's loss in thousands of dollars and basic and diluted earnings (loss) per common share for the years ended December 31, 2004, 2003, and 2002, respectively, would have been as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2004 2003 2002 ----------------- ---------------- ----------------- Net income (loss) to common stockholders: As reported $ 19,963 $ (5,521) $ (8,156) Stock compensation expense determined under fair value method (2,739) (1,020) (2,044) -------------- ------------- -------------- Pro forma $ 17,224 $ (6,541) $ (10,200) ============== ============= ============== Basic net earnings (loss) to common stockholders per share: As reported $ 1.12 $ (0.76) $ (1.52) Stock compensation expense (0.15) (0.14) (0.38) -------------- ------------- -------------- Pro forma $ 0.97 $ (0.90) $ (1.90) ============== ============= ============== Diluted net earnings (loss) to common stockholders per equivalent share: As reported $ 0.95 $ (0.76) $ (1.52) Stock compensation expense (0.13) (0.14) (0.38) -------------- ------------- -------------- Pro forma $ 0.82 $ (0.90) $ (1.90) ============== ============= ==============
The Pro forma income (loss) and pro forma basic and diluted earnings (loss) per share for the years ended December 31, 2003 and 2002 have been restated to properly account for forfeitures. All incentive stock options under the Plan, other than those granted to any person holding more than 10% of the total combined voting power of all classes of outstanding stock, are granted at the fair market value of the common stock at the grant date. The weighted average fair value of the stock options granted during the years ended December 31, 2004, 2003 and 2002 was $6,093,000, $595,000, and $689,000, respectively. The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2004: a risk-free interest rate of between 2.63% and 3.13%; expected lives of between six months and three years; and expected volatility of between 35.7% and 41.13%. The following weighted average assumptions were used for grants in 2003: a risk-free interest rate of between 2.21% and 2.63%; expected lives of three years; and expected volatility of between 41.13% and 53.0%. The assumptions used in 2002 included a risk-free interest rate of 3.69%, expected lives ranging from six months to five years, and expected volatility of 54.7%. F - 11 2. ACQUISITIONS INFOCROSSING HEALTHCARE SERVICES, INC. On October 1, 2004, the Company acquired the Medicaid, Medicare and Managed Care claims processing business (the "Claims Processing Business") of Verizon Information Technologies Inc. ("VITI") from Verizon Communications Inc. (NYSE: VZ). The sale was structured as an acquisition of the common stock of the Claims Processing Business. The purchase price was $43,500,000 in cash and approximately $1,886,000 in related acquisition costs (the "IHS Acquisition"). Immediately following the closing of the IHS Acquisition, the Claims Processing Business' name was changed to Infocrossing Healthcare Services, Inc. ("IHS"). The IHS Acquisition was pursuant to a Purchase and Sale Agreement, dated as of September 1, 2004, between Verizon Data Services, Inc. (VITI's parent) and the Company. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their respective fair values. In connection with the allocation of the purchase price, goodwill of $25,357,000 and an intangible asset subject to amortization in the amount of $10,320,000, relating to contract rights and customer relationships, was recorded. The intangible asset is being amortized over its estimated useful life of ten years. The goodwill related to the IHS Acquisition is deductible for tax purposes. IHS is engaged in the business of providing customers in the healthcare industry with information technology outsourcing services, healthcare transaction processing services, Health Insurance Portability and Accountability Act consulting and implementation services, payer application solutions and Medicaid fiscal agent services. Such customers mainly are located in Missouri, Florida, Arizona, Alabama, Arkansas, North Dakota, Utah, and Montana. The following table summarizes the preliminary fair values of the assets acquired and the liabilities assumed at the date of the IHS Acquisition. OCTOBER 1, 2004 (IN THOUSANDS) Trade accounts receivable $ 9,146 Other current assets 57 ----------- Total current assets 9,203 Property, equipment, and purchased software 2,049 Intangible assets subject to amortization 10,320 Goodwill 25,357 ----------- Total assets acquired 46,929 ----------- Accrued expenses (1,380) Deferred revenue (72) Other current liabilities (91) ----------- Total current liabilities (1,543) ----------- Purchase price $ 45,386 =========== F - 12 INFOCROSSING WEST, INC. On April 2, 2004, the Company acquired all of the outstanding capital stock of ITO Acquisition Corporation, a California corporation doing business as Systems Management Specialists ("SMS"), from ITO Holdings, LLC ("Holdings") for $34,909,000 in cash, $1,224,000 in related acquisition costs and 135,892 shares of common stock of the Company valued at approximately $1,439,000 (the "SMS Acquisition"). Subsequent to the acquisition, SMS changed its name to Infocrossing West, Inc. ("IFOX West"). The value of the 135,892 shares was determined using the average market price of the Company's common stock two days before and after March 4, 2004, when the terms of the acquisition were determined and announced. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the tangible and intangible assets acquired and the liabilities assumed based on their respective fair values. In connection with the allocation of the purchase price, goodwill of $40,648,000 and an intangible asset subject to amortization in the amount of $1,650,000, relating to contract rights and customer relationships, was recorded. In connection with an acquisition by SMS prior to April 2004, the Company may have to pay contingent consideration for a period of up to four years. Through December 31, 2004, such contingent consideration totaled $281,000, which was recorded as additional goodwill. IFOX West, headquartered in Orange County, California, provides computing operations, business process outsourcing and managed application services to clients primarily located in the western United States. The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of the SMS Acquisition. APRIL 2, 2004 (IN THOUSANDS) Trade accounts receivable $ 3,313 Other current assets 1,447 ------------------ Total current assets 4,760 Property, equipment, and purchased software 4,033 Intangible assets subject to amortization 1,650 Other assets 793 Goodwill 40,648 ------------------ Total assets acquired 51,884 ------------------ Accrued expenses (7,983) Current portion of capitalized lease obligations (1,529) Other current liabilities (87) ------------------ Total current liabilities (9,599) Long term liabilities (5,043) ------------------ Total liabilities assumed (14,642) ------------------ Purchase price, net of cash acquired of $330 $ 37,242 ================== In 2004, the Company acquired two additional businesses (the "Minor Acquisitions") for $7,090,000 in cash, $116,000 in related acquisition costs and 123,193 shares of common stock of the Company valued at approximately $1,500,000. The purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on their respective fair values. As part of the allocation, approximately $8,530,000 was allocated to goodwill and $501,000 was allocated to an amortizable intangible asset (contract rights and customer relationships) that are being amortized over its estimated useful life of five years. The goodwill related to the Minor Acquisitions is deductible for tax purposes. The results of the aforementioned acquisitions are included with that of the Company for the period subsequent to the respective acquisitions. The Company is in the process of finalizing the fair value of certain assets, thus the allocation of the purchase prices of the acquisitions above are subject to adjustment. F - 13 The following unaudited condensed combined pro forma information for the years ended December 31, 2004 and 2003 give effect to the IHS Acquisition and the SMS Acquisition as if they had occurred on January 1, 2003. For the purposes of the pro forma information, the Company has assumed that, other than the related financings, it had sufficient cash to make the acquisitions. The pro forma information may not be indicative of the results that actually would have occurred had the transactions been in effect on the dates indicated, nor does it purport to indicate the results that may be obtained in the future. The pro forma information does not give effect to planned synergies and cost savings, nor to the Minor Acquisitions because the impact these acquisitions would have on the pro forma information is not material. PRO FORMA INFORMATION (IN THOUSANDS EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, ----------------------------------- 2004 2003 ---------------- --------------- Revenues $ 149,552 $ 143,560 ============ =========== Net income (loss) $ 23,475 $ (835) ============ =========== Net income (loss) to common stockholders $ 23,475 $ (7,712) ============ =========== Basic net earnings (loss) to common stockholders per share $ 1.33 (0.98) ============ =========== Diluted net earnings (loss) to common stockholders per equivalent share $ 1.12 $ (0.98) ============ =========== 3. PROPERTY, EQUIPMENT AND SOFTWARE PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE Property, equipment and purchased software consists of the following (in thousands):
DEPRECIABLE DECEMBER 31, LIVES (YEARS) ------------------------------------------ -------------- 2004 2003 -------------------- ------------------ -------------- Computer equipment $ 12,907 $ 11,220 5-7 Computer equipment acquired under capital leases (Note 7) 19,445 10,118 * Furniture and office equipment 1,566 1,271 7 Leasehold improvements 9,225 8,874 * Purchased software 8,603 6,736 5 Vehicles 153 132 3 ---------------- -------------- 51,899 38,351 Less accumulated depreciation and amortization, including $8,630 and $5,011 attributable to assets under capital leases at December 31, 2004 and 2003, respectively (26,786) (19,626) ---------------- -------------- $ 25,113 $ 18,725 ================ ==============
* Shorter of the useful life or the length of the lease. Depreciation and amortization charged to operations was $7,194,000, $5,137,000 and $4,959,000 for the years ended December 31, 2004, 2003 and 2002, respectively. F - 14 DEFERRED SOFTWARE COSTS Deferred software costs consist of the following (in thousands):
DECEMBER 31, ----------------------------------- 2004 2003 --------------- ---------------- Cost of internally-developed software $ 6,461 $ 6,094 and enhancements, including software under development Accumulated amortization (5,384) (4,830) ----------- ------------ $ 1,077 $ 1,264 =========== ============
Amortization of deferred software costs charged to operations was $554,000, $616,000 and $590,000 for the years ended December 31, 2004, 2003 and 2002, respectively. 4. GOODWILL AND OTHER INTANGIBLE ASSETS GOODWILL Changes in Goodwill for the years ended December 31, 2004 and 2003 is as follows: YEAR ENDED DECEMBER 31, ------------------------------------- 2004 2003 ---------------- ----------------- $ 28,361 $ 28,451 Goodwill, beginning of year SMS Acquisition 40,929 - IHS Acquisition 25,357 - Minor Acquisitions 8,530 - Other - (90) ------------ ------------- Goodwill, end of year $ 103,177 $ 28,361 ============ ============= OTHER INTANGIBLE ASSETS Other intangible assets consist of the following (in thousands): DECEMBER 31, ------------------------------------- 2004 2003 ---------------- ----------------- $ 14,851 $ 2,380 Acquired customer lists Accumulated amortization (2,523) (1,592) ------------ ------------- $ 12,328 $ 788 ============ ============= Amortization charged to operations was $931,000, $354,000 and $432,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Future amortization expense related to customer lists is estimated as follows (in thousands): Years ending December 31: 2005 $ 1,694 2006 1,449 2007 1,282 2008 1,259 2009 1,076 Thereafter 5,568 ----------- $ 12,328 =========== F - 15 5. ACCRUED EXPENSES Accrued expenses consists of the following (in thousands): DECEMBER 31, -------------------------------- 2004 2003 -------------- -------------- $ 1,585 $ 211 Payroll related accruals Interest 1,690 67 Software licenses and maintenance 1,016 240 Hardware leases and maintenance 1,412 57 Professional fees 958 280 Outside processing 389 25 Other 1,439 636 ---------- ---------- $ 8,489 $ 1,516 ========== ========== 6. RELATED PARTY TRANSACTIONS Due from related parties consists of the following (in thousands): DECEMBER 31, --------------------------- 2004 2003 ----------- ------------ Due from the Chairman, bearing interest at the Prime Rate (5.25% at December 31, 2004) plus 1% per annum, repayable, including accrued interest, on demand $ 94 $ 89 Due from other officers, bearing interest at the Prime Rate, repayable, including accrued interest, on demand 144 137 ------- -------- Total due from related parties $ 238 $ 226 ======= ======== In accordance with the Sarbanes-Oxley Act of 2002, no further advances are being made to the Company's officers. Effective January 1, 2005, the Company entered into employment agreements with the Company's Chairman and Chief Executive Officer (the "Chairman); and the Company's Vice Chairman, President and Chief Operating Officer (the "Vice Chairman"), replacing prior agreements originally signed as of November 1, 1999. The employment agreements each provide for, among other items: an initial annual base salary of $455,815; increases at the greater of the Cost of Living Index or as determined by the Compensation Committee of the Board of Directors; bonuses at the discretion of, and related to the satisfaction of goals to be determined by, the Board of Directors or the Compensation Committee; Company-paid medical, life and other group benefits; and the use of a current model auto and membership in a health club of the executive's choosing. The Chairman's employment agreement provides for full-time employment for five years, three years part-time employment at 75% of the base salary then in effect, and two years of reduced part-time employment at 50% of the base salary then in effect. The Vice Chairman's employment agreement provides for full-time employment for two years, three years part-time employment at 75% of the base salary then in effect, and two years of reduced part-time employment at 50% of the base salary then in effect. During part-time periods, if they elect to remain on the Board of Directors, they will remain as Chairman and Vice-Chairman. F - 16 The employment agreements provide for lifetime pension benefits of $180,000 annually for the Chairman and $120,000 annually for the Vice Chairman, which will be paid beginning with the commencement of each executive's reduced part-time employment period. The Company will also continue to provide medical, life and disability benefits for life to the executives and their spouses. The Company will pay for a $2 million life insurance policy for the Chairman, and a $500,000 policy for the Vice Chairman. Each executive shall designate their beneficiaries. The Company may elect to defer compensation in excess of amounts deductible for Federal income tax purposes (currently $1,000,000), to the earlier of (1) a tax year where the compensation will be deductible, (b) the first anniversary of the termination of employment of the executive, or (c) the date on which the executive must pay Federal income tax on the amount. The Chairman's employment agreement provides that no stock option awards will be granted through December 31, 2006, except in the sole discretion of the Board of Directors, or a duly authorized committee of the Board. The Vice Chairman's agreement provides that no stock option awards will be granted through December 31, 2006. In August 2004, the Chairman and Vice Chairman had been granted fully vested, nonqualifed options to acquire 500,000 and 350,000 shares, respectively, of the Company's common stock at a price equal to the market price as of the date of grant. The options were granted pursuant to the Company's 2002 Stock Option and Stock Appreciation Rights Plan, as amended. On January 21, 2005, the Chairman was awarded a fully vested, nonqualified option to acquire 750,000 shares of the Company's common stock at $25.00 per share (Note 9). 7. NOTES PAYABLE, CONVERTIBLE DEBT, AND CAPITALIZED LEASE OBLIGATIONS Long-Term Debt consists of the following (in thousands): DECEMBER 31, ------------------------------------ 2004 2003 --------------- ---------------- Borrowing under a non-revolving $ 24,375 - loan facility Notes payable - 24,937 Convertible debt due 2024 69,542 - Capitalized lease obligations 10,198 3,335 Other loans - 19 ----------- ------------- 104,115 28,291 Less current portion (3,683) (2,559) ----------- ------------- $ 100,432 25,732 =========== ============= F - 17 BORROWING UNDER A NON-REVOLVING LOAN FACILITY In July 2004, the Company established a $25,000,000, non-revolving loan facility, available for use in connection with the acquisition of complementary businesses. Advances could be made during the first three years of the term of the facility with interest paid monthly in arrears at prime plus 3.0%. The interest rate floor is 8.5%. Monthly principal payments equal to 2.5% of the initial outstanding balance will commence at the conclusion of the draw period (as that term is defined in the agreement) and continue until March 2009 when any remaining balance will be due. Advances were subject to satisfying certain acquisition criteria and the approval of the lenders. The Company paid a 1.0% commitment fee at the closing of the loan and paid an unused facility fee at the rate of 0.75% per annum until it borrowed more than $10,000,000 on a cumulative basis. The Company may incur prepayment penalties if it terminates the facility during the first 18 months or prepays any advance prior to the one-year anniversary of the applicable borrowing date. The facility and any loans made under the facility are guaranteed by all of the Company's subsidiaries, and any such loans and the guarantees are secured by a first-priority interest on substantially all of the Company's assets, including the capital stock and assets of the subsidiaries. The facility contains certain covenants including, but not limited to: a maximum leverage ratio; minimum consolidated earnings before interest, taxes, depreciation, and amortization; a minimum debt coverage ratio; and limitations on indebtedness, capital expenditures, investments, loans, mergers and acquisitions, stock issuances, and transactions with affiliates. In addition, the terms of the facility limit the Company's ability to pay dividends. The Company was in compliance with such covenants at December 31, 2004. On October 1, 2004, the Company borrowed $24,375,000 from the non-revolving loan facility to pay a portion of the cost of the IHS acquisition. The amount borrowed represents the full loan availability under the line. The $625,000 balance must remain available in the event the Company is required to fund an Interest Reserve, as that term is defined in the loan agreement. Monthly principal payments of approximately $609,000 will begin on July 1, 2007, and a final payment of $11,578,000 is scheduled to be made March 15, 2009. NOTES PAYABLE On October 21, 2003, in connection with the redemption of the redeemable preferred stock, the Company issued $25,000,000 of senior secured term loans maturing in October 2008. These term loans were held by the prior holders of the redeemable preferred stock. On February 13, 2004, the term loans were purchased by a financial institution. The terms and conditions of the term loans were not materially altered. On April 2, 2004, the term loan agreement was amended and restated to provide an additional $15,000,000 used to fund a portion of the purchase price of SMS. On June 30, 2004, the Company repaid the outstanding balance on the term loans, and the unamortized balance of $1,097,000 in deferred financing cost was written off. CONVERTIBLE DEBT On June 30, 2004, the Company completed a private offering of $60,000,000 aggregate principal amount of 4.0% Convertible Senior Notes due July 15, 2024 (the "Notes"). Approximately $40,000,000 of the net proceeds from this offering was used to repay the notes payable described in the previous paragraph. The remaining balance was used to fund acquisitions and for general corporate purposes. On July 6, 2004, the initial purchaser exercised its option in full to purchase an additional $12,000,000 of the Notes. Net proceeds after a discount of $2,520,000 and approximately $591,000 of costs and fees were approximately $68,889,000. The discount and loan costs are being amortized over the life of the Notes using the interest method. At December 31, 2004, the unamortized discount was $2,458,000 and unamortized loan costs was $576,000. Interest on the Notes is payable semi-annually in arrears beginning on January 15, 2005. Offers and sales of the Notes were made only in the United States to qualified institutional buyers in transactions exempt from the registration requirements of the Securities Act of 1933, as amended (the Securities Act"). The notes were originally issued by us in a transaction exempt from the registration requirements of the Securities Act and were immediately resold by the initial purchaser in reliance on Rule 144A. The Notes and the shares of common stock into which they may be converted may be resold pursuant to a registration statement on Form S-3 that became effective in December 2004. the Company will not receive any proceeds from any sales of common stock under this registration statement. F - 18 The Notes are convertible, subject to certain conditions, at the option of the holder prior to maturity, into shares of the Company's common stock at a specified conversion price, subject to certain adjustments. At the initial conversion price of $15.36, the $72,000,000 of Notes would be convertible into 4,687,500 common shares. After the effective date of the Registration Statement and prior to the end of the 18th month thereafter, if the market price of the Company's common stock is less than 68.23% ($10.48 initially, subject to adjustment) of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period, the conversion price shall immediately be reduced by 17.38% (to $12.69 initially, subject to adjustment); provided that (i) this adjustment shall only be applicable to Notes that have been sold or otherwise distributed pursuant to the registration statement referred to above or pursuant to Rule 144(k) under the Securities Act (and such adjustment shall apply to all such Notes, regardless of whether they are so sold or distributed before or after adjustment), and (ii) there shall be no more than one such reduction of the conversion price during the term of the Notes. The holders may convert their Notes into shares of the Company's common stock, initially at the conversion price of $15.36 per share, equal to a conversion rate of approximately 65.1042 shares per $1,000 principal amount of Notes, prior to the close of business on their stated maturity date under any of the following circumstances: (1) during any fiscal quarter if the market price per share of the Company's common stock for a period of at least 20 consecutive trading days during the 30 consecutive trading day period ending on the last day of the preceding fiscal quarter is more than 130% of the applicable conversion price; (2) on or before July 15, 2019, during the five business-day period following any 10 consecutive trading-day period in which the trading price for the Notes during such ten-day period was less than 98% of the applicable conversion value for the Notes during that period, subject to certain limitations; (3) if the Notes have been called for redemption; or (4) upon the occurrence of specified corporate transactions. The specified transactions include: (1) certain distributions to the Company's common stockholders of rights to acquire shares of the Company's common stock at a discount; (2) certain distributions to the Company's common stockholders when the distribution has a per share value in excess of 5% of the market price of the Company's common stock; and (3) a consolidation, merger or binding share exchange pursuant to which the Company's common stock will be converted into cash, securities or other property. Upon a "change of control," as defined in the indenture, the holders can require us to repurchase all or part of the Notes for cash equal to 100% of principal plus accrued interest. A consolidation, merger, or binding exchange also may constitute a "change of control" in certain instances. If the "change of control" occurred prior to July 15, 2009, in certain instances, the Company may be required to pay a "make whole premium" when repurchasing the Notes. The amount of the "make whole premium" is set forth in the indenture. The Company has a call option, pursuant to which the Notes may be redeemed, in part or in whole, for cash at any time on or after July 15, 2007 at a price equal to 100% of the principal amount of the Notes, plus accrued interest plus a "premium" if the redemption is prior to July 15, 2009, provided, however, the Notes are only redeemable prior to July 15, 2009 if the market price of the Company's common stock has been at least 150% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period. The "premium" referred to in the preceding sentence shall be in an amount equal to $173.83 per $1,000 principal amount of Notes, less the amount of any interest actually paid on such Notes prior to the redemption date. The holders of the Notes may require that the Company purchase for cash all or a portion of the Notes on July 15, 2009, 2014, and 2019 at a repurchase price equal to 100% of the principal amount of the Notes plus any accrued interest. There are no financial covenants, other than a limitation on incurring of additional indebtedness, as defined in the indenture. We are not restricted from paying dividends, or issuing other securities, or repurchasing other securities issued by us under the terms of the indenture. F - 19 CAPITAL LEASE OBLIGATIONS Assets subject to capital lease agreements are reflected in property and equipment as capital leases. During the years ended December 31, 2004, 2003, and 2002, the Company entered into capital leases aggregating approximately $5,942,000, $2,475,000, and $1,278,000, respectively, excluding those assumed in business combinations. The following is a schedule of future minimum lease payments under capital leases, together with the present value of the net minimum lease payments (amounts in thousands): Years ending December 31: 2005 $ 4,514 2006 3,707 2007 2,514 2008 769 -------------- Total minimum lease payments 11,504 Less amount representing interest (1,306) -------------- Present value of net minimum lease payments 10,198 Less current portion of obligations under capital leases 3,683 -------------- Long-term portion $ 6,515 ============== 8. INCOME TAXES The significant components of (benefit) provision for income taxes consists of (in thousands):
YEARS ENDED DECEMBER 31, -------------------------------------------------- 2004 2003 2002 --------------- ------------- -------------- Current tax (benefit) provision: Federal $ 60 $ - $ (250) State and local (49) 42 42 Deferred benefit (12,550) - - ----------- --------- ---------- (Benefit) provision for income taxes $ (12,539) $ 42 $ (208) =========== ========= ==========
F - 20 A reconciliation of income taxes computed at the federal statutory rate to (benefit) provision for income tax is as follows (in thousands):
YEARS ENDED DECEMBER 31, ------------------------------------------------- 2004 2003 2002 ------------- ------------- ------------- Tax provision computed at the statutory rate $ 2,612 $ 468 $ 316 Increase (decrease) in taxes resulting from: State and local income taxes, net of federal income taxes 361 28 28 Non-deductible expenses 28 17 14 Benefit of tax credits - (471) (315) Change in valuation allowance (15,207) - - Other, net (333) - (251) ---------- --------- ---------- $ (12,539) $ 42 $ (208) ========== ========= ==========
Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands): DECEMBER 31, --------------------------------------- 2004 2003 ----------------- ------------------ Deferred tax assets: Accrued liabilities $ 1,211 $ 292 Allowance for doubtful accounts 132 149 Deferred rent 519 404 Net operating loss 15,342 15,835 Stock option exercise 967 - Other 364 132 ------------- -------------- 18,535 16,812 ------------- -------------- Deferred tax liabilities: Depreciation and amortization (1,942) (1,080) Intangible assets (709) - Deferred software costs (447) (525) ------------- -------------- (3,098) (1,605) ------------- -------------- Net tax assets 15,437 15,207 Valuation allowance (2,462) (15,207) ------------- -------------- Net deferred taxes $ 12,975 $ - ============= ============== In 2004, the Company recorded $967,000 of deferred taxes attributable to the disqualifying disposition of stock options, directly increasing additional paid in capital. F - 21 As of December 31, 2003, the Company had established a valuation allowance of approximately $15.2 million against its deferred tax assets. As of December 31, 2004, the Company believes that it is more likely than not that it will be able to realize its deferred tax assets through expected future profits, and released the entire valuation allowance that was established as of December 31,2003. At December 31, 2004, the Company recorded a valuation allowance of approximately $2.5 million against deferred tax assets related to approximately $5.9 million of net operating loss carryforwards acquired in the SMS Acquisition due to the uncertainty of realizing a tax benefit from that deferred tax asset. At December 31, 2004, the Company had net operating loss carryforwards of approximately $37 million for federal income tax purposes that begin to expire in 2019. The use of these net operating loss carryforwards may be limited under Section 382 of the Internal Revenue Code, as a result of cumulative changes in ownership of more than 50% over a three year period. The Company reviews its deferred tax asset on a quarterly basis to determine if a valuation allowance is required, primarily based on its estimate of future taxable income. Changes in the Company's assessment of the need for a valuation allowance could give rise to adjustments in the valuation allowance and tax expense in the period of change. At December 31, 2004, the Company has federal alternative minimum tax credit carryforwards of approximately $60,000 that do not expire. 9. STOCKHOLDERS' EQUITY PREFERRED STOCK The Company is authorized to issue up to 3,000,000 shares of preferred stock, $0.01 par value. The preferred stock may be issued in one or more series, the terms of which may be determined by the Board of Directors without further action by the stockholders, and may include voting rights (including the right to vote as a series on certain matters), preferences as to dividends and liquidation conversion, redemption rights, and sinking fund provisions. At December 31, 2004, no preferred shares are outstanding. SERIES A PREFERRED STOCK On May 10, 2000, the Company issued 157,377 shares in a private placement of redeemable 8% Series A Cumulative Convertible Participating Preferred Stock with an aggregate face value of $60 million (the "Series A Preferred Stock") and warrants to purchase 2,531,926 shares of the Company's common stock at an exercise price of $0.01 per share (the "Investor Warrants"). The Company received $58,430,596 after payment of issuance costs and related legal fees. The initial carrying values of the Investor Warrants ($28,180,132) and Series A Preferred Stock ($30,250,464) were determined by apportioning an amount equal to the proceeds from the private placement multiplied by the relative value of each class of security as of the commitment date. The difference between the carrying value and the face value of the Series A Preferred Stock was accreted as a monthly charge against retained earnings using the interest method. Accumulated and accrued unpaid dividends also increased the carrying value of the Series A Preferred Stock through a charge to retained earnings. F - 22 On October 21, 2003, the Company purchased and retired all the outstanding Series A Preferred Stock and all the Investor Warrants for $80,000,000, using $55,000,000 in cash from the proceeds of the first of two private stock offerings discussed below and issuing $25,000,000 in notes payable (See Note 7). The fair value of the Series A Preferred Stock and dividends payable thereon was estimated at approximately $60,066,000, and a $630,000 adjustment was recorded to accretion expense in the fourth quarter of 2003. The fair values of the Series A Preferred Stock and the warrants were determined in the following manner. The Company's fair value ("Enterprise Value") was calculated using a discounted future cash flow model (ignoring the effects of the private placement and the recapitalization) at approximately $128 million. Using the Black-Scholes method and assuming a seven year life, a risk-free interest rate of 3.13%, and volatility of 54.23%, the fair value of the warrants was calculated to be approximately $21 million. The market value of the Company's common stock outstanding immediately prior to the private stock offering was approximately $42 million. The residual Enterprise Value of $65 million was attributed to the Series A Preferred Stock. The fair values of the warrants and the Series A Preferred Stock were then proportionally allocated to the $80 million consideration, resulting in final fair values for the warrants and the Series A Preferred Stock of $19.9 million and $60.1 million, respectively. COMMON STOCK The Company is authorized to issue up to 50,000,000 shares of common stock, $0.01 par value. The holders of common stock are entitled to one vote per share. There is no cumulative voting for the election of directors. Subject to the prior rights of any series of preferred stock which may from time to time be outstanding, holders of common stock are entitled to receive ratably any dividends as may be declared by the Board of Directors of the Company out of legally available funds, and upon the liquidation, dissolution, or winding up of the Company, are entitled to share ratably in all assets remaining after the payment of liabilities, and payment of accrued dividends and liquidation preferences on the preferred stock outstanding, if any. Holders of common stock have no preemptive rights, and have no rights to convert their common stock into any other security. PRIVATE STOCK OFFERINGS On October 21, 2003, the Company sold 9,739,111 shares of common stock and five year warrants to purchase 3,408,689 shares of common stock for a net aggregate amount of approximately $69,942,000. The warrants have an exercise price of $7.86 per share and expire in October 2008. The private stock offering was made only to accredited investors in a transaction exempt from the registration requirements of the Securities Act of 1933. The net proceeds of the private stock offering were principally used to fund the redemption of preferred stock and warrants discussed above, the repayment of outstanding debentures as noted below, and to pay related fees and expenses. The remainder of the proceeds was used for working capital purposes. On February 12, 2004, a Registration Statement on Form S-3, filed by the Company on behalf of the private stock offering investors as selling shareholders, was declared effective. The Company will not receive any proceeds from any sales of stock under this registration statement. In 2004, holders of warrants to purchase 825,706 shares exercised their warrants for cash, resulting in proceeds to the Company of approximately $6,490,000. In addition, four holders exercised warrants to purchase 705,388 shares by surrendering warrants for 389,412 shares in cashless exercises. The shares underlying the surrendered warrants had, at the respective exercise dates, market values equal to the exercise price of the total of the warrants, $5,544,350 in the aggregate. The holders received net shares totaling 315,976. On March 31, 2004, the Company sold 2,917,000 shares of common stock for a net aggregate amount of approximately $28,240,000. The private stock offering was made only to accredited investors in a transaction exempt from the registration requirements of the Securities Act of 1933. The net proceeds of the private stock offering were principally used to fund a portion of the purchase price of IFOX West as described in Note 2. On June 10, 2004, a Registration Statement on Form S-3, filed by the Company on behalf of the private stock offering investors as selling shareholders, was declared effective. The Company will not receive any proceeds from any sales of stock under this registration statement. F - 23 PRIVATE SALE OF DEBENTURES WITH WARRANTS In connection with the issuance in February 2002 of debentures, the Company issued warrants (the "Debenture Warrants") to purchase up to 2,000,000 shares of the common stock of the Company. The Debenture Warrants have an exercise price of $5.86 per share and expire on January 31, 2007. Debenture Warrants to purchase 62,500 shares of common stock could be cancelled by the Company for each full month between the date the debentures were repaid and February 1, 2004. On October 21, 2003, the Company repaid the debentures and cancelled Debenture Warrants to purchase 937,500 shares of common stock. The remaining 1,062,500 Debenture Warrants have not been exercised. OTHER WARRANTS In February 2001, the Company issued a warrant to purchase 65,000 shares of the Company's common stock at $18.00 per share in settlement of any future contingent consideration payable under an agreement to purchase the assets of a business. This warrant has a ten year life. The fair value of the warrant of $146,900, calculated using the Black-Scholes pricing model, was recorded as additional goodwill relating to the related acquisition. On June 5, 2000, the Company issued warrants to former debt holders to purchase 30,000 shares of the Company's common stock at $19.25 per share as consideration for the settlement of all other potential equity interests in the Company held by them. The warrants were immediately exercisable and expired unexercised on June 5, 2004. On January 13, 2004, the Company issued warrants to a new client to purchase 50,000 shares of the Company's common stock at $15.00 per share in connection with the signing of a five-year contract. The warrants are immediately exercisable and expire January 13, 2009. The fair value of the warrants of $137,300, calculated using the Black-Scholes pricing model, is being amortized over the term of the contract with the client. STOCK OPTION PLANS On June 25, 2002, the stockholders approved a Board of Directors resolution establishing the Company's 2002 Stock Option and Stock Appreciation Rights Plan (the "2002 Plan"). In September 1992, the Company had adopted the 1992 Stock Option and Stock Appreciation Rights Plan (as subsequently amended and restated, "the 1992 Plan") that provided for the granting of options to employees, officers, directors, and consultants for the purchase of common stock. The material features of the 1992 Plan and the 2002 Plan are substantially the same. Incentive stock options may be granted only to employees and officers of the Company, while non-qualified options may be issued to directors and consultants, as well as to officers and employees of the Company. Upon adoption of the 2002 Plan, the resolution of the Board of Directors stipulated that no further grants be made pursuant to the 1992 Plan. The grants previously made under the 1992 Plan will not be affected. The number of authorized shares available in the 1992 Plan is equal to the total unexercised options remaining at any time. At December 31, 2004, the number of unexercised options in the 1992 Plan was 945,537. The Board initially authorized 1,000,000 shares for grant under the 2002 Plan. Both plans provide a maximum exercise period of ten years. Qualified options granted to a 10% or greater stockholder shall have a maximum term of five years under Federal tax rules. As a matter of practice, except with respect to a 10% or greater stockholder, the typical exercise period for options granted under the existing plan has been ten years from the date of grant. On June 15, 2004, the Company's stockholders approved a proposal to increase the number of authorized shares in the 2002 Plan to 3,000,000. The Company's Board of Directors or a committee of the Board consisting of at least two non-employee directors determine those individuals to whom options will be granted, the number of shares of common stock which may be purchased under each option, and (when necessary) the option exercise price. The Board or the committee also determines the expiration date of the options (typically 10 years, except for 10% shareholders, which expire in 5 years), and the vesting schedule of the options. F - 24 The per share exercise price of an incentive stock option may not be less than the fair market value of the common stock on the date the option is granted. The per share exercise price of a non-qualified option shall be determined by the committee, except that the Company will not grant non-qualified options with an exercise price lower than 50% of the fair market value of common stock on the day the option is granted. In addition, any person who, on the date of the grant, already owns, directly or indirectly, 10% or more of the total combined voting power of all classes of stock outstanding, may only be granted an option if the exercise price of such option is at least 110% of the fair market value of the common stock on the date of the grant. The Board or the committee may also grant "stock appreciation rights" ("SARs") in connection with specific options granted under the plan. Each SAR entitles the holder to either: (a) cash (in an amount equal to the excess of the fair value of a share of common stock over the exercise price of the related options); or (b) common stock (the number of shares of which is to be determined by dividing the SARs cash value by the fair market value of a share of common stock on the SAR exercise date); or (c) a combination of cash and stock. SARs may be granted along with options granted under the 2002 Plan, and to holders of previously granted options. No SARs have been granted under the either plan. Activity in the Plan during the periods from January 1, 2002 through December 31, 2004 is as follows:
NUMBER OF EXERCISE PRICE RANGE WEIGHTED AVERAGE OPTIONS EXERCISE PRICE --------------- -------------------------- -------------------- Options outstanding, January 1, 2002 1,403,771 $3.25 - $37.78 $9.77 Options granted 252,100 $4.95 - $8.63 $6.37 Options exercised (53,885) $3.78 - $7.14 $5.38 Options cancelled (195,051) $4.38 - $27.25 $12.64 --------------- Options outstanding, December 31, 2002 1,406,935 $3.25 - $37.78 $8.93 Options granted 228,750 $6.27 - $9.91 $8.34 Options exercised (19,034) $4.50 - $7.71 $5.57 Options cancelled (85,897) $4.63 - $27.25 $11.64 --------------- Options outstanding, December 31, 2003 1,530,754 $3.25 - 37.78 $8.73 Options granted 1,844,750 $6.98 - $17.38 $13.66 Options exercised (345,668) $3.25 - $12.59 $5.66 Options cancelled (17,231) $4.86 - $29.98 $10.06 --------------- Options outstanding, December 31, 2004 3,012,605 $3.63 - $37.78 $12.10 ===============
F - 25
ADDITIONAL INFORMATION REGARDING EXERCISE PRICE RANGES OF OPTIONS OUTSTANDING: - ------------------------------------------------------------------------------------------------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE WEIGHTED CONTRACTUAL EXERCISE NUMBER OF AVERAGE LIFE NUMBER OF PRICE OF EXERCISE PRICE OPTIONS EXERCISE REMAINING OPTIONS EXERCISABLE RANGE OUTSTANDING PRICES (YEARS) EXERCISABLE OPTIONS - -------------------- ---------------- ------------- --------------- -------------- --------------- $3.63 - $5.44 157,173 $5.08 3.8 155,309 $5.08 $5.45 - $8.16 242,032 $7.02 6.7 197,151 $6.99 $8.17 - $12.23 1,532,500 $11.01 7.7 1,461,650 $11.05 $12.24 - $18.35 1,040,650 $15.48 9.3 591,216 $14.49 $18.36 - $27.53 32,750 $21.20 5.5 32,750 $21.20 $27.54 - $37.78 7,500 $34.80 5.1 7,500 $34.80 ---------------- -------------- 3,012,605 2,445,576 ================ ==============
There were 2,445,576, 1,262,972, and 1,130,906 options exercisable at December 31, 2004, 2003, and 2002, respectively. At December 31, 2004, there are 903,794 options available for future grant. At December 31, 2004, the Company has reserved 3,055,095 common shares for issuance upon exercise of the following warrants: (i) 1,062,500 shares exercisable at $5.86 per share expiring January 31, 2007; (ii) 65,000 shares exercisable at $18.00 per share expiring September 16, 2010; (iii) 50,000 shares exercisable at $15.00 per share expiring January 13, 2009; and (iv) 1,877,595 shares exercisable at $7.86 per share expiring October 20, 2008. At December 31, 2004, the Company had reserved 4,687,500 shares for issuance upon the potential exchange of the $72,000,000 outstanding convertible notes (see Note 7). Total shares reserved for exchange of convertible debt and the exercise of warrants and options (including options available for grant) is 11,658,994. On January 21, 2005, the Chairman was awarded a fully vested, nonqualified option to acquire 750,000 shares of the Company's common stock at $25.00 per share. The average of the high and low prices for one share of the Company's common stock on the date of the grant was $16.995. The award was made pursuant to the 2002 Plan. The purpose of the grant is to mitigate the financial impact on the Chairman for having provided options at $25.00 per share on 750,000 shares of the Company's common stock owned by him to the purchasers (including their successors and assigns) of the Series A Preferred Stock. 10. COMMITMENTS AND CONTINGENCIES LEASE OBLIGATIONS Operating leases for facilities extend through December 31, 2019. Several of these leases contain escalation clauses, which cause the amounts paid each year to increase by a stated amount or percentage. The Company records as expense, however, a fixed amount representing the average of these varying payments. The difference between the cash payments and the expense recorded is deferred rent. The Company leases space in buildings (the "Buckhead Facility") owned by the former parent of Infocrossing Southeast, Inc. ("IFOX SE"). At February 5, 2002, the Company occupied approximately 33,400 square feet. The lease agreement permits the Company to reduce its use of this space for a pro-rata reduction in rent. The Company has moved most of the operations of IFOX SE to its own facility in the Atlanta metropolitan area, and occupies approximately 11,100 square feet in the Buckhead Facility as of December 31, 2004. This lease agreement expires on January 31, 2006, unless the Company reduces its use of this space to zero at an earlier date. F - 26 The Company's obligation under certain of these leases are secured by a cash deposit or a standby letter of credit, aggregating $618,000 at December 31, 2004 and $549,000 at December 31, 2003. The standby letter of credit is collateralized by a cash investment that has been classified, along with the cash deposit, as long-term assets. Total expense for occupancy costs was approximately $3,989,000, $2,492,000 and $2,264,000 for the years ended December 31, 2004, 2003 and 2002. The Company leases certain of its data center equipment, various items of office equipment, and vehicles under standard commercial operating leases. The Company also has fixed-term obligations for software licenses and for disaster recovery services. Approximate minimum future lease payments for real estate and other operating leases, software licenses, and disaster recovery services are as follows (in thousands): Years ending December 31, 2005 $ 11,206 2006 10,068 2007 8,686 2008 7,936 2009 6,664 Thereafter 23,381 ------------ $ 67,941 ============ The Company sublet approximately 12,000 square feet in its California facility through December 31, 2005. Income from this sublease will be approximately $202,000 in 2005. LEGAL PROCEEDINGS On November 1, 2004, the Company was served with a summons and complaint in a lawsuit commenced by two former employees of ITO Acquisition Corporation d/b/a Systems Management Specialists, now known as Infocrossing West, Inc. ("West") filed in the Superior Court of California, Orange County (Case No. 04CC10709). Plaintiffs assert that they had been induced to join West in 2002 based on promises of receiving equity interests and options to acquire additional equity in West. Plaintiffs assert that on numerous occasions they had received verbal assurance of receiving the foregoing equity interests in West. The Company had acquired West on April 2, 2004. Plaintiffs' employment with West terminated shortly after the Company's acquisition of West. Plaintiffs maintain that they are entitled to direct damages of at least $15 million plus punitive damages, costs, attorneys' fees, and other relief as the court may award. In addition, one of the plaintiffs also asserted a claim for unpaid commissions of approximately $30,000. On November30, 2005, West filed an answer denying all of plaintiffs' allegations. Discovery commenced recently. West is indemnified pursuant to the Stock Purchase Agreement between us and ITO Holdings, LLC ("Holdings") dated as of March 3, 2004 (the "SPA") for breaches of numerous representations and warranties contained in the SPA. Holdings represented and warranted to us, among other things, that it owned all of West's capital stock and there were no other equity interests or commitments relating to West's capital stock. Holdings has confirmed its indemnification obligations with respect to the claims asserted by plaintiffs. If, however, discovery reveals that the commissions at issue were earned after March 3, 2004 or, if earned prior to such date, they were properly accrued, the Company agreed to cooperate with Holdings to determine the appropriate amount of commissions, if any, which would be due and owing from West. West believes it is in its best interest to resolve the commissions issue early in the litigation to avoid needless and protracted proceedings and expenses relating to such a minor dispute. Accordingly, Holdings has agreed that West will not be responsible for, or asked to contribute to, attorney's fees and costs associated with the resolution of the commissions claim. F - 27 It is premature to give a proper evaluation of the probability of a favorable or unfavorable outcome. While it is again premature to give a proper evaluation of the potential liability, the Company believes that the above matters will be resolved without any material adverse impact on the Company's financial position, results of operations, or cash flows. 11. RETIREMENT PLANS The Company maintains a 401(k) Savings Plan covering all eligible employees who have attained the age of 21 years and worked at least 1,000 hours in a one-year period. Plan participants may elect to contribute up to 100% of covered compensation each year, to the IRS maximum. The Company may make matching contributions at the discretion of the Board of Directors. The Company has not made any matching contributions. The administrative costs of the Plans are borne by the Company. 12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended December 31, 2004 and 2003 (in thousands except per share data):
THREE MONTHS ENDED: ------------------------------------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 2004 2004 2004 2004 ------------------ ------------------ ------------------- ------------------ Revenues $ 15,176 $ 24,611 $ 26,445 $ 38,717 ============== ============== =============== ============== Net income (loss) $ 775 $ (262) $ 2,041 $ 17,409 ============== ============== =============== ============== Net income (loss) per basic common share $ 0.05 $ (0.01) $ 0.11 $ 0.91 ============== ============== =============== ============== Net income (loss) per diluted common share $ 0.05 $ (0.01) $ 0.10 $ 0.68 ============== ============== =============== ==============
THREE MONTHS ENDED: ------------------------------------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 2003 2003 2003 2003 ------------------ ------------------ ------------------- ------------------ Revenues $ 13,129 $ 13,582 $ 14,114 $ 14,403 ============== ============== =============== ============== Net income (loss) $ 270 $ 105 $ 451 $ 530 ============== ============== =============== ============== Net loss to common stockholders $ (2,178) $ (2,396) $ (2,105) $ 1,158 ============== ============== =============== ============== Net loss to common stockholders per basic common share $ (0.40) $ (0.45) $ (0.39) $ 0.09 ============== ============== =============== ============== Net loss to common stockholders per diluted common share $ (0.40) $ (0.45) $ (0.39) $ 0.08 ============== ============== =============== ==============
F - 28
INFOCROSSING, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) BALANCE AT CHARGED TO BEGINNING OF COSTS AND CHARGED TO BALANCE AT END PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD ----------------- ---------------- --------------- ---------------- ---------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year ended December 31, 2004 $ 570 $ 329 $ - $ 650 (a) $ 249 ============= ============ =========== ============ ============ Year ended December 31, 2003 $ 1,051 $ 144 $ - $ 625 (a) $ 570 ============= ============ =========== ============ ============ Year ended December 31,2002 $ 1,009 $ 228 $ - $ 186 (a) $ 1,051 ============= ============ =========== ============ ============ VALUATION ALLOWANCE OFFSETTING NET DEFERRED TAX ASSETS Year ended December 31, 2004 $ 15,207 $ 15,207 $ 2,462 $ - $ 2,462 ============= ============ =========== ============ ============ Year ended December 31, 2003 $ 15,799 $ - $ - $ 592 $ 15,207 ============= ============ =========== ============ ============ Year ended December 31,2002 $ 15,681 $ 118 $ - $ - $ 15,799 ============= ============ =========== ============ ============
(a) Uncollectible accounts written off, net of recoveries. S - 1 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 4.10 Warrant Agreement between the Company and the Warrantholders Party thereto. 10.4E Third Amendment to Acquisition Loan Agreement and Other Documents, dated as of December 29, 2004. 10.5B Joinder to Security Agreement dated October 1, 2004. 10.6B Addendum to Stock Pledge Agreement dated October 1, 2004. 10.7D First Amendment to Loan Agreement and other Loan Documents, dated as of February 13, 2004, by and among the Company, certain subsidiaries of the Company, certain lenders named therein, and CapitalSource Finance LLC. 10.7E Master Assignment and Assumption Agreement, dated as of February 13, 2004, by and among by and among the Company, as borrower; certain subsidiaries of the Company, as guarantors; Infocrossing Agent, Inc., as agent for assigning lenders named therein; assigning lenders named therein; and CapitalSource Finance LLC. 10.13B Settlement and Release Agreement dated as of October 15, s2004 by and among the Company and Jim Cortens. 10.14 Employment Agreement, dated as of October 1, 2004, by and between a subsidiary of the Company and Michael J. Luebke. 10.15B Amendment to 2002 Plan adopted by the Board of Directors on January 21, 2005. 10.15C Amendment to 2002 Plan approved at the Company's Annual Meeting of Stockholders held on June 15, 2004. 10.15D Amendment to 2002 Plan adopted by the Board of Directors on April 1, 2004. 10.16B Amendment to 1992 Plan approved at the Company's Annual Meeting of Stockholders held on June 22, 2001. 10.18A Lease dated June 2, 1997 between the Company and Leonia Associates, LLC. 10.18B First Amendment of Lease between the Company and Leonia Associates, LLC, dated January 16, 1998. 10.18C Second Amendment of Lease between the Company and Leonia Associates, LLC, dated as of September 9, 1999. 10.18D Third Amendment of Lease between the Company and Leonia Associates, LLC, dated as of August 28, 2000, incorporated by reference to Exhibit 10.7D to the Company's 10-K for the fiscal year ended October 31, 2000. 10.18E Fourth Amendment of Lease between the Company and Leonia Associates, LLC, dated as of April 19, 2004. 10.20A Lease Agreement between Birch Windell, LLC (Landlord) and ITO Acquisition Corp (Tenant) dated as of December 19, 2002 10.20B First Amendment to Lease between Global Brea, LLC and ITO Acquisition Corporation 21 List of Subsidiaries of Infocrossing 23 Consent of Independent Registered Public Accounting Firm 31 Certifications required by Rule 13a-14(a) to be filed. 32 Certifications required by Rule 13a-14(b) to be furnished but not filed. EX-3.(I) 2 ex3-1a_k.txt CERTIFICATE OF INCORPORATION CERTIFICATE OF INCORPORATION OF COMPUTER OUTSOURCING SERVICES, INC. 1. NAME. The name of the corporation (hereinafter, the "CORPORATION") is Computer Outsourcing Services, Inc. 2. PURPOSE. The purposes for which the Corporation is formed are to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law ("DCGL"). 3. REGISTERED AGENT AND REGISTERED OFFICE FOR SERVICE OF PROCESS. The Secretary of State of the State of Delaware is designated as the agent of the Corporation upon whom process against it may be served, and the Registered Agent at its post office address, which shall be the Registered Office of the Corporation, to which the Secretary of State shall mail a copy of such process served upon him is: The Corporation Trust Company 1209 Orange Street Wilmington, DE 4. CAPITAL STOCK. 4.1 AUTHORIZED CAPITAL STOCK. The total number of shares of stock which the Corporation shall have authority to issue is 11,000,000, consisting of 1,000,000 shares of preferred stock, par value $.01 per share, ("PREFERRED STOCK") and 10,000,000 shares of Common Stock, par value $.01 per share ("COMMON STOCK"). 4.1.1 PREFERRED STOCK. Authority is hereby expressly granted to the Board of Directors (the "BOARD") from time to time to issue the Preferred Stock as Preferred Stock of one or more series and in connection with the creation of any such series to fix by the resolution or resolutions providing for the issue of shares thereof the designation, voting powers, preferences, and relative, participating, optional, or other special rights of such series, and the qualifications, limitations, or restrictions thereof. Such authority of the Board with respect to each such series shall include, but not be limited to, the determination of the following: -1- 4.1.1.1 the distinctive designation of, and the number of shares comprising, such series, which number may be increased (except where otherwise provided by the Board in creating such series) or decreased (but not below the number of shares thereof then outstanding) from time to time by like action of the Board; 4.1.1.2 the dividend rate or amount for such series, the conditions and dates upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes or any other series of any class or classes of stock, and whether such dividends shall be cumulative, and if so, from which date or dates for such series; 4.1.1.3 whether or not the shares of such series shall be subject to redemption by the Corporation and the times, prices and other terms and conditions of such redemption; 4.1.1.4 whether or not the shares of such series shall be subject to the operation of a sinking fund or purchase fund to be applied to the redemption or purchase of such shares and if such a fund be established, the amount thereof and the terms and provisions relative to the application thereof; 4.1.1.5 whether or not the shares of such series shall be convertible into or exchangeable for shares of any other class or classes, or of any other series of any class or classes, of stock of the Corporation and if provision be made for conversion or exchange, the times, prices, rates adjustments, and other terms and conditions of such conversion or exchange; 4.1.1.6 whether or not the shares of such series shall have voting rights, in addition to the voting rights provided by law, and if they are to have such additional voting rights, the extent thereof; 4.1.1.7 the rights of the shares of such series in the event of any liquidation, dissolution, or winding up of the Corporation or upon any distribution of its assets; and 4.1.1.8 any other powers, preferences, and relative, participating, optional, or other special rights of the shares of such series, and the qualifications, limitations, or restrictions thereof, to the full extent now or hereafter permitted by law and not inconsistent with the provisions hereof. 4.2 DIVIDENDS, ETC. Subject to any provisions of this Certificate of Incorporation, so long as any shares of Common Stock are outstanding, holders of Common Stock shall be entitled to receive such dividends and other distributions in cash, stock of any corporation other than the Corporation or property of the Corporation as may be declared thereon by the Board from time to time out of assets or funds of the Corporation legally available therefor and shall share equally on a per share basis in all such dividends and other distributions. -2- 4.3 VOTING. 4.3.1 ONE VOTE PER SHARE. Each holder of record of Common Stock shall have one vote for each share outstanding in his or her name on the books of the Corporation and entitled to vote. Cumulative voting shall not be permitted. 4.3.2 CLASS VOTING. The holders of Common Stock and other classes and designations of stock as shall be determined by the Board, shall vote together as a single class unless otherwise determined by the Board. 4.3.3 QUORUM. The holders of a majority of all of the issued and outstanding shares eligible to vote, present in person or represented by proxy, shall constitute a quorum for the transaction of any business at any meeting of shareholders. 4.3.4 ACTION WITHOUT MEETING. Except as may be otherwise specifically provided by law, whenever by any provision of law or of this Certificate of Incorporation the vote of shareholders at a meeting thereof is required or permitted to be taken in connection with any corporate action, the meeting and vote of shareholders may be dispensed with and such action may be taken if holders of at least the minimum number of shares required to authorize such action if such meeting were held and all shares entitled to vote thereon were present in person or by proxy, consent in writing to such action. 5. BOARD OF DIRECTORS. 5.1 NUMBER. The number of directors ("DIRECTORS") shall be determined by the Board. The Board shall have three classifications of Directors, namely Class A, Class B and Class C, and each class shall have an equal number of Directors to the greatest extent possible. 5.2 ELECTION OF BOARD. The Board shall be elected in accordance with the by-laws and the DGCL. 5.3 TERM. Each Director shall serve for a term of three years continuing until the meeting of the shareholders at which the election of the Class of Directors of which he or she is a member is in the regular order of business and until his successor is duly elected and qualified, or until his earlier death, resignation or removal. Notwithstanding the foregoing, the terms of members of the initial Board shall be one year for Class A Directors, two years for Class B Directors and three years for Class C Directors. 5.4 REMOVAL AND VACANCIES. Unless otherwise provided in this Certificate of Incorporation, the holders of a majority of the shares of outstanding Common Stock shall have the right to remove any one or more of the Directors at any time, but only with cause, and to concomitantly elect, by plurality vote, a successor or successors to fill any vacancy on the Board caused by the removal of any Director. -3- Any vacancy caused by the death, disability, or resignation of any Director or failure by the holders of a majority of the shares of outstanding Common Stock to concomitantly fill a vacancy on the Board caused by the removal of a Director for cause shall be filled by a vote of a majority of the remaining Directors then in office even though such number may constitute less than a quorum; PROVIDED that if no Directors remain, then vacancies shall be filled by plurality vote of the holders of the outstanding Common Stock. Any Director so appointed to fill a vacancy shall serve for the remainder of this term and until his successor is duly elected and qualified. 5.5 QUORUM. Not less than three Directors shall constitute a quorum for the transaction of business at any duly called meeting of the Board. 5.6 ACTION BY THE BOARD. A majority vote of Directors present at a meeting of Directors at which a quorum is present shall be required to effect any action by the Board with respect to any matter. 6. AMENDMENTS TO CERTIFICATE OF INCORPORATION. The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, as the same may be amended, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by law; and all rights, preferences and privileges of whatsoever nature conferred upon shareholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the right reserved in this Section 6. 7. BY-LAWS. The Board is hereby authorized to adopt, amend or repeal the by-laws of the Corporation. 8. DURATION. The duration of the Corporation is to be perpetual. 9. INDEMNIFICATION. The Directors shall have the authority to provide in the by-laws for the indemnification of directors and officers to the fullest extent permitted by law. 10. PERSONAL LIABILITY OF DIRECTORS. The personal liability of the Directors is hereby eliminated to the fullest extent permitted by the provisions of the DGCL as the same may be amended and supplemented, or any successor provision thereto. 11. NO PREEMPTIVE RIGHTS. No holder of any share of the Corporation shall, because of his ownership of shares, have a preemptive or other right to purchase, subscribe for or take any part of any shares or any part of the notes, debentures, bonds or other securities convertible into or carrying options or warrants to purchase shares of the Corporation issued, optioned or sold by the Corporation after its incorporation, whether the shares be authorized by this Certificate of Incorporation or be authorized by an amended certificate duly filed and in effect at the time of the issuance or sale of such shares or such notes, debentures, bonds or other securities convertible into or carrying options or warrants to purchase shares of the Corporation. Any part of the shares authorized by this Certificate of Incorporation or by an amended certificate duly filed, and any part of the notes, debentures, bonds or other securities convertible into or carrying options or warrants to -4- purchase shares of the Corporation may at any time be issued, optioned for sale and sold or disposed of by the Corporation pursuant to resolution of the Board to such persons and upon such terms and conditions as may, to the Board, seem proper and advisable without first offering to existing shareholders the said shares or the said notes, debentures, bonds or other securities convertible into or carrying options or warrants to purchase shares of the Corporation or any part of any thereof. 12. SPECIAL MEETINGS OF SHAREHOLDERS. Special meetings of the shareholders may be called only by the Chairman of the Board, the President of the Corporation or by the majority vote of the Directors on the Board. Notwithstanding the foregoing, whenever the holders of one or more classes or series if Preferred Stock shall have the right, voting separately as a class or series, to elect Directors, such holders may call, pursuant to the terms of the resolution or resolutions adopted by the Board, special meetings of holders of Preferred Stock. 13. The name and address of the sole incorporator is Richard A. Krantz, Robinson & Cole LLP, 695 East Main Street, Stamford, CT 06904. The undersigned has signed this Certificate of Incorporation on May 14, 1999. /s/ Richard A. Krantz --------------------- Richard A. Krantz Sole Incorporator -5- EX-31 3 ex31_k04.txt SECTION 302 CERTIFICATIONS EXHIBIT 31 CERTIFICATIONS I, Zach Lonstein, certify that: 1. I have reviewed this annual report on Form 10-K of Infocrossing, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting March 16, 2005 /s/ ZACH LONSTEIN -------------------------------------- Zach Lonstein Chairman and Chief Executive Officer CERTIFICATIONS (CONTINUED) I, William J. McHale, certify that: 1. I have reviewed this annual report on Form 10-K of Infocrossing, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting March 16, 2005 /s/ WILLIAM J. McHALE ------------------------------------- William J. McHale Chief Financial Officer EX-23 4 ex23_k04.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-110191) pertaining to the 2002 Stock Option and Stock Appreciation Rights Plan of Infocrossing, Inc. and subsidiaries, Registration Statement (Form S-8 No. 333-46720) pertaining to the Amended and Restated 1992 Stock Option and Stock Appreciation Rights Plan of Infocrossing, Inc. and Registration Statements (Form S-3 No. 333-45663, Form S-3 No. 33-94040 and Form S-3 No. 333-110173) of our reports dated March 14, 2005, with respect to the consolidated financial statements and schedule of Infocrossing, Inc. and subsidiaries, Infocrossing, Inc. and subsidiaries management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Infocrossing, Inc. and subsidiaries, included in the Annual Report (Form 10-K) for the year ended December 31, 2004. /S/ ERNST & YOUNG LLP NEW YORK, NEW YORK March 15, 2004 EX-32 5 ex32_k04.txt SECTION 906 CERTIFICATIONS EXHIBIT 32 The following certification shall not be deemed "filed" for purposes of section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings. CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Infocrossing, Inc. (the "Company") on Form 10-K for the period ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, Zach Lonstein and William J. McHale, Chairman and Chief Executive Officer and Chief Financial Officer, respectively, of the Company, certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ ZACH LONSTEIN /s/ WILLIAM J. McHALE - --------------------------------- ------------------------------- Zach Lonstein William J. McHale Chairman and Chief Executive Officer Chief Financial Officer March 16, 2005 March 16, 2005 A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-4 6 ex4-10_k.txt PREFERRED WARRANT AGREEMENT EXHIBIT 4.10 WARRANT AGREEMENT Dated as of May 10, 2000 between Computer Outsourcing Services, Inc. as Issuer, and the Warrantholders Party Hereto --------------------------------------------- Series A Common Stock Warrants of Computer Outsourcing Services, Inc. --------------------------------------------- -2- WARRANT AGREEMENT WARRANT AGREEMENT dated as of May 10, 2000, between, Computer Outsourcing Services, Inc., a Delaware corporation (the "Company"), and each of the warrantholders party hereto (collectively, with their successors and assigns, the "Warrantholders"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company proposes, among other things, to issue and sell pursuant to a Securities Purchase Agreement, dated as of April 7, 2000, among the Company and DB Capital Investors, L.P. (the "Securities Purchase Agreement"), 157,377 shares (the "Shares") of the Company's Series A Cumulative Convertible Participating Preferred Stock ("Series A Preferred Stock") and 2,531,926 Series A Common Stock Warrants (the "Warrants"), each representing the right to purchase one share of Common Stock, to be issued upon exercise of the Warrants; and WHEREAS, the execution and delivery of this Agreement is a condition precedent to the consummation of the transactions contemplated by the Securities Purchase Agreement; NOW, THEREFORE, in consideration of the premises and mutual agreements herein, the Company hereby agrees as follows for the equal and ratable benefit of the Warrantholders: ARTICLE I DEFINITIONS Section 1.01. Definitions. "Affiliate" of any specified Person means (i) any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person or (ii) any other Person who is a director or executive officer (A) of such specified Person, (B) of any Subsidiary of such specified Person or (C) of any Person described in clause (i) above. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agreement" means this Warrant Agreement as amended or supplemented from time to time. "Board of Directors" or "Board" means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board. "Business Day" means each day that is not a Saturday, Sunday or other day on which banking institutions in New York, New York are authorized or required by law to close. "Cashless Exercise Ratio" means a fraction, the numerator of which is the excess of the Current Market Value per share of Common Stock on the Exercise Date over the Exercise Price per share as of the Exercise Date and the denominator of which is the Current Market Value per share of the Common Stock on the Exercise Date. "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity. "Common Stock" means the Common Stock, par value $.01 per share, of the Company. "Current Market Value" per share of Common Stock or any other security at any date means (i) if the security is not registered under the Exchange Act, the value of the security, determined in good faith by the Board of Directors and certified in a board resolution, or (ii) if the security is registered under the Exchange Act, the average of the daily closing bid prices (or the equivalent in an over-the-counter market) for each Business Day during the period commencing 15 Business Days before such date and ending on the date one day prior to such date, or if the security has been registered under the Exchange Act for less than 15 consecutive Business Days before such date, the average of the daily closing bid prices (or such equivalent) for all of the Business Days before such date for which daily closing bid prices are available; provided, however, that if the closing bid price is not determinable for at least ten Business Days in such period, the "Current Market Value" of the security shall be determined as if the security were not registered under the Exchange Act. "ETG Earnout Shares" shall mean any shares of Common Stock issued subsequent to the date of the Securities Purchase Agreement pursuant to the terms of the Asset Purchase Agreement dated as of December 16, 1998, by and among the Company, COSI Acquisition Corp., Enterprise Technology Group, Incorporated and certain stockholders of Enterprise Technology Group, Incorporated as amended from time to time, (including, without limitation, Sections 3.3 and 3.4 thereof). "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exercise Date" means, for a given Warrant, the day on which such Warrant is exercised pursuant to Section 3.04. "Holder" means the Person in whose name a Warrant is registered on the Warrant Registrar's books. "Issue Date" means the date on which the Warrants are initially issued. "Officer" means the Chairman of the Board of Directors, the Chief Executive Officer, the Chief Financial Officer, the President, any Vice President, the Treasurer or the Secretary of the Company. "Person" means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock", as applied to the Capital Stock of any Person, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Capital Stock of any other class of such Person. "Securities" means the Warrants and the Warrant Shares. "Securities Act" means the Securities Act of 1933, as amended. "Securities Purchase Agreement" has the meaning assigned to it in the recitals hereto. "Series A Preferred Stock" has the meaning assigned to it in the recitals hereto. "Shares" has the meaning assigned to it in the recitals hereto. "Subsidiary" of any Person means any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by (a) such Person, (b) such Person and one or more Subsidiaries of such Person or (c) one or more Subsidiaries of such Person. "Uniform Commercial Code" shall mean the New York Uniform Commercial Code, as in effect from time to time. "Warrant" has the meaning assigned to it in the recitals hereto. "Warrant Certificates" mean the registered certificates issued by the Company under this Agreement representing the Warrants. "Warrant Shares" mean the shares of Common Stock (and any other securities) for which the Warrants are exercisable or which have been issued upon exercise of Warrants. Section 1.02. Other Definitions. Term Defined in Section ---- ------------------ "Cashless Exercise" 3.04 "Company" Preamble "Exercise Price" 3.01 "Exercise Rate" 4.01 "Expiration Date" 3.02(b) "Stock Registrar" 3.07 "Stock Transfer Agent" 3.05 "Warrantholder" Preamble "Warrant Registrar" 2.03 Section 1.03. Rules of Construction. Unless the context otherwise requires: (i) a defined term has the meaning assigned to it; (ii) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles as in effect from time to time; (iii) "or" is not exclusive; (iv) "including" means including without limitation; and (v) words in the singular include the plural and words in the plural include the singular. ARTICLE II WARRANT CERTIFICATES Section 2.01. Form and Dating. The Warrant Certificates shall each be substantially in the form of Exhibit A hereto, which is hereby incorporated in and expressly made a part of this Agreement. The Warrant Certificates may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company). Each Warrant Certificate shall be dated the date that it is executed by the Company. Section 2.02. Execution and Countersignature. Two Officers shall sign the Warrant Certificates for the Company by manual or facsimile signature. If an Officer whose signature is on a Warrant Certificate no longer holds that office at the time the Company issues the Warrant Certificate, the Warrant Certificate shall be valid nevertheless. Section 2.03. Warrant Registrar. The Company shall maintain an office or agency where Warrants may be presented for registration of transfer, exchange or exercise (the "Warrant Registrar"). The Warrant Registrar shall keep a register of the Warrants and of their transfer, exchange or exercise. The Company may have one or more co-registrars. The Company may act as Warrant Registrar. The term Warrant Registrar includes any co-registrars. The Company shall initially serve as Warrant Registrar in connection with the Warrants. The Company shall enter into an appropriate agency agreement with any Warrant Registrar not a party to this Agreement. The agreement shall implement the provisions of this Agreement that relate to such agent. The Company shall notify the Warrantholders of the name and address of any such agent. If the Company fails to maintain a Warrant Registrar, the Company shall act as such. The Company may remove any Warrant Registrar upon written notice to such Warrant Registrar and to the Warrantholders; provided, however, that no such removal shall become effective until (1) acceptance of an appointment by a successor as evidenced by an appropriate agreement entered into by the Company and such successor Warrant Registrar and delivered to the Warrantholders or (2) notification to the Warrantholders that the Company shall serve as Warrant Registrar until the appointment of a successor in accordance with clause (1) above. The Warrant Registrar may resign at any time upon written notice. The Company and the Warrant Registrar may deem and treat the Person in whose name a Warrant Certificate is registered as the absolute owner of such Warrant Certificate for all purposes whatsoever and neither the Company and the Warrant Registrar shall be affected by notice to the contrary. Section 2.04. Warrantholder Lists. The Company shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Warrantholders. Section 2.05. Transfer and Exchange. The Warrants shall be issued in registered form and shall be transferable only upon the surrender of a Warrant Certificate for registration of transfer and in compliance with the provisions of this Agreement. When a Warrant is presented to the Warrant Registrar with a request to register a transfer, the Warrant Registrar shall register the transfer as requested if the requirements of Section 8-401(a) of the Uniform Commercial Code are met. When Warrants are presented to the Warrant Registrar with a request to exchange them for an equal number of Warrants of other denominations, the Warrant Registrar shall make the exchange as requested if the requirements of Section 8-401(a)(1) and (2) of the Uniform Commercial Code are met. To permit registration of transfers and exchanges, the Company shall execute Warrant Certificates at the Warrant Registrar's request. The Company may require payment of a sum sufficient to pay all taxes, assessments or other governmental charges in connection with any transfer, exchange or exercise pursuant to this Section 2.05. Subject to the restrictions set forth in this Section 2.05, each Warrantholder may at any time and from time to time freely transfer its Warrant and the Warrant Shares in whole or in part. No Warrant has been, and the Warrant Shares at the time of their issuance may not be, registered under the Securities Act, and, except as provided in any separate agreement providing for registration rights, nothing herein contained shall be deemed to require the Company to so register any Warrant or Warrant Shares. The Warrants and the Warrant Shares are issued or issuable subject to the provisions and conditions contained herein, and every Holder of a Warrant or Warrant Shares by accepting such Warrant or Warrant Shares agrees with the Company to such provisions and conditions, and represents to the Company that such Warrant has been acquired and the Warrant Shares will be acquired for the account of such Warrantholder for investment and not with a view to or for sale in connection with any distribution thereof. Except as otherwise permitted by this Section 2.05, each Warrant (including each Warrant issued upon the transfer of any Warrant) and all Warrant Shares shall be stamped or otherwise imprinted with legends in substantially the following form: (a) "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE COMPANY SUCH CERTIFICATES AND OTHER INFORMATION AS THE COMPANY MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS" and (b) "THIS WARRANT IS ALSO SUBJECT TO TRANSFER RESTRICTIONS SET FORTH IN A SECURITIES PURCHASE AGREEMENT, DATED AS OF APRIL 7, 2000, AMONG THE COMPANY AND THE OTHER PARTIES REFERRED TO THEREIN (THE "SECURITIES PURCHASE AGREEMENT"). THIS WARRANT MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN SUCH SECURITIES PURCHASE AGREEMENT AND THE WARRANT AGREEMENT" and (c) "ALL WARRANTS AND ALL WARRANT SHARES RECEIVED BY THE WARRANTHOLDERS UPON EXERCISE OF THE WARRANTS WILL BE SUBJECT TO THE TERMS AND CONDITIONS INCLUDING CERTAIN TRANSFER RESTRICTIONS OF A STOCKHOLDERS AGREEMENT DATED AS OF MAY __, 2000, AS AMENDED, AMONG THE COMPANY AND THE VARIOUS STOCKHOLDERS OF THE COMPANY, AND EACH WARRANTHOLDER AGREES TO BE BOUND BY THE TERMS AND CONDITIONS OF SUCH STOCKHOLDERS AGREEMENTS AS SUCH STOCKHOLDERS AGREEMENTS MAY BE AMENDED FROM TIME TO TIME" Transfers of Warrants and Warrant Shares are subject to restrictions as provided in (i) Section 6.5 of the Securities Purchase Agreement and (ii) that certain Stockholders Agreement dated as of May 10, 2000 as amended among the various stockholders of the Company. Prior to any transfer or attempted transfer of any Warrants, the Holder of such Warrants shall give 10 days' prior written notice (a "Transfer Notice") to the Company of such Holder's intention to effect such transfer, describing the manner and circumstances of the proposed transfer, and, if requested by the Company, obtain from counsel to such Holder who shall be reasonably satisfactory to the Company, an opinion that the proposed transfer of such Warrants may be effected without registration under the Securities Act. After receipt of the Transfer Notice and opinion, the Company shall, within five days thereof, so notify the Holder of such Warrants and such Holder shall thereupon be entitled to transfer such Warrants, in accordance with the terms of the Transfer Notice. Each Warrant issued upon such transfer shall bear the restrictive legends set forth above, unless, with respect to the legend in paragraph (a) above, in the opinion of such counsel such legend is not required in order to ensure compliance with the Securities Act. The Holder of the Warrants giving the Transfer Notice shall not be entitled to transfer such Warrants until receipt of notice from the Company under this Section 2. Section 2.06. Replacement Certificate. If a mutilated Warrant is surrendered to the Company or if a Warrantholder claims that the Warrant Certificate has been lost, destroyed or wrongfully taken, the Company shall execute a replacement Warrant Certificate if the requirements of Section 8-405 of the Uniform Commercial Code are met, such that the Warrantholder (i) notifies the Company within a reasonable time after he has notice of such loss, destruction or wrongful taking and the Company does not register a transfer prior to receiving such notification, (ii) makes such request to the Company prior to the Warrant being acquired by a protected purchaser as defined in Section 8-303 of the Uniform Commercial Code (a "protected purchaser") and (iii) satisfies any other reasonable requirements of the Company. If required by the Company, such Warrantholder shall furnish an indemnity bond sufficient in the reasonable judgment of the Company to protect the Company from any loss that it may suffer if a Warrant is replaced. The Company may charge the Warrantholder for its expenses in replacing a Warrant Certificate. Every replacement Warrant is an additional obligation of the Company. The provisions of this Section 2.06 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement of mutilated, lost, destroyed or wrongfully taken Securities. Section 2.07. Outstanding Warrants. Warrants outstanding at any time are all Warrant Certificates executed by the Company except for those canceled by it, those delivered to it for cancellation and those described in this Section 2.07 as not outstanding. A Warrant does not cease to be outstanding because an Affiliate of the Company holds the Warrant. A Warrant ceases to be outstanding if the Company holds the Warrant. If a Warrant Certificate is replaced pursuant to Section 2.06, it ceases to be outstanding unless the Company receives proof satisfactory to it that the replaced Warrant Certificate is held by a protected purchaser. Section 2.08. Cancellation. The Company at any time may cancel Warrant Certificates which have been surrendered for registration of transfer, exchange, exercise or cancellation. The Company and no one else shall cancel all Warrant Certificates surrendered for registration of transfer, exchange, exercise or cancellation. The Company may not issue new Warrant Certificates to replace Warrants Certificates that have been exercised or Warrants which the Company has purchased or otherwise acquired. ARTICLE III EXERCISE TERMS Section 3.01. Exercise. Each Warrant shall initially entitle the Holder thereof, subject to adjustment pursuant to the terms of this Agreement, to purchase one (1) share of Common Stock. The exercise price (the "Exercise Price") of each Warrant is $0.01 per share. Section 3.02. Time of Exercise; Separability. (a) Subject to the terms and conditions set forth herein, the Warrants shall be exercisable at any time and from time to time on any Business Day on or after the Issue Date. (b) No Warrant shall be exercisable after May 10, 2007 (the "Expiration Date"). (c) The Shares and the Warrants will be separably transferrable, subject to compliance with applicable securities laws, on the Issue Date. Section 3.03. Expiration. A Warrant shall terminate and become void as of the earlier of (i) the close of business on the Expiration Date or (ii) the date such Warrant is exercised. The Company shall give notice not less than 90, and not more than 120, days prior to the Expiration Date to the Holders of all then outstanding Warrants to the effect that the Warrants will terminate and become void as of the close of business on the Expiration Date; provided, however, that if the Company fails to give notice as provided in this Section 3.03, the Warrants will nevertheless expire and become void on the Expiration Date. Section 3.04. Manner of Exercise. Warrants may be exercised upon (i) surrender to the Warrant Registrar at its office of the related Warrant Certificate, together with the form of election attached thereto to purchase Common Stock duly filled in and signed by the Holder thereof and (ii) payment to the Company, of the Exercise Price for each Warrant Share or other security issuable upon the exercise of such Warrants then exercised. Such payment shall be made (i) in cash or by certified or official bank check payable to the order of the Company or by wire transfer of funds to an account designated by the Company for such purpose or (ii) without the payment of cash, by reducing the number of shares of Common Stock obtainable upon the exercise of a Warrant and payment of the Exercise Price in cash so as to yield a number of shares of Common Stock upon the exercise of such Warrant equal to the product of (a) the number of shares of Common Stock issuable as of the Exercise Date upon the exercise of such Warrant (if payment of the Exercise Price were being made in cash) and (b) the Cashless Exercise Ratio. An exercise of a Warrant in accordance with the immediately preceding clause (ii) is herein called a "Cashless Exercise". Upon surrender of a Warrant Certificate representing more than one Warrant in connection with the Holder's option to elect a Cashless Exercise, the number of shares of Common Stock deliverable upon a Cashless Exercise shall be equal to the number of shares of Common Stock issuable upon the exercise of Warrants that the Holder specifies are to be exercised pursuant to a Cashless Exercise multiplied by the Cashless Exercise Ratio. All provisions of this Agreement shall be applicable with respect to a surrender of a Warrant Certificate pursuant to a Cashless Exercise for less than the full number of Warrants represented thereby. Subject to Section 3.02, the rights represented by the Warrants shall be exercisable at the election of the Warrantholders thereof either in full at any time or from time to time in part and in the event that a Warrant Certificate is surrendered for exercise of less than all the Warrants represented by such Warrant Certificate at any time prior to the Expiration Date, a new Warrant Certificate representing the remaining Warrants shall be issued. Section 3.05. Issuance of Warrant Shares. Subject to Section 2.06, upon the surrender of Warrant Certificates and payment of the per share Exercise Price or election of a Cashless Exercise, as set forth in Section 3.04, the Company shall issue and cause the transfer agent for the Common Stock ("Stock Transfer Agent") to countersign and deliver to or upon the written order of the Warrantholder and in such name or names as the Holder may designate, a certificate or certificates for the number of full Warrant Shares so purchased upon the exercise of such Warrants or other securities or property to which it is entitled, registered or otherwise, to the Person or Persons entitled to receive the same (including any depositary institution so designated by a Warrantholder), together with cash as provided in Section 3.06 in respect of any fractional Warrant Shares otherwise issuable upon such exercise. Such certificate or certificates shall be deemed to have been issued and any Person so designated therein shall be deemed to have become a Holder of record of such Warrant Shares as of the date of the surrender of such Warrant Certificates and payment of the per share Exercise Price or election of a Cashless Exercise, as aforesaid; provided, however, that if, at such date, the transfer books for the Warrant Shares shall be closed, the certificates for the Warrant Shares in respect of which such Warrants are then exercised shall be issuable as of the date on which such books shall next be opened and until such date the Company shall be under no duty to deliver any certificates for such Warrant Shares; provided further, however, that such transfer books, unless otherwise required by law, shall not be closed at any one time for a period longer than 90 calendar days. Section 3.06. Fractional Warrant Shares. The Company shall not be required to issue fractional Warrant Shares on the exercise of Warrants. If more than one Warrant shall be exercised in full at the same time by the same Warrantholder, the number of full Warrant Shares which shall be issuable upon such exercise shall be computed on the basis of the aggregate number of Warrant Shares which may be purchasable pursuant thereto. If any fraction of a Warrant Share would, except for the provisions of this Section 3.06, be issuable upon the exercise of any Warrant (or specified portion thereof), the Company shall pay an amount in cash equal to the Current Market Value per Warrant Share, as determined on the day immediately preceding the date the Warrant is presented for exercise, multiplied by such fraction, computed to the nearest whole cent. Section 3.07. Reservation of Warrant Shares. The Company shall at all times keep reserved out of its authorized shares of Common Stock a number of shares of Common Stock sufficient to provide for the exercise of all outstanding Warrants. The registrar for the Common Stock (the "Stock Registrar") shall at all times until the Expiration Date reserve such number of authorized shares as shall be required for such purpose. The Company will keep a copy of this Agreement on file with the Stock Transfer Agent. The Company will supply such Stock Transfer Agent with duly executed stock certificates for such purpose and will itself provide or otherwise make available any cash which may be payable as provided in Section 3.06. The Company will furnish to such Stock Transfer Agent a copy of all notices of adjustments (and certificates related thereto) transmitted to each Holder. The Company covenants that all Warrant Shares which may be issued upon exercise of Warrants shall, upon issue, be fully paid, nonassessable, free of preemptive rights, free from all taxes and free from all liens, charges and security interests with respect to the issue thereof. Section 3.08. Compliance with Law. Notwithstanding anything in this Agreement to the contrary, in no event shall a Warrantholder be entitled to exercise a Warrant unless in the opinion of counsel, the exercise of such Warrants is exempt from the registration requirements of the Securities Act and such securities are qualified for sale or exempt from qualification under the applicable securities laws of the states or other jurisdictions in which such Holders reside. Section 3.09 Obtaining Stock Exchange Listings. The Company will from time to time take all action which may be necessary so that the Warrant Shares, immediately upon their issuance upon the exercise of Warrants, will be listed on the NASDAQ National Market or such other of the principal securities exchanges, markets and automated quotation systems within the United States of America, if any, on which other shares of Common Stock are then listed. In the event that, at any time during the period in which the Warrants are exercisable, the Common Stock is not listed on any principal securities or exchanges or markets within the United States of America, the Company will use its best efforts to permit the Warrant Shares to be designated PORTAL securities in accordance with the rules and regulations adopted by the National Association of Securities Dealers, Inc. relating to trading in the Private Offering, Resales and Trading through Automated Linkages market. Section 3.10 No Dilution or Impairment. The Company (a) will not permit the par or nominal value of any Warrant Shares issuable upon the exercise of Warrants to exceed the amount payable therefor upon such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares on the exercise of the Warrants from time to time outstanding and (c) will not take any action which results in any adjustment of the Exercise Rate if the total number of shares of Common Stock (or other securities) issuable after the action upon the exercise of all of the Warrants would exceed the total number of shares of Common Stock (or other securities) then authorized by the Company's Certificate of Incorporation and available for the issuance of shares of Common Stock (or other securities) upon such exercise. ARTICLE IV ANTIDILUTION PROVISIONS Section 4.01. General. The number of shares of Common Stock issuable upon the exercise of each Warrant (the "Exercise Rate") is subject to adjustment from time to time upon the occurrence of the events enumerated in this Article IV. The Exercise Rate shall initially be 1.0000. Section 4.02. Adjustment for Common Stock Dividends. If the Company shall hereafter pay a dividend or make a distribution to holders of the outstanding shares of Common Stock in shares of Common Stock, the Exercise Rate in effect at the opening of business on the date following the date fixed for the determination of shareholders entitled to receive such dividend or other distribution shall be increased by multiplying such Exercise Rate by a fraction of which the numerator shall be the sum of the number of shares of Common Stock outstanding at the close of business on the Common Stock Record Date (as defined in Section 4.07) and the total number of shares constituting such dividend or other distribution and the denominator shall be the number of shares of Common Stock outstanding at the close of business on the Common Stock Record Date fixed for such determination, such increase to become effective immediately after the opening of business on the day following the Common Stock Record Date. If any dividend or distribution of the type described in this Section 4.02 is declared but not so paid or made, the Exercise Rate shall again be adjusted to the Exercise Rate which would then be in effect if such dividend or distribution had not been declared. Section 4.03. Adjustment for Issuances of Common Stock, Options, Warrants, Rights and Convertible or Exchangeable Securities. If the Company shall issue, sell or distribute any shares of Common Stock (including, without limitation, any ETG Earnout Shares, which such ETG Earnout Shares shall for purposes of this Section 4.03 be deemed issued for no additional consideration) or offer or issue, sell or distribute options, rights or warrants to any Person entitling them to subscribe for or purchase shares of Common Stock or issue, sell or distribute convertible or exchangeable securities which are convertible or exchangeable for shares of Common Stock, in each case, at a price per share less than $14.61, the Exercise Rate shall be adjusted so that the same shall equal the rate determined by multiplying the Exercise Rate in effect at the opening of business on the date immediately prior to such sale, issuance or distribution of shares, options, rights, warrants or exchangeable or convertible securities by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on such date plus the total number of additional shares of Common Stock to be issued, sold or distributed or subject to such options, rights, warrants or exchangeable or convertible securities for subscription or purchase and of which the denominator shall be the number of shares of Common Stock outstanding at the close of business on such date plus the number of shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock to be issued, sold or distributed or subject to such options, rights, warrants or exchangeable or convertible securities would purchase at a price of $14.61 per share. Such adjustment shall become effective immediately after the opening of business on the day following the issuance, sale or distribution of such shares, options, rights, warrants or exchangeable or convertible securities. To the extent that shares of Common Stock are not delivered pursuant to such options, rights, warrants or exchangeable or convertible securities, upon the expiration or termination of such options, rights, warrants or exchangeable or convertible securities the Exercise Rate shall again be adjusted to be the Exercise Rate which would then be in effect had the adjustments made upon the issuance, sale or distributions of such options, rights, warrants or exchangeable or convertible securities been made on the basis of delivery of only the number of shares of Common Stock actually delivered. If such shares, options, rights, warrants or exchangeable or convertible securities are not so issued, the Exercise Rate shall again be adjusted to be the Exercise Rate which would then be in effect if such date fixed for the determination of shareholders entitled to receive such shares, options, rights, warrants or exchangeable or convertible securities had not been fixed. In determining whether any shares, options, rights, warrants or exchangeable or convertible securities entitle the Holders to subscribe for or purchase shares of Common Stock at less than $14.61 per share, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received for such options, rights, warrants or exchangeable or convertible securities, with the value of such consideration, if other than cash, to be determined in good faith by the Board of Directors and the amount of any exercise price or subscription price required to be paid upon exercise of such options, rights, warrants or exchangeable or convertible securities. Section 4.04. Adjustment upon Subdivision, Reclassification or Combination of Common Stock. If the outstanding shares of Common Stock shall be subdivided or reclassified into a greater number of shares of Common Stock, the Exercise Rate in effect at the opening of business on the day following the day upon which such subdivision or reclassification becomes effective shall be proportionately increased, and, conversely, if the outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Exercise Rate in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately reduced, such increase or reduction, as the case may be, to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. Section 4.05. Adjustments for Mergers, Consolidations, etc. In case of any consolidation of the Company with, or merger of the Company into, any other corporation, or in case of any merger of another corporation into the Company (other than a merger that does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock of the Company), or in case of any sale, conveyance or transfer of all or substantially all the assets of the Company, the Holder of each Warrant shall have the right thereafter, during the period such Warrant shall be exercisable in accordance with its terms, to exercise such Warrant for the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer by a holder of the number of shares of shares of Common Stock of the Company into which such Warrant might have been exercised immediately prior to such consolidation, merger, conveyance or transfer, assuming such Holder of shares of Common Stock of the Company failed to exercise his rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer (provided that, if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer is not the same for each Common Share of the Company in respect of which such rights of election shall not have been exercised ("nonelecting share"), then for the purpose of this Section 4.05 the kind and amount of securities, cash and other property receivable upon such consolidation, merger, conveyance or transfer by each nonelecting share shall be deemed to be the kind and amount so receivable per share by a plurality of the nonelecting shares). Such securities shall provide for adjustments which, for events subsequent to the effective date of the triggering event, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article IV. The above provisions of this Section 4.05 shall similarly apply to successive consolidations, mergers, conveyances or transfers. Section 4.06. Other Events. If any event occurs as to which the foregoing provisions of this Article IV are not strictly applicable or, if strictly applicable, would not, in the good faith judgment of the Board of Directors, fairly and adequately protect the purchase rights of the Warrants in accordance with the essential intent and principles of such provisions, then such Board of Directors shall make such adjustments in the application of such provisions, in accordance with such essential intent and principles, as shall be reasonably necessary, in the good faith opinion of such Board of Directors, to protect such purchase rights as aforesaid, but in no event shall any such adjustment have the effect of decreasing the Exercise Rate or decreasing the number of Warrant Shares issuable upon exercise of the Warrants. Section 4.07. Certain Definitions. For purposes of this Article IV, the following term shall have the meaning indicated: "Common Stock Record Date" shall mean, with respect to any dividend, distribution or other transaction or event in which the holders of Common Stock have the right to receive any cash, securities or other property or in which the Common Stock (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of shareholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise). Section 4.08. Deferral of Certain Adjustments. No adjustment in the Exercise Rate shall be required unless such adjustment would require an increase or decrease of at least 1% in such rate; provided, however, that any adjustments which by reason of this Section 4.08 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article IV shall be made by the Company and shall be rounded to fourth decimal place. No adjustment need be made for a change in the par value or no par value of the Common Stock. Section 4.09. Officers Certificate; Notice of Adjustment. Whenever the Exercise Rate is adjusted as herein provided, the Company shall promptly file with the Warrant Registrar an Officers' certificate setting forth the Exercise Rate after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Promptly after delivery of such certificate, the Company shall prepare a notice of such adjustment of the Exercise Rate setting forth the adjusted Exercise Rate and the date on which each adjustment becomes effective and shall mail such notice of such adjustment of the Exercise Rate to each Warrantholder at such Warrantholder's last address appearing on the register of Warrantholders maintained by the Warrant Registrar for that purpose within 20 days of the effective date of such adjustment. Failure to deliver such notice shall not affect the legality or validity of any such adjustment. Section 4.10. Right to Delay Issuance of Incremental Common Stock. In any case in which this Article IV provides that an adjustment shall become effective immediately after a Common Stock Record Date for an event, the Company may defer until the occurrence of such event issuing to any holder of Warrants exercised after such Common Stock Record Date and before the occurrence of such event the additional shares of Common Stock issuable upon such exercise by reason of the adjustment required by such event over and above the shares of Common Stock issuable upon such exercise before giving effect to such adjustment. Section 4.11. Treasury Shares Disregarded. For purposes of this Article IV, the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company. The Company shall not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. Section 4.12. No Adjustment for Certain Issuances. Notwithstanding anything to the contrary set forth herein, this Article IV shall not apply, and no adjustment to the Exercise Rate shall be made with respect to (A) compensatory or incentive stock options (or any shares of Common Stock issued upon the exercise thereof) issued pursuant to employee stock option plans of the Company which have been approved by the Board of Directors of the Company, (B) issuances of Common Stock to employees, officers, directors and consultants of the Company, pursuant to employee benefit plans approved by the Board of Directors of the Company, or (C) shares of Common Stock issued upon the conversion of the Series A Preferred Stock. Section 4.13. Notice of Certain Adjustments. If the Company shall take any action requiring an adjustment to the Exercise Rate pursuant to this Article IV, then the Company shall cause to be filed with the Warrant Registrar, and shall cause to be mailed to all Warrantholders at their last addresses as they shall appear in the Warrant Register, at least 20 Business Days (or 10 Business Days in any case specified in clause 4.02 or 4.03 above) prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of which the holders of shares of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined or (y) the date on which a reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective, and the date as of which it is expected that holders of shares of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. Failure to give the notice required by this Section 4.13 or any defect therein shall not affect the legality or validity of any dividend, distribution, right, warrant, reclassification, consolidation, merger, sale transfer, dissolution, liquidation or winding-up, or the vote upon any such action. Section 4.14. Adjustment to Warrant Certificate. The form of Warrant Certificate need not be changed because of any adjustment made pursuant to this Article IV, and Warrant Certificates issued after such adjustment may state the same Exercise Price and the same number of shares of Common Stock issuable upon exercise of the Warrants as are stated in the Warrant Certificates initially issued pursuant to this Agreement. The Company, however, may at any time in its sole discretion make any change in the form of Warrant Certificate that it may deem appropriate to give effect to such adjustments and that does not affect the substance of the Warrant Certificate, and any Warrant Certificate thereafter issued or countersigned, whether in exchange or substitution for an outstanding Warrant Certificate or otherwise, may be in the form as so changed. Section 4.15. Certain Tax Matters. Notwithstanding anything to the contrary set forth herein, for federal income tax purposes (but not for any other purpose of this Warrant Agreement), any adjustments to the Exercise Rate made in respect of any ETG Earnout Shares shall be treated as an adjustment to the purchase price of the Warrants. ARTICLE V MISCELLANEOUS Section 5.01. Persons Benefiting. Nothing in this Agreement is intended or shall be construed to confer upon any Person other than the Company and the Warrantholders any right, remedy or claim under or by reason of this Agreement or any part hereof. Section 5.02. Rights of Warrantholders. Holders of unexercised Warrants are not entitled to (i) receive dividends or other distributions, (ii) receive notice of or vote at any meeting of the stockholders, (iii) consent to any action of the stockholders, (iv) receive notice of any other proceedings of the Company, (v) exercise any preemptive right or (vi) exercise any other rights whatsoever as stockholders of the Company. Section 5.03. Amendment. Any amendment or supplement to this Agreement shall require the written consent of the Warrantholders of a majority of the then outstanding Warrants. The consent of each Warrantholder affected shall be required for any amendment pursuant to which the Exercise Price would be increased, the Exercise Rate would be decreased (other than pursuant to adjustments provided herein) or the antidilution provisions in Article IV are altered in a manner which adversely affects the Warrantholders. In determining whether the Warrantholders of the required number of Warrants have concurred in any direction, waiver or consent, Warrants owned by the Company or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company shall be disregarded and deemed not to be outstanding. Also, subject to the foregoing, only Warrants outstanding at the time shall be considered in any such determination. Section 5.04. Notices. Any notice or communication shall be in writing and delivered in person or mailed by first-class mail addressed as follows: Computer Outsourcing Services, Inc. 2 Christie Heights Street Leonia, New Jersey 07605 Attn: Nicholas J. Letizia, Chief Financial Officer with a copy to: Robinson & Cole LLP 695 E. Main Street Stamford, CT 06904 Attention: Richard A. Krantz, Esq. Tel: (203) 462-7505 Fax: (203) 462-7599 The Company by notice to the Warrantholders may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Warrantholder shall be mailed to the Warrantholder at the Warrantholder's address as it appears on the Company's records and shall be sufficiently given if so mailed within the time prescribed. Failure to mail a notice or communication to a Warrantholder or any defect in it shall not affect its sufficiency with respect to other Warrantholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. Section 5.05. Governing Law. THIS AGREEMENT AND THE WARRANTS SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. Section 5.06. Successors. All agreements of the Company in this Agreement and the Warrant Certificates shall bind its successors. Section 5.07. Multiple Originals. The parties may sign any number of copies of this Agreement. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is enough to prove this Agreement. Section 5.08. Table of Contents The table of contents and headings of the Articles and Sections of this Agreement have been inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. Section 5.09. Severability. The provisions of this Agreement are severable, and if any clause or provision shall be held invalid, illegal or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect in that jurisdiction only such clause or provision, or part thereof, and shall not in any manner affect such clause or provision in any other jurisdiction or any other clause or provision of this Agreement in any jurisdiction. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first written above. COMPUTER OUTSOURCING SERVICES, INC. By: /s/ Zach Lonstein Name: Zach Lonstein Title: Chief Executive Officer WARRANTHOLDERS DB CAPITAL INVESTORS, L.P., By: DB Capital Partners, L.P., its General Partner By: DB Capital Partners, Inc., its General Partner By: /s/ Frank Schiff Name: Frank Schiff Title: Managing Director SANDLER CAPITAL PARTNERS V, L.P. By: Sandler Investment Partners, L.P., General Partner By: Sandler Capital Management, General Partner By: MJDM Corp., a General Partner By /s/ Ed Grinacoff Name: Ed Grinacoff Title Managing Director: SANDLER INTERNET PARTNERS, L.P. By: Sandler Investment Partners, L.P., General Partner By: Sandler Capital Management, General Partner By: MJDM Corp., a General Partner By /s/ Ed Grinacoff Name: Ed Grinacoff Title: Managing Director SANDLER CO-INVESTMENT PARTNERS, L.P. By: Sandler Investment Partners, L.P., General Partner By: Sandler Capital Management, General Partner By: MJDM Corp., a General Partner By /s/ Ed Grinacoff Name: Ed Grinacoff Title: Managing Director PRICE FAMILY LIMITED PARTNERS By /s/ Michael Price Name: Michael Price Title: General Partner BENAKE, L.P. By /s/ Lynn Forester Name: Lynn Forester Title: General Partner EXHIBIT A [FORM OF FACE OF WARRANT CERTIFICATE] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE COMPANY SUCH CERTIFICATES AND OTHER INFORMATION AS THE COMPANY MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. THIS WARRANT IS ALSO SUBJECT TO TRANSFER RESTRICTIONS SET FORTH IN A SECURITIES PURCHASE AGREEMENT, DATED AS OF APRIL 7, 2000, AMONG THE COMPANY AND THE OTHER PARTIES REFERRED TO THEREIN (THE "SECURITIES PURCHASE AGREEMENT"). THIS WARRANT MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN SUCH SECURITIES PURCHASE AGREEMENT AND THE WARRANT AGREEMENT. ALL WARRANTS AND ALL WARRANT SHARES RECEIVED BY THE WARRANTHOLDERS UPON EXERCISE OF THE WARRANTS WILL BE SUBJECT TO THE TERMS AND CONDITIONS INCLUDING CERTAIN TRANSFER RESTRICTIONS OF A STOCKHOLDERS AGREEMENT DATED AS OF MAY __, 2000, AS AMENDED, AMONG THE COMPANY AND THE VARIOUS STOCKHOLDERS OF THE COMPANY (THE "STOCKHOLDERS AGREEMENT"), AND EACH WARRANTHOLDER AGREES TO BE BOUND BY THE TERMS AND CONDITIONS OF SUCH STOCKHOLDERS AGREEMENT AS SUCH STOCKHOLDERS AGREEMENT MAY BE AMENDED FROM TIME TO TIME. No. [ ] SERIES A COMMON STOCK WARRANT OF COMPUTER OUTSOURCING SERVICES, INC. THIS CERTIFIES THAT [ ], or its registered assigns, is the registered holder of Series A Common Stock Warrants (the "Warrants"). Each Warrant entitles the holder thereof (the "Holder"), at its option and subject to the provisions contained herein and in the Warrant Agreement referred to below, to purchase from Computer Outsourcing Services, Inc., a Delaware corporation ("the Company"), one (1) share of Common Stock, par value of $.01 per share, of the Company (the "Common Stock") at the per share exercise price of $0.01 (the "Exercise Price") or by Cashless Exercise referred to below. This Warrant Certificate shall terminate and become void as of the close of business on May 10, 2007 (the "Expiration Date") or upon the exercise hereof as to all the shares of Common Stock subject hereto. The number of shares issuable upon exercise of the Warrants and the Exercise Price per share shall be subject to adjustment from time to time as set forth in the Warrant Agreement (as defined). This Warrant Certificate is issued under and in accordance with a Warrant Agreement dated as of May 10, 2000 (the "Warrant Agreement"), between the Company and various Warrantholders party thereto (the "Warrantholders"), and is subject to the terms and provisions contained in the Warrant Agreement, to all of which terms and provisions the Holder of this Warrant Certificate consents by acceptance hereof. The Warrant Agreement is hereby incorporated herein by reference and made a part hereof. Reference is hereby made to the Warrant Agreement for a full statement of the respective rights, limitations of rights, duties and obligations of the Company and the Warrantholders. Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Warrant Agreement. A copy of the Warrant Agreement may be obtained for inspection by the Holder hereof upon written request to the Company at 2 Christie Heights Street, Leonia, New Jersey 07605, Attention: Chief Financial Officer. Subject to the terms of the Warrant Agreement, the Warrants may be exercised in whole or in part (i) by presentation of this Warrant Certificate with the Election to Purchase attached hereto duly executed and with the simultaneous payment of the Exercise Price in cash (subject to adjustment) to the Company for the account of the Company or (ii) by Cashless Exercise. Payment of the Exercise Price in cash shall be made by certified or official bank check payable to the order of the Company or by wire transfer of funds to an account designated by the Company for such purpose. Payment by Cashless Exercise shall be made without the payment of cash by reducing the amount of Common Stock that would be obtainable upon the exercise of a Warrant and payment of the Exercise Price in cash so as to yield a number of shares of Common Stock upon the exercise of such Warrant equal to the product of (1) the number of shares of Common Stock for which such Warrant is exercisable as of the Exercise Date (if the Exercise Price were being paid in cash) and (2) a fraction, the numerator of which is the excess of the Current Market Value per share of Common Stock on the Exercise Date over the Exercise Price per share as of the Exercise Date and the denominator of which is the Current Market Value per share of the Common Stock on the Exercise Date. As provided in the Warrant Agreement and subject to the terms and conditions therein set forth, the Warrants shall be exercisable at any time and from time to time on any Business Day after the Issue Date; provided, however, that no Warrant shall be exercisable after May 10, 2007. As provided in the Warrant Agreement, the Exercise Rate is subject to adjustment upon the happening of certain events. The Company may require payment of a sum sufficient to pay all taxes, assessments or other governmental charges in connection with the transfer or exchange of the Warrant Certificates pursuant to the terms of the Warrant Agreement, but not for any exchange or original issuance (not involving a transfer) with respect to temporary Warrant Certificates, the exercise of the Warrants or the Warrant Shares. Upon any partial exercise of the Warrants, there shall be countersigned and issued to the Warrantholder hereof a new Warrant Certificate representing those Warrants which were not exercised. This Warrant Certificate may be exchanged at the office of the Company by presenting this Warrant Certificate properly endorsed with a request to exchange this Warrant Certificate for other Warrant Certificates evidencing an equal number of Warrants. No fractional Warrant Shares will be issued upon the exercise of the Warrants, but the Company shall pay an amount in cash equal to the Current Market Value per Warrant Share on the day immediately preceding the date the Warrant is exercised, multiplied by the fraction of a Warrant Share that would be issuable on the exercise of any Warrant. All shares of Common Stock issuable by the Company upon the exercise of the Warrants shall, upon such issue, be duly and validly issued and fully paid and non-assessable. The Warrantholder in whose name the Warrant Certificate is registered may be deemed and treated by the Company as the absolute owner of the Warrant Certificate for all purposes whatsoever and the Company shall not be affected by notice to the contrary. The Warrants do not entitle any Warrantholder hereof to any of the rights of a stockholder of the Company. This Warrant Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Company. COMPUTER OUTSOURCING SERVICES, INC. By: -------------------------------------------------- Name: Title: Attest: - ------------------------------- Name: Title: DATED: FORM OF ELECTION TO PURCHASE WARRANT SHARES (to be executed only upon exercise of Warrants) COMPUTER OUTSOURCING SERVICES, INC. The undersigned hereby irrevocably elects to exercise __________________ Warrants to acquire shares of Common Stock, par value $.001 per share, of Computer Outsourcing Services, Inc., (i) at an exercise price per share of Common Stock of $0.01 (subject to adjustment as provided in the Warrant Agreement) or (ii) through Cashless Exercise and otherwise on the terms and conditions specified in the Warrant Certificate and the Warrant Agreement, surrenders this Warrant Certificate and all right, title and interest therein to Computer Outsourcing Services, Inc. and directs that the shares of Common Stock deliverable upon the exercise of such Warrants be registered or placed in the name and at the address specified below and delivered thereto. Check method of exercise: Exercise at $0.01 per share of Common Stock (subject to adjustment as provided in the Warrant Agreement): - --- Cashless Exercise: _____ Date: , -------------------- ------- _____________________________________________________________1 (Signature of Owner) (Street Address) - ------------------------------------------------------------- (City) (State) (Zip Code) Signature Guaranteed by: - ------------------------------------------------------------ Securities and/or check to be issued to: Please insert social security or identifying number: Name: Street Address: City, State and Zip Code: A new Warrant Certificate evidencing any unexercised Warrants evidenced by the within Warrant Certificate is to be issued to: Please insert social security or identifying number: Name: Street Address: City, State and Zip Code: ASSIGNMENT FORM To assign this Warrant, fill in the form below: I or we assign and transfer this Warrant to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Warrant on the books of the Company. The agent may substitute another to act for him. - ----------------------------------------------------------------- Date: __________ Your Signature: _______________________ - ----------------------------------------------------------------- The signature must correspond with the name as written upon the face of the Warrant Certificate in every particular, without alteration or enlargement or any change whatever, and must be guaranteed by a national bank or trust company or by a member firm of any national securities exchange. EXHIBIT A Form of Face of Warrant Certificate TABLE OF CONTENTS ARTICLE I DEFINITIONS...................................................1 Section 1.01. Definitions......................................1 Section 1.02. Other Definitions................................3 Section 1.03. Rules of Construction............................4 ARTICLE II WARRANT CERTIFICATES.........................................4 Section 2.01. Form and Dating..................................4 Section 2.02. Execution and Countersignature...................4 Section 2.03. Warrant Registrar................................4 Section 2.04. Warrantholder Lists..............................5 Section 2.05. Transfer and Exchange............................5 Section 2.06. Replacement Certificate..........................7 Section 2.07. Outstanding Warrants.............................7 Section 2.08. Cancellation.....................................7 ARTICLE III EXERCISE TERMS..............................................8 Section 3.01. Exercise.........................................8 Section 3.02. Time of Exercise; Separability...................8 Section 3.03. Expiration.......................................8 Section 3.04. Manner of Exercise...............................8 Section 3.05. Issuance of Warrant Shares.......................9 Section 3.06. Fractional Warrant Shares........................9 Section 3.07. Reservation of Warrant Shares....................9 Section 3.08. Compliance with Law.............................10 Section 3.09 Obtaining Stock Exchange Listings................10 Section 3.10 No Dilution or Impairment........................10 ARTICLE IV ANTIDILUTION PROVISIONS.....................................11 Section 4.01. General.........................................11 Section 4.02. Adjustment for Common Stock Dividends...........11 Section 4.03. Adjustment for Issuances of Common Stock, Options, Warrants, Rights and Convertible or Exchangeable Securities................11 Section 4.04. Adjustment upon Subdivision, Reclassification or Combination of Common Stock..............................12 Section 4.05. Adjustments for Mergers, Consolidations, etc....12 Section 4.06. Other Events....................................13 Section 4.07. Certain Definitions..............................13 Section 4.08. Deferral of Certain Adjustments.................13 Section 4.09. Officers Certificate; Notice of Adjustment......13 Section 4.10. Right to Delay Issuance of Incremental Common Stock.....................................14 Section 4.11. Treasury Shares Disregarded.....................14 Section 4.12. No Adjustment for Certain Issuances.............14 Section 4.13. Notice of Certain Adjustments...................14 Section 4.14. Adjustment to Warrant Certificate...............14 Section 4.15. Certain Tax Matters.............................15 ARTICLE V MISCELLANEOUS................................................15 Section 5.01. Persons Benefiting..............................15 Section 5.02. Rights of Warrantholders........................15 Section 5.03. Amendment.......................................15 Section 5.04. Notices.........................................15 Section 5.05. Governing Law...................................16 Section 5.06. Successors......................................16 Section 5.07. Multiple Originals..............................16 Section 5.08. Table of Contents...............................16 Section 5.09. Severability....................................16 - -------- 1 The signature must correspond with the name as written upon the face of the Warrant Certificate in every particular, without alteration or enlargement or any change whatever, and must be guaranteed by a national bank or trust company or by a member firm of any national securities exchange. EX-10 7 ex10-4e_k.txt 3RD AMENDMENT TO ACQUISITION LINE EXHIBIT 10.4E THIRD AMENDMENT TO ACQUISITION LOAN AGREEMENT AND OTHER LOAN DOCUMENTS This THIRD AMENDMENT TO ACQUISITION LOAN AGREEMENT AND OTHER LOAN DOCUMENTS (this "Amendment"), dated as of December 29, 2004, is entered into by and between CAPITALSOURCE FINANCE LLC, a Delaware limited liability company, in its capacity as agent (in such capacity, "Agent") for the Lenders under the Loan Agreement referenced below, the Lenders party thereto, and INFOCROSSING, INC., a Delaware corporation ("Borrower"). R E C I T A L S: A. The Borrower, Agent and the Lenders have entered into that certain Acquisition Loan Agreement dated as of July 29, 2004 (as the same has been amended by that certain Amended and Restated Consent, Waiver and First Amendment to Acquisition Loan Agreement dated as of October 6, 2004 (the "First Amendment"), that certain Second Amendment to Acquisition Loan Agreement and Other Loan Documents dated as of November 8, 2004 (the "Second Amendment") and may further be amended, restated, supplemented or otherwise modified from time to time, the "Loan Agreement"). B. Borrower, Agent and the Lenders desire to amend and modify the First Amendment and the Second Amendment as herein set forth. NOW, THEREFORE, in consideration of the mutual agreements herein contained, and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto agree as follows: 1. Definitions. Capitalized terms used herein, including in the above recitals, but not elsewhere defined herein shall have the respective meanings ascribed to such terms in the Loan Agreement. 2. Amendments to First Amendment and the Second Amendment. The First Amendment and the Second Amendment hereby are amended as follows: (a) Section 4(c) of the First Amendment and Section 2.2(a) of the Second Amendment hereby is amended by deleting the date "December 31, 2004" and substituting "January 31, 2005" therefor. 3. Conditions to Effectiveness. The effectiveness of this Amendment shall be subject to the satisfaction of all of the following conditions in a manner, form and substance satisfactory to the Agent: (a) the representations and warranties contained herein and in all other Loan Documents, as amended hereby, shall be true and correct in all material respects as of the date hereof, except for such representations and warranties limited by their terms to a specific date; (b) no Default or Event of Default shall be in existence; (c) the Borrower shall have delivered to the Agent an executed original copy of this Amendment and each other agreement, document or instrument reasonably requested by the Agent in connection with this Amendment, each in form and substance reasonably satisfactory to Agent and Lenders; (d) the Borrower shall have paid all fees, costs and expenses owed to and/or incurred by the Agent and Lenders arising in connection with the Loan Documents and/or this Amendment; and (e) all proceedings taken in connection with the transactions contemplated by this Amendment and all documentation and other legal matters incident thereto shall be satisfactory to the Agent. 4. Loan Agreement in Full Force and Effect as Amended. Except as specifically amended hereby, the Loan Agreement and other Loan Documents, including the First Amendment and the Second Amendment, shall remain in full force and effect and hereby are ratified and confirmed as so amended. Except as expressly set forth herein, this Amendment shall not be deemed to be a waiver, amendment or modification of any provisions of the Loan Agreement or any other Loan Document, including the First Amendment and the Second Amendment, or any right, power or remedy of Agent or Lenders, or constitute a waiver of any provision of the Loan Agreement or any other Loan Document, including the First Amendment and the Second Amendment, or any other document, instrument and/or agreement executed or delivered in connection therewith or of any Default or Event of Default under any of the foregoing, in each case whether arising before or after the date hereof or as a result of performance hereunder or thereunder. Except as set forth herein, Agent and Lenders reserve all rights, remedies, powers, or privileges available under the Loan Agreement, the other Loan Documents (including the First Amendment and the Second Amendment), at law or otherwise. All references to the Loan Agreement shall be deemed to mean the Loan Agreement as modified hereby. This Amendment shall not constitute a novation or satisfaction and accord of the Loan Agreement and/or other Loan Documents (including the First Amendment and the Second Amendment), but shall constitute an amendment thereof. The parties hereto agree to be bound by the terms and conditions of the Loan Agreement and the other Loan Documents (including the First Amendment and the Second Amendment) as amended by this Amendment, as though such terms and conditions were set forth herein. Each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of similar import shall mean and be a reference to the Loan Agreement as amended by this Amendment, and each reference herein or in any other Loan Document (including the First Amendment and the Second Amendment) to the "Loan Agreement" or "Credit Agreement" shall mean and be a reference to the Loan Agreement as amended and modified by this Amendment. 5. Representations. Borrower hereby represents and warrants to Agent and Lenders as follows: (a) it is duly incorporated, validly existing and in good standing under the laws of Delaware; (b) the execution, delivery and performance by it of this Amendment and all other Loan Documents executed and/or delivered in connection herewith are within its powers, have been duly authorized, and do not contravene (i) its articles of incorporation, by-laws, or other organizational documents, or (ii) any applicable law; (c) no consent, license, permit, approval or authorization of, or registration, filing or declaration with, any Governmental Authority or other Person is required in connection with the execution, delivery, performance, validity or enforceability of this Amendment or any other Loan Documents executed and/or delivered in connection herewith by or against it; (d) this Amendment and all other Loan Documents executed and/or delivered in connection herewith have been duly executed and delivered by it; (e) this Amendment and all other Loan Documents executed and/or delivered in connection herewith constitute its legal, valid and binding obligation enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally or by general principles of equity; (f) after giving effect to this Amendment, it is not in default under the Loan Documents and no Default or Event of Default exists, has occurred and is continuing; and (g) the representations and warranties contained in the Loan Documents (including the First Amendment and the Second Amendment) as amended hereby are true and correct in all material respects as of the date hereof as if made on the date hereof, except for such representations and warranties limited by their terms to a specific date. 6. Miscellaneous. (a) This Amendment may be executed in any number of counterparts (including by facsimile), and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original instrument but all of which together shall constitute one and the same agreement. Each party agrees that it will be bound by its own facsimile signature and that it accepts the facsimile signature of each other party. The descriptive headings of the various sections of this Amendment are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof or thereof. Whenever the context and construction so require, all words herein in the singular number herein shall be deemed to have been used in the plural, and vice versa, and the masculine gender shall include the feminine and neuter and the neuter shall include the masculine and feminine. (b) This Amendment may not be changed, amended, restated, waived, supplemented, discharged, canceled, terminated or otherwise modified orally or by any course of dealing or in any manner other than as provided in the Loan Agreement. This Amendment shall be considered part of the Loan Agreement, the First Amendment and the Second Amendment, as applicable, and shall be a Loan Document for all purposes under the Loan Agreement and the other Loan Documents. (c) This Amendment, the Loan Agreement and the other Loan Documents (including the First Amendment and the Second Amendment) constitute the final, entire agreement and understanding between the parties with respect to the subject matter hereof and thereof and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements between the parties, and shall be binding upon and inure to the benefit of the successors and assigns of the parties hereto and thereto. There are no unwritten oral agreements between the parties with respect to the subject matter hereof and thereof. (d) THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE CHOICE OF LAW PROVISIONS SET FORTH IN THE LOAN AGREEMENT AND SHALL BE SUBJECT TO THE WAIVER OF JURY TRIAL AND NOTICE PROVISIONS OF THE LOAN AGREEMENT. (e) Borrower may not assign, delegate or transfer this Amendment or any of its rights or obligations hereunder. No rights are intended to be created under this Amendment for the benefit of any third party donee, creditor or incidental beneficiary of Borrower or any Guarantor. Nothing contained in this Amendment shall be construed as a delegation to Agent or Lenders of Borrower's or any Guarantor's duty of performance, including, without limitation, any duties under any account or contract in which Agent has or Lenders have a security interest or Lien. This Amendment shall be binding upon the Borrower and its successors and assigns. (f) Borrower shall pay all costs and expenses incurred by Agent and Lenders or any of their affiliates, including, without limitation, reasonable attorneys' fees and expenses, in connection with entering into, negotiating, preparing, reviewing and executing this Amendment and the documents, agreements and instruments contemplated hereby and all related agreements, documents and instruments, and all of the same shall be part of the Obligations. If Agent, any Lender or any of their affiliates uses in-house counsel for any of the purposes set forth above the Borrower expressly agrees that the Obligations include reasonable charges for such work commensurate with the fees that would otherwise be charged by outside legal counsel selected by such Person in its sole discretion for the work performed. (g) Borrower hereby (i) agrees that this Amendment shall not limit or diminish its obligations under the Loan Documents, (ii) reaffirms its obligations under each of the Loan Documents to which it is a party, and (iii) agrees that each of such Loan Documents, as amended hereby, remains in full force and effect and is hereby ratified and confirmed. (h) All representations and warranties made in this Amendment shall survive the execution and delivery of this Amendment and no investigation by Agent or Lenders shall affect such representations or warranties or the right of Agent or Lenders to rely upon them. (i) BORROWER ACKNOWLEDGES AND AGREES THAT (A) IT HAS NO CLAIMS, COUNTERCLAIMS, OFFSETS, CREDITS OR DEFENSES TO THE LOAN DOCUMENTS AND THE PERFORMANCE OF ITS OBLIGATIONS THEREUNDER, OR (B) IF IT HAS ANY SUCH CLAIMS, COUNTERCLAIMS, OFFSETS, CREDITS OR DEFENSES TO THE LOAN DOCUMENTS AND/OR ANY TRANSACTION RELATED TO THE LOAN DOCUMENTS AND/OR THE OBLIGATIONS, THE SAME ARE HEREBY WAIVED, RELINQUISHED AND RELEASED IN CONSIDERATION OF AGENT'S AND LENDERS' EXECUTION AND DELIVERY OF THIS AMENDMENT. [SIGNATURES APPEAR ON FOLLOWING PAGE] Third Amendment to Acquisition Loan Agreement and Other Loan Documents IN WITNESS WHEREOF, each of the parties has duly executed this Amendment as of the day and year first written above. INFOCROSSING, INC., a Delaware corporation, as Borrower By: /s/ Zach Lonstein ----------------- Name: Zach Lostein Title Chairman and Chief Executive Officer CAPITALSOURCE FINANCE LLC, as Agent and a Lender By: /s/ Joseph Turitz ----------------- Name: Joseph Turitz Title: General Counsel Corporate Finance Group EX-10 8 ex10-5_k.txt JOINDER AGREEMENT EXHIBIT 10.5 JOINDER TO SECURITY AGREEMENT October 1, 2004 The undersigned party hereby joins in the execution of that certain Guaranty and Security Agreement dated as of July 29, 2004 (as the same may be amended, restated, supplemented or otherwise modified an in effect from time to time, the "GUARANTY AND SECURITY AGREEMENT") by and among Infocrossing, Inc., a Delaware corporation, Infocrossing Southeast, Inc., a Georgia corporation formerly know as Amquest, Inc., ETG, Inc., a Delaware corporation, Infocrossing Services, Inc., a Delaware corporation, Infocrossing Services Southeast, Inc., a Georgia corporation formerly known as Amquest Services, Inc., Infocrossing West, Inc., a California corporation formerly know as ITO Acquisition Corporation, Infocrossing Services West, Inc., a California corporation, and each other Person that becomes an Obligor thereunder after the date and pursuant to the terms thereof, to and in favor of CapitalSource Finance LLC, a Delaware limited liability company, as Agent. By executing this Joinder to Guaranty and Security Agreement, the undersigned hereby agrees that it is a Guarantor and an Obligor thereunder with the same force and effect as if originally named therein as a Guarantor and an Obligor and agrees to be bound by all of the terms and provisions of the Guaranty and Security Agreement. Each reference to a Guarantor or an Obligor in the Guaranty and Security Agreement shall be deemed to include the undersigned. Capitalized terms used herein but not otherwise defined herein shall have the respective meanings ascribed thereto in the Guaranty and Security Agreement. The undersigned hereby represents and warrants to the Agent that: (a) the undersigned does not own any Commercial Tort Claim except for those disclosed on Schedule 2(d) hereto; (b) the principal place of business and chief executive office of the undersigned is as set forth on Schedule 5(a) hereto; (c) the undersigned has not, in the past four months, changed its name, been party to a merger, consolidation or other change in structure or used any tradename except as set forth in Schedule 5(a) hereto; (d) the location of all Collateral owned by the undersigned is as shown on Schedule 5(b) hereto; (e) except as set forth in Schedule 5(h) hereto, none of the undersigned's Copyrights, Patents or Trademarks is the subject of any licensing or franchise agreement; and (f) Schedule 5(h) hereto lists all of the undersigned's Copyright Licenses, Copyrights, Patent Licenses, Patents, Trademark Licenses and Trademarks. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the undersigned has duly executed this Joinder to Guaranty and Security Agreement as of the date first written above. INFOCROSSING HEALTHCARE SERVICES, INC., a Delaware corporation formerly known as Verizon Information Technologies Inc. By: /s/ Zach Lonstein ----------------- Name: Zach Lonstein Title: Chief Executive Officer EX-10 9 ex10-6b_k.txt ADDENDUM TO STOCK PLEDGE AGREEMENT EXHIBIT 10.6B ADDENDUM TO STOCK PLEDGE AGREEMENT INFOCROSSING, INC., a Delaware corporation ("PLEDGOR"), being a Pledgor pursuant to that certain Stock Pledge Agreement dated as of July 29, 2004 (as amended, restated, supplemented or otherwise modified from time to time, the "PLEDGE AGREEMENT") in favor of CapitalSource Finance LLC, as Agent ("SECURED PARTY"), by executing this Addendum, hereby acknowledges that Pledgor legally and beneficially owns all of the issued and outstanding shares of capital stock of INFOCROSSING HEALTHCARE SERVICES, INC., a Delaware corporation formerly known as Verizon Information Technologies Inc. (the "CORPORATION"). Pledgor hereby agrees and acknowledges that stock of the Corporation shall be deemed "Pledged Shares" pursuant to the Pledge Agreement and such Pledged Shares shall be deemed Pledged Collateral pursuant to the Pledge Agreement. Pledgor hereby represents and warrants to Secured Party that (i) all of the capital stock of Corporation now owned by Pledgor is presently represented by the stock certificates listed below, which stock certificates, with irrevocable proxies coupled with interest and undated stock powers duly executed in blank by Pledgor, are being delivered to Secured Party, simultaneously herewith, and (ii) after giving effect to this Addendum, the representations and warranties set forth in Section 3 of the Pledge Agreement are true, complete and correct as of the date hereof. Capitalized terms used herein but not otherwise defined herein shall have the respective meanings given to such terms in the Pledge Agreement.
- ---------------------------------------------------------------------------------------------------------------------- PLEDGOR PLEDGED SUBSIDIARY CLASS OR OTHER CERTIFICATE NUMBER NUMBER OF PLEDGED PERCENTAGE OF DESCRIPTION OF (IF APPLICABLE) SECURITIES TOTAL OUTSTANDING PLEDGED SECURITIES SECURITIES PLEDGED - ---------------------------------------------------------------------------------------------------------------------- Infocrossing, Inc. Infocrossing Healthcare Common 2 150 100% Services, Inc. - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS] Addendum to Stock Pledge Agreement IN WITNESS WHEREOF, the undersigned has caused this Addendum to Stock Pledge Agreement to be executed as of October 1, 2004. INFOCROSSING, INC., a Delaware corporation By: /s/ Zach Lonstein ----------------- Name: Zach Lonstein Title: Chief Executive Officer Acknowledgment of Addendum to Stock Pledge Agreement ACKNOWLEDGMENT The undersigned hereby (a) acknowledges receipt of a copy of the Stock Pledge Agreement dated as of July 29, 2004 (as amended, restated, supplemented or otherwise modified from time to time, the "PLEDGE AGREEMENT"), (b) waives any rights or requirement at any time hereafter to receive a copy of such Pledge Agreement in connection with the exercise of voting rights by Secured Party, and (c) agrees promptly to note on its books and records the transfer of the security interests in the equity interests of the undersigned as provided in such Pledge Agreement, including the following legend: PURSUANT TO THAT CERTAIN PLEDGE AGREEMENT, DATED AS OF JULY 29, 2004 (AS FROM TIME TO TIME AMENDED, RESTATED, SUPPLEMENTED OR OTHERWISE MODIFIED AND IN EFFECT FROM TIME TO TIME, THE "PLEDGE AGREEMENT"), INFOCROSSING, INC., A DELAWARE CORPORATION, HAS, UNDER THE CIRCUMSTANCES SPECIFIED IN SUCH PLEDGE AGREEMENT, EMPOWERED CAPITALSOURCE FINANCE LLC, A DELAWARE LIMITED LIABILITY COMPANY, AS AGENT FOR CERTAIN LENDERS, TO VOTE THE EQUITY INTERESTS REPRESENTED BY THIS CERTIFICATE PURSUANT TO SUCH PLEDGE AGREEMENT. Dated: October 1, 2004 INFOCROSSING HEALTHCARE SERVICES, INC., a Delaware corporation formerly known as Verizon Information Technologies Inc. By: /s/ Zach Lonstein ----------------- Name: Zach Lonstein Title: Chief Executive Officer EX-10 10 ex10-7e_k.txt ASSUMPTION AGREEMENT - CAPSOURCE EXHIBIT 10.7E MASTER ASSIGNMENT AND ASSUMPTION AGREEMENT This Master Assignment and Assumption Agreement (this "Agreement") is made as of February 13, 2004 by and among CapitalSource Finance LLC ("Assignee"), Infocrossing Agent, Inc., as agent for the several Lenders party to the Loan Agreement described below (in such capacity, the "Agent"), the Lenders listed on the signature pages hereto (collectively, the "Assignors"), Infocrossing, Inc., a Delaware corporation ("Borrower"), Infocrossing Services, Inc. a Delaware corporation ("ISI"), ETG, Inc., a Delaware corporation ("ETG"), AmQUEST, Inc. ("AQI"), a Georgia corporation, and AmQUEST Services, Inc., a Georgia corporation ("AQSI", and together with ISI, ETG and AQI, the "Subsidiaries"). All capitalized terms used in this Agreement and not otherwise defined herein will have the respective meanings set forth in the Loan Agreement. RECITALS: WHEREAS, each Assignor made certain Loans and other financial accommodations to Borrower pursuant to that certain Term Loan Agreement dated as of October 21, 2003 (the "Loan Agreement") by and among Agent, the Assignors and Borrower; WHEREAS, pursuant the terms and conditions hereof, each Assignor wishes to sell all of its respective rights, title and interests in the Loans (in the respective principal amounts set forth on Schedule I hereto under the column titled "Principal Amount on the Effective Date") and other Loan Obligations owing to it and all of its rights, title and interests in, to and under the Loan Agreement and other Loan Documents, and to assign and transfer all duties and obligations thereunder, to the Assignee in exchange for their respective Gross Purchase Proceeds (as defined below) and for other good and valid consideration, the receipt and sufficiency of which hereby are acknowledged; and WHEREAS, the Assignee is willing to acquire such Loans and other Loan Obligations and assume all rights, title and interests under the Loan Agreement and other Loan Documents as aforesaid, subject to the terms and conditions hereof. NOW, THEREFORE, in consideration of the foregoing premises and the agreements, provisions, and covenants herein contained, Agent, each Assignor, the Assignee and the Borrower hereby agree as follows: 1. ASSIGNMENT, DELEGATIONS, AND ACCEPTANCE 1.1 Conveyance of Loans and other Loan Obligations. Based on the representations, warranties and covenants contained herein, each Assignor hereby irrevocably sells and assigns to the Assignee, without recourse (except to the extent arising from a breach of a representation or warranty made by such Assignor hereunder), and the Assignee hereby irrevocably purchases and acquires, all of the right, title and interest, legal or equitable, of such Assignor in and to: (i) all of its Loans (and all proceeds thereof and collections thereon and including all interest and fees received or receivable by such Assignor, if any, with respect to such Loans and the other Loan Obligations relating to the period after the Effective Date (as defined herein) (it being hereby agreed that such Assignor shall hold all such proceeds in trust for the benefit of Assignee and shall turn over such proceeds promptly upon receipt thereof)); and (ii) all of the other Loan Obligations owing or payable to such Assignor, together with all right, title and interest in, to and under the Loan Documents, including its Commitment, and to the proceeds of any related insurance policies and the related Liens and Collateral securing such Loans and the other Loan Obligations (collectively, the "Assigned Interests;" provided, that, "Assigned Interests" of any Assignor shall not include, and such Assignor shall not be deemed to have relinquished, such Assignor's rights under Sections 2.7, 2.8(a), 2.9, 9.5(c) or 9.5(d) of the Loan Agreement to the extent such rights relate to the time prior to the Effective Date; provided, further, that, for the avoidance of doubt, the Assigned Interests of any Assignor shall not include, and nothing in this Agreement is intended to effect a sale or assignment by such Assignor of, the option to purchase up to 750,000 shares of Common Stock, par value $.01 per share, of the Borrower, currently owned by Zach Lonstein). By its execution of this Agreement, each Assignor agrees (i) it hereby relinquishes its rights with respect to its portion of the Assigned Interests and (ii) that after giving effect to the sale and assignment effectuated hereby, no Loans or other Loan Obligations (except to the extent expressly provided otherwise herein) are or will be owing to it and such Assignor no longer holds any Commitment. The parties hereto intend the sale of the Assigned Interests hereunder to be a true sale by each Assignor to the Assignee that is absolute and irrevocable and that provides the Assignee with the full and complete benefits of ownership of the Assigned Interests. The sale and assignment of the Assigned Interests hereunder is without representation or warranty, except as expressly provided in this Agreement. 1.2 Payment by the Assignee and Borrower. (a) The Assignee shall pay to each Assignor (or its designees) such Assignor's Gross Purchase Proceeds in accordance with this Section 1.2. (i) On the Effective Date and subject to the terms and conditions herein set forth, the Assignee shall pay to each Assignor by wire transfer, pursuant to the instructions contained on Schedule II hereto for such Assignor, not later than 3:00 p.m. (New York time), the amount set forth on Schedule I hereto opposite the name of such Assignor in the column titled "Net Purchase Price" (such Assignor's "Net Purchase Proceeds"), which Net Purchase Proceeds of such Assignor equals the amount by which (x) the gross purchase price set forth on Schedule I hereto opposite the name of such Assignor in the column titled "Gross Purchase Price" (each such amount with respect to an Assignor, its "Gross Purchase Proceeds"), exceeds (y) the sum of (I) such Assignor's pro rata portion of the $311,718.75 fee payable to Roth Capital Partners (the "Roth Fee") in connection with the transactions contemplated hereby (such Assignor's "Portion of the Roth Fee"), plus (II) such Assignor's pro rata portion of attorneys' fees in the amount of $25,000 owing to Paul, Weiss, Rifkind, Wharton & Garrison LLP (the "Legal Fee") in connection with the transactions contemplated hereby (such Assignor's "Portion of the Legal Fee"). (ii) On the Effective Date and subject to the terms and conditions herein set forth, Assignee shall pay (i) to Roth Capital Partners by wire transfer, pursuant to the instructions contained on Schedule II hereto for Roth Capital Partners, not later than 3:00 p.m. (New York time), the Roth Fee, and each Assignor hereby authorizes Assignee to make payment of its Portion of the Roth Fee in accordance with the terms hereof on behalf of such Assignor, and (ii) to Paul, Weiss, Rifkind, Wharton & Garrison LLP by wire transfer, pursuant to the instructions contained on Schedule II hereto for Paul, Weiss, Rifkind, Wharton & Garrison LLP, not later than 3:00 p.m. (New York time), the Legal Fee, and each Assignor hereby authorizes Assignee to make payment of its Portion of the Legal Fee in accordance with the terms hereof on behalf of such Assignor. Each Assignor agrees and acknowledges to and for the benefit of Assignee that receipt of the Roth Fee and the Legal Fee by the entities listed above shall constitute receipt by such Assignor of its pro rata share of such amounts for purposes of effectuating the assignment and assumption contemplated hereby. (b) On the Effective Date and subject to the terms and conditions herein set forth, Borrower shall pay to each Assignor by wire transfer, pursuant to the instructions contained on Schedule II hereto for such Assignor, not later than 3:00 p.m. (New York time), all accrued and unpaid interest through the date hereof in respect of such Assignor's Assigned Interest (the amount of which is set forth on Schedule I hereto opposite the name of such Assignor in the column titled "Accrued Interest Amount") (such Assignor's "Accrued Interest Amount"). 1.3 Acceptance by Assignee. As of the Effective Date, pursuant to this Agreement, the Assignee acknowledges its receipt and acceptance of the Assigned Interests and all other related interests in the Collateral and under the Loan Documents and hereby assumes all obligations and duties of each Assignor under the Loan Agreement and the other Loan Documents. The Assignee (i) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Loan Agreement and the other Loan Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto, and (ii) agrees that it shall perform all of the obligations which by the terms of the Loan Agreement are required to be performed by it as a Lender in accordance with their terms. 1.4 Consents to Assignment. By their respective signatures below, Agent, Borrower and each Subsidiary of Borrower hereby consent to the assignment described in Section 1.1 above whether or not in compliance with the terms of the Loan Agreement. 1.5 Agent's Fee. On the Effective Date, and subject to the terms and conditions herein contained, Borrower shall pay to the Agent by wire transfer of immediately available funds, pursuant to the instructions contained on Schedule II hereto for the Agent, no later than 3:00 p.m. (New York time), the amount of $4,000, constituting the registration and processing fee pursuant to Section 9.6(e) of the Loan Agreement. 2. REPRESENTATIONS, WARRANTIES AND COVENANTS 2.1 Assignee's Representations, Warranties and Covenants. Assignee hereby represents, warrants, and covenants to and for the benefit of each Assignor as follows: (a) This Agreement is a legal, valid, and binding agreement of Assignee, enforceable according to its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws affecting creditors' rights generally and general equitable principles (whether considered in a proceeding in equity or at law); (b) Assignee has full power and authority to enter into, execute, deliver and carry out the terms of this Agreement and to incur the obligations provided for herein, all of which have been duly authorized by all proper and necessary action and are not prohibited by the organizational instruments of Assignee; (c) Assignee is familiar with transactions of the kind and scope reflected in this Agreement, the Loan Agreement and the other Loan Documents; (d) Assignee has made its own independent investigation of the financial condition and affairs of the Borrower, has conducted its own evaluation of the Loan Agreement and the other Loan Documents and the Borrower's creditworthiness, has made its decision to consummate the transactions contemplated hereby independently and without reliance upon Assignors, and will continue to do so; (e) Assignee acknowledges and agrees that Assignors make no representation or warranty and assume no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Loan Agreement or with respect to the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Agreement, any other Loan Document or any other instrument or document furnished pursuant thereto, and (ii) except as set forth in Section 2.2(e), the performance or observance by Borrower or any of its Subsidiaries or Affiliates of any of their respective obligations under the Loan Agreement, any other Loan Document or any other instrument or document furnished to pursuant thereto; (f) Assignee has received a copy of the Loan Agreement, together with copies of financial statements delivered pursuant thereto, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Agreement; and (g) Assignee has total assets in excess of $5,000,000, as required pursuant to Section 9.6(c) of the Loan Agreement. 2.2 Assignors' Representations, Warranties and Covenants. Each Assignor hereby severally, and not jointly and severally, represents, warrants and covenants to and for the benefit of Assignee as follows: (a) such Assignor has full power and authority to enter into, execute, deliver and carry out the terms of this Agreement and to incur the obligations provided for herein, all of which have been duly authorized by all proper and necessary action and are not prohibited by the organizational instruments of such Assignor; (b) such Assignor is the legal and beneficial owner of its portion of the Assigned Interests and the Note, if any, delivered to Borrower by it pursuant to Section 1.2 above, free and clear of any adverse claim, Lien, encumbrance, security interest, restriction on transfer (other than those set forth in Section 9.6 of the Loan Agreement), purchase option, call or similar right of a third party; (c) this Agreement is a legal, valid and binding agreement of such Assignor, enforceable according to its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws affecting creditors' rights generally and general equitable principles (whether considered in a proceeding in equity or at law); (d) as of the Effective Date, the outstanding principal amount of the Loans made by such Assignor is equal to the Gross Purchase Price set forth on Schedule I hereto opposite the name of such Assignor in the column titled "Gross Purchase Price"; (e) as of the Effective Date, no Event of Default under Section 7(a) of the Loan Agreement has occurred and is continuing in respect of principal and/or interest owing to such Assignor; and (f) there are no Non-Excluded Taxes levied against such Assignor or otherwise in effect with respect to such Assignor, on the Closing Date in respect of its Loan Obligations. 3. CONDITIONS PRECEDENT 3.1 Effective Date. The assignments by the Assignors and the acceptances by Assignee effectuated under Sections 1.1, 1.2 and 1.3 above shall be and are effective, and Assignee will become and is a Lender with respect to the Assigned Interests under the Loan Agreement, upon the date (the "Effective Date") that all of the following conditions are satisfied: (a) The execution and delivery by each of the parties hereto of this Agreement. (b) Payment to each Assignor of its respective Net Purchase Proceeds and Accrued Interest Amount by the appropriate parties, payment to Roth Capital Partners of the Roth Fee pursuant to Section 1.2 and payment to Paul, Weiss, Rifkind, Wharton & Garrison LLP of the Legal Fee pursuant to Section 1.2. (c) Payment by Borrower to the Agent of the registration and processing fee pursuant to Section 1.5 of this Agreement. (d) Delivery to Borrower of all Notes issued, if any, to each Assignor under the Loan Agreement and the execution and delivery by Borrower to Assignee of a new promissory note(s) (the "New Notes") in the original aggregate principal amount of $24,937,500. (e) The acceptance and recording by the Agent in the Register of this executed Agreement, which acceptance and recording shall occur on the date hereof. (f) Payment by the Borrower of a non-refundable $25,000 closing and amendment fee to the Assignee, the receipt of which hereby is acknowledged by the Assignee. 4. EXPENSES AND FEES Borrower acknowledges that its obligations to reimburse reasonable expenses incurred by the Agent and the Assignors as provided under the Loan Agreement and the other Loan Documents shall survive the date hereof to the extent provided in the Loan Agreement or such Loan Document. 5. INDEMNIFICATION (a) (i) Borrower, for itself and on behalf of each of its Subsidiaries, hereby agrees, jointly and severally, to indemnify, pay, defend and hold harmless the Assignee and its officers, directors, employees, agents and attorneys from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments suits, claims, costs and expenses (including all reasonable fees and expenses of counsel to such Persons) of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against such Person arising out of or by reason of (x) any action or inaction by any Assignor or (y) any litigations, investigations, claims or proceedings which arise out of or are in any way related to the Loan Agreement or the other Loan Documents in each case, to the extent relating to any of the transactions occurring thereunder prior to the effectiveness of this Agreement, but excluding any and all liabilities, obligations, losses, damages, penalties, actions, judgments suits, claims, costs and expenses (including all reasonable fees and expenses of counsel to such Persons) of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against such Person to the extent arising out of or by reason of such Person's gross negligence or willful misconduct (collectively, the "Prior Claims"); and (ii) Borrower, for itself and on behalf of each of its Subsidiaries, hereby absolutely, fully, unconditionally, and irrevocably, releases, relieves, absolves, acquits, and discharges the Assignee and its officers, directors, employees, agents and attorneys from any and all Prior Claims, and Borrower and its Subsidiaries each acknowledges that no such Prior Claims are assumed by the Assignee hereunder or otherwise. (b) Borrower, for itself and on behalf of each of its Subsidiaries, hereby confirms that they shall remain obligated to each Assignor and, to the extent entitled under the Loan Documents, its Affiliates and the members, partners, directors, officers, employees, agents and advisors of such Assignor and its Affiliates with respect to its ongoing indemnification obligations under the Loan Documents which are for the benefit of "Lenders" (or such other Persons) thereunder, with respect to such Assignor's tenure as a Lender, to the extent such obligations expressly survive the payment of the Loans and/or the termination of the Loan Documents. 6. NOTICES The parties hereto expressly agree that the address set forth below Assignee's signature hereunder shall serve as Assignee's initial notice address under the Loan Agreement and the other Loan Documents. 7. AMENDMENTS AND WAIVERS No amendment, modification, termination, or waiver of any provision of this Agreement shall be effective without the written concurrence of each of the parties hereto. No delay on the part of any party hereto in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by any party hereto of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy. 8. SEVERABILITY; CONFLICTS; SECURITIES Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law. In the event any provision of this Agreement is or is held to be invalid, illegal, or unenforceable under applicable law, such provision will be ineffective only to the extent of such invalidity, illegality, or unenforceability, without invalidating the remainder of such provision or the remaining provisions of the Agreement. In addition, in the event any provision of or obligation under this Agreement is or is held to be invalid, illegal, or unenforceable in any jurisdiction, the validity, legality, and enforceability of the remaining provisions or obligations in any other jurisdictions will not in any way be affected or impaired thereby. In the event of any conflict between any term, covenant or condition of this Agreement and any term, covenant or condition of any of the Loan Documents, the provisions of this Agreement shall control and govern. For purposes of this Section 8, to the extent that any provisions of any of the Loan Documents provide rights, remedies and benefits to Assignee, as a Lender, that exceed the rights, remedies and benefits provided to Assignee under this Agreement, such provisions of the applicable Loan Documents shall be deemed to supplement (and not to conflict with) the provisions hereof. The transactions contemplated hereby represent commercial transactions and not investments and not transactions in securities for purposes of any securities laws. 9. SECTION TITLES Section and Subsection titles in this Agreement are included for convenience of reference only, do not constitute a part of this Agreement for any other purpose, and have no substantive effect. 10. SUCCESSORS AND ASSIGNS This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 11. GOVERNING LAW; JURISDICTIONS, SERVICE OF PROCESS, VENUE This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York without giving effect to its choice of law provisions. 12. WAIVER OF JUST TRIAL EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION ARISING UNDER THE LOAN DOCUMENTS OR IN ANY WAY CONNECTED WITH OR INCIDENTAL TO THE DEALINGS OF THE PARTIES WITH RESPECT TO THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY, WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENTS OF THE PARTIES TO THE WAIVER OF THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY. 13. COUNTERPARTS This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which, when so executed and delivered, will be deemed an original and all of which shall together constitute one and the same instrument. Any such counterpart which may be delivered by facsimile or electronic transmission shall be deemed the equivalent of an originally signed counterpart and shall be fully admissible in any enforcement proceedings regarding this Agreement. 14. FURTHER ASSURANCES Borrower, Assignee and each Assignor will, at the cost and expense of Borrower, cause to be promptly and duly taken, executed, acknowledged and delivered all such further acts, documents and assurances as may from time to time be necessary, or as any other party hereto from time to time reasonably may request, in order to carry out the intent and purposes of this Agreement and the transactions contemplated herein, including, but not limited to, executing any documents necessary to evidence the transfer of the Assigned Interests from the Assignors to Assignee. IN WITNESS WHEREOF, this Agreement has been duly executed as of the date first written above. Assignee: CAPITAL SOURCE FINANCE LLC By: /s/ JOSEPH TURITZ Name: Joseph Turitz Title: General Counsel Notice Address: 4445 Willard Avenue, 12th floor Chevy Chase, MD 20815 ========================= Assignor: MIDOCEAN CAPITAL INVESTORS, L.P., as a Lender By: MidOcean Capital Partners, L.P., its general partner By: Existing Fund GP, Ltd., its general partner By: /s/ TYLER T. ZACHEM Name: Tyler T. Zachem Title: ________________ Assignor: SANDLER CAPITAL PARTNERS V, L.P., as a Lender By: Sandler Investment Partners, L.P., General Partner By: Sandler Capital Management, General Partner By: MJDM Corp., a General Partner By: /s/ MORIA MITCHELL Name: Moria Mitchell Title: President Assignor: SANDLER CAPITAL PARTNERS V FTE, L.P., as a Lender By: Sandler Investment Partners, L.P., General Partner By: Sandler Capital Management, General Partner By: MJDM Corp., a General Partner By: /s/ MORIA MITCHELL Name: Moria Mitchell Title: President Assignor: SANDLER TECHNOLOGY PARTNERS SUBSIDIARY, LLC, as a Lender By: Sandler Technology Partners, L.P., Manager By: Sander Investment Partners, L.P., General Partner By: Sandler Capital Management, General Partner By: MJDM Corp., a General Partner By: /s/ MORIA MITCHELL Name: Moria Mitchell Title: President Assignor: SANDLER CO-INVESTMENT PARTNERS, L.P., as a Lender By: Sandler Capital Management, General Partner By: MJDM Corp., a General Partner By: /s/ MORIA MITCHELL Name: Moria Mitchell Title: President Assignor: SANDLER CAPITAL PARTNERS V GERMANY, L.P., as a Lender By: Sandler Investment Partners, L.P., General Partner By: Sandler Capital Management, General Partner By: MJDM Corp., a General Partner By: /s/ MORIA MITCHELL Name: Moria Mitchell Title: President Assignor: PRICE FAMILY LIMITED PARTNERS, as a Lender By: /s/ MICHAEL PRICE Name: Michael Price Title: ___________________________ AGREED TO AND ACCEPTED THIS 13th DAY OF FEBRUARY, 2004 Agent: INFOCROSSING AGENT, INC. By: /s/ TYLER T. ZACHEM Name: Tyler T. Zachem Title: _____________________ Borrower: INFOCROSSING, INC. By: /s/ WILLAIM J. McHALE Name: William J. McHale Title: Senior Vice President Subsidiaries: INFOCROSSING SERVICES, INC. By: /s/ WILLAIM J. McHALE Name: William J. McHale Title: Vice President ETG, INC. By: /s/ WILLAIM J. McHALE Name: William J. McHale Title: Vice President AMQUEST, INC. By: /s/ WILLAIM J. McHALE Name: William J. McHale Title: Vice President AMQUEST SERVICES, INC. By: /s/ WILLAIM J. McHALE Name: William J. McHale Title: Vice President SCHEDULE I TO ASSIGNMENT AGREEMENT Amounts Effective Date: February 13, 2004
- ------------------------------------- ----------------------- -------------------- -------------------- --------------------- Principal Amount on the Effective Date Net Purchase Price Gross Purchase Accrued Interest Assignor Price Amount - ------------------------------------- ----------------------- -------------------- -------------------- --------------------- MIDOCEAN CAPITAL INVESTORS, L.P. $12,489,572.81 $12,320,932.28 $12,489,572.81 $137,385.30 - ------------------------------------- ----------------------- -------------------- -------------------- --------------------- SANDLER CAPITAL PARTNERS V, L.P. $8,077,647.27 $7,968,578.79 $8,077,647.27 $88,854.12 - ------------------------------------- ----------------------- -------------------- -------------------- --------------------- SANDLER CAPITAL PARTNERS V FTE, L.P. $2,987,314.00 $2,946,977.77 $2,987,314.00 $32,860.45 - ------------------------------------- ----------------------- -------------------- -------------------- --------------------- SANDLER TECHNOLOGY PARTNERS $832,637.19 $821,394.50 $832,637.19 $9,159.01 SUBSIDIARY, LLC - ------------------------------------- ----------------------- -------------------- -------------------- --------------------- SANDLER CO-INVESTMENT PARTNERS, L.P. $208,153.31 $205,342.72 $208,153.31 $2,289.69 - ------------------------------------- ----------------------- -------------------- -------------------- --------------------- SANDLER CAPITAL PARTNERS V GERMANY, $300,554.73 $296,496.49 $300,554.73 $3,306.10 L.P. - ------------------------------------- ----------------------- -------------------- -------------------- --------------------- PRICE FAMILY LIMITED PARTNERS $41,620.69 $41,058.70 $41,620.69 $457.83 - ------------------------------------- ----------------------- -------------------- -------------------- --------------------- Total $24,937,500.00 $24,600,781.25 $24,937,500.00 $274,312.50 ============== ============== ============== =========== - ------------------------------------- ----------------------- -------------------- -------------------- ---------------------
SCHEDULE II TO ASSIGNMENT AGREEMENT Wire Transfer Instructions
- ------------------------------------------------------------ --------------------------------------------------------- Party Wire Transfer Instructions - ------------------------------------------------------------ --------------------------------------------------------- The Bank of New York MidOcean Capital Investors, L.P. New York, New York ABA No. 021-000-018 Account Name: Pershing LLC Account Number: 890-051238-5 Client Name: MidOcean Capital Investors, LP Client Account Number: 6TP-00271-1 Reference: Infocrossing Note Repayment - ------------------------------------------------------------ --------------------------------------------------------- Chase Manhattan Bank Sandler Capital Partners V, L.P. 1211 Avenue of the Americas NYC NY 10036 ABA 021-000-021 For further credit to: Sandler Capital Partners V, LP Acct 967-032903 Re: Infocrossing - ------------------------------------------------------------ --------------------------------------------------------- Chase Manhattan Bank Sandler Capital Partners V FTE, L.P. 1211 Avenue of the Americas NYC NY 10036 ABA 021-000-021 For further credit to: Sandler Capital Partners V FTE, LP Acct 967-816912 Re: Infocrossing - ------------------------------------------------------------ --------------------------------------------------------- Citibank Sandler Technology Partners Subsidiary, LLC 111 Wall St NYC NY 10005 ABA # 021-000-089 A/C Name - Morgan Stanley A/C # 388-90774 For Further Credit to: Sandler Technology Partners Subsidiary, L.P. A/C # 038-102907 Re: Infocrossing - ------------------------------------------------------------ --------------------------------------------------------- Sandler Co-Investment Partners, L.P. Chase Manhattan Bank 1211 Avenue of the Americas NYC NY 10036 ABA 021-000-021 For further credit to: Sandler Capital Management Acct 967-085071 Re: InfoCrossing - ------------------------------------------------------------ --------------------------------------------------------- Chase Manhattan Bank Sandler Capital Partners V Germany, L.P. 1211 Avenue of the Americas NYC NY 10036 ABA 021-000-021 For further credit to: Sandler Capital Partners V Germany, LP Acct 739-202375 - ------------------------------------------------------------ --------------------------------------------------------- Citibank NA Price Family Limited Partners NYC, NY 10043 ABA #21 000 089 FBO: Charles Schwab and Co. A/C# 405 539 53 For the Account of: The Price Family Limited Partnership Schwab A/C# 7221-0300 - ------------------------------------------------------------ --------------------------------------------------------- California Bank & Trust Roth Capital Partners 1940 Century Park East Los Angeles, CA 90067 ABA #121002042 FBO Roth Capital Partners LLC Account # 3640012901 - ------------------------------------------------------------ --------------------------------------------------------- Citibank, N.A. Paul, Weiss, Rifkind, Wharton & Garrison LP 111 Wall Street New York, NY 10005 ABA # 021-000089 Account No. 0652-6767 - ------------------------------------------------------------ --------------------------------------------------------- ABA # 021-000-018 Agent The Bank of New York New York, NY A/C Name: Pershing LLC A/C #: 890-051238-5 Client Name: InfoCrossing Agent, Inc. Client A/C #: 6TP-00965-8 - ------------------------------------------------------------ ---------------------------------------------------------
EX-10 11 ex10-13b_k.txt CORTENS RESIGNATION EXHIBIT 10.13B SETTLEMENT AND RELEASE AGREEMENT SETTLEMENT AND RELEASE AGREEMENT dated as of October 15, 2004 (this "AGREEMENT"), by and among INFOCROSSING, INC., a Delaware corporation (the "COMPANY") and Jim Cortens, an individual ("EXECUTIVE"). W I T N E S S E T H: - - - - - - - - - - WHEREAS the Company and Executive are parties to an Employment Agreement pursuant to which Executive serves as the Executive Vice President of the Company (the "Employment Agreement"); and WHEREAS certain events have occurred and certain disputes have arisen between the Company and Executive which have caused the Company and Executive to conclude that it is in their mutual best interests to terminate the employment relationship between them; and WHEREAS the Company and Executive do, in fact, desire to terminate their employment relationship and to settle any and all outstanding claims among them; and WHEREAS the Company and Executive acknowledge that this Agreement supercedes and replaces the Employment Agreement; WHEREAS, each party hereto, having been afforded the opportunity to be represented by counsel of its choice, has determined that a comprehensive and final settlement of any and all claims among them is in the parties mutual best interests. NOW THEREFORE, in consideration of the mutual covenants, agreements and releases set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, it is hereby agreed between the parties as follows: ARTICLE I DEFINITIONS As used herein, the following terms shall have the following meanings: "Affiliated Party" shall mean, with respect to any person or legal entity, any spouse, heir, executor, administrator, successor assignee, subsidiary, affiliate (as such term is defined under Rule 12b-2 under the Exchange Act), officer, director, shareholder employee, agent or representative (including any person or entity acting as legal counsel) of such person or legal entity. "Agreement" shall have the meaning set forth in the preamble hereto. "Applicable Law" means (a) any United States federal, state, local or foreign law, statute, rule, regulation, order, writ, injunction, judgment, decree or permit of any Governmental Authority and (b) any rule or listing requirement of any applicable national stock exchange or listing requirement of any national stock exchange or Commission recognized trading market on which securities issued by the Company is listed or quoted. "Executive" shall have the meaning set forth in the preamble hereto. "Claim" means any allegation, action, obligation, cause of action, right of action, suit, debt, dues, sum of money, account, reckoning, bond, bill, specialty, covenant, contract, controversy, agreement, promise, variance, trespass, damages, judgment, expense, execution, claim or demand whatsoever, whether in law, equity or admiralty and whether in contract or in tort. "Closing Date" shall mean the date that is eight days after the execution and delivery of this Agreement by each of the parties hereto. "COBRA" means Section 4980B of the Internal Revenue Code of 1986, as amended, and Part 6 of Subtitle B of Title I of the Employee Retirement Income Security Act of 1974, as amended. "Commission" means the United States Securities and Exchange Commission. "Company" shall have the meaning set forth in the preamble hereto. "Confidential Information" shall have the meaning set forth in Section 4.3 hereof. "Employment Agreement" shall have the meaning set forth in the recitals hereto. "Governmental Authority" means (i) any foreign, federal, state or local court or governmental or regulatory agency or authority, (ii) any arbitration board, tribunal or mediator and (iii) any national stock exchange or Commission recognized trading market on which securities issued by the Company are listed or quoted. "Person" means any individual, partnership, corporation, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or government or agency or political subdivision thereof, or other entity. ARTICLE II TERMS OF SETTLEMENT Section 2.1. Salary and Benefits; Termination of Employment. The Company shall pay to Executive all of his normal base salary (but not any bonus) and benefits through October 15, 2004. Said payments shall be in the ordinary course of the Company's business and in accordance with customary practices. The parties hereto agree that October 15, 2004, shall be deemed to be Executive's last day of employment by the Company and that his employment shall be deemed to have terminated as of 5:00 p.m. Pacific Daylight Time. The Company shall pay to Executive, in each case less applicable withholdings, $16,134.62 representing deferred salary and $20,627.40 representing accumulated, but unused, paid time-off of 171.62 hours. The unused paid time-off includes the amount accrued by ITO Acquisition Corporation d/b/a Systems Management Specialists ("SMS") as of the time that the Company acquired SMS. Although the Company believes that Executive waived his right to the amount representing deferred salary and the level of unused paid time-off does not properly reflect actual time-off taken by Executive, the Company waives any Claim with respect thereto. Executive agrees the determination of the gross sums payable with respect to deferred salary and unused paid time-off are correct. The Company also shall pay to Executive as severance (a) $93,750, less applicable withholdings, and (b) nine monthly payments of $10,416.67, less applicable withholdings, (the "Monthly Severance Payments") beginning on November 15, 2004; provided, however, that no Monthly Severance Payments shall be due with respect to which Executive has entered into an employment relationship with any other party. All parties agree that Executive shall have no claim for any item of compensation (including, without limitation, any salary, bonus, accrued and unused vacation pay or benefits) for any period after October 15, 2004, except as expressly set forth in this Agreement. Section 2.2. Medical Insurance. From and after the date the Closing Date through the earlier to occur of (a) July 15, 2005 or (b) the date on which Executive obtains employment with another employer pursuant to which he is eligible to receive, the Company shall pay the cost of any COBRA or equivalent coverage elected by Executive under the Company's existing employee medical insurance coverage. Executive hereby agrees that he shall, within seven days of obtaining alternate employment pursuant to which he is eligible to receive medical insurance, notify the Company that he has obtained such employment and the Company's obligation to provide medical insurance hereunder shall thereafter cease. Section 2.3. Resignations; Compensation Matters. Executive hereby agrees that, on the Closing Date, he shall resign each of his positions as an employee, officer, director, agent or representative of the Company (including, but not limited to all positions or memberships in trade associations, if any, held solely by virtue of his affiliation with the Company). From and after the Closing Date, Executive will not represent himself as being affiliated with the Company in any capacity whatsoever. In furtherance and not in limitation of this Section 2.3, on the Closing Date Executive shall execute and deliver to the Company a resignation letter substantially in the form of Exhibit A attached hereto. Executive acknowledges that, as of the Closing Date, he has no disagreement with the Company on any matter relating to the Company's operations, policies or practices, including without limitation, with respect to any accounting matters and Executive affirms that he has not complained of and is not aware of any fraudulent activity or any act(s) which would form the basis of a claim of fraudulent or illegal activity by the Company. Section 2.4. Reimbursement of Reasonable Business Expenses. The Company shall reimburse Executive for the reasonable business expenses incurred in carrying out his duties and responsibilities as the Company's Executive Vice President under the Employment Agreement through October 15, 2004 upon presentation of expense reports and such supporting documentation as the Company customarily requires of its executives in accordance with the Company's policies for reimbursement of business expenses incurred by the Company's employees and officers. Section 2.5. No Further Compensation or Benefits. It is the intention of the parties that all obligations they are undertaking in settlement of their disputes are fully set forth in this Agreement, together with the Exhibits hereto, and that, notwithstanding anything to the contrary set forth in the Employment Agreement or elsewhere, no further compensation or benefits shall be due Executive from the Company or any of its Affiliated Parties. Executive and the Company each shall bear their own expenses incurred in connection with the negotiation and preparation of the Agreement. ARTICLE III MUTUAL RELEASES Section 3.1. Release by Executive. Except for obligations specifically undertaken pursuant to this Agreement or any Exhibit hereto, Executive hereby releases and discharges each of the Company and its Affiliated Parties from all Claims which either Executive and/or any of his Affiliated Parties ever had, now have, or hereafter can, shall, or may have for, upon or by reason of the Employment Agreement. Nothing in this Agreement shall affect the respective rights and/or duties of the Company or Executive under that certain Stock Option Agreement under the Infocrossing, Inc. 2002 Stock Option and Stock Appreciation Rights Plan dated April 2, 2004, between the Company and the Executive. Section 3.2. Release by the Company. Except for obligations specifically undertaken pursuant to this Agreement or any Exhibit hereto, the Company hereby releases and discharges Executive and each of his Affiliated Parties from all Claims which the Company and/or any of its Affiliated Parties ever had, now have, or hereafter can, shall, or may have for, upon or by reason of the Employment Agreement, including any Claim for breach of contract or any Claim for costs, fees or other expenses, including attorneys fees, incurred in relation to the Employment Agreement. Section 3.3. Indemnification Rights. Notwithstanding any of the foregoing, the Company hereby agrees that Executive shall not forfeit any of his rights to indemnification to which he may be entitled in his capacity as an officer, director or employee of the Company for any actions taken by him in his capacity as an officer, director or employee of the Company during the time that he was employed by the Company. ARTICLE IV SPECIAL RELEASES OF EXECUTIVE & COVENANTS Section 4.1. Employment Related Releases. In exchange for and in order to induce the Company to release any Claims the Company may have against him pursuant to the Employment Agreement and to induce the Company to make the payments set forth in Article II of this Agreement, effective as of the Closing Date, Executive, hereby releases and waives any and all Claims that he and his Affiliated Parties may have against the Company and its Affiliated Parties, known or unknown, existing or claimed to exist with respect to all matters relating to his employment, and separation from employment, with the Company, including, but not limited to, all allegations, Claims or violations related to severance, notice of termination, the payment of salary or benefits and all Claims arising under the following, in each case as amended: Title VII of the Civil Rights Act of 1964, as amended; The Civil Rights Act of 1991; Sections 1981 through 1988 of Title 42 of the United States Code, as amended; The Employee Retirement Income Security Act of 1974, as amended; The Immigration Reform and Control Act, as amended; The Equal Pay Act of 1963; The Family and Medical Leave Act of 1993; the Civil Rights Act of 1866; The Americans with Disabilities Act of 1990, as amended; THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, AS AMENDED; The Older Workers Benefits Protection Act, as amended; The Workers Adjustment and Retraining Notification Act, as amended; The Occupational Safety and Health Act, as amended; The Sarbanes-Oxley Act of 2002; any Applicable Executive Order programs; California Family Rights Act - Cal. Govt. Code ss. 12945.2 et seq.; California Fair Employment and Housing Act-Cal. Gov't Code ss. 12900 et seq.; California Unruh Civil Rights Act-Civ. Code ss. 51 et seq.; California Sexual Orientation Bias Law-Cal. Lab. Code ss.1101 et seq.; California AIDS Testing and Confidentiality Law-Cal. Health & Safety Code ss.120775 et seq. and ss.120975 et seq.; California Confidentiality of Medical Information-Cal. Civ. Code ss.56 et seq.; California Smokers' Rights Law-Cal. Lab. Code ss.96; California Parental Leave Law-Cal. Lab. Code ss.230.7 et seq.; California Apprenticeship Program Bias Law-Cal. Lab. Code ss.3070 et seq.; California Wage Payment Act, as amended; California Equal Pay Law-Cal. Lab. Code ss.1197.5 et seq.; California Whistleblower Protection Law-Cal. Lab. Code ss. 1102-5(a) to (c); California Military Personnel Bias Law-Cal. Mil. & Vet. Code ss.394 et seq.; California Family and Medical Leave-Cal. Lab. Code ss.233; California's Rehabilitation Leave--Cal. Lab. Code ss. 1025; California Parental Leave for School Visits Law-Cal. Lab. Code ss.230.7 et seq.; California Electronic Monitoring of Employees-Cal. Lab. Code ss.435 et seq.; California Occupational Safety and Health Act, as amended, California Labor Code ss.6300 ET SEQ., and any applicable regulations thereunder; California Consumer Reports: Discrimination Law-Cal. Civ. Code ss.1786.10 et seq.; California Political Activities of Employees Act-Cal. Lab. Code ss.1101 et seq.; California Domestic Violence Victim Employment Leave Act-Cal. Lab. Code ss.230.1; California Time Off For Victims of Crime--Ca. Labor Code ss. 230.2; California Voting Leave Law-Cal. Elec. Code ss.14350 et seq.; California Court Leave Law-Cal. Lab. Code ss.230; California Volunteer Firefighter/Emergency Personnel Leave--Ca. Labor Code ss. 230.3;Los Angeles AIDS-Based Discrimination Ordinance, Los Angeles Municipal Ordinance ss.45.80 et seq.; the New Jersey Law Against Discrimination (N.J.S.A. 10:5-12); New Jersey Family Leave Act; New Jersey State Wage and Hour Law; New Jersey Conscientious Employee Protection Act; New Jersey Equal Pay Law; New Jersey Occupational Safety and Health Law; New Jersey Genetic Privacy Act; New Jersey Smokers' Rights Law; New Jersey Tobacco Use Discrimination Law; New Jersey laws regarding Political Activities of Employees, Lie Detector Tests, Jury Duty, Employment Protection, and Discrimination; any other federal, state or local civil or human rights law or any other local, state or federal law, regulation or ordinance; United States, California, and New Jersey Constitutions; or any other federal, state or local statute or ordinance; or under any public policy, contract or tort, or under common law; for wrongful discharge; or arising under any practices or procedures of the Company or its Affiliated Parties; or any Claim for breach of contract, infliction of emotional distress, defamation, or any Claim for costs, fees or other expenses, including attorneys fees, incurred in these matters. Section 4.2. WAIVER OF UNKNOWN CLAIMS. This is a full and final release covering all unsuspected, unknown, undisclosed and unanticipated losses, wrongs, injuries, debts, claims or damages to Executive which may have arisen, or may arise, from any act or omission prior to the date of execution of this Agreement, and which arise out of or are related, directly or indirectly, to Executive's dealings with Company or its Affiliated Parties or any matters in Section 4.1 above. Therefore, Employee waives any and all rights or benefits which he may now have, or in the future may have, under the terms of Section 1542 of the California Civil Code, which provides as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. Executive acknowledges that he has read this Agreement, including the waiver of California Civil Code Section 1542, that Executive understands the Agreement and the Section 1542 waiver, and so freely and knowingly enters into this Agreement. Executive acknowledges that he may hereafter discover facts different from or in addition to those he knows or now believes to be true with respect to the matters released or described in this Agreement, and he agrees that the releases and agreements contained herein shall be and will remain effective in all respects notwithstanding any later discovery of any such different or additional facts. Executive hereby assumes any and all risk of any mistake in connection with the true facts involved in the matters, disputes, or controversies described herein or with regard to any facts which are now unknown to Executive relating thereto. Section 4.3. Consideration Period; Waiver. Executive acknowledges that he has been advised that he is entitled to at least 21 days to consider this Agreement. Executive agrees that any modifications, material or otherwise, made to this Agreement do not restart or affect in any manner the original 21 calendar day consideration period. In the event that he executes and delivers this Agreement prior to the expiration of the 21 day period, Executive hereby agrees such execution and delivery shall constitute a waiver of the balance of said period. Section 4.4. Acknowledgment of Executive Regarding Consideration. Executive hereby acknowledges and agrees that he has received good and valuable consideration for entering into this Agreement. Section 4.5. Confidential Information. (a) Executive hereby agrees, that except as may be required by law, to hold in strictest confidence and to not directly or indirectly publish, disseminate or otherwise disclose or allow to be disclosed, any "Confidential Information" (as defined below); PROVIDED, HOWEVER, that Executive shall have no obligation to maintain in confidence any information that is or becomes publicly available through no fault of himself. "Confidential Information" shall mean business or proprietary information (including, without limitation, business plans, financial information and other subject matter pertaining to any business of the Company or any of its affiliates) that is not commonly known in the industry. Confidential Information shall also include, for example and without limitation, confidential knowledge, data, financial information or data, marketing techniques and material, business plans, methods and strategies (whether or not patentable or reduced to practice), business operations and systems, software, computer code, flow charts, pricing policies, information concerning employees, customers and/or vendors, trade secrets, discoveries, inventions (whether or not patentable or reduced to practice), improvements, research, scientific engineering information, development, databases, know-how, show-how, designs, products, compositions, original works of authorship, prototypes, maskworks, physical materials, manufacturing processes and other information disclosed or submitted orally, in writing, or by any other media. The Confidential Information as set forth above may be in any form, including but not limited to, any intangible form such as unrecorded knowledge, information, ideas or concepts, or may be embodied in equipment or other tangible form such as documents, drawings, photographs, computer code, software or other printed or electronic media. (b) Executive agrees that a breach of his obligations contained in this Section 4.5 would cause irreparable damage to the Company and any of its affiliates, the exact amount of which will be difficult to ascertain and that the remedies at law for any such breach will be inadequate. Accordingly, Executive agrees that if he breaches any of his obligations contained in the Section 4.5, in addition to any other remedy which may be available at law or in equity, the Company shall be entitled to specific performance and injunctive relief, without a showing that monetary damages will not provide an adequate remedy and without being required to post a bond. Section 4.6. Non-Solicitation. (a) Executive agrees and acknowledges that for a period of twelve (12) months after October 15, 2004, Executive shall not, either directly or indirectly, personally, or on behalf of or in conjunction with any person or firm, divert or take away any client or customer of the Company or solicit, induce, facilitate, recruit, encourage or cause any employee, consultant, contractor, agent or representative of the Company, to leave their employment or engagement with the Company for any reason. Company and Executive acknowledge that restrictions on solicitation do not apply to Patrick A. Dolan who concurrently herewith is entering into a separate severance agreement with the Company. As indicated in Section 8(b) of the Employment Agreement, Executive acknowledged that the foregoing non-solicitation covenant was given, in part, in connection with and in consideration of the Company's acquisition of ITO Acquisition Corporation, now known as Infocrossing West, Inc., pursuant to a Stock Purchase Agreement dated as of March 3, 2004 between the Company and ITO Holdings, LLC, a California limited liability company in which Executive holds a member interest. (b) Executive agrees that a breach of his obligations contained in this Section 4.6 would cause irreparable damage to the Company and any of its affiliates, the exact amount of which will be difficult to ascertain and that the remedies at law for any such breach will be inadequate. Accordingly, Executive agrees that if he breaches any of his obligations contained in the Section 4.6, in addition to any other remedy which may be available at law or in equity, the Company shall be entitled to specific performance and injunctive relief, without a showing that monetary damages will not provide an adequate remedy and without being required to post a bond. Section 4.7. Return of Company Property. Executive agrees to return to the Company any and all documents, materials, records, computer disk or other items in his possession or control belonging to the Company or containing Confidential Information relating to the Company, to surrender to the Company any identification or credit cards, keys, telephones, equipment or other such items owned by the Company or within the lawful possession of the Company. Section 4.8. Continued Assistance. Executive agrees if requested by the Company, in the Company's sole discretion, to provide reasonable assistance during normal business hours during the period ending on July 15, 2005 (the "Severance Period") with the transition of management of the Company or any subsidiary of the Company including, but not limited to, matters involving customers, human resources, vendors, financial, strategic, marketing, sales, and supplier matters as well as acquisitions with respect to which the company or business acquired is owned directly or indirectly by the Company. Such reasonable assistance during the Severance Period shall not exceed twenty five (25) hours per month; provided, however, if the Company does not use the full twenty five (25) hours available for a particular month, any unused hours shall be available for use by the Company in a subsequent month. Any continued assistance provided hereunder shall be without additional compensation except Company shall reimburse Executive for reasonable out-of-pocket costs and expenses incurred in connection with the rendering of any such assistance. Executive shall obtain Company's pre-approval of any such expenses and Company shall not unreasonably withhold approval of such expenses. Notwithstanding anything to the contrary, however, Executive will not be obligated to provide such assistance hereunder after July 15, 2005. Section 4.9. Expense Reports. Within 15 calendar days of the Closing Date], Executive will submit all expense reports and supporting documentation for the reasonable business expenses incurred in carrying out his duties and responsibilities as the Company's Executive Vice President under the Employment Agreement through October 15, 2004. Executive agrees that the Company will not be obligated to consider reimbursement of any expenses not reflected in such reports, time being of the essence. ARTICLE V CERTAIN MATTERS Section 5.1. Representation by Counsel. Each party hereto acknowledges that, at all times during the negotiation and preparation of this Agreement, including, but not limited to the releases contained in Articles III and IV hereof such party has been represented by counsel of its choice, that such party understands the contents of this Agreement and its binding effect, that such party has reviewed this Agreement with its counsel prior to the execution and delivery hereof, and intends to knowingly and voluntarily release the Claims released hereby as of the Closing Date. Section 5.2. Right of Revocation. Executive shall have seven (7) days following the execution of this Agreement to revoke this Agreement and this Agreement shall not become effective or enforceable and the Closing Date shall not occur until such revocation period has expired. Any revocation within this period shall be submitted in writing to the Board of Directors, as set forth in Section 7.5. The revocation must be in writing and must be personally delivered, or mailed and post marked, within seven (7) days of the execution and delivery of this Agreement. No payments provided for herein will be made until the Closing Date. If this Agreement is revoked by Executive during such revocation period, then this Agreement shall be void and of no effect. At the Closing Date, and in the absence of a revocation under this Section 5.2, Executive will confirm that he has elected not to revoke this Agreement by delivering a letter to the Company in the form attached as Exhibit B. Section 5.3. No Release of Claims for Failure to Perform this Agreement. For the avoidance of doubt, each party expressly acknowledges and agrees that no party hereto is releasing any Claim arising out of the failure of any party hereto to perform any obligation which such party is expressly required to perform under this Agreement. ARTICLE VI REPRESENTATIONS AND WARRANTIES Section 6.1. Representations and Warranties of Executive. Executive hereby represents and warrants to the Company on the date hereof and on and as of the Closing Date as follows: (a) Capacity. Executive has full capacity to enter into this Agreement and this Agreement constitutes his valid and legally binding obligation, enforceable in accordance with its terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, and (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies. (b) No Violation; Consents. The execution, delivery and performance by Executive of this Agreement does not and will not contravene any Applicable Law to which he is subject. The execution, delivery and performance by Executive of this Agreement will not violate, result in a breach of or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under any contract to which Executive is a party or by which Executive is bound or to which any of his assets is subject. (c) No Known Third Party Claims. Executive is not aware of any third party Claims or potential Claims which individually or in the aggregate are material to the Company which could be reasonably asserted against the Company or its subsidiaries, officers, directors or employees as a result of actions taken by Executive while acting as an officer or director of the Company. Section 6.2. Representations and Warranties of the Company. The Company hereby represents and warrants to each Purchaser on the date hereof and on and as of the Closing Date as follows: (a) Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. (b) Authorization. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement and the performance of all obligations of the Company hereunder has been taken or will be taken prior to the Closing, and this Agreement constitutes, or will, upon execution hereof by the parties hereto, constitute, a valid and legally binding obligation of the Company, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, and (ii) as limited by laws and principles relating to the availability of specific performance, injunctive relief, or other equitable remedies. (c) No Violation; Consents. The execution, delivery and performance by the Company of this Agreement does not and will not contravene any Applicable Law. The execution, delivery and performance by the Company of this Agreement will not (i) violate, result in a breach of or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under any contract to which the Company is a party or by which the Company is bound or to which any of its assets is subject and (ii) will not conflict with or violate any provision of the certificate of incorporation or by-laws or other governing documents of the Company. (d) No Known Third Party Claims. The Company is not aware of any third party Claims or potential Claims which individually or in the aggregate are material to Executive which could reasonably be asserted against Executive as a result of actions taken by the Company in respect of Executive during the time Executive was acting as an officer or director of the Company. ARTICLE VII MISCELLANEOUS Section 7.1. Expenses. The parties hereto shall pay all of their own expenses relating to the transactions contemplated by this Agreement, including, without limitation, the fees and expenses of their respective counsel. Section 7.2. Governing Law. The interpretation and construction of this Agreement, and all matters relating hereto, shall be governed by the laws of the State of California applicable to agreements executed and to be performed solely within such State. Section 7.3. Jurisdiction. Any judicial proceeding brought against any of the parties to this Agreement on any dispute arising out of this Agreement or any matter related hereto may be brought in the courts of the State of California, or in the United States District Courts in California, and, by execution and delivery of this Agreement, each of the parties to this Agreement consents to and accepts the exclusive jurisdiction of such courts, and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. Section 7.4. Captions. The Article and Section captions used herein are for reference purposes only, and shall not in any way affect the meaning or interpretation of this Agreement. Section 7.5. Notices. Any notice or other communication required or permitted under this Agreement shall be sufficiently given if delivered in person or sent by telecopy or by registered or certified mail, postage prepaid, addressed as follows: If to the Company: Infocrossing, Inc. 2 Christie Heights Leonia, NJ 07605 Attention: Chairman of the Board If to Executive: Jim Cortens c/o McDermott Will & Emery LLP 18191 Von Karman Avenue Suite 400 Irvine, CA 92612-7107 Attention: Thomas K. Brown, Esq. Section 7.6. Parties in Interest. This Agreement may not be transferred, assigned, pledged or hypothecated by any party hereto, other than by operation of law. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective Affiliated Parties. Section 7.7. Counterparts. This Agreement may be executed in two or more counterparts, all of which taken together shall constitute one instrument. Section 7.8. Entire Agreement. This Agreement, including the other documents referred to herein which form a part hereof, contains the entire understanding of the parties hereto with respect to the subject matter contained herein and therein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. Section 7.9. Amendments. This Agreement may not be changed orally, but only by an agreement in writing signed by each of the parties hereto which makes specific reference to this Agreement. Section 7.10. Severability. It is the desire and intent of the parties that this Agreement, including, without limitation, the mutual releases contained herein, shall be enforced to the fullest extent permissible under the laws of the State of California. If any particular provision or portion of any provision hereof, including, without limitation, any of the mutual releases contained herein, shall be adjudicated to be invalid or unenforceable, this Agreement shall be deemed to be amended to delete herefrom any such provision or portion so adjudicated in a manner calculated to give maximum effect to the remaining provisions of this Agreement; PROVIDED that the essence of this Agreement can be maintained. No such deemed amendment of this Agreement shall in any way whatsoever affect or impair the validity, legality and enforceability of the remaining provisions hereof. Section 7.11. Confidentiality. (a) The Company, through its respective officers and directors, covenant and agree that they shall not knowingly issue, participate in or cause (in whole or in part) the release of any adverse information or adverse statements relating to Executive or this Agreement or the circumstances surrounding this Agreement to anyone (including but not limited to any person or entity in the business trade, media or public) except to each of their counsel, accountants or agents or as required by law or upon the prior written consent of Executive. Notwithstanding, the foregoing within two business days after the Closing Date, the Company shall cause to filed with the Commission a Form 8-K announcing the resignation of Executive and attaching this Agreement as an Exhibit thereto. (b) Executive covenants and agrees that he shall not knowingly issue, participate in or cause (in whole or in part) the release of any adverse information or adverse statements relating to the Company and its affiliates and their respective officers and directors or this Agreement or the circumstances surrounding this Agreement to anyone (including, but not limited to any person or entity in the business trade, media or public) except to each of his counsel or accountant or as required by law or upon the prior written consent of the Company. IN WITNESS WHEREOF, the Company has caused its corporate name to be hereunto subscribed by its officer thereunto duly authorized, and Executive has signed this Agreement, all as of the day and year first above written. INFOCROSSING, INC. By: /s/-ZACH LONSTEIN Name: Zach Lonstein Title: Chairman & Chief Executive Officer /s/ JIM CORTENS Jim Cortens EXHIBIT A FORM OF RESIGNATION LETTER [Letterhead of Jim Cortens] ___________ __, 2004 Infocrossing, Inc. 2 Christie Heights Street Leonia, New Jersey 07605 Attention: Board of Directors Gentlemen: Effective immediately, I hereby resign any and all positions which I may hold as an officer, director, agent, employee or other representative of Infocrossing, Inc (the "Company"). In addition, I hereby acknowledge that, as of the date hereof, I have no disagreement with the Company on any matter relating to the Company's operations, policies or practices, including without limitation, with respect to any accounting matters. Further, I hereby affirm that I have not complained of nor am I aware of any fraudulent activity or any act(s) which would form the basis of a claim of fraudulent or illegal activity by the Company. Yours truly, ------------------------------- Jim Cortens EXHIBIT B [Letterhead of Jim Cortens] October __, 2004 Infocrossing, Inc. 2 Christie Heights Street Leonia, New Jersey 07605 Attention: Board of Directors Gentlemen: On ______________ [date] I executed a Settlement and Release Agreement between Infocrossing, Inc. (the "Company") and me. I was advised by the Company, in writing, to consult with an attorney of my choosing, prior to executing this Settlement and Release Agreement. More than seven (7) calendar days have elapsed since I executed the above-mentioned Settlement and Release Agreement. I have at no time revoked my acceptance or execution of that Agreement and hereby reaffirm my acceptance of that Settlement and Release Agreement. Therefore, in accordance with the terms of our Settlement and Release Agreement, I hereby request payment of the monies described in Article II of that Agreement. Yours truly, ------------------------------- Jim Cortens EX-10 12 ex10-14_k.txt LUEBKE EMPLOYMENT AGREEMENT EXHIBIT 10.14 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of October 1, 2004 by Michael J. Luebke ("Executive"), and Infocrossing Healthcare Services, Inc., a Delaware corporation (the "Company"). RECITALS WHEREAS, the Company desires to employ Executive and to enter into this Agreement embodying the terms of such employment; and WHEREAS, Executive desires to enter into this Agreement and to accept employment with the Company, subject to the terms and conditions of this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the promises and the mutual covenants and agreements set forth herein and for other good and valuable consideration, the adequacy and receipt of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment. The Company hereby agrees to employ Executive, and Executive hereby agrees to be employed by the Company, on an at-will basis on the terms and conditions set forth in this Agreement. 2. Position and Duties. (a) Position. During the term of his employment by the Company, Executive shall serve as the President and report directly to the Board of Directors of the Company. (b) Duties. Executive shall have such duties and authority consistent with the position of President as shall be assigned to him from time to time by the Board of Directors. Executive shall devote his full business time, attention, skill and best efforts to the performance of his duties under this Agreement and shall not engage in any other business or occupation while employed by the Company. Notwithstanding the foregoing, nothing herein shall preclude Executive from: (i) engaging in charitable activities and community affairs and (ii) managing his personal investments and affairs; PROVIDED, HOWEVER, that the activities set out in clauses (i) and (ii) shall be limited by Executive so as not to materially interfere, individually or in the aggregate, with the performance of his duties and responsibilities hereunder. 3. Compensation. (a) Base Salary. During the term of Executive's employment, the Company shall pay Executive an annual base salary of $250,000 (the "Annual Base Salary") payable in accordance with the Company's regular payroll practices. The Annual Base Salary shall be reviewed at least annually by the Board of Directors and may be adjusted in the sole discretion of the Board of Directors. (b) Parent Options. Subject and pursuant to the terms and conditions of the Parent's 2002 Stock Option and Stock Appreciation Rights Plan (the "Plan"), the Company agrees to promptly cause to be granted to the Executive the right and option (the "Parent Options") to purchase up to 50,000 shares of common stock of the Parent, par value $.01 per share ("Common Stock"), to be issued as provided in the Plan. All such Parent Options shall be Incentive Stock Options, as defined in Section 422A of the Internal Revenue Code of 1986 (the "Code"), to the extent permissible thereunder. Any Parent Options in excess of the limits of Section 422A of the Code shall be non-qualified stock options having a term of ten (10) years from the date of grant. All Parent Options shall be exercisable at a price equal to the Fair Market Value (as defined in the Plan) on October 1, 2004, the date of grant. Parent Options to purchase 16,666 shares of Common Stock shall vest on October 1, 2004; Parent Options to purchase 16,667 shares of Common Stock shall vest on October 1, 2005; and Parent Options to acquire the remaining 16,667 shares shall vest on October 1, 2006. (c) Performance Bonus. The Company may provide a performance bonus with a target amount of $100K payable at the close of each fiscal year other than the fiscal year ending December 31, 2004. For the fiscal year ending December 31, 2004, The Company's Board of Directors may award Executive a performance bonus in sole and absolute discretion. For subsequent fiscal years, the Board of Directors in conjunction with the Compensation Committee of the Board of Directors of Parent will establish criteria and conditions to be satisfied for Executive to earn the target amount of the performance bonus. The Board of Directors and the Compensation Committee of the Board of Directors of Parent will determine such criteria and conditions in their sole and absolute discretion. Such goals and conditions will be communicated to Executive during the first quarter of the applicable fiscal year. Any performance bonus due to Executive shall be paid to Executive not later than ninety (90) days following the end of the applicable fiscal year. Notwithstanding performance, the Company's Board of Directors may adjust the actual bonus as the Board of Directors deems necessary, in their absolute discretion, in view of the Company's overall financial condition. (d) Additional Compensation. In addition to the Annual Base Salary and the Parent Options, Executive shall receive such additional compensation, bonus pay and additional grants of options to acquire Common Stock as the Board of Directors may award Executive from time to time in the Board's sole and absolute discretion. (e) Withholding. The Company shall deduct and withhold from any compensation payments payable to Executive all social security and other federal, state and local taxes and charges in the minimum amounts (or such greater amounts as Executive may from time to time request) which currently are or which hereafter may be required by law to be so deducted and withheld, including withholding pursuant to bonus withholding rates, as applicable. 4. Benefits; Vacation and Expense Reimbursement. (a) Benefits. During the term of Executive's employment, Executive shall be entitled to participate in all fringe benefits (including without limitation, group medical and dental insurance) and other benefit plans which are available from time to time to executive employees of the Company subject in each case to the generally applicable terms and conditions of the applicable plan or program. The Company agrees to pay Executive the difference between his existing Verizon health plan and the Company's health plan up to an amount equal to the Company's health plan. In addition, the Company shall purchase a disability insurance policy on behalf and for the benefit of Executive pursuant to which Executive shall be eligible to receive annual payments in an amount equal to no less than 60% of the Annual Base Salary in effect at the time Executive is deemed to have become disabled pursuant to Section 6(c) of this Agreement. (b) Vacation; Holidays and Sick Leave. During the term of Executive's employment, Executive shall be entitled to five (5) weeks of paid time off ("PTO") per year under the same terms and conditions as other employees of the Company. In addition, Executive shall be entitled to all paid Company holidays and other benefits as are generally provided to other executives of the Company in accordance with the Company policies in effect from time to time. (c) Expense Reimbursement. Executive shall be authorized to incur reasonable expenses in carrying out his duties and responsibilities under this Agreement and the Company shall reimburse him, in accordance with Company policies and procedures, for all business expenses incurred in connection with carrying out the business of the Company upon presentation of expense statements or such other supporting information as the Company may customarily require of its executives. 5. Confidentiality Agreement. Concurrently with the execution of this Agreement, Executive shall execute the Company's standard Employee Confidentiality and Invention Assignment Agreement (the "Confidentiality Agreement"). 6. Termination of Executive's Employment. (a) Termination of Employment. Executive's employment may be terminated (i) by the Company, at any time, for any reason or for no reason (including, without limitation, due to the Disability (as defined below) of Executive) and (ii) by Executive at any time with or without Good Reason (as defined below). In addition, Executive's employment shall terminate upon the death of Executive. (b) Definitions. (i) Disability. For purposes of this Agreement, a "Disability" shall occur in the event that there is a determination by the Company, upon the advice of an independent qualified physician, reasonably acceptable to Executive, that Executive has become physically or mentally incapable of performing his duties under this Agreement and such disability has disabled Executive, or can reasonably be anticipated to disable Executive, for a cumulative period of one hundred eighty (180) days within a twelve (12) month period. (ii) Good Reason. For purposes this Agreement, "Good Reason" shall mean: (A) the occurrence of any material breach of this Agreement by the Company which remains uncured for a period of more than thirty (30) days after written notice of such breach and of Executive's intention to terminate his employment for "Good Reason" if such breach is not remedied; (B) a failure to pay any amount due hereunder within ten (10) business days following written demand for payment, which demand shall state that Executive intends to resign for Good Reason if such payment is not made within such ten (10) business day period; (C) the assignment to Executive of duties or responsibilities materially inconsistent with Executive's current position, duties or responsibilities sufficient to constitute a substantial diminution of status within the Company which duties or responsibilities are not reassigned within thirty (30) days after written demand from Executive, which demand shall state that Executive intends to resign for Good Reason if such duties and responsibilities are not reassigned; or (D) a relocation of the office of the Company to which Executive is required to report to a location outside of a fifty (50) mile radius of the then existing location of such office or a requirement that Executive relocate his residence from Tampa, Florida. (iii) Change of Control. If there is a change of control, Executive will be entitled to compensation under paragraph 7(a) below, as well as vest in all stock options. 7. Compensation Upon Termination of Employment. (a) Generally. Except as otherwise provided in Section 7(b) and Section 7(c), if the Company terminates Executive's employment for any reason (including, without limitation, as a result of Executive's death or Disability) or Executive terminates his employment for Good Reason, the Company shall: (i) immediately upon such termination, pay to Executive (A) any unpaid Annual Base Salary at the rate then in effect accrued through and including the date of termination and (B) an amount equal to the value of Executive's accumulated PTO; (ii) subject to Section 8(a), pay to Executive a minimum severance of one twelfth of the Annual Base Salary in effect as of the date of the termination of Executive's employment each month after such termination (such monthly payments, the "Monthly Severance Payments"), in accordance with the Company's regular payroll practices and payroll schedule for a period of twelve (12) months (the "Severance Period"); PROVIDED, HOWEVER, that, if Executive enters into an employment or consulting relationship with any other party during the Severance Period, the Monthly Severance Payments shall immediately be reduced by fifty percent (50%) for the remainder of the Severance Period; PROVIDED FURTHER, that, if Executive's employment is terminated as a result of Executive's Disability, the Monthly Severance Payments shall be reduced by the amount, if any, paid to Executive during the Severance Period under any disability insurance policy purchased by the Company on behalf and for the benefit of Executive; Executive will continue to accrue stock options during his entire severance period; and (iii) subject to Section 8(a), make all payments necessary to provide Executive with continuation coverage under the Company's group health plan until the earlier to occur of (A) the expiration of the Severance Period or, (B) in the event Executive enters into an employment or consulting relationship with any other party during the Severance Period, the date on which Executive becomes eligible to participate in the group health plan of such other party. Executive's right to receive the severance benefits described in Section 7(a)(ii) and Section 7(a)(iii) shall be subject to (x) Executive's execution of a full and complete release in favor of the Company and its officers, directors, shareholders and affiliates (and the respective officers, directors and shareholders of such affiliates), in form and substance reasonably acceptable to the Company, releasing the Company and such other parties from any and all claims of Executive in connection with his employment by the Company, and (y) Executive's compliance with the provisions of Section 8 of this Agreement. Except for the salary, PTO and severance payments described in this Section 7(a), the Company shall not be obligated to make any further payments to Executive hereunder. (b) Compensation Upon Termination by Company in Event of Misconduct. In the event that the Company terminates Executive's employment as a result of Misconduct (as defined below), the Company shall, immediately upon such termination, pay to Executive (i) any unpaid Annual Base Salary at the rate then in effect accrued through and including the date of termination and (ii) an amount equal to the value of Executive's accumulated PTO. Upon the payment of the amounts described in the previous sentence, the Company shall not be obligated to make any further payments to Executive hereunder. For purposes of this Section 7(b), "Misconduct" shall mean (1) any act of theft, fraud, embezzlement, falsification of Company or customer documents, misappropriation of funds or other assets of the Company, or other acts of dishonesty or misconduct involving the property or affairs of the Company or the carrying out of Executive's duties; (2) a conviction (by trial, upon a plea or otherwise) or the admission of guilt of any felony or misdemeanor involving moral turpitude or other act of dishonesty, fraud or deceit; or (3) the repeated material violation of any written policy or procedure of the Company. (c) Compensation Upon Termination by Executive Without Good Reason. If Executive terminates his employment without Good Reason, the Company shall, immediately upon such termination, pay to Executive (i) any unpaid Annual Base Salary at the rate then in effect accrued through and including the date of termination and (ii) an amount equal to the value of Executive's accumulated PTO. Upon the payment of the amounts described in the previous sentence, the Company shall not be obligated to make any further payments to Executive hereunder. 8. Non-Competition and Non-Solicitation. (a) Non-Competition. Executive acknowledges that the nature of the Company's business is such that if the Executive were to become employed by, or substantially involved in, the business of a competitor of the Company following the termination of the Executive's employment with the Company, it would be very difficult for Executive not to rely on or use the Company's trade secrets and confidential information. Thus, to avoid the inevitable disclosure of the Company's trade secrets and confidential information, Executive agrees and acknowledges that Executive's right to receive the severance benefits described in Section 7(a)ii and Section 7(a)iii shall be conditioned upon Executive not directly or indirectly engaging in (whether as an employee, consultant, agent, proprietor, principal, partner, major stockholder, corporate officer, director or otherwise), management or control of, any person, firm, corporation or business that competes with the Company's business at the time of termination for a period equal to Executive's severance period. Notwithstanding the foregoing, Executive shall not be prohibited from owning shares of a business that competes with the Company's business if the shares are listed on a national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934, as amended, and the investment in such shares does not exceed two percent (2%) of the outstanding shares of such class of shares. (b) Non-Solicitation. Executive agrees and acknowledges that, for a period of twelve (12) months after the termination of Executive's employment with the Company for any reason, Executive shall not, either directly or indirectly, personally, or on behalf of or in conjunction with any person or firm, divert or take away any client or customer of the Company or solicit, induce, facilitate, recruit, encourage or cause any employee, consultant, contractor, agent or representative of the Company, to leave their employment or engagement with the Company for any reason. (c) Understanding of Covenants. Executive hereby represents that he: (i) is familiar with the foregoing covenants not to compete and not to solicit; (ii) is fully aware of and agrees specifically to his obligations thereunder, including, without limitation, the reasonableness of the length of time and scope of these covenants: (iii) acknowledges that the remedies set forth herein for violation of such covenants are in addition to any remedies that the Company may have in law or in equity; and (iv) understands that he will also be executing simultaneously with this Agreement, the Confidentiality Agreement and that the obligations set forth in that Agreement are in addition to those set forth in this Section. 9. Remedies. The parties hereto agree that the Company would suffer irreparable harm from a breach by Executive of any of the covenants or agreements contained in Section 8 of this Agreement. Therefore, in the event of the actual or threatened breach by Executive of any of the provisions of Section 8 of this Agreement, the Company may, in addition and supplementary to other rights and remedies existing in its favor, apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce or prevent any violation of the provisions thereof. 10. Representation of Executive. Executive hereby warrants and represents that he is not bound by any other agreement or subject to any other restriction which would either prevent him from entering into this Agreement or from performing his duties as contemplated hereunder. 11. Indemnification. The Company shall, to the maximum extent permitted by the General Corporation Law of the State of California, indemnify Executive and hold Executive harmless from and against any claim, loss or cause of action arising from or out of Executive's performance as an officer or employee of the Company or in any other capacity, including serving as a fiduciary, in which Executive serves at the request of the Company, except for acts or omissions not in good faith or which involve gross negligence, intentional misconduct or a knowing violation of law, for any breach of Executive's duty of loyalty or any other fiduciary duty to the Company, or for any transaction from which Executive derived an improper personal benefit. If any claim is asserted against Executive for which Executive reasonably believes in good faith he is entitled to be indemnified hereunder, the Company shall, at its option, (i) assume the defense thereof; or (ii) pay Executive's reasonable legal expenses (or cause such expenses to be paid), if the Company does not so assume the defense; PROVIDED, HOWEVER that Executive shall reimburse the Company for such amounts if Executive shall be found by a final, non appealable order of a court of competent jurisdiction or any arbitrator or mediator (whose judgment Executive has agreed to be bound by) not to be entitled to indemnification. 12. Arbitration and Equitable Relief. (a) Executive and the Company each agree that any dispute or controversy arising out of, relating to, or in connection with this Agreement, or the interpretation, validity, construction, performance, breach, or termination thereof shall be settled by arbitration to be held in Orange County, California, in accordance with the National Rules for the Resolution of Employment Disputes then in effect of the American Arbitration Association (the "Rules"). The arbitrator may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator's decision in any court having jurisdiction. (b) The arbitrator shall apply California law to the merits of any dispute or claim, without reference to rules of conflict of law. The arbitration proceedings shall be governed by California arbitration law and by the Rules. (c) The Company shall pay the costs and expenses of such arbitration, and each party shall separately pay his or its attorneys' fees and expenses. (d) Executive has read and understands this Section 12. Executive understands that by signing this Agreement, Executive agrees to submit any future claims arising out of, relating to, or in connection with this Agreement, or the interpretation, validity, construction, performance, breach, or termination thereof to binding arbitration, and that this arbitration clause constitutes a waiver of Executive's right to a jury trial and relates to the resolution of all disputes relating to all aspects of the employer/executive relationship, including but not limited to, the following claims: (i) employment; breach of contract, both express and implied; breach of the covenant of good faith and fair dealing, both express and implied; negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; and defamation; (ii) any and all claims for violation of any federal state or municipal law, regulation, statute or ordinance, including, but not limited to, Title VII of the Civil Rights act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities act of 1990, the Fair Labor Standards Act, the California Fair Employment and Housing Act, and the California Labor Code Section 201, ET SEQ; and (iii) any and all claims arising out of any other laws and regulations relating to employment or employment discrimination. (e) By signing this Agreement, the Company agrees to submit any future claims arising out of, relating to, or in connection with this Agreement, or the interpretation, validity, construction, performance, breach or termination thereof to binding arbitration, and further agrees that this arbitration clause constitutes a waiver of the Company's right to a jury trial and relates to the resolution of all disputes relating to all aspects of the relationship between the Company and Executive. (f) Adherence to this Section regarding Arbitration shall not limit the right of the parties hereto to obtain any provisional remedy including, without limitation, injunctive or similar relief, from any court of competent jurisdiction as may be necessary to protect their respective rights and interests pending arbitration, particularly if necessary to avoid irreparable harm. 13. Successors and Assigns. This Agreement may not be assigned by Executive; PROVIDED, HOWEVER, that Executive's rights to payments hereunder shall, upon his death, inure to the benefit of Executive's personal or legal representatives, executors, administrators, heirs, distributees, devisees and legatees. This Agreement shall inure to the benefit of and be binding on the successors and assigns of the Company. 14. Modification or Waiver. No provision of this Agreement may be modified, waived, or discharged unless agreed to in writing by both parties hereto. The failure of a party to insist upon strict adherence to any term, condition or other provision of this Agreement shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term, condition or other provision of this Agreement. 15. Notices. All notices or other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given if delivered by hand or delivered by a recognized delivery service or mailed, postage prepaid, by express, certified or registered mail, return receipt requested, and addressed to the Company or Executive, as applicable, at the address set forth below (or to such other address as shall have been previously provided in accordance with this Paragraph 14): If to the Company: Infocrossing Healthcare Services, Inc. c/o Infocrossing, Inc. 2 Christie Heights Street Leonia, NJ 07605 Attention: General Counsel Fax: (201) 840-7126 If to Executive: Michael J. Leubke 17926 Cachet Isle Drive Tampa, FL 33647 Fax: 813-982-2020 (voice & fax) 16. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with the laws of the State of Florida without regard to its conflict of laws provisions. 17. Severability. Whenever possible, each provision and term of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision or term of this Agreement shall be held to be prohibited by or invalid under such applicable law, then such provision or term shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or affecting in any manner whatsoever the remainder of such provisions or term or the remaining provisions or terms of this Agreement. 18. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 19. Entire Agreement. This Agreement and the Confidentiality Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersedes all other prior agreements and undertakings, both written and oral, among the parties with respect to the subject matter hereof. 20. Acknowledgement of Executive. EXECUTIVE ACKNOWLEDGES THAT HE HAS HAD THE OPPORTUNITY TO CONSULT TAX AND LEGAL COUNSEL IN REGARD TO THIS AGREEMENT, THAT HE HAS READ AND UNDERSTANDS THIS AGREEMENT, THAT HE IS FULLY AWARE OF ITS LEGAL EFFECT, AND THAT HE HAS ENTERED INTO IT FREELY AND VOLUNTARILY AND BASED ON HIS OWN JUDGMENT AND NOT ON ANY REPRESENTATIONS, UNDERSTANDINGS, OR PROMISES OTHER THAN THOSE CONTAINED IN THIS AGREEMENT. [Remainder of Page Intentionally Left Blank] [Signature Page to Employment Agreement] IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. EXECUTIVE INFOCROSSING HEALTHCARE SERVICES, INC. /s/ MICHAEL J. LUEBKE By: /s/ ROBERT B. WALLACH - ----------------------------- -------------------------- Michael J. Luebke Name: Rober B. Wallach Title: Vice Chairman EX-10 13 ex10-7d_k.txt 1ST AMENDMENT TO LOAN AGREEMENT EXHIBIT 10.7D FIRST AMENDMENT TO LOAN AGREEMENT AND OTHER LOAN DOCUMENTS This FIRST AMENDMENT TO LOAN AGREEMENT AND OTHER LOAN DOCUMENTS (this "Amendment"), dated as of February 13, 2004, is by and among INFOCROSSING, INC., a Delaware corporation (the "Borrower"), the Subsidiaries of the Borrower that are signatories hereto (collectively, the "Guarantors"), the financial institutions that are parties hereto as "Lenders" (together with any other financial institutions that become parties to the Loan Agreement defined below, in each case with their successors and assigns, collectively, the "Lenders"), and CAPITALSOURCE FINANCE LLC, a Delaware limited liability company, as such a Lender and as Agent for the Lenders (this and all other capitalized terms used but not otherwise defined herein shall have the respective meanings ascribed to such terms in Section 1 below). R E C I T A L S: A. The Borrower, Infocrossing Agent, Inc. (the "Prior Agent") and certain "Lenders" (collectively, the "Prior Lenders") entered into that certain Term Loan Agreement dated as of October 21, 2003 (the "Existing Loan Agreement;" the Existing Loan Agreement, as amended hereby, and as the same further may be amended, modified, supplemented or restated in accordance with its terms and as in effect from time to time, the "Loan Agreement"), pursuant to and subject to the terms and conditions of which, among other things, such Prior Lenders initially extended a certain term loan to the Borrower. B. On the date hereof, and effective immediately prior, and as a condition precedent, to the effectiveness of this Amendment, (i) the Borrower, the Prior Agent, the Prior Lenders and the Lenders entered into that certain Assignment and Assumption Agreement (the "Assignment and Assumption Agreement"), pursuant to and subject to the terms and conditions of which, among other things, the Prior Lenders assigned and delegated to the Lenders, for value, all of their Commitments, Loans and other interests in the Loan Obligations to the Lenders and (ii) the Borrower, the Prior Agent, the Agent and the Lenders entered into that certain Agreement Regarding Transitional Matters (the "Agency Assignment"), pursuant to and subject to the terms and conditions of which, among other things, the Prior Agent assigned and delegated to the Agent all of its obligations as "Agent" under the Loan Documents. C. As a condition to execution and delivery of the Assignment and Assumption Agreement and the Agency Assignment by the Agent and the Lenders, CapitalSource Finance LLC required the Borrower to agree to amend and modify the Existing Loan Agreement as herein set forth, and the parties hereto desire to so amend and modify the Existing Loan Agreement. NOW, THEREFORE, in consideration of the mutual agreements herein contained, and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereto agree as follows: 1. Definitions. Capitalized terms used but not elsewhere defined herein shall have the respective meanings ascribed to such terms in the Loan Agreement. 2. Amendments to the Existing Loan Agreement. The Existing Loan Agreement is amended as follows: 2.1 Cover Page. The Cover Page of the Existing Loan Agreement hereby is amended by deleting the reference to "Infocrossing Agent, Inc. as Agent" and substituting "CapitalSource Finance LLC as Agent" in lieu thereof 2.2 Section 1.1 - Substituted Definitions. Section 1.1 of the Existing Loan Agreement hereby is amended by substituting the following definitions of the terms set forth below in lieu of the current versions of such definitions contained in the Existing Loan Agreement: "Agent": CapitalSource Finance LLC, as agent for the Lenders under this Agreement and the other Loan Documents, together with its successors and assigns in such capacity. "Loan": collectively, any term loan held by any Lender pursuant to this Agreement, plus the amount of any additional loans made under the Loan Interest Reserve pursuant to Section 2.1(c) (the aggregate amount of which additional loans shall not exceed $625,000), and such term loans and additional loans being referred to collectively as the "Loans." "Permitted Acquisition": the acquisition by the Borrower or any Domestic Subsidiary of the Borrower of all or any portion of the assets or stock or other equity interests of any Person engaged in a business that would be permitted under subsection 6.15, including pursuant to a merger or consolidation; provided that all such acquisitions are approved by the Board of Directors and stockholders, if required, of the Borrower or such Domestic Subsidiary and the acquiree and are not otherwise hostile and, in the case of a merger (x) involving the Borrower, the surviving entity is the Borrower or (y) involving any such Domestic Subsidiary, the surviving entity is such Domestic Subsidiary or otherwise becomes a Loan Party upon consummation thereof; and provided, further, that: (i) if such acquisition is an asset acquisition, the subject assets are located in the continental United States or, if such acquisition is a stock or other equity acquisition or a merger, the acquiree or target is an entity incorporated or otherwise organized under the laws of a State of the United States; (ii) on the closing date of such acquisition, both before and immediately after giving effect to such proposed acquisition, no Default or Event of Default has occurred or will occur or be continuing; (iii) after giving effect to any such acquisition there shall be no negative effect on Consolidated EBITDA on a pro forma basis, and the Borrower would remain in compliance with the covenants set forth in subsection 6.1 on a pro forma basis (determined on a pro forma basis (A) as of the last day of the most recently ended fiscal quarter of the Borrower for which financial statements are available (computed on the basis of (x) balance sheet amounts as of the most recently completed fiscal quarter, and (y) income statement amounts for the most recently completed period of four consecutive fiscal quarters) and (B) on the basis of twelve month projections updated to give effect to such acquisition) and the Borrower delivers a certificate of a Responsible Officer certifying compliance with this clause (iii); and (iv) any Person or business acquired becomes a wholly-owned Subsidiary of the Borrower or of a Guarantor following such acquisition and such Person becomes a Guarantor, and the Borrower shall, and shall cause any applicable Subsidiary to, execute any documents and take all actions that may be required under applicable law or that the Agent reasonably may request, in order to comply with subsection 5.10 herein, and the Borrower shall have used commercially reasonable efforts to either (A) obtain and deliver to Agent a collateral assignment of representations, warranties and indemnities in respect of the documentation evidencing such acquisition, acknowledged in writing by the related sellers thereunder, or (B) include in such documentation a provision expressly permitting such a collateral assignment, in each case in form and substance satisfactory to the Agent. 2.3 Section 1.1 - Additional Definitions. Section 1.1 of the Existing Loan Agreement hereby is amended further by adding the following terms and respective definitions to such Section 1.1 in the appropriate alphabetical order: "Effective Date": as defined in the First Amendment and which, for all purposes under this Agreement, shall be deemed to be the date of the First Amendment. "First Amendment": that certain First Amendment to Loan Agreement and other Loan Documents dated as of February 13, 2004 among the Borrower, its Subsidiaries, the Agent and the Lenders. "Loan Interest Reserve": as of any date, a reserve equal to the amount, if any, by which (a) the product of (x) 2.5% (two and one-half percent), multiplied by (y) $25,000,000 less the amount of repayments of the Loans pursuant to Section 2.2(a)(i) as and when made, exceeds (b) all additional loans made by the Lenders under the Loan Interest Reserve pursuant to Section 2.1(c) of the Loan Agreement after the Effective Date. "Prepayment Premium Amount": with respect to any prepayment of the Loans to which a Prepayment Premium Amount is to be calculated, the greater of (x) two percent (2.0%) of the amount so prepaid and (y) Related Yield Maintenance Fee in respect of such amount so prepaid. "Related Yield Maintenance Fee": with respect to any prepayment of the Loans, the present value (discounted at the one year Treasury rate in effect on the day that is two (2) Business Days prior to the date on which such prepayment is made, determined by the Agent in its reasonable discretion) of the total interest and fees which could be earned on the amount so prepaid from the effective date of such prepayment through the date that is the first anniversary of the Effective Date. "Subject Period": see Section 2.3(a). 2.4 Section 2.1. Section 2.1 of the Existing Loan Agreement hereby is amended by adding the following clause (c) to such Section 2.1 in the appropriate alphabetical order: Upon the failure of the Borrower to pay interest pursuant to the terms of this Agreement when due after giving effect to any applicable grace period for such payment of interest (the amount of any such overdue unpaid interest, the "Past Due Interest"), and regardless of whether or not any other Default or Event of Default then exists or would result therefrom, the Agent shall be entitled, in its sole and absolute discretion, to cause the Lenders to make additional loans to the Borrower the proceeds of which shall be used by the Borrower to pay such Past Due Interest; provided that such additional loans shall not exceed in the aggregate the Loan Interest Reserve then in effect (each such additional loan, an "Interest Advance"), and each such Interest Advance shall be deemed part of the outstanding principal balance of the Loans and shall constitute Loan Obligations. The Borrower hereby irrevocably and unconditionally agrees to pay to the Agent, for the ratable benefit of the Lenders, all Interest Advances in accordance with the payment terms relating to the other portions of the Loans. Any Event of Default arising from the failure of the Borrower to pay interest pursuant to this Agreement when due (after the expiration of any grace period for such payment) shall be deemed cured by utilization of the Loan Interest Reserve; provided, that, the making of Interest Advances shall not be deemed to cure any other Default or Event of Default that may then exist or result therefrom. 2.5 Section 2.3(a). Section 2.3(a) of the Existing Loan Agreement hereby is deleted in its entirety and the following is substituted in lieu thereof: 2.3 Prepayments. (a) The Borrower shall have the right at any time and from time to time to prepay the Loans in whole or in part subject to the requirements of this Section without penalty or premium; provided, that (i) if the Borrower has entered into an agreement for a Change of Control or the Borrower or any other Person otherwise has publicly announced its intention to consummate a transaction that would institute a Change of Control, in either case after the last day of the Subject Period (as defined below), the Borrower may only prepay the Loans at a prepayment amount equal to the Fixed Early Prepayment Amount, plus accrued and unpaid interest to the date of prepayment, and (ii) if the Borrower optionally prepays any portion of the Loans pursuant to Section 2.3(a) during the period commencing on the Effective Date and ending on the first anniversary thereof (the "Subject Period"), the Borrower shall pay to the Agent, for the ratable benefit of the Lenders, an amount equal to the applicable Prepayment Premium Amount applicable to the amount so prepaid, which Prepayment Premium Amounts shall be due and payable on the respective dates of prepayment; provided, that: (I) the Borrower shall not be required to pay any such Prepayment Premium Amount unless the aggregate amount of all prepayments made during the Subject Period exceed $15,000,000 in total, in which case the Borrower shall be required to pay Prepayment Premium Amounts in accordance with the foregoing in respect of all prepayments of Loans made during the Subject Period (excluding the first $15,000,000 of such prepayments made during the Subject Period); and (II) if, during the Subject Period: (1) the Borrower shall have delivered to the Agent a term sheet, commitment letter or letter of intent describing the material terms of a proposed Specified Acquisition (the "Presented Terms"); (2) the Loan Obligations are either (x) prepaid in full in cash from the proceeds of any refinancing made by any financial institution other than CapitalSource Finance LLC and that is not an Affiliate of the Borrower (a "Third Party Financing Source") or (y) purchased in full by a Third Party Financing Source at par (plus accrued and unpaid interest, fees and other amounts then due and owing) (any transaction of the type described in this clause (2) is referred to as a "Third Party Refinancing"); and (3) (x) such Third Party Refinancing occurred within sixty (60) days after the Agent shall have notified the Borrower in writing that the Required Lenders intend to withhold consent to a Specified Acquisition based on the Presented Terms and (y) prior to the occurrence of such Third Party Refinancing, the related Third Party Financing Source shall have consented in writing to the consummation of such Specified Acquisition on terms substantially similar to the Presented Terms; then the Borrower shall not be required to pay a Prepayment Premium Amount in respect of such full prepayment. For purposes of the foregoing, a "Specified Acquisition" shall mean an acquisition that otherwise constitutes a Permitted Acquisition, the total cash purchase price (specifically excluding any Indebtedness or other obligations to be assumed or incurred in connection therewith and the value of any non-cash consideration, including any imputed value of any non-competition, non-solicitation and similar arrangements) of which exceeds $10,000,000, 2.6 Section 2.6. Section 2.6 of the Existing Loan Agreement hereby is amended by adding the following sentence to the end of such Section 2.6: "The Borrower absolutely and unconditionally promises to pay, when due and payable pursuant hereto, principal, interest and all other amounts and Loan Obligations payable hereunder and under any other Loan Document, without any right of rescission and without any deduction whatsoever, including any deduction for set-off, recoupment or counterclaim, notwithstanding any damage to, defects in or destruction of the Collateral or any other event, including obsolescence of any Property or improvements." 2.7 Section 6.2. Section 6.2 of the Existing Loan Agreement hereby is amended by (x) deleting the word "and" at the end of clause (h) of such Section 6.2, (y) deleting the "." at the end of clause (i) of such Section 6.2 and substituting "; and" in lieu thereof and (z) adding the following clause (j) to such Section 6.2 in the appropriate alphabetical order: (i) unsecured Indebtedness of the Borrower or any of its Subsidiaries in an aggregate principal amount (for the Borrower and all Subsidiaries) not to exceed $1,000,000 at any time outstanding. 2.8 Section 6.9. Section 6.9 of the Existing Loan Agreement hereby is amended by deleting clause (h) contained in such Section 6.9 and substituting the following clause (h) in lieu thereof: (h) Permitted Acquisitions by the Borrower or any of its Subsidiaries to the extent the total cash purchase price (specifically excluding any Indebtedness or other obligations to be assumed or incurred in connection therewith and the value of any non-cash consideration, including any imputed value of any non-competition, non-solicitation and similar arrangements) of all such Permitted Acquisitions does not exceed $10,000,000 during the term of this Agreement. 2.9 Section 7. Section 7 of the Existing Loan Agreement hereby is amended by (i) deleting the "." at the end of clause (i) thereof and substituting a "; or" in lieu thereof and (ii) adding the following clause (j) immediately after such clause (i) in the appropriate alphabetical order: (j) the Borrower or any of its Subsidiaries shall be criminally indicted or convicted of a felony or under any law that could lead to a forfeiture of any material (as determined by Agent in its reasonable discretion) Collateral; 2.10 Section 7. Section 7 of the Existing Loan Agreement hereby further is amended by adding the following sentence to the end of such Section 7: Without limiting the foregoing, upon the occurrence and during the continuance of any Event of Default, the Agent may, and shall at the request of the Required Lenders, exercise on behalf of itself and the Lenders all rights and remedies available to it and the Lenders under the Loan Documents, applicable law (including, without limitation, the Uniform Commercial Code) or otherwise. 2.11 Section 9.2. Section 9.2 of the Existing Loan Agreement hereby is deleted in its entirety and the following is substituted in lieu thereof: 9.2 Notices. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by facsimile transmission) and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made (a) in the case of delivery by hand, when delivered, (b) in the case of delivery by mail, three days after being deposited in the mails, postage prepaid, or (c) in the case of delivery by facsimile transmission, when sent and receipt has been confirmed, addressed as follows in the case of the Borrower and the Agent, and as set forth in Schedule I in the case of the other parties hereto, or to such other address as may be hereafter notified by the respective parties hereto: The Borrower: Infocrossing, Inc. 2 Christie Heights Street Leonia, New Jersey 07605 Attention: Nicholas J. Letizia, Esq., Senior Vice President and General Counsel Fax: (201) 840-7126 The Agent: CapitalSource Finance LLC 4445 Willard Avenue, 12th Floor Chevy Chase, Maryland 20815 Attention: Portfolio Manager Telephone: (301) 841-2700 FAX: (301) 841-2340 E-Mail: kelias@capitalsource.com provided that any notice, request or demand to or upon the Agent or the Lenders shall not be effective until received. 2.12 Section 9.6(c). Section 9.6(c) of the Existing Loan Agreement is amended by adding the following sentences to the end of such Section 9.6(c): Anything contained in the Loan Documents to the contrary notwithstanding, (i) CapitalSource Finance LLC and its Affiliates shall not be required to execute and deliver any assignment and assumption agreement in connection with any transaction involving its Affiliates or its or its Affiliates' lenders or funding or financing sources, (ii) no lender to or Affiliate, funding or financing source of CapitalSource Finance LLC or its Affiliates shall be considered a Lender hereunder, and (iii) there shall be no limitation or restriction on (A) the ability of CapitalSource Finance LLC, any of its Affiliates or any of its or its Affiliates' lenders or funding or financing sources to assign or otherwise transfer any Loan Document, Commitment or Loan Obligation to any Affiliate, lender or financing or funding source or (B) any such lender's or funding or financing source's ability to assign or otherwise transfer any Loan Document, Commitment or Loan Obligation; provided, however, CapitalSource Finance LLC shall continue to be liable as a "Lender" under the Loan Documents unless such Affiliate, lender or funding or financing source executes an assignment and assumption agreement and becomes a "Lender." Further, Section 9.15(b) shall not prohibit or restrict CapitalSource Finance LLC, or any of its Affiliates, lenders or funding or financing sources, from disclosing any non-public information referred to therein to any of their respective Affiliates, lenders or funding or financing sources. 2.13 Schedules and Exhibits. Schedules I and 2.1 currently attached to the Existing Loan Agreement are replaced by Schedules I and 2.1 attached hereto. 2.14 Additional Agreements and Representations and Warranties of the Borrower. Without limiting any of the representations, warranties, covenants, agreements and obligations of the Borrower and its Subsidiaries under the Loan Agreement and the other Loan Documents, the Borrower hereby: (a) agrees that, so long as any amount is owing to any Lender or the Agent under the Loan Agreement or under any other Loan Document: (i) the Borrower shall furnish to each Lender, concurrently with the delivery of the financial statements referred to in subsection 5.1(a), (b) and (c), a certificate of a Responsible Officer evidencing the compliance by the Borrower and its Subsidiaries with the financial covenants contained in Section 6.1, including a calculation thereof, as of the last day of the period covered by such financial statements; (ii) the Borrower shall not, and shall not permit or cause any of its Subsidiaries to, create, form, organize or permit to exist any Foreign Subsidiaries, including, without limitation, for purposes of consummating any acquisition; (iii) the Borrower shall not, and shall not permit or cause any of its Subsidiaries to, create, incur, assume or suffer to exist any Indebtedness that otherwise would have been permitted to exist under Section 6.2(i) of the Loan Agreement (or permit to exist any Lien as security therefor) unless and only to the extent, prior to any such creation, incurrence, assumption or sufferance, the Borrower, the Subsidiaries, the to-be-holders of such Indebtedness and the Agent, for the benefit of the Lenders, shall have entered into an intercreditor and subordination agreement in form and substance satisfactory to the Agent; (iv) upon request by the Agent or any Lender, and in any event within three (3) Business Days of any such request, the Borrower shall execute and deliver to the Agent new Notes and/or split or divide the Notes in exchange for then existing Notes in such smaller amounts or denominations as the Agent or such Lender shall specify in their respective sole and absolute discretion (and no Lender shall be required to return an existing Note to the Borrower until receipt of a new Note); provided, that the aggregate principal amount of such new, split or divided Notes does not exceed the aggregate principal amount of such existing Notes to be exchanged therefor; and (v) the Borrower shall not issue any preferred stock or other equity interests or securities that provide for mandatory cash dividends or distributions or put rights or mandatory redemptions thereof, in each case prior to the payment in full in cash of the Loan Obligations; and (b) represents and warrant to and for the benefit of the Agent and the Lenders that, as of the date hereof: (i) neither the Borrower nor any Subsidiary of the Borrower has any Subsidiaries other than those Persons who are signatories hereto; (ii) the outstanding equity securities of the Borrower and each of its Subsidiaries have been duly authorized and validly issued and are fully paid and nonassessable; and (iii) neither the Borrower nor any of its Subsidiaries (a) has issued any rights which can be convertible into or exchangeable or exercisable for any of the equity securities of any such Subsidiary, or any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, any such equity securities of any Subsidiary of the Borrower or any securities convertible into or exchangeable or exercisable for any such equity securities or (b) is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any of the equity securities of the Borrower or any of its Subsidiaries or other convertible rights or options or debt securities. 3. Conditions to Effectiveness. The effectiveness of this Amendment shall be subject to the satisfaction of all of the following conditions in a manner, form and substance satisfactory to the Agent: (a) Representations and Warranties. All of the representations and warranties of the Borrower and each of its Subsidiaries set forth in the Existing Loan Agreement and the other Loan Documents (including, without limitation, this Amendment) to the extent such Person is a party thereto shall be true and correct in all material respects (or, with respect to any such representation or warranty that, by its terms, is qualified by materiality, Material Adverse Effect or similar qualification, such representation or warranty shall be true and correct in all respects), except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects as of such earlier date (or, with respect to any such representation or warranty that, by its terms, is qualified by materiality, Material Adverse Effect or similar qualification, such representation or warranty shall be true and correct in all respects). (b) Delivery of Documents. The following shall have been delivered to the Agent, each duly authorized and executed, as applicable: (1) this Amendment; (2) Notes payable to the order of each Lender in their respective Pro Rata Share of the Loan (each of which Notes payable to CapitalSource Finance LLC shall be in maximum denominations of $5,000,000); (3) such evidence of the authority of the Borrower and each of its Subsidiaries to execute and deliver this Amendment and all other Loan Documents delivered in connection herewith as the Agent may require, including, but not limited to, (i) a copy of resolutions duly adopted by the board of directors of each such Person, authorizing the execution by each such Person of this Amendment and the other agreements, documents and instruments to be executed by each such Person pursuant to this Amendment (collectively, the "Other Amendment Documents"), certified as complete and correct by a Responsible Officer of each such Person, and (ii) a certificate of the secretary or assistant secretary of each such Person to the effect that neither the articles of incorporation nor the bylaws of such Person have been amended or modified since the Closing Date or, if more recent than the Closing Date, the date on which certified copies of such documents previously were delivered to the Agent; (4) a good standing and, if available, tax good standing certificate, for the Borrower and each Subsidiary of the Borrower from the Secretary of State (or similar, applicable Governmental Authority) of its state of incorporation or formation, as applicable; (5) unaudited consolidated and consolidating financial statements of the Borrower and its Subsidiaries as of the end of December 31, 2003, which financial statements shall be prepared in accordance with GAAP consistently applied with prior periods (subject to lack of footnotes and year-end adjustments), and monthly projections with respect to the Borrower and its Subsidiaries for the twelve (12) months after the month in which the Effective Date occurs, certified on behalf of the Borrower by a Responsible Officer; (6) standard lenders' loss payable endorsements in favor of the Agent, for the benefit of the Agent and the Lenders, with respect to the insurance policies or other instruments or documents evidencing insurance coverage on the properties of the Borrower and its Subsidiaries in accordance with the provisions of the Loan Agreement and endorsements to all liability insurance policies naming the Agent and the Lenders as additional insureds thereunder; (7) the Assignment and Assumption Agreement; (8) a certificate executed by a Responsible Officer of the Borrower on behalf of the Borrower certifying to the Agent and the Lenders that all necessary governmental, regulatory, creditor, shareholder, partner, member and other material consents, approvals and exemptions required to be obtained by the Company in connection with the transactions evidenced hereby have been duly obtained and are in full force and effect; (9) a certificate signed by a Responsible Officer of the Borrower dated as of the Effective Date affirming the matters set forth in this Section 3 and the satisfaction of the conditions precedent herein contained; and (10) such other instruments, documents, certificates, consents, waivers and opinions (including opinions from Latham & Watkins, counsel to the Borrower and its Subsidiaries) as the Agent reasonably may request. (c) Assignment and Assumption Agreement; Agency Assignment. The transactions contemplated by the Assignment and Assumption Agreement and the Agency Assignment shall have been consummated in accordance with the respective terms thereof, and all deliveries and other conditions therein contained shall have been made or otherwise satisfied. (d) No Default. No Default or Event of Default shall exist or be created hereby. (e) No Material Adverse Effect. No Material Adverse Effect shall have occurred since December 31, 2002. (f) Copies of Documents. Delivery to Agent of copies, certified by a Responsible Officer of the Borrower, of the material Loan Documents. (g) Search Results; Lien Terminations. Delivery to Agent of certified copies of Uniform Commercial Code Requests for Information or Copies (Form UCC-11), or a similar search report certified by a party acceptable to the Agent, dated a date reasonably near to the Effective Date, listing all effective financing statements which name the Borrower and each of its Subsidiaries (under their present names and any previous names) as debtors and which are filed in the jurisdictions in which filings are to be made pursuant to the Loan Documents, together with (i) copies of such financing statements, (ii) executed copies of proper Uniform Commercial Code Form UCC-3 termination statements, if any, necessary to release all Liens and other rights of any Person in any collateral described in the Loan Documents previously granted by any Person (other than Liens permitted by under the Loan Agreement) and (iii) such other Uniform Commercial Code Form UCC-3 termination statements and/or Uniform Commercial Code amendments or modifications as the Agent may request, including, without limitation, amendments to evidence the change in agency pursuant to the Agency Assignment. (h) Filings, Registrations and Recordings. The Agent shall have received each document (including Uniform Commercial Code financing statements and in lieu financing statements or amendments thereto) required by the Loan Documents or under law or reasonably requested by the Agent to be filed, registered or recorded in order to create in favor of the Agent, for the benefit of the Agent and the Lenders, a perfected Lien on the Collateral described therein, prior and superior to any other Person, in proper form for filing, registration or recording. (i) Satisfaction of the Agent's Counsel. All legal matters incident to the transactions contemplated hereby shall be reasonably satisfactory to counsel for the Agent. The date on which the foregoing conditions shall have been satisfied shall be referred to herein as the "Effective Date." The execution and delivery of this Amendment by the Borrower and the Guarantors shall be deemed a representation and warranty by such Persons that the foregoing conditions precedent have been satisfied in all respects as of the date hereof. 4. References. From and after the Effective Date, all references in the Existing Loan Agreement and the other Loan Documents to the Loan Agreement shall be deemed to refer to the Existing Loan Agreement, as amended hereby. This Amendment, the Assignment and Assumption Agreement and the Agency Assignment each constitutes a Loan Document. 5. Representations and Warranties. The Borrower and each of its Subsidiaries (individually, an "Obligor" and collectively, the "Obligors") each hereby confirms to the Agent and the Lenders that the representations and warranties set forth in the Existing Loan Agreement and the other Loan Documents are true and correct in all material respects as of the date hereof (or, with respect to any such representation or warranty that, by its terms, is qualified by materiality, Material Adverse Effect or similar qualification, such representation or warranty are true and correct in all respects), except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects as of such earlier date (or, with respect to any such representation or warranty that, by its terms, was qualified by materiality, Material Adverse Effect or similar qualification, such representation or warranty shall have been true and correct in all respects). Each Obligor further represents and warrants to the Agent and the Lenders that (a) it has full power and authority to execute and deliver this Amendment and the Other Amendment Documents and to perform its obligations hereunder and thereunder, (b) upon the execution and delivery hereof and thereof, this Amendment and the Other Amendment Documents will be valid, binding and enforceable upon it in accordance with their respective terms, subject to bankruptcy, insolvency and similar laws affecting the enforceability of creditors' rights generally and to general principles of equity, (c) the execution, delivery and performance of this Amendment and/or the Other Amendment Documents do not and will not contravene, conflict with, violate or constitute a default under (i) the articles of incorporation, certificate of limited partnership, bylaws or agreement of limited partnership of such Obligor, as applicable, or (ii) any applicable law, rule or regulation, or any judgment, decree or order, of which such Obligor has knowledge or any material agreement, indenture or instrument to which such Obligor is a party or is bound or which is binding upon or applicable to all or any portion of its property and (d) no Default or Event of Default presently exists. 6. Reserved. 7. No Further Amendments; Ratification of Liability; Waiver. Except as amended hereby, the Existing Loan Agreement and each of the other Loan Documents shall and do remain in full force and effect in accordance with their respective terms. Each Obligor, as a debtor, grantor, pledgor, guarantor or assignor, or in any similar capacity in which it has granted Liens or acted as an accommodation party or guarantor, as the case may be, hereby ratifies, confirms and reaffirms its liabilities, its payment and performance obligations (contingent or otherwise) and its agreements under the Existing Loan Agreement and the other Loan Documents to the extent such Person is a party thereto (including, without limitation, the Borrower's payment obligations under Sections 2.2(a)(i) and 2.10 of the Loan Agreement (for clarification purposes, each quarterly installment of the Loans shall be in an aggregate amount equal to 0.25% of $25,000,000, plus, with respect to any subsequent such installment, the amount of any Interest Advances), all as amended by this Amendment, and the liens and security interests granted, created and perfected thereby, and acknowledges that (a) it has no defenses, claims or set-offs to the enforcement of such liabilities, obligations and agreements, (b) the Agent and the Lenders (and the Prior Agent and the Prior Lenders) have fully performed all obligations to such Person which such Persons may have had or have on and as of the date hereof and (c) other than as specifically set forth herein, neither the Agent nor any of the Lenders waives, diminishes or limits any term or condition contained in the Existing Loan Agreement or any other Loan Document. The Agent and the Lenders' agreement to the terms of this Amendment or any other amendment of the Existing Loan Agreement or any other Loan Document shall not be deemed to establish or create a custom or course of dealing among the Obligors, the Agent and the Lenders, or any of them. This Amendment and the Other Amendment Documents contain the entire agreement among the Obligors, the Agent and the Lenders contemplated by this Amendment. 8. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, and all of which, when taken together, shall constitute one and the same instrument. 9. Further Assurances. Each Obligor covenants and agrees that it will at any time and from time to time do, execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, all such further acts, documents and instruments as reasonably may be required by the Agent in order to effectuate fully the intent of this Amendment. 10. Severability. If any term or provision of this Amendment or the application thereof to any party or circumstance shall be held to be invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, the validity, legality and enforceability of the remaining terms and provisions of this Amendment shall not in any way be affected or impaired thereby, and the affected term or provision shall be modified to the minimum extent permitted by law so as most fully to achieve the intention of this Amendment. 11. Captions. The captions in this Amendment are inserted for convenience of reference only and in no way define, describe or limit the scope or intent of this Amendment or any of the provisions hereof. 12. Governing Law. This Amendment shall be a contract made under and governed by the laws of the State of New York, without regard to conflict of laws principles. [the remainder of this page intentionally left blank] First Amendment to Loan Agreement and Other Loan Documents Delivered at Chicago, Illinois as of the day and year first above written. BORROWER: INFOCROSSING, INC. By: /s/ WILLIAM J. McHALE Its: Senior Vice President GUARANTORS: AMQUEST, INC., a Georgia corporation By: /s/ WILLIAM J. McHALE Its: Vice President ETG, INC., a Delaware corporation By: /s/ WILLIAM J. McHALE Its: Vice President INFOCROSSING SERVICES, INC., a Delaware corporation By: /s/ WILLIAM J. McHALE Its: Vice President AMQUEST SERVICES, INC., a Georgia corporation By: /s/ WILLIAM J. McHALE Its: Vice President LENDERS: CAPITALSOURCE FINANCE LLC, as a Lender By: /s/ JOSEPH TURITZ Its: General Counsel AGENT: CAPITALSOURCE FINANCE LLC, as the Agent By: /s/ JOSEPH TURITZ Its: General Counsel SCHEDULE 2.1 LENDERS' COMMITMENTS
================================== ================================= =========================== ========================= LENDER COMMITMENT OUTSTANDING AMOUNT OF PRO RATA SHARE TERM LOAN AS OF EFFECTIVE DATE - ---------------------------------- --------------------------------- --------------------------- ------------------------- CapitalSource Finance LLC $25,000,000 $24,937,500 100% - ---------------------------------- --------------------------------- --------------------------- ------------------------- TOTALS $25,000,000 $24,937,500 100% ================================== ================================= =========================== =========================
SCHEDULE I Lenders' Addresses CapitalSource Finance LLC CAPITALSOURCE FINANCE LLC 4445 Willard Avenue, 12th Floor Chevy Chase, Maryland 20815 Attention: Portfolio Manager Telephone: (301) 841-2700 FAX: (301) 841-2340 E-Mail: kelias@capitalsource.com Wire Instructions: Bank: Bank of America, Baltimore, MD Account: 003939396662 ABA: 026009593 Account Name: CapitalSource Funding LLC - CFG Reference: Infocrossing EX-10 14 ex10-15b_k.txt AMENDMENT TO 2002 PLAN EXHIBIT 10.15B AMENDMENT TO 2002 STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN OF INFOCROSSING, INC. (THE "PLAN") AS APPROVED BY THE BOARD OF DIRECTORS ON JANUARY 21, 2005 Section 6 of the Plan shall be amended and restated in its entirety as follows: 6. PERIOD OF OPTION AND CERTAIN LIMITATIONS ON RIGHT TO EXERCISE. (a) Options shall be exercisable over the Option period as, and at the times the Committee determines. The Option period shall be determined by the Committee, but shall not exceed ten years from the date of the grant of such option (except as provided in (e) below). In the case of an Insider ISO, the Option period shall not exceed five years from the date of the grant of such Option. (b) Except as provided in (c), (d) and (e) below, however, an ISO may not be exercised unless the Optionee is then in the employ of the Company and shall have been continuously so employed since the date of the grant of the Option. Absence on leave approved by the Committee shall not be considered a termination of employment for any purpose of the Plan. The Committee may, if it or counsel for the Company shall deem it necessary or desirable for any reason, require as a condition of exercise, that the Optionee (or the purchaser acting under (c) or (e) below) represent in writing to the Company at the time of the exercise of such Option that it is the Optionee's then intention to acquire the Shares as to which the Option is then being exercised for investment and not with a view to the distribution thereof. (c) Unless otherwise determined by the Board or the Committee, Options other than ISOs granted under the Plan to an Optionee shall not be transferable otherwise than by will or by the laws of descent and distribution, and such Option shall be exercisable, during the Optionee's lifetime, only by him or his legal guardian or legal representative. Unless otherwise determined by the Board or the Committee, a transfer of an Option by will or by the laws of descent and distribution shall not be effective unless the Committee shall have been furnished with such evidence as it may deem necessary to establish the validity of the transfer. (d) Unless otherwise determined by the Board or the Committee, or unless earlier terminated in accordance with their terms, all Options of any Optionee shall terminate ninety days after any of the following: (i) voluntary termination of employment by the Optionee, with or without Company consent, or (iii) termination of the Optionee's employment by the Company other than for cause, or (iii) termination of the Optionee's employment because of disability, retirement, or because the employing subsidiary has ceased to be a subsidiary of the Company and the Optionee did not, prior thereto or contemporaneously therewith, become an employee of the Company or of another subsidiary, or (iv) termination of the Optionee's service as a director or consultant of the Company (other than for cause), unless the Optionee remains thereafter an employee of the Company; provided, that if the employment of an Optionee (or service as a director or consultant) shall be terminated for cause (which shall be determined by the Committee), all of such Optionee's Options shall terminate as of the date of such termination for cause. (e) If an Optionee dies while in the employ of the Company or in the service of the Company as a director or consultant, or within ninety days after the date on which the Optionee ceased to be an employee, director or consultant of the Company (other than by reason of termination for cause), the Option theretofore granted to the Optionee shall be exercisable by the Optionee's estate, or unless otherwise determined by the Board or the Committee, by a person who acquired the right to exercise such option by bequest or inheritance or by reason of the death of the Optionee, but only within a period of twelve calendar months next succeeding such death and then only if and to the extent that the Optionee was entitled to exercise such Option at the date of death, except that the number of shares may be adjusted in accordance with the provisions of Section 8 hereof. (f) An ISO, granted under the Plan, in order to remain qualified as such, shall be subject to all other limitations on exercise imposed by the IRC to qualify for treatment as an ISO. EX-10 15 ex10-15c_k.txt AMENDMENT TO 2002 PLAN EXHIBIT 10.15C AMENDMENT TO 2002 STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN OF INFOCROSSING, INC. (THE "PLAN") AS APPROVED AT THE ANNUAL MEETING OF STOCKHOLDERS ON JUNE 15, 2004 At the Annual Meeting of Stockholders held on June 15, 2004, the stockholders approved a proposal to amend the Plan to increase the total number of shares of common stock for which options may be granted from 1,000,000 to 3,000,000. EX-10 16 ex10-15d_k.txt AMENDMENT TO 2002 PLAN EXHIBIT 10.15D AMENDMENT TO 2002 STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN OF INFOCROSSING, INC. (THE "PLAN") AS APPROVED BY THE BOARD OF DIRECTORS ON APRIL 1, 2004 Section 6(d) of the Plan shall be amended and restated in its entirety as follows: "Unless otherwise determined by the Board or the Committee, or unless earlier terminated in accordance with their terms, all Options of any Optionee shall terminate ninety days after any of the following: (i) voluntary termination of employment by the Optionee, with or without Company consent, or (ii) termination of the Optionee's employment by the Company other than for cause, or (iii) termination of the Optionee's employment because of disability, retirement, or because the employing subsidiary has ceased to be a subsidiary of the Company and the Optionee did not, prior thereto or contemporaneously therewith, become an employee of the Company or of another subsidiary, or (iv) termination of the Optionee's service as a director or consultant of the Company (other than for cause), unless the Optionee remains thereafter an employee of the Company; provided, that if the employment of an Optionee (or service as a director or consultant) shall be terminated for cause (which shall be determined by the Committee), all of such Optionee's Options shall terminate as of the date of such termination for cause." EX-10 17 ex10-16b_k.txt AMENDMENT TO 1992 PLAN EXHIBIT 10.16B AMENDMENT TO 1992 STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN OF COMPUTER OUTSOURCING SERVICES, INC. (THE "PLAN") AS APPROVED AT THE ANNUAL MEETING OF STOCKHOLDERS ON JUNE 22, 2001 At the Annual Meeting of Stockholders held on June 22, 2001, the stockholders approved a proposal to amend the Plan (i) to permit a holder of a vested stock option to exercise by paying the exercise price with (a) cash; (b) shares having a market value at least equal to the exercise price of the option; (c) the proceeds of a loan from an independent broker-dealer whereby the loan is secured by the option or the stock to be received upon exercise; or (d) any combination of the foregoing. and (ii) to increase the total number of shares of common stock for which options may be granted from 2,700,000 to 3,100,000. EX-10 18 ex10-18a_k.txt LEONIA LEASE LEASE AGREEMENT made the 2nd day of June, 1997, between LEONIA ASSOCIATES, L.L.C, a New Jersey Limited Liability Company, having its principal place of business c/o Sterling Management Co., Inc., 72 Essex Street, Lodi, New Jersey 07644 (hereinafter referred to as "Landlord"); and COMPUTER OUTSOURCING SERVICES, INC., a New York Corporation, having an office located at 360 West 31st Street, New York, NY 10001, (hereinafter referred to as "Tenant"). PREAMBLE BASIC LEASE PROVISIONS AND DEFINITIONS In addition to other terms elsewhere defined in this Lease, the following terms whenever used in this Lease should have only the meanings set forth in this section, unless such meanings are expressly modified, limited or expanded elsewhere herein. (1) Additional Rent shall mean all sums in addition to Fixed Basic Rent payable by Tenant to Landlord pursuant to the provisions of this Lease, or sums expended by Landlord on Tenant's behalf or fines imposed upon Landlord as a result of Tenant's failure to comply with the terms hereof. (2) Base Real Estate Taxesshall mean: Those Real Estate Taxes determined by multiplying the tax rate in effect for Calendar Year 1997 by the assessment for the Building Area and Building averaged for the 1997/1998 Calendar Years. (3) Broker shall mean MRH Real Estate Services, Inc. and Cushman & Wakefield, Inc. (4) Building shall mean the building located at 2 Christie Heights, in the Borough of Leonia, County of Bergen, State of New Jersey. (5) Building Holidays shall mean those shown on Exhibit "E". (6) Commencement Date is October 1, 1997 and shall, for the purposes hereof, be subject to Paragraph "27" and "43" hereof. (7) Demised Premises or Premises: 50,000 gross rentable square feet, 30,000 square feet of which is on the First Floor and 20,000 square feet of which is on the Second Floor as shown on Exhibit "A" hereto, which includes an allocable share of the Common Facilities as defined in Paragraph "42(C)". The foregoing square footage is approximate and is set forth solely for the purpose of computing all pass-throughs required to be paid by the Tenant to the Landlord under the terms and conditions of the within Agreement. (8) Exhibits. The following Exhibits attached to this Lease are incorporated herein and made a part hereof: Exhibit A Premises Plan Exhibit B Rules and Regulations Exhibit C Landlord's Work Exhibit D Cleaning Services Exhibit E Building Holidays (9) Fixed Basic Rent for the first Five (5) Years and Three (3) Months of the Term of this Lease shall mean: THREE MILLION EIGHT HUNDRED SIX THOUSAND TWO HUNDRED FIFTY AND 00/100 ($3,806,250.00) DOLLARS. (A) Yearly Rate: SEVEN HUNDRED TWENTY FIVE THOUSAND AND 00/100 ($725,000.00) DOLLARS. (B) Monthly Installment: SIXTY THOUSAND FOUR HUNDRED SIXTEEN AND 67/100 ($60,416.67) DOLLARS. Fixed Basic Rent for the next Six (6) years of the Term of this Lease shall mean: FOUR MILLION NINE HUNDRED FIFTY THOUSAND AND 00/100 ($4,950,000.00) DOLLARS for the Term payable as follows: (A) Yearly Rate: EIGHT HUNDRED TWENTY FIVE AND 00/100 ($825,000.00) DOLLARS. (B) Monthly Installment: SIXTY EIGHT THOUSAND SEVEN HUNDRED FIFTY AND 00/100 (68,750.00) DOLLARS. (10) Tenant's Percentage: SEVENTY FOUR POINT SIXTY THREE (74.63%) PERCENT which percentage is stipulated and agreed to by the parties hereto, subject to adjustment as provided for in Paragraph "42(e)". (11) Building Area: Lot 2, Block 503, on the Tax Map of the Borough of Leonia, County of State of New Jersey. (12) Parking Spaces shall mean a total of One Hundred Fifty (150) spaces; assigned and unassigned as indicated. (a) Assigned: 23 including 15 covered spaces for Tenant and 8 uncovered spaces for Tenant's visitors. (b) Unassigned: 127 (13) Permitted use shall be general and executive offices . (14) Security Deposit shall be $181,250.00. (15) Term shall mean Eleven (11) Years and Three (3) Months from the Commencement Date, unless extended pursuant to any option contained herein. (16) Termination Date shall be December 31, 2008. (17) Rent shall mean Fixed Basic Rent and Additional Rent. (18) Standard Industrial Classification Number of Tenant is . W I T N E S S E T H: For and in consideration of the covenants herein contained, and upon the terms and conditions herein set forth, Landlord and Tenant agree as follows: 1. DESCRIPTION. Landlord hereby leases to Tenant, and Tenant hereby hires from Landlord, the Demised Premises as defined in the Preamble (hereinafter called "Demised Premises" or "Premises"), as shown on the plan or plans initialed by the parties hereto marked Exhibit A annexed hereto and made part hereof in the Building as defined in the Preamble (hereinafter called the "Building") which is situated on the Building Area, together with the right to use, in common with other tenants of the Building and invitees, customers and employees, those public areas of the Common Facilities as hereinafter defined. 2. TERM. The Premises are leased for the Term to commence on the Commencement Date and to end at 12:00 midnight on the Termination Date, all as defined in the Preamble or on such other date as the Term may expire or be terminated pursuant to the provisions of this Lease or pursuant to law, at which time Tenant shall deliver up the Premises in accordance with all of the terms hereof; and Paragraph 25 ("Holdover Tenancy") shall in no way be construed as a waiver of this requirement to timely remove. 3. BASIC RENT. Tenant shall pay to Landlord during the Term the Fixed Basic Rent as defined in the Preamble (hereinafter called "Fixed Basic Rent"), payable in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. The Fixed Basic Rent shall accrue at the Yearly Rate as defined in the Preamble and shall be payable in advance on the first day of each calendar month during the Term at the Monthly Installments as defined in the Preamble, in accordance with the provisions of this Lease herein set forth, except that if the Commencement Date is not the first (1st) day of the month, Rent for the month in which the Commencement Date occurs shall be prorated to the end of the month, the first (1st) full monthly installment of Rent shall be due on the first (1st) day of the next month and after the expiration of the number of years in the Term of this Lease, the Term shall expire on the last day of the same month in which the Commencement Date of the Term occurred, it being the intention of the parties that the Term expire on the last day of the month. Landlord acknowledges receipt from Tenant of the first Monthly Installment by check, subject to collection, for Fixed Basic Rent for the first month of the Term. Tenant shall pay Rent as hereinafter provided, to Landlord at Landlord's above-stated address, or at such other place as Landlord may designate in writing, without the necessity of a bill therefore or demand of any nature whatsoever, and without counterclaim, deduction or set-off. 4. USE AND OCCUPANCY. (a) The Premises shall be used and occupied only for the Permitted Use described in the Preamble to this Lease and for no other use or purpose. Tenant shall not use or permit the use of the Premises or any part thereof in any way which would violate any certificate of occupancy for the Building or the Premises, or any of the covenants, agreements, terms, provisions and conditions of this Lease, or for any unlawful purposes or in any unlawful manner, or, in the reasonable judgment of any insurer of the Building, cause Landlord's insurance thereon to be canceled; and Tenant shall not suffer or permit the Premises or any part thereof to be used in any manner or anything to be done therein or suffer or permit anything to be brought into or kept in the Premises which, in the reasonable judgment of Landlord, shall in any way impair the character, reputation or appearance of the Building, impair or interfere with any of the Building services or the proper and economic heating, cleaning, air conditioning or other servicing of the Building or the Premises, or impair or interfere with the use of any of the other areas of the Building by, or occasion discomfort, inconvenience or annoyance to, any of the other tenants or occupants of the Building, if any. Tenant shall have access to the Building and the Demised Premises twenty-four (24) hours a day, three hundred sixty five (365) days a year. (b) If any governmental license or permit (other than the certificate of occupancy required to be obtained by Landlord) shall be required for the proper and lawful conduct of Tenant's business or other activity carried on in the Premises by Tenant and if the failure to secure such license or permit would, in any way, affect Landlord, Tenant, at Tenant's expense, shall duly procure and thereafter maintain such license or permit and submit the same to inspection by Landlord. Tenant, at Tenant's expense, shall at all times, comply with the terms and conditions of each such license or permit. (c) Tenant shall not store or permit to be used in any way in, on or about the Demised Premises any "hazardous materials", which, for the purposes hereof, shall include any chemical substance, material or waste or component thereof which is now or hereafter listed, defined or regulated as a hazardous or toxic chemical, substance, material or waste or component thereof by any Federal, State or local environmental laws and regulations promulgated pursuant to any of the foregoing including, for example at the federal level only and without limitation, the Resource Conservation and Recovery Act of 1976, 42 U.S.C. 6901, et seq.; the Occupational Safety and Health Act of 1970, 29 U.S.C. 651, et seq.; the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. 9601, et seq.; the Toxic Substances Control Act, 15 U.S.C. 2601, et seq.; the Clean Air Act, 42 U.S.C. 7401, et seq.; the Safe Drinking Water Act, 42 U.S.C. 300f, et seq.; and the Clean Water Act, 33 U.S.C. 1251, et seq. The foregoing shall not be deemed to prohibit the use of customary office supplies and equipment in quantities reasonably necessary for Tenant's Permitted Use. (d) Landlord agrees to indemnify and hold harmless the Tenant from any and all claims, damages, fines, judgments, penalties, costs, liabilities or losses (including, without limitation, any and all sums paid for settlement of claims, attorneys' fees, consultant and expert fees) arising during or after the Lease Term from or in connection with the presence or suspected presence of Hazardous Substances in or on the Premises, unless the Hazardous Substances are present as a result of negligence, willful misconduct of other acts of Tenant, Tenant's agents, employees, contractors or invitees. Without limitation of the foregoing, this indemnification shall include any and all costs incurred due to any investigation of the site or any cleanup, removal or restoration mandated by a federal, state or local agency or political subdivision, unless the Hazardous Substances are present as a result of negligence, willful misconduct or other acts of Tenant, Tenant's agents, employees, contractors or invitees. This indemnification shall spcifically include any and all costs due to Hazardous Substances which flow, diffuse, migrate or percolate into, onto or under the Premises after the Lease Term Commences. 5. CARE AND REPAIR OF PREMISES. Tenant covenants to commit no act of waste and to take good care of the Premises and the fixtures and appurtenances therein, and shall, in the use and occupancy of the Premises comply with all laws, orders and regulations of the federal, state and municipal governments or any of their departments affecting the Premises and with any and all environmental requirements resulting from the Tenant's use of the Premises, this covenant to survive the expiration or sooner termination of the Lease. Landlord shall, at Tenant's expense [except for structural repairs not necessitated by the misuse or neglect of Tenant or Tenant's agents, servants, visitors or licensees, which repairs, if any, shall be amortized over their useful life in accordance with generally accepted accounting principles, consistently applied, and included as an Operating Cost expense in accordance with Paragraph 23(a)], make all necessary repairs to the Premises. Landlord shall make all necessary repairs to the Common Facilities and to the parking areas, if any, the same to be included as an Operating Cost, except where the repair has been made necessary by misuse or neglect primarily caused by Tenant or Tenant's agents, servants, visitors or licensees, in which event Landlord shall nevertheless make the repair but Tenant shall pay to Landlord, as Additional Rent, immediately upon demand, the costs therefor. All improvements made by Tenant to the Premises, which are so attached to the Premises that they cannot be removed without material injury to the Premises, shall become the property of Landlord upon installation. Not later than the last day of the Term, Tenant shall, at Tenant's expense (a) remove all Tenant's personal property and those improvements made by Tenant which have not become the property of Landlord, including trade fixtures, movable paneling, partitions, and the like, (b) repair all injury done by or in connection with the installation or removal of said property and improvements, and (c) surrender the Premises in as good condition as they were at the beginning of the Term, reasonable wear and tear and damage by fire, the elements, casualty, or other cause not due to the misuse or neglect by Tenant, Tenant's agents, servants, visitors or licensees excepted, and in "broom clean" condition. All other property of Tenant remaining on the Premises after the last day of the Term shall be conclusively deemed abandoned and may be removed by Landlord, and Tenant shall reimburse Landlord for the cost of such removal. Landlord may have any such property stored at Tenant's risk and expense. Tenant acknowledges the existence of environmental laws, rules, and regulations, including, but not limited to, the Environmental Clean-up Responsibility Act of 1983 ("ECRA") and the Industrial Site Recovery Act of 1993 ("ISRA").Tenant shall comply with any and all such laws, rules, and regulations. Tenant represents to Landlord that Tenant's Standard Industrial Classification (SIC) Number, as same is set forth in the Preamble to this Lease and as used on Tenant's Federal Tax Return will not subject the Premises to ECRA/ISRA applicability. Any change by Tenant to an operation with a SIC Number subject to ECRA/ISRA shall require Landlord's written consent. Any such proposed change shall be sent in writing to Landlord sixty (60) days prior to the proposed change. Landlord, at its sole option, may arbitrarily deny such consent. Within thirty (30) days of the date of the expiration of the term of this Lease or the date of sooner termination hereof, Tenant shall provide to Landlord appropriate evidence of compliance with ECRA/ISRA and the rules, regulations and directives promulgated in connection therewith and applicable to Tenant's surrendering of the Premises, the Building, the Building Area and the Common Facilities to Landlord and ceasing its operations therein and thereon. Evidence of compliance as used in this paragraph and this Lease shall be deemed to include a letter of non- applicability regarding ECRA/ISRA or a letter of negative declaration issued by the New Jersey Department of Environmental Protection and Energy. Tenant hereby agrees to execute such documents as Landlord reasonably deems necessary to make such application as Landlord reasonably requires to assure compliance resulting from Tenant's use of the Demised Premises, including, but not limited to, payment of state agency fees, engineering fees, clean-up costs, filing fees, and suretyship expenses. As used in this Lease, ECRA/ISRA compliance shall include applications for determinations of non-applicability by the appropriate governmental authority. The foregoing undertaking shall survive the termination or sooner expiration of this Lease and surrender of the Demised Premises and shall also survive sale, lease, or assignment of the Demised Premises by Landlord. Tenant agrees to indemnify and hold Landlord harmless from any violation of ECRA/ISRA occasioned by Tenant's use of the Demised Premises. Tenant shall immediately provide Landlord with copies of all correspondence, reports, notices, orders, findings, declarations, and other materials pertinent to the Tenant's compliance and the Department of Environmental Protection and Energy ("DEPE") requirements under ECRA/ISRA as they are issued or received by the Tenant. 6. ALTERATIONS, ADDITIONS OR IMPROVEMENTS. Tenant shall not, without first obtaining the written consent of Landlord not to be unreasonably withheld or unduly delayed in each and every instance, make any alterations, additions or improvements in, to or about the Premises. Before proceeding with any Alteration, Tenant shall submit to Landlord, for Landlord's approval, plans and specifications for the work to be done, and Tenant shall not proceed with such work until it obtains Landlord's written approval of such plans and specifications which approval shall not be unreasonably withheld.Landlord agrees to approve or disapprove any such Alteration within fifteen (15) Business Days following Tenant's submission of the same for review in accordance with this Paragraph (the "First Review Period"). If Landlord shall disapprove of any of Tenant's plans during Landlord's First Review Period, Tenant shall be advised in writing by Landlord of the reasons for such disapproval. After Tenant resubmits its revised plans and specifications to Landlord, Landlord shall have a Second Review Period (as defined below) for review of the same subject to the other terms of this Paragraph. Landlord hereby agrees to give its approval or disapproval to said plans and specifications submitted by Tenant for Landlord's review within five (5) Business Days of receipt of the same by Landlord (the "Second Review Period"). With respect to either the First and/or Second Review Periods described herein, if Landlord shall fail to approve or disapprove of any such proposed plans and specifications within the aforementioned periods and the cause for such failure on the part of Landlord shall not be cause beyond the reasonable control of Landlord, then, provided Tenant shall, following the expiration of the aforementioned periods, send Landlord a notice (the "Warning Notice") setting forth Landlord's failure to so approve or disapprove the submitted plans and specifications and provided such Warning Notice shall expressly reference this Paragraph "6" of the Lease and the consequences of Landlord's failure to respond within the five (5) day period hereinafter set forth, then if Landlord shall fail to approve or disapprove of the submitted plans and specifications within a five (5) day period following the date upon which Landlord shall have received such Warning Notice, the proposed submitted plans and specifications shall be deemed approved. Notwithstanding the foregoing, Tenant may make decorative, non- structural alterations or alterations with a cost less than $50,000 which do not impact building mechanical systems or structure without the approval of the Landlord. 7. ACTIVITIES INCREASING INSURANCE RATES. If by reason of failure of Tenant to comply with the provisions of this Lease, including but not limited to the manner in which Tenant uses or occupies the Premises, the insurance rates shall, at the commencement of the Term, or at any time thereafter, be higher than they otherwise would be for a similar type building insured under a standard casualty policy, then Tenant shall reimburse Landlord, as Additional Rent hereunder, for that part of all insurance premiums thereafter paid or incurred by Landlord, which shall have been charged because of such failure or use by Tenant, and Tenant shall make such reimbursement upon the first (1st) day of the month following the billing to Tenant of such additional cost by Landlord. 8. ASSIGNMENT AND SUBLEASE. Provided that Tenant shall not be in default hereunder, Tenant may assign the Lease or sublease the Premises to any party, subject to the following: (a) In the event that Tenant desires to sublease the whole or any portion of the Premises or assign the within Lease to any other party, the terms and conditions of such sublease or assignment, together with the name and address of the proposed assignee or sublessee, financial statements prepared by a certified public accountant, certified to the President of the proposed assignee or sublessee; the nature and character of the business of the proposed sublessee or assignee; and any other information requested by Landlord reasonably calculated to enable Landlord to determine the proposed assignee or sublessee's financial responsibility, shall be communicated to Landlord in writing no later than sixty (60) days prior to the effective date of any such sublease or assignment, and, prior to such effective date, Landlord shall have the option, exercisable in writing to Tenant, to recapture the within Lease so that such prospective sublessee or assignee shall then become the sole Tenant of Landlord hereunder, or alternatively, to recapture said space, provided the aggregate of all subleased space as recaptured exceeds 15,000 square feet and the sublease as recaptured is for the balance of the term less one (1) day. Upon receipt by Tenant of said notification of intent to recapture, Tenant shall then remove itself and all of its personal property from the Demised Premises pursuant to all the terms, conditions and provisions of this Lease and in accordance with Paragraph 5 of this Lease pertaining to Tenant's removal and restoration of the Demised Premises. In the event Landlord shall recapture the Demised Premises pursuant to this Paragraph as above stated, the Tenant's obligation to pay Rent and all other payments due hereunder shall continue until Tenant has completed its removal and restoration of the Demised Premises pursuant thereto. Tenant shall be required to pay the full monthly rental for every month or any portion thereof in which it remains in occupancy hereunder up to and until it has completed its removal from the Demised Premises in accordance with all of the terms of this Lease and Landlord has retaken possession thereof. After Tenant's removal from the Demised Premises and restoration of same, and Landlord has retaken possession thereof, this Lease shall terminate, cease and come to an end. (b) In the event that Landlord elects not to recapture the Lease as hereinabove provided, Tenant may nevertheless assign this Lease or sublet the whole or any portion of the Premises, subject to the Landlord's prior written consent, which consent shall not be unreasonably withheldor unduly delayed; provided, however, that Landlord shall not be deemed unreasonable if it refuses to consent to any proposed sublease or assignment of the Lease to any tenant, subtenant or other occupant of the Building, or, if, in the reasonable judgment of Landlord, the business of such proposed subtenant or assignee is not compatible with the type of occupancy of the Building,and subject to the consent of any mortgagee, trust deed holder, or ground lessor, on the basis of the following terms and conditions: (1) The Demised Premises shall not, without Landlord's prior consent, have been listed or otherwise publicly advertised for assignment or subletting at a rental rate lower than the higher of (a) the annual Rent then payable, or (b) the then prevailing rental rate for other space in the Building. (2) The terms and conditions of the sublease or assignment shall not be materially altered from those terms and conditions previously communicated to Landlord. (3) The assignee or sublessee shall assume, by written instrument satisfactory to Landlord, exercising reasonable discretion, all of the obligations of this Lease, and a copy of such assumption agreement shall be furnished to Landlord within ten (10) days of its execution. (4) Tenant and each assignee shall be and remain liable for the observance of all the covenants and provisions of this Lease, including, but not limited to, the payment of Rent reserved herein, throughout the Term, as the same may be renewed, extended or otherwise modified. (5) Tenant and any assignee shall promptly pay to Landlord fifty (50%) percent of any consideration received for any assignment or sublet and/or all of the Rent received by Tenant in excess of the Rent required to be paid by Tenant for the area assigned or sublet, computed on the basis of an average square foot rent for the gross square footage Tenant has leased, except that Tenant shall in such instance be entitled to retain one hundred (100%) percent of any compensation received for furniture and equipment without sharing it with Landlord, provided such compensation is at fair market value. (6) In any event, the acceptance by Landlord of any Fixed Basic Rent or Additional Rent from the assignee or from any of the subtenants, or the failure of Landlord to insist upon a strict performance of any of the terms, conditions, and covenants contained herein, shall not release Tenant herein, nor any assignee assuming this Lease or sublessee, from any and all of the obligations herein during and for the entire Term. (7) Tenant shall deposit with Landlord a sum equal to three (3) months rent to be paid by the sublessee or assignee as and for an additional Security Deposit to be held by Landlord in accordance with the terms of Paragraph 16 hereof. (8) Landlord shall require a Seven Hundred Fifty and 00/100 ($750.00) Dollar payment to cover its handling charges for each request for consent to any sublet or assignment prior to its consideration of the same. Tenant acknowledges that its sole remedy with respect to any assertion that Landlord's failure to consent to any sublet or assignment is unreasonable shall be the remedy of specific performance, and Tenant shall have no other claim or cause of action against Landlord as a result of Landlord's actions in refusing to consent thereto. (c) Any sublet or assignment to a parent, subsidiary, affiliate (as hereinafter defined) or successor entity of Tenant shall not be subject to the provisions of Subparagraphs (a) and (b)(5) hereof and shall not require Landlord's prior written consent, but all other provisions of this Paragraph shall apply. Provided Tenant is not in default of this Lease, the Tenant named herein, shall have the right, without requiring the prior consent of Landlord, to assign its interest in this Lease, for the use permitted in this Lease, to sublet the whole or part of the Premises on one or more occasions to any number of affiliates of the Tenant named herein. For the purposes of this Paragraph "8(b)(8)(c)", an "affiliate" of the Tenant named herein shall mean any corporation, partnership or other business entity which controls or is controlled by, or is under common control with Tenant and the term "control" as used with respect to any corporation, partnership, or other business entity shall mean the possession of the power to direct or cause the direction of the management and policies of such corporation, partnership, or other business entity whether through the ownership of voting securities or contract. Any transfer or cessation of control over any affiliate to which the Lease is assigned shall constitute an assignment of this Lease to which all of the provisions of this Paragraph "8(b)(8)(c)" shall apply. No such assignment shall be valid or effective unless, within ten (10) days after the execution thereof, Tenant shall deliver to Landlord all of the following: (I) a duplicate original instrument of assignment, in form and substance reasonably satisfactory to Landlord, duly executed by Tenant, in which Tenant shall (A) waive all notices of default given to the assignee, and all other notices of every kind or description now or hereafter provided in this Lease, by statute or rule of law, and (B) acknowledge that Tenant's obligations with respect to this Lease shall not be discharged, released or impaired by (i) such assignment, (ii) any amendment or modification of this Lease, whether or not the obligations of Tenant are increased thereby, (iii) any further assignment or transfer of Tenant's interest in this Lease, (iv) any exercise, non-exercise or waiver by Landlord of any right, remedy, power or privilege under orwith respect to this Lease, (v) any waiver, consent, extension, indulgence or other act or omission with respect to any other obligations of Tenant under this Lease, (vi) any act or thing which, but for the provisions of such assignment, might be deemed a legal or equitable discharge of a surety or assignor, to all of which Tenant shall consent in advance, and (C) expressly waive and surrender any then existing defense to its liability hereunder it being the purpose and intent of Landlord and Tenant that the obligations of Tenant hereunder as assignor shall be absolute and unconditional under any and all circumstances, and (II) an instrument, in form and substance satisfactory to Landlord, duly executed by the assignee, in which such assignee shall assume the observance and performance of, and agree to be bound by, all of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed. Tenant may, upon written notice to Landlord, but without Landlord's written consent, permit any "affiliates" (as hereinabove defined) to use the whole or part of the Premises for any of the uses permitted to Tenant. Such use shall not be deemed to vest in any such affiliates any right or interest in this Lease or in any such affiliates any right or interest in this Lease or in the Premises, nor shall such use release, relieve, discharge or modify any of Tenant's obligations hereunder. Tenant may upon written notice to Landlord, but without Landlord's written consent, assign or transfer its entire interest in the Lease and the leasehold estate hereby created or sublet the whole or part of the Premises to a "successor corporation" of Tenant, as such term is hereinafter defined, provided that Tenant shall not be in default in any of the terms, covenants, conditions and agreements of this Lease, including, but not limited to, the payment of the Fixed Basic Rent or Additional Rent payable by Tenant hereunder. A "successor corporation" as used in this Paragraph "8(b)(8)(c)" shall mean (i) a corporation into which or with which Tenant, its corporate or other successors or assigns, is merged or consolidated, in accordance with applicable statutory provisions for the merger or consolidation of corporations or any other business entities, provided that by operation of law or by effective provisions contained in the instruments of merger or consolidation, the liabilities of the corporation are assumed by the corporation surviving such merger or consolidation, or (ii) a corporation acquiring this Lease and the term hereby demised, the good will and all or substantially all of the other property and assets (other than capital stock of such acquiring corporation) of Tenant, its corporate successors or assigns, and assuming all or substantially all of the liabilities of Tenant, its corporate successors or assigns, or (iii) any corporate successor to a successor corporation becoming such by either of the methods described above in clauses (i) and (ii). The acquisition by Tenant, its corporate successors or assigns, of all or substantially all of the assets, together with the assumption of all or substantially all of the obligations and liabilities of any corporation, shall be deemed to be a merger of such corporation into Tenant for the purpose of this Paragraph "8(b)(8)(c)". A successor corporation shall, pursuant to the subparagraph "(c)", have all of the rights and obligations of Tenant hereunder. (d) Notwithstanding Subparagraph (c) above, if Tenant is a corporation, and, if, at any time during the Term, the persons owning a majority of its "voting stock" at the time of the execution of this Lease should cease to own a majority of such voting stock (except as the result of transfers by bequest or inheritance), Tenant covenants to so notify Landlord. Landlord may terminate this Lease by Notice to Tenant to be effective ninety (90) days after service. This section shall not apply whenever Tenant is a corporation, the outstanding stock of which is listed on a recognized stock exchange. For the purposes of this Subparagraph (d), stock ownership with the principles set forth in Section 544 of the Internal Revenue Code of 1986, as amended, to and including the date of this Lease, and the term "voting stock" shall refer to shares of stock regularly entitled to vote for the election of directors of the corporation. (e) If, pursuant to the Federal Bankruptcy Code (or any similar law hereafter enacted having the same general purpose), Tenant is permitted to assign this Lease, notwithstanding the restrictions contained in this Lease, adequate assurance of future performance by an assignee expressly permitted under such code shall be deemed to mean the deposit of cash security in an amount equal to the sum of one year's Rent, plus an amount equal to the sum of all other charges due and payable by Tenant hereunder for the calendar year preceding the year in which such assignment is intended to become effective, which deposit shall be held by Landlord for the balance of the Term, without interest, as security for the full performance of all of Tenant's obligations under this Lease, to be held and applied in the manner specified for security in Paragraph 16. (f) If this Lease be assigned, or if the Demised Premises or any part thereof be underlet or occupied by anyone other than Tenant, Landlord may, after default by Tenant collect Rent from the assignee, undertenant or occupant and apply the net amount collected to the Rent herein reserved, but no such assignment, underletting, occupancy or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, undertenant or occupant as Tenant, or a release of Tenant from the further performance by Tenant of all covenants on the part of Tenant herein contained. The consent by Landlord to an assignment or underletting shall not in any wise be construed to relieve Tenant from obtaining the express consent in writing of Landlord to any further assignment or underletting, nor shall the same release or discharge Tenant from any liability, past, present or future, under this Lease, and Tenant shall continue fully liable in all respects hereunder. 9. COMPLIANCE WITH RULES AND REGULATIONS. Tenant shall, at Tenant's sole cost and expense, observe and comply with the rules and regulations hereinafter set forth in Exhibit B, annexed hereto and made a part hereof, and with such further reasonable rules and regulations as Landlord may prescribe uniformly applied to all tenants in the Building, on written notice to Tenant, for the safety, care and cleanliness of the Building and the comfort, quiet and convenience of other occupants of the Building. Tenant shall not place a load upon any floor of the Demised Premises exceeding the floor load per square foot area which it was designed to carry, to wit: 80 lbs per square foot live load on the Second Floor and 200 lbs per square foot live load on the First Floor, and which is allowed by law. Landlord reserves the right to prescribe the weight and position of all safes, business machines and mechanical equipment. Such installments shall be placed and maintained by Tenant, at Tenant's expense, in settings sufficient, in Landlord's judgment, reasonably exercised, to absorb and prevent vibration, noise and annoyance. 10. DAMAGE TO BUILDING/WAIVER OF SUBROGATION. If the Building is damaged by fire or any other cause to such extent that the cost of restoration, as reasonably estimated by Landlord, will equal or exceed twenty-five percent (25%) of the replacement value of the Building (exclusive of foundations) just prior to the occurrence of the damage, then Landlord may, no later than the sixtieth (60th) day following the damage, give Tenant a notice of election to terminate this Lease, or, if the cost of restoration of the Demised Premises will equal or exceed fifty percent (50%) of such replacement value and if the Demised Premises shall not be reasonably usable for the purpose for which they are leased hereunder, then Tenant may, no later than the sixtieth (60th) day following the damage, give Landlord a notice of election to terminate this Lease. In either said event of election, this Lease shall be deemed to terminate on the thirtieth (30th) day after the giving of said notice, and Tenant shall surrender possession of the Premises within a reasonable time thereafter; and Rent shall be apportioned as of the date of said surrender, and any Rent paid for any period beyond said date shall be repaid to Tenant. If the cost of restoration as estimated by Landlord shall amount to less than twenty-five percent (25%) of said replacement value of the Building, or if, despite the cost, Landlord does not elect to terminate this Lease, Landlord shall restore the Building and the Premises with reasonable promptness, subject to Force Majeure, as hereinafter defined, and Tenant shall have no right to terminate this Lease. Tenant understands that Landlord will not carry insurance of any kind on Tenant's furniture, fixtures, equipment or improvements and Landlord shall not be obligated to restore fixtures and improvements owned by Tenant. In any case in which use of the Premises is affected by any damage to the Building, there shall be either an abatement or an equitable reduction in Fixed Basic Rent depending on the period for which and the extent to which the Premises are not reasonably usable for the purpose for which they are leased hereunder. The words "restoration" and "restore" as used in this Paragraph shall include repairs. If the damage results primarily from the fault of Tenant, or Tenant's agents, servants, visitors or licensees, Tenant shall not be entitled to any abatement or reduction in Rent, except to the extent of any rent insurance maintained by Tenant and received by Landlord. Landlord shall maintain rent insurance, same to be charged to Tenant as an Operating Cost. Notwithstanding the provisions of this Paragraph of the Lease, in the event of any loss or damage to the Building, the Premises and/or any contents (herein "property damage"), each party waives all claims against the other for any such loss or damage and each party shall look only to any insurance which it has obtained to protect against such loss (or in the case of Tenant, against any tenant of the Building that has not waived subrogation against Tenant) and each party shall obtain, for each policy of such insurance, provisions waiving any claims against the other party (and against any other tenant[s] in the Building that has waived subrogation against Tenant) for loss or damage within the scope of such insurance. 11. EMINENT DOMAIN. If Tenant's use of the Premises is materially affected due to the taking by eminent domain of (a) the Premises or any part thereof or any estate therein; or (b) any other part of the Building; then, in either event, this Lease shall terminate on the earlier of (i) the date of delivery of the Deed by the owner of the fee to the Condemnor or (ii) the date of lawful physical possession by Condemnor provided said possession materially affects Tenant's use of the Demised Premises. The Rent shall be apportioned as of said termination date and any Rent paid for any period beyond said date shall be repaid to Tenant. Tenant shall not be entitled to any part of the award for such taking or any payment in lieu thereof, but Tenant may file a separate claim for any taking of fixtures and improvements owned by Tenant which have not become Landlord's property, and for moving expenses, provided the same shall in no way affect or diminish Landlord's award. In the event of a partial taking, which does not affect a termination of this Lease, but does deprive Tenant of the use of a portion of the Demised Premises, there shall either be an abatement or an equitable reduction of the Fixed Basic Rent, depending on the period for which and the extent to which the portion of the Premises so taken are not reasonably usable for the purpose for which they are leased hereunder, and Tenant's Percentage shall be proportionately adjusted, except that Tenant may terminate this Lease if any partial taking results in Tenant being unable to substantially conduct its business at the Premises. 12. INSOLVENCY OF TENANT. Either (a) the appointment of a receiver to take possession of all or substantially all of the assets of Tenant, or (b) a general assignment by Tenant for the benefit of creditors, or (c) any action taken or suffered by Tenant, voluntarily or involuntarily, under any insolvency, reorganization or bankruptcy law or act, shall constitute a default under this Lease by Tenant, and Landlord may terminate this Lease forthwith and upon notice of such termination Tenant's right to possession of the Demised Premises shall cease, and Tenant shall then quit and surrender the Premises to Landlord but Tenant shall remain liable as hereinafter provided in Paragraph 14 hereof. 13. LANDLORD'S REMEDIES ON DEFAULT. If Tenant defaults in the payment of Rent, or defaults in the performance of any of the other terms, covenants and conditions hereof, or permits the Premises to become deserted, abandoned or vacated in excess of six (6) months, Landlord may give Tenant notice of such default, and, if Tenant does not cure any Rent default (hereinafter "Monetary Default") within five (5) days, or other default (hereinafter "Non-Monetary Default") within fifteen (15) days, after giving of such notice, or if such other default is of such nature that it cannot be completely cured within such period, if Tenant does not commence such curing within such fifteen (15) days and thereafter proceed with reasonable diligence and in good faith to cure such default, or, if Tenant shall be deemed an Habitual Late Payer, to be construed as a Non-Monetary Default for the purposes of a dispossess proceeding but not requiring any notice as provided for all other Non-Monetary Defaults, then, in any such event, Landlord may terminate this Lease on not less than ten (10) days' notice to Tenant, and on the date specified in said notice, Tenant's right to possession of the Demised Premises shall cease, and Tenant shall then quit and surrender the Premises to Landlord, but Tenant shall remain liable as hereinafter provided. If this Lease shall have been so terminated by Landlord pursuant to Paragraphs 12 and 13 hereof, Landlord may at any time thereafter resume possession of the Premises by any lawful means and remove Tenant or other occupants and their effects. Tenant shall be liable for, and pay to Landlord, within ten (10) days after demand, as Additional Rent hereunder, reasonable attorneys' fees, disbursements and costs incurred by Landlord in enforcing the provisions of this Lease. 14. DEFICIENCY. In any case where Landlord has recovered possession of the Premises by reason of Tenant's default, Landlord may, at Landlord's option, occupy the Premises or cause the Premises to be redecorated, altered, divided, consolidated with other adjoining premises (if any), or otherwise changed or prepared for re-letting, and may re-let the Premises, or any part thereof, as agent of Tenant or otherwise, for a term or terms to expire prior to, at the same time as, or subsequent to, the original expiration date of this Lease, at Landlord's option, and receive the Rent therefor. Rent so received shall be applied first to payment of such expenses as Landlord may have incurred in connection with recovery of possession, redecorating, altering, dividing, consolidating with other adjoining premises (if any), or otherwise changing or preparing for re-letting, and the re-letting, including brokerage and reasonable attorney's fees, and then to payment of damages in amounts equal to the Rent hereunder and to the costs and expenses of performance of the other covenants of Tenant as herein provided. Tenant agrees, in any such case, whether or not Landlord has re-let, to pay to Landlord damages equal to the Rent and other sums herein agreed to be paid by Tenant, less the net proceeds of the reletting, if any, as ascertained from time to time, and the same shall be payable by Tenant on the several rent days above specified. Tenant shall not be entitled to any surplus accruing as a result of any such re-letting. In re-letting the Premises as aforesaid, Landlord may grant rent concessions, and Tenant shall not be credited therewith. No such re-letting shall constitute a surrender and acceptance or be deemed evidence thereof. If Landlord elects, pursuant hereto, actually to occupy and use the Premises, or any part thereof, during any part of the balance of the Term as originally fixed or since extended, there shall be allowed against Tenant's obligation for Rent or damages as herein defined, during the period of Landlord's occupancy, the reasonable value of such occupancy, not to exceed in any event the Rent herein reserved and such occupancy shall not be construed as a release of Tenant's liability hereunder. Alternatively, in any case where Landlord has recovered possession of the Premises by reason of Tenant's default, Landlord may, at Landlord's option, and at any time thereafter, and without notice or other action by Landlord, and without prejudice to any other rights or remedies it might have hereunder or at law or equity, become entitled to recover from Tenant as damages for such breach, in addition to such other sums herein agreed to be paid by Tenant, to the date of re-entry, expiration and/or dispossess, an amount equal to the difference between the Rent reserved in this Lease from the date of such default to the date of expiration of the Term, as the same may have been extended or renewed, and the then fair and reasonable rental value (inclusive of Rent) of the Premises for the same period. Said damages shall become due and payable to Landlord immediately upon such breach of this Lease and without regard to whether this Lease be terminated or not, and, if this Lease be terminated, without regard to the manner in which it is terminated. In the computation of such damages, the difference between any installments of Rent thereafter becoming due and the fair and reasonable rental value of the Premises for the period for which such installment was payable shall be discounted to the date of such default at the rate of not more than four percent (4%) per annum. Tenant hereby waives all right of redemption to which Tenant or any person under Tenant might be entitled by any law now or hereafter in force. In the event of any breach or threatened breach by Tenant of any of the agreements, terms, covenants or conditions contained in this Lease, Landlord shall be entitled to enjoin such breach or threatened breach and shall have the right to invoke any right or remedy allowed at law or in equity or by statute or otherwise as though re-entry, summary dispossess proceedings, and other remedies were not provided for in this Lease. During the pendency of any proceedings brought by Landlord to recover possession by reason of default, Tenant shall continue all money payments required to be made to Landlord, and Landlord may accept such payments for use and occupancy of the Demised Premises. In such event, Tenant waives its right in such proceedings to claim as a defense that the receipt of such money payments by Landlord constitutes a waiver by Landlord of such default. Landlord's remedies hereunder are in addition to any remedy allowed by law. 15. SUBORDINATION OF LEASE. This Lease shall, at Landlord's option, or at the option of the holder of any underlying lease (the "Ground Lease") or holder of any first mortgage or deed of trust (the "Mortgage"), be subject and subordinate to any such Ground Lease(s) and to any such Mortgage which may now or hereafter affect the real property of which the Premises form a part, and also to all renewals, modifications, consolidations and replacements of said Ground Lease(s) and said Mortgage. Although no instrument or act on the part of Tenant shall be necessary to effectuate such subordination, Tenant will, nevertheless, within five (5) days of receipt of same, execute and deliver such further instruments confirming such subordination of this Lease as may be desired by the holder of said Mortgage or by any of the Landlords under such Ground Lease(s). Tenant hereby appoints Landlord attorney-in-fact, irrevocably, to execute and deliver any such instrument for Tenant. If any Ground Lease to which this Lease is subject terminates or any Mortgage superior to this Lease is foreclosed upon or otherwise sold, Tenant shall, on timely request, attorn to the owner of the reversion. (a) Landlord represents that as of the date hereof, there is only one superior mortgage with respect to the Real Property which is held by Interchange State Bank (hereinafter "Mortgagee"). With respect to Mortgagee, the provisions of Article 15 hereof shall be effective upon the delivery to Tenant of a subordination, non-disturbance and attornment agreement in favor of Tenant. Such subordination, non-disturbance and attornment agreement shall be substantially in the form attached hereto as Schedule F, and Landlord shall deliver the same to Tenant within thirty (30) days after the execution and delivery of this Lease by and to both Landlord and Tenant. Tenant agrees that it shall, at the request of Landlord, enter into a subordination, non- disturbance and attornment agreement in the form as annexed hereto as Schedule F. If Landlord shall fail to obtain such subordination, non-disturbance and attornment agreement within thirty (30) days after the execution and delivery of this Lease, then except as expressly set forth below, Landlord shall have no liability therefor, but Tenant may terminate this Lease upon three (3) Business Days' prior written notice to Landlord furnished at any time during the five (5) day period following the expiration of the foregoing thirty (30) day period or following such earlier date upon which Landlord has notified Tenant that Landlord will not be able to obtain such subordination, non-disturbance and attornment agreement, and following the expiration of said three (3) Business Days, this Lease shall forthwith terminate. If this Lease shall be so terminated, Landlord shall reimburse Tenant for any reasonable out-of-pocket expenses incurred by Tenant for actual and reasonable construction, architectural or engineering fees in connection with this Lease, which such expenses were incurred and are allocable to a period following the date of the execution and delivery of this Lease by both parties, except to the extent previously paid by virtue of and subject to the provisions of Paragraph 27(b) of this Lease. If at any time prior to the expiration of the thirty (30) day period hereinabove provided, Landlord shall notify Tenant that Landlord will not be able to obtain for Tenant from Mortgagee such subordination, non-disturbance and attornment agreement substantially in the form annexed hereto as Schedule F in regard to this Lease, then Landlord may give notice thereof to Tenant and Tenant shall have a period of ten (10) days after the date of such notice to terminate this Lease; provided, however that Landlord's obligation to reimburse Tenant in the event of a lease termination for certain expenses as set forth in the previous sentence shall not include any expenses incurred by Tenant following the date Landlord gives Tenant the notice as described in this sentence. If Tenant shall not exercise any of its rights of termination as herein provided, Landlord shall have no further obligation to seek to obtain a subordination, non-disturbance and attornment agreement from Mortgagee and this Lease shall not be affected by Landlord's inability to obtain the same. (b) With respect to future superior mortgages and future superior leases, the provisions of Article 15 hereof shall be conditioned upon the execution and delivery by and between Tenant and any such superior mortgagees or superior lessor of a subordination, non-disturbance or attornment agreement on the customary form of such superior mortgagee or superior lessor which shall provide in substance that so long as no default exists hereunder beyond any applicable grace period (if any), Tenant shall not be disturbed in its possession of the Premises pursuant to the provisions of this Lease. Tenant agrees to execute such non-disturbance agreements and return same to Landlord within ten (10) days after Landlord's written request therefor. If Tenant shall fail to so execute, acknowledge and return any of the foregoing non-disturbance agreements, then this Lease shall be subordinate to such existing or future superior mortgages or such existing or future superior leases, as the case may be, notwithstanding the fact that Tenant has not executed and delivered such non-disturbance agreement. (c) Any lease to which this Lease is, at the time referred to, subject and subordinate is herein called "superior lease" and the lessor of a superior lease or its successor in interest, at the time referred to, is herein called "superior lessor"; and any mortgage to which this Lease is, at the time referred to, subject and subordinate is herein called "superior mortgage" and the holder of a superior mortgage is herein called "superior mortgagee". As of the date hereof, there are no superior leases affecting the Real Property. 16. SECURITY DEPOSIT. (a) Tenant shall deposit with Landlord on the signing of this Lease the Security Deposit as defined in the Preamble for the full and faithful performance of Tenant's obligations under this Lease, including, without limitation, the surrender of possession of the Premises to Landlord as herein provided. If Landlord applies any part of said Security Deposit to cure any default of Tenant, Tenant shall, on demand, deposit with Landlord the amount so applied so that Landlord shall have the full Security Deposit on hand at all times during the Term. Landlord,in the event that the Demised Premises are sold, shall transfer and deliver the Security Deposit, as such,to the purchaser of the Demised Premises and shall notify Tenant thereof, and thereupon Landlord shall be discharged from any further liability in reference thereto. The Security Deposit (less any portions thereof used, applied or retained by Landlord in accordance with the provisions of this Paragraph 16), which need not be placed in any separate account of Landlord, shall be returned to Tenant, without interest, within thirty (30) days after the expiration or sooner termination of this Lease without the fault of Tenant and after delivery of the entire Premises to Landlord in accordance with the provisions of this Lease. Tenant covenants that it will not assign or encumber or attempt to assign or encumber the Security Deposit and Landlord shall not be bound by any such assignment, encumbrance or attempt thereof. (b) Three (3) months prior to the Termination Date, the Landlord will obtain an irrevocable letter of credit in favor of Tenant to secure its obligation to return the Security Deposit as required under this Lease. In the event the Landlord fails to do so, the Tenant shall have the right of setoff equal to an amount not to exceed the Security Deposit against the payment of Fixed Basic Rent and Additional Rent for the last three (3) months of the term of this Lease. In the event of the insolvency of Tenant, or in the event of the entry of a bankruptcy judgment in any court against Tenant which is not discharged within thirty (30) days after entry, or in the event a petition is filed by or against Tenant under any chapter of the bankruptcy laws of the State of New Jersey or the United States of America, then in such event, Landlord may require Tenant to deposit additional security, to be held by Landlord pursuant to the terms of this Lease, in an amount which in Landlord's sole judgment reasonably exercised would be sufficient to adequately assure Tenant's performance of all of its obligations under this Lease including all payments subsequently accruing. Failure of Tenant to deposit the security required by this Paragraph, within ten (10) days after Landlord's written demand, shall constitute a material breach of this Lease by Tenant. 17. RIGHT TO CURE THE BREACHING PARTY'S BREACH. If any party hereto breaches any covenant or condition of this Lease, the other party hereto may (but shall not be obligated to), on reasonable notice to the breaching party (except that no notice need be given in case of emergency), cure such breach at the expense of the breaching party and the reasonable amount of all costs and expenses (including, without limitation, reasonable attorneys' fees, disburse- ments and costs), incurred by the curing party in so doing (whether paid by the curing party or not) shall be deemed Additional Rent payable on demand. 18. MECHANIC'S LIENS. Tenant covenants not to suffer or permit any mechanic's or materialmen's or other liens to be filed against Landlord's fee or leasehold interest in the Building, Building Area or Demised Premises by reason of work, labor, services or materials supplied or claimed to have been supplied to Tenant or any contractor, subcontractor or any other party or person acting at the request of Tenant or anyone holding the Demised Premises or any part thereof or under the Tenant, and Tenant shall, within thirty (30) days after receiving notice of the filing thereof, cause the same to be discharged of record by payment, deposit, bond or Order of a Court of competent jurisdiction or otherwise. Nothing in this Lease contained shall be deemed or construed in any way as constituting consent by Landlord to the making of any alterations or additions by Tenant for the purposes of N.J.S.A. 2A:44-68, et seq., or any amendment thereof, or constituting a request by Landlord, express or implied, to any contract, subcontract, labor or materialmen for the performance of any labor or the furnishing of any materials for the use or benefit of the Landlord. 19. RIGHT TO INSPECT AND REPAIR. Landlord may enter the Demised Premises but shall not be obligated to do so (except as required by any specific provision of this Lease) at any reasonable time on reasonable notice to Tenant (except that no notice need be given in case of emergency) for the purpose of inspection or the making of such repairs, replacement or additions, in, to, on and about the Premises or the Building, as well as for servicing, inspecting and reading the check meter(s) installed therein, as Landlord deems necessary or desirable. Tenant shall have no claims or cause of action against Landlord by reason thereof. In no event shall Tenant have any claim against Landlord for interruption to Tenant's business, however occurring, except for Landlord's gross negligence, willful act or omission. 20. SERVICES PROVIDED BY LANDLORD. Subject to intervening laws, ordinances, regulations and executive orders, while Tenant is not in default under any of the provisions of this Lease, Landlord agrees to furnish, at Tenant's sole cost and expense as more particularly set forth herein: (a) The cleaning services as set forth on Exhibit D annexed hereto and made a part hereof, subject to the conditions therein stated. Tenant shall pay the cost of all cleaning services required by Tenant as an Operating Cost. If Tenant [using a standard of reasonableness] is dissatisfied with Landlord's cleaning service, Tenant shall notify Landlord in writing about such dissatisfaction setting forth the reasons thereof. Landlord shall have a period of three (3) months upon receipt of said notice to satisfy Tenant's reasonable complaints. In the event the cleaning service is still unsatisfactory, Tenant shall have the option of designating a different cleaning service, provided the cost to Landlord of such substituted service is equal to or less than the prior service. (b) Heating, ventilating and air conditioning (herein "HVAC"), as appropriate for the season, together with Common Facilities lighting and electric energy all during "Building Hours," as hereinafter defined. c) Cold and hot water for drinking and lavatory pur- poses. (d) Elevator service during Building Hours. (e) Restroom supplies and exterior window cleaning when reasonably required. (f) Notwithstanding any requirements of this Lease, Landlord shall not be liable for failure to furnish any of the aforesaid services when such failure is due to Force Majeure, as hereinafter defined. Landlord's liability for its failure to furnish any service required to be furnished by it pursuant to this Lease shall be as set forth in Paragraph 21. Landlord shall not be liable, under any circumstances, except for Landlord's gross negligence, willful act or omission, including, but not limited to, that arising from the negligence of Landlord, its agents, servants or invitees, or from defects, errors or omissions in the construction or design of the Demised Premises and/or the Building including the structural and non-structural portions thereof, for loss of or injury to Tenant or to property, however occurring, through or in connection with or incidental to the furnishing of, or failure to furnish, any of the aforesaid services or for any interrup- tion to Tenant's business however occurring. (g) Tenant acknowledges that it is currently the only Tenant of the Building and that it will operate its business on a twenty-four (24) hour basis, including Building Holidays. Accordingly, and until such time as this ceases to be the case, Tenant shall pay to Landlord as Additional Rent one hundred (100%) percent of Landlord's cost of providing the following services: (i) cleaning services as set forth on Exhibit D; (ii) all HVAC, lighting, electric, water, sewer, and all other utilities; (iii) all HVAC, lighting, electric, water, sewer, and all other utilities during Building Holidays after it ceases to be the only tenant; (iv) all HVAC, lighting, electric, water, sewer and all other utilities during all periods other than Building Hours after it ceases to be the only tenant. (h) Anything contained elsewhere in this Lease to the contrary notwithstanding, until such time as the Building is fully leased, Tenant's Percentage for the services set forth in subparagraph (g) of this Paragraph, and for which it must pay Additional Rent, shall be calculated and determined based on its pro rata share of the square footage of the occupied space in the Building. 21. INTERRUPTION OF SERVICES OR USE. Interruption or curtailment of any service maintained in the Building or at the Building Area, if caused by Force Majeure, as hereinafter defined, shall not entitle Tenant to any claim against Landlord or to any abatement in Rent, and shall not constitute a constructive or partial eviction, unless Landlord fails to take measures as may be reasonable under the circumstances to restore the service without undue delay. If the Premises are rendered untenantable in whole or in part, for a period of ten (10) consecutive business days, by making of repairs, replacements or additions, other than those made with Tenant's consent or caused by misuse or neglect by Tenant, or Tenant's agents, servants, visitors or licensees, there shall be a proportionate abatement of Rent from and after said tenth (10th) consecutive business day and continuing for the period of such untenantability. In no event shall Tenant be entitled to claim a constructive eviction from the Premises unless Tenant shall first have notified Landlord in writing of the condition or conditions giving rise thereto, and, if the complaints be justified, unless Landlord shall have failed, within a reasonable time after receipt of such notice, to remedy, or commence and proceed with due diligence to remedy, such condition or conditions, all subject to Force Majeure, as hereinafter defined. 22. BUILDING STANDARD ELECTRIC SERVICE. (a) Landlord agrees to redistribute Building Standard Office Electrical Service (as hereinafter defined) to the Premises consistent with the requirements as set forth in this Lease (not exceeding the present electrical capacity at the Premises" upon the following terms and conditions: (i) Landlord shall, at Landlord's sole cost and expense, install a check meter to measure all of the electric power being consumed by Tenant on the First (1st) Floor of the Demised Premises inclusive of HVAC service, and Tenant shall pay to Landlord the amount so consumed as determined by said meter calculated at the rate structure then existing of the utility company supplying electrical energy to the Building for Tenant's consumption, as so measured. As to Tenant's consumption of electrical power and HVAC on the Second (2nd) Floor of the Demised Premises, Tenant shall pay its pro rata share, to wit: 54.05% of the cost thereof determined by a meter or meters installed by the Landlord for the Second (2nd) Floor of the Building in the manner heretofore set forth. The Landlord shall also install a check meter to measure electric power inclusive of HVAC service for the common areas for which Tenant shall pay its pro rata share and which shall be included in the amount of Operating Costs to be paid to landlord by Tenant pursuant to the terms of Paragraph 23(b). All of the foregoing shall be adjusted to reflect the Tenant's 24 hours access to the Building, as well as its use thereof during Building Holidays as set forth in Paragraph 20(g). Said payments shall be due as Additional Rent with the next installment of Fixed Basic Rent thereafter becoming due. Notwithstanding the foregoing, Tenant shall have the option, at its sole cost and expense, of installing its own direct electric meters, and if necessary, reducting the HVAC system to measure its consumption of electric power, inclusive of HVAC and contracting directly with the utility providing same, in which event it shall not pay its pro rata cost of any such consumption separately metered. (ii) Landlord shall not be liable in any way to Tenant for any loss, damage or expense which Lessee may sustain or incur as a result of any failure, defect or change in the quantity or character of electrical energy available for redistribution to the Premises pursuant to this paragraph, nor for any interruption in the supply, and Tenant agrees that such supply may be interrupted for inspection, repairs and replacement on reasonable notice and in emergencies. In any event, the full measure of Landlord's liability for any interruption in the supply due to Landlord's acts or omission shall be an abatement of Fixed Basic Rent. In no event shall Landlord be liable for any business interruption suffered by Tenant. (iii) Landlord shall at a reasonable and competitive cost to Tenant furnish and install all replacement lighting tubes, lamps ballasts and bulbs required in the Premises. (iv) Tenant shall make no alteration to the existing electrical risers, wiring and other conductors or outlets without Landlord's consent. Should Landlord consent, all such alterations shall be provided by Landlord and the cost therefor paid for by Tenant upon demand as Additional Rent. (b) The "Building Standard Electric Service" shall, unless otherwise provided by agreement in writing between the parties, be defined as the provision by Landlord of electrical current for usual office requirements, equipment and heating, ventilating and air-conditioning systems, all consistent with the requirements of Exhibit C annexed hereto, from 8:00 a.m. to 6:00 p.m. on every day, Monday through Friday, and on those Saturdays from 8:00 a.m. to 1:00 p.m. provided, with respect to Saturday service, Tenant shall notify and request the same 48 hours in advance, but excluding those holidays set forth on Exhibit E annexed hereto. In no event shall Building Standard Electric Service include electrical current for any computer room installation, data processing center, or for any requirements needing greater than a 15-amp line. All installments of electrical fixtures, appliances and equipment within the Demised Premises shall be subject to Landlord's prior written approval which approval shall not be unreasonably withheld or unduly delayed. Nothing herein shall be construed as conferring on Landlord the right or option to cut off electric service to the Building outside of Building Hours, except in instances requiring emergency or necessary repairs, it being intended that electrical service to the elevators and Demised Premises shall be available on a twenty-four (24) hour basis. Accordingly, the Standard defined herein is provided as a measure for the allocation of costs of the electrical service only. Tenant shall pay to Landlord in equal monthly installments, as Additional Rent, in advance, the reasonable cost of electrical services and energy in excess of the Standard referred to above, whether resulting from the installation of additional fixtures, appliances or equipment with or without Landlord's consent, or from use at times other than those set forth above. Landlord shall have the right, but not the obligation, at any time, to conduct an electrical survey of the Demised Premises to assist in the determination of such electrical services and energy utilized by Tenant in excess of the Standard referred to above for the purpose of calculating the Additional Rent due to Landlord from Tenant for Tenant's use of electrical services and energy in excess of the Standard referred to above. The provisions of this subparagraph (b) shall only apply to the electric usage of Tenant in the Second (2nd) Floor of the Demised Premises. (c) In the event that the utility company that furnishes electric energy to the Landlord, for supply to the Tenant, declines to continue furnishing electric energy to Landlord for Building Standard Electric Service not due to Landlord's nonpayment of electricity bills, Landlord reserves the right to discontinue furnishing electric energy to Tenant at any time, upon reasonable notice to Tenant, and from and after the effective date of such termination, Landlord shall no longer be obligated to furnish Tenant with electric energy, provided however, that such termination date may be extended for a time reasonably necessary for Tenant to make arrangement to obtain electric service directly from the public utility company servicing the Building. If Landlord exercises such right of termination, this Lease shall remain unaffected thereby and shall continue in full force and effect; and thereafter Tenant shall diligently arrange to obtain electric service directly from the utility company servicing the Building, and may utilize the then existing electric feeders, risers and wiring serving the Demised Premises to the extent available and safely capable to being used for such purpose and only to the extent of Tenant's then authorized connected load. Landlord shall not be obligated to pay any part of any cost required for Tenant's direct electric service. 23. ADDITIONAL RENT. A. 1. Tax Escalation. If the Real Estate Taxes for the Building and Building Area at which the Demised Premises are located for any Calendar Year or proportionate part thereof, during the Term, shall be greater than the Base Real Estate Taxes (adjusted proportionately for periods less than a Calendar Year), then Tenant shall pay to Landlord as Additional Rent, Tenant's percentage of all such excess Real Estate Taxes. As used in this Paragraph 23(A), the words and terms which follow mean and include the following: (i) "Base Real Estate Taxes" shall be as defined in the Preamble. (ii) "Real Estate Taxes" shall mean the property taxes and assessments imposed upon the Building and Building Area, or upon the Rent, as such, payable to Landlord, including, but not limited to, real estate, city, county, village, school and transit taxes, or taxes, assessments or charges levied, imposed or assessed against the Building and Building Area by any other taxing authority, whether general or specific, ordinary or extraordinary,foreseen or unforeseen. Income, franchise, transfer, inheritance, corporate, mortgage recording, capital stock taxes of Landlord, or penalties or interest thereon, shall be deemed excluded from the term "real estate taxes" for the purposes hereof. If, due to a future change in the method of taxation, any franchise, income or profit tax shall be levied against Landlord in substitution for, or in lieu of, or in addition to, any tax which would otherwise constitute a Real Estate Tax, such franchise, income or profit tax shall be deemed to be a Real Estate Tax for the purposes hereof; conversely, any additional real estate tax hereafter imposed in substitution for,or in lieu of any franchise, income or profit tax (which is not in substitution for, or in lieu of, or in addition to, a Real Estate Tax as hereinbefore provided) shall not be deemed a Real Estate Tax for the purposes hereof. (2) Payment. At any time, and from time to time, after the establishment of the Base Real Estate Taxes, Landlord shall advise Tenant in writing of Tenant's pro rata share with respect to same as estimated for the next twelve (12) month period (and for each succeeding twelve (12) month period or proportionate part thereof if the last period prior to the Lease's termination is less than twelve (12) months) as then known to Landlord, and thereafter, Tenant shall pay as Additional Rent, Tenant's Percentage of these costs for the then current period affected by such advice (as the same may be periodically revised by Landlord as additional costs are incurred) in equal Monthly Installments, such new rates being applied to any months for which the Fixed Basic Rent shall have already been paid which are affected by the Tax Escalation Costs above referred to, as well as the unexpired months of the current period, the adjustment for the then expired months to be made at the payment of the next succeeding monthly rental, all subject to final adjustment at the expiration of each Calendar Year as defined in Subparagraph (c) hereof (or proportionate part thereof, if the last period prior to the Lease's termination is less than twelve (12) months). (i) Tenant, shall have the right at its own cost and expense, in good faith, to contest the levy of any such taxes, assessments or liens or the validity or amount thereof, by appropriate legal proceedings which shall not operate to prevent the collection of said taxes and assessments, and the sale of the Premises or any part thereof to satisfy the same,and pending any such legal proceedings, the Landlord shall have the right to pay, discharge or remove the taxes, assessments or liens so contested. Any such proceeding for contesting the validity of or to recover overpayment of any such real estate taxes, assessments or liens may be brought by Tenant in the name of the Landlord or in the name of the Tenant, or both,as may be necessary or proper or as Tenant may deem advisable, provided that if any such proceeding be brought by Tenant, it shall save the Landlord harmless against any and all loss, cost or expense of any kind including legal fees that may be imposed upon Landlord or the Premises in connection therewith. Any such proceedings for the contesting of the validity of or to recover overpayment of any such real estate taxes, assessments, or liens shall not relieve the Tenant of its obligation to pay the Escalation Costs when due, as required under the terms of this Lease. Landlord shall give notice to the Tenant within sixty (60) days from the date that Landlord receives notice of any increase in the assessed value of or the taxes imposed on the Premises or on the property of which the Premises forms a part. (ii) If Landlord shall receive a refund for any Tax Year in which a Tax Payment shall have been made by Tenant, Landlord shall repay to Tenant, Tenant's Proportionate Share of such refund after deducting therefrom the costs and expenses incurred by Landlord and which have not been borne by Tenant for its cost of obtaining such refund. If Landlord shall effect a reduction in assessed valuation thus reducing the amount of taxes which would otherwise be payable by Tenant hereunder, Tenant shall pay, within twenty (20) days after demand, to Lessor, Tenant's share of the costs and expenses of obtaining such reduction of assessed value (less any amounts paid or applied upon receipt of refund), which demand shall set forth a breakdown of such costs and expenses. Notwithstanding anything herein contained to the contrary, in the event the last period prior to the Lease's termination is less than twelve (12) months, the Base Real Estate Taxes during said period shall be proportionately reduced to correspond to the duration of said final period. B. OPERATING COSTS. (a) It is expressly agreed that Tenant will pay in addition to Fixed Basic Rent provided in Paragraph 3 above, Additional Rent for all of Landlord's costs of operating and maintaining the Building so that the Fixed Basic Rent shall be absolutely net to Landlord, except as otherwise specifically set forth in this Lease. Tenant shall pay to Landlord, as Additional Rent, Tenant's Percentage, as defined in the Preamble of all operating and maintenance costs incurred by Landlord for the Building and Office Building area for any Calendar Year (or proportionate part thereof if the Lease was not in effect during the entire Calendar Year ("Operating Costs Payment") Operating costs shall include, by way of illustration and not of limitation: personal property taxes; management fees at an initial rate of $40,000.00 with reasonable yearly increases thereafter of five (5%) percent; labor, including all wages and salaries; fringe benefits; social security taxes, and other taxes which may be levied against Landlord upon such wages and salaries; supplies; repairs and cleaning services, maintenance for structural and non-structural repairs whether ordinary or extraordinary; maintenance and service contracts; the cost of all HVAC, electric, water, sewer, gas and other utilities for the Building, common facilities and common areas not otherwise billed to Tenant, but not including utility and energy costs for which any other tenant is to pay separately pursuant to a check meter or other measuring device; painting; wall and window washing; laundry and towel service; tools and equipment; fire and other insurance, trash removal, repair, maintenance and replacement of roofs, parking area, curbs and walkways; snow removal; public amenities; and all other items properly constituting direct operating costs according to standard accounting practices, provided that the contract price charged to Landlord for all of the above shall be at commercially reasonable prices usually charged for similar buildings in similar locations (hereinafter collectively referred to as the "Operating Costs"), but not including, brokerage commissions, leasing commissions, finder's fees, space planner fees and other similar type fees, salaries and fringe benefits for Landlord's executives above the rank of building manager; costs of repairs or replacements incurred by reason of fire or other casualty or condemnation; costs for constructing a tenant installation for any individual tenant at the Building, or amounts contributed to any such tenant in lieu thereof, or any other tenant allowances granted as an inducement to enter into a lease; amounts received by Landlord through proceeds of insurance or by any manufacturer's warranty to the extent the proceeds are compensation for expenses which were previously included in Operating Costs hereunder; advertising and promotional expenditures; costs incurred or any specific compensation Landlord receives in performing work or funishing services for any new or existing tenant in the Building;rent and other charges payable in connection with any ground or underlying lease; amounts paid to affiliates of Landlord in excess of the amounts that would have been paid absent such relationship; costs of any special services rendered to a tenant of the Building which is not rendered generally to tenants therein; interest or penalties for late payments by Landlord; refinancing costs; legal, appraisal and auditing fees and court costs in connection with leasing space in the Building or in connection with proceedings or applications to reduce real estate tax assessments; all expenses for which Landlord has received reimbursement and any fines or penalties imposed by legal authorities having jurisdiction thereof by reason of such existing violations; rent payable with respect to any leasing office; management fees in excess of those referred to herein; costs incurred in operating the parking facilities for the Building except to the extent the cost of operating the parking facilities exceeds the revenues generated from operating the parking facilities; and costs incurred to test, survey, cleanup, contain, abate, remove, or otherwise remedy hazardous waste or asbestos-containing materials from the Property unless the waste or asbestos-containing materials were in or on the Property because of Tenant's negligence or willful acts or omissions; depreciation of Building; interest, points and fees on debt or amortization on any mortgage or mortgages encumbering the Building and/or the land on which the Building is situated; income or excess profits taxes; costs of maintaining Landlord's corporate existence; franchise taxes; and expenditures required to be capitalized for federal income tax purposes, inclusive of renovations to and replacement of the Building and equipment, (which expenditures shall be amortized over their useful life in accordance with generally accepted accounting principles, consistently applied, and such amortization shall be included as an Operating Cost expense), unless said expenditures are for the purpose of reducing Operating Costs within the Building and Building Area or are required under any governmental law, ordinance or regulation, in which event the costs thereof shall be included. (b) Commencing as of the Commencement Date, Tenant shall pay its Tenant's Percentage of the Operating Costs. Tenant shall make estimated payments on account of Tenant's Percentage of these Operating Costs in monthly installments in advance on the first (1st) day of each month, equal to One-Twelfty (1/12th) of Tenant's Percentage of the Landlord's expenditures for Operating Costs for the Calendar Year or part thereof immediately preceding the year in which to be made. Monthly payments in the first full or partial Calendar Year commencing with the Commencement Date shall be TEN THOUSAND AND 00/100 ($10,000.00) DOLLARS. If Tenant's estimated payments on account of a full or partial year exceeds the actual amount of Tenant's Percentage of Operating Costs for such period, Tenant shall be entitled to offset the excess against the estimated payments on account of Tenant's Percentage of Operating Costs next to become due Landlord. If Tenant's actual amount of Tenant's Percentage of Operating Costs exceed Tenant's estimated payments on account for a full or partial year, Tenant shall pay Landlord the deficiency for such period within thirty (30) days after receipt of the annual statement described below. C. Calendar Year. As used in this Paragraph 23, and throughout this Lease, Calendar Year shall mean the twelve (12) month period commencing January 1 and ending December 31. Once the Base Real Estate Taxes are established, in the event any lease period is less than a Calendar Year, then the Base Real Estate Taxes shall be adjusted to equal the proportion that said Lease period bears to the Calendar Year, and Tenant shall pay to Landlord as Additional Rent for such period, an amount equal to Tenant's Percentage of the Excess for said period over the adjusted base with respect to same. D. Books and Records. For the protection of Tenant, Landlord shall maintain books of account which shall be open to Tenant and its representatives at all reasonable times so that Tenant can determine that such Operating and Tax Costs have, in fact, been paid or incurred. Any disagreement with respect to any one or more of said charges if not satisfactorily settled between Landlord and Tenant shall be referred by either party to an independent Certified Public Accountant to be mutually agreed upon, and if such an accountant cannot be agreed upon, the American Arbitration Association in Newark, New Jersey shall be asked by either party to select an arbitrator, whose decision on the dispute will be final and binding upon both parties, who shall jointly share any cost of such arbitration. Pending resolution of said dispute, Tenant shall pay to Landlord the sum so billed by Landlord subject to its ultimate resolution as aforesaid. E. Right of Review. Once Landlord shall have finally determined said Operating or Tax Costs at the expiration of a Calendar Year, then as to the item so established, Tenant shall only be entitled to dispute said charge as finally established, or review the records therefor, for a period of nine (9) months after such charge is finally established, and Tenant specifically waives any right to dispute any such charge, or review the records therefor, at the expiration of said nine (9) month period. 24. TENANT'S ESTOPPEL. Tenant shall from time to time, within ten (10) days of receipt of a request from Landlord, execute, acknowledge and deliver to Landlord, or to anyone Landlord shall designate, without charge to Landlord, a written statement of Tenant certifying that (i) the Lease is unmodified and in full force and effect, or that the Lease is in full force and effect as modified and listing the instruments of modification; (ii) the dates to which the rents and charges have been paid; (iii) that Tenant has not discharged or used and does not discharge or use any hazardous or toxic substance or waste at the Premises or Building Area; and (iv) whether or not, to the best of Tenant's knowledge, Landlord is in default hereunder, and if so, specifying the nature of the default, and as to any other matters as may reasonably be so requested. It is intended that any such statement delivered pursuant to this Paragraph 24 may be relied upon by a prospective purchaser of Landlord's interest or mortgagee of Landlord's interest or assignee of any mortgage of Landlord's interest. 25. HOLDOVER TENANCY. If Tenant holds possession of the Premises after the Term, Tenant shall become a tenant from month to month under the provisions herein provided, at a monthly basic rental of double the rate charged herein for Fixed Basic Rent as provided for pursuant to N.J.S.A. 2A:42-6 it being agreed that "yearly rate", as used in that Statute, shall be equal to the Fixed Basic Rent of the last Lease Year of the Term, and without the requirement for demand or notice by Landlord to Tenant demanding delivery of said Premises for which this Lease and all relevant provisions shall be deemed sufficient written demand (but Additional Rent shall continue as provided in this Lease), which sum shall be payable in advance on the first day of each month, and such tenancy shall continue until terminated by Landlord, or until Tenant shall have given to Landlord, at least sixty (60) days prior to the intended date of termination, a written notice of intent to terminate such tenancy, which termination date must be as of the end of a calendar month. The provisions of this Paragraph do not exclude the Landlord's rights of re-entry and shall not be deemed or construed as a waiver by Landlord of any other rights or remedies granted to Landlord under the terms of this Lease or as available at law. 26. RIGHT TO SHOW PREMISES. Landlord may show the Premises to prospective purchasers and mortgagees at any time, upon reasonable prior notice to Tenant, and Landlord shall have the right to place upon the Premises a suitable "For Sale" sign. During the twelve (12) months prior to Termination Date, of this Lease, Landlord may show the Premises to prospective tenants, during business hours on reasonable notice to Tenant and may place the usual "to let" signs thereon, provided same do not obstruct any window. 27. LANDLORD'S WORK - TENANT'S WORK. CREDIT FOR TENANT'S BUILDOUT (a) Landlord agrees that, at Landlord's expense, prior to the commencement of the Term, it will do substantially all of the work in the Demised Premises in accordance with Exhibit C annexed hereto and made a part hereof ("Landlord's Work"), otherwise Landlord shall have no obligation to perform any other "Landlord's Work" in the Demised Premises, and Tenant specifically agrees that it will accept the Demised Premises in its "as is" condition. (b) Tenant shall be responsible for all other work in the Demised Premises including Tenant's buildout. Provided Tenant is not in default of this Lease, Landlord shall pay Tenant, up to two (2) years after the Commencement Date, the sum of EIGHT HUNDRED THOUSAND and 00/100 ($800,000.00) DOLLARS towards said buildout on the following additional terms and conditions: (i) upon receiving paid invoices for Tenant's completed buildout in the minimum amount of $200,000, Landlord shall pay Tenant the sum of $200,000 on June 30, 1997; (ii) upon receiving paid invoices for Tenant's completed buildout in the minimum amount of an additional $100,000, Landlord shall pay Tenant the sum of $100,000 on July 31, 1997; (iii) upon receiving paid invoices for Tenant's completed buildout in the minimum amount of an additional $100,000, Landlord shall pay Tenant the sum of $100,000 on August 30, 1997; (iv) upon receiving paid invoices for Tenant's completed buildout in the minimum amount of an additional $200,000, Landlord shall pay Tenant the sum of $200,000 on September 30, 1997; (v) upon receiving paid invoices for Tenant's completed buildout in the mimimun amount of an additional $200,000, Landlord shall pay Tenant the sum of $200,000 on December 31, 1997. (vi) For the purposes of this paragraph, Tenant's completed buildout shall include all work to complete the Demised Premises to Tenant's specifications, inclusive of alarm systems, computer cabling and data line, and the upgrading of UPS and the generator and the installation of additional UPS, generator and supplemental HVAC plus a ten (10%) percent add-on factor for architectural and soft costs, but excluding Tenant's telephone and furniture, which have been actually installed in the Demised Premises. In the event Tenant does not expend the sum of $800,000 for Tenant's buildout within two (2) years of the Commencement Date, Tenant shall receive a rent credit from Landlord for the sum not expended or $50,000, whichever is less. Tenant shall have the right to receive said rent credit prior to the aforesaid two (2) year period upon written notification by Tenant to the Landlord that Tenant's Buildout is completed. Upon payment by the Landlord of the aforesaid rent credit, Landlord shall have no further obligation under this Paragraph to make any additional payment towards Tenant's Buildout. (vii) Anything contained herein to the contrary notwithstanding, Landlord, at its sole and exclusive option, may make the above payments directly to Tenant's contractors subject to verification by Tenant as to the amount due such contractor. In the event Landlord fails to make any of the aforesaid payments, Tenant shall have the right of setoff against rent payable hereunder. In the event paid invoices equal less than any installment Landlord is required to pay hereunder, Landlord shall pay Tenant only the amount of the invoice required to be paid pursuant to the terms of this Paragraph, but any unpaid amount shall be paid with the next installment subject to the Landlord's receiving corresponding invoices for Tenant's completed Buildout for same. (c) Lease Commencement shall occur when Landlord has substantially completed all the work to be done by Landlord in accordance with Exhibit C (except for so-called "punch list" items of unfinished work, if any, which shall be completed by Landlord not more than sixty (60) days after Lease Commencement), unless Landlord has been precluded from completing said work as a result of Tenant's acts or omissions. In no event shall Tenant's obligation to pay Fixed Basic Rent and Additional Rent, other than utilities, commence prior to October 1, 1997 (d) Landlord and Tenant agree and acknowledge that but for Tenant's Work and Tenant's Buildout, the Landlord and the Building would be exempt from ADA requirements. Anything contained herein to the contrary notwithstanding, and except as specifically set forth in Exhibit "C", the Tenant shall be liable for any additions, alterations or revisions of the Demised Premises,and Building bathrooms,in order to make same ADA compliant, and the Tenant hereby holds the Landlord harmless and indemnifies it from any and all liabilities, lawsuits, judgments, fines or penalties emanating from any ADA requirement imposed upon the Landlord. 28. WAIVER OF TRIAL BY JURY. It is mutually agreed by and between Landlord and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action or proceeding brought by either of the parties hereto against the other on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Demised Premises, and/or any claim of injury or damage, and any emergency statute or any other statutory remedy. Should Landlord seek recourse to equity to enforce any of its rights under this Lease, Tenant agrees to waive any defense which it might otherwise have that Landlord has an adequate remedy at law. Tenant agrees that it shall not interpose any counterclaim or set-off in a summary proceeding or in any action based, in whole or in part, on nonpayment of Rent, without, however, waiving any such claim or set-off or precluding its right to assert such claim or set-off in any separate action. 29. LATE CHARGE/HABITUAL LATE PAYER. (a) Anything in this Lease to the contrary notwithstanding, at Landlord's option, Tenant shall pay a "Late Charge" of eight percent (8%) of any installment of Rent paid more than five (5) days after the due date thereof, to cover the extra expense involved in handling delinquent payments. The amount of the Late Charge to be paid by Tenant shall be reassessed and added to Tenant's obligations for each successive monthly period until paid. (b) Should Tenant pay Rent later than five (5) days after the due date more than once within a four (4) month period or more than twice within a Lease Year, Tenant shall be deemed an Habitual Late Payer. 30. TENANT'S INSURANCE. (a) Tenant covenants to provide, on or before the Commencement Date, a comprehensive policy of general liability insurance naming Landlord as an additional named insured, insuring Tenant and Landlord against any liability commonly insured against and occasioned by accident resulting from any act or omission on or about the Premises and any appurtenances thereto. Such policy is to be written by an insurance company qualified to do business in the State of New Jersey reasonably satisfactory to Landlord. The policy shall be with limits not less than Three Million ($3,000,000.00) Dollars in respect of any one person, in respect of any one accident, and in respect of property damage. Said limits shall be subject to periodic review, and Landlord reserves the right to increase said coverage limits if, in the reasonable opinion of Landlord, said coverage becomes inadequate and is less than that commonly maintained by tenants in similar buildings in the area by tenants making similar uses. Said policy shall contain a provision for ten (10) days written notice by certified or registered mail, return receipt requested, to Landlord of any change or modification of said policy. At least ten (10) days prior to the expiration or termination date of any policy, Tenant shall deliver a renewal or replacement policy with proof of the payment of the premium therefor. (b) Tenant covenants and represents, said representation being specifically designed to induce Landlord to execute this Lease, that Tenant's personal property and fixtures and any other items which Tenant may bring to the Premises which may be subject to any claim for damages or destruction due to Landlord's negligence shall be fully insured by a policy of insurance covering all risks with no deductible which policy shall specifically provide for a waiver of subrogation for Landlord and all Building tenants without regard to whether or not same shall cost an additional premium and notwithstanding anything to the contrary contained in this Lease. Should Tenant fail to maintain said all risk insurance with the required waiver of subrogation, or fail to maintain the liability insurance, naming Landlord as an additional named insured, then Tenant shall be in default hereunder and shall be deemed to have breached its covenants as set forth herein. 31. COMPLETE AGREEMENT. This Lease constitutes the complete agreement and understanding between the parties hereto with respect to the matters set forth herein, and supersedes and terminates any and all prior negotiations or understandings between the parties hereto. No alteration, amendment or modification of any of the terms and provisions of this Lease shall be valid unless made pursuant to an instrument in writing signed by each of the parties hereto. No representations or promises shall be binding on the parties hereto except those representations and promises contained herein or in some future writing signed by the party making such representation(s) or promise(s). The parties do not intend to confer any benefit hereunder on any person, firm, corporation or other entity, other than the parties hereto. 32. QUIET ENJOYMENT. Landlord covenants that if, and so long as, Tenant pays the Rent as herein provided, and performs the covenants hereof, Landlord shall do nothing to affect Tenant's right to peaceably and quietly have, hold and enjoy the Premises for the Term, subject to the provisions of this Lease. 33. INDEMNITY. Tenant shall indemnify and save harmless Landlord and its agents from (a) any and all claims (i) arising from (x) the conduct or management by Tenant, its subtenants, licensees, its or their employees, agents, contractors or invitees on the Demised Premises or of any business therein, or (y) any work or thing whatsoever done, or any condition created (other than by Landlord for Landlord's account) in or about the Demised Premises during the Term, or during the period of time, if any, prior to the Commencement Date that Tenant may have been given access to the Demised Premises, or (ii) arising from any negligent or otherwise wrongful act or omission of Tenant or any of its subtenants or licensees or its or their employees, agents, contractors or in- vitees, and (b) all costs, expenses and liabilities incurred in or in connection with each such claim or action or proceeding brought thereon. In case any action or proceeding be brought against Landlord by reason of any such claim, Tenant, upon notice from Landlord, shall resist and defend such action or proceeding. (a) For the purposes of this Lease, "Hazardous Material" means and includes any hazardous, toxic or dangerous waste, substance or material (including without limitation all dental, medical and pharmaceutical waste or so-called red-bag waste) defined as such in (or for the purposes of) the Comprehensive Environmental Response, Compensation, and Liability Act, any so-called "Superfund" or "Superlien" law, or other Federal, State or Local Statute, law, ordinance, code, rule, regulation, order, decree or other requirement or any Governmental Authority relating to, or imposing liability or standards of conduct concerning, any hazardous, toxic or dangerous waste, substance or material, as now or at any time hereinafter may be in effect as same may be amended. (b) Tenant shall comply with any and all laws, regulations, or orders with respect to the discharge and removal of Hazardous Material, shall pay immediately when due the costs of removal of any such Hazardous Material, and shall keep the Demised Premises, the Building, and the Building Area free of any lien imposed pursuant to such laws, regulations or orders. If Tenant fails to do so, then, after notice to Tenant and the expiration of the earlier of (i) applicable cure periods hereunder, or (ii) the cure period permitted under applicable law, regulation, or order, Landlord may either declare this Lease to be in default or cause the Demised Premises, the Building and the Building Area to be freed from the Hazardous Material with the cost of the removal to be paid by Tenant as Additional Rent. Upon Tenant's failure to do so, Tenant shall give Landlord and its agents and employees access to the Demised Premises, and Landlord shall have the right, but not the obligation, to remove such Hazardous Material. Tenant further agrees not to release or dispose of any Hazardous Material at the Demised Premises, the Building, or the Building Area except as permitted under all applicable laws, regulations and conditions. Landlord shall have the right at any time to conduct an environmental audit of the Demised Premises, the Building and the Building Area and Tenant shall cooperate in the conduct of any such environmental audit. Tenant shall defend, indemnify and save Landlord harmless from and against any and all loss, cost, damage and expenses (including all attorney's fees and costs) asserted or proven against Landlord as a result of any claim in connection with such Hazardous Material. The foregoing indemnification is in addition to any other indemnification contained herein and shall survive any termination or expiration of the Lease. Notwithstanding the foregoing, Tenant shall not be responsible for compliance with any laws as the relate to pre-existing conditions. (c) Tenant shall not install or permit to be installed in the Demised Premises, the Building or the Building Area friable asbestos or any substance containing asbestos or any other material deemed to be hazardous by Federal, State or Local regulations respecting such material (hereinafter collectively referred to as "Asbestos"), and shall promptly,at Tenant's expense, either (i) remove any material which such regulations deem hazardous and require to be removed or (ii) otherwise comply with such Federal, State or Local regulations. If Tenant shall fail to so remove or otherwise comply,Landlord may declare this Lease to be in default and/or do whatever is necessary to eliminate said substance from the Demised Premises, the Building, or the Building Area or otherwise comply with the applicable law, regulation, or order and the costs thereof shall be paid by Tenant as Additional Rent. Upon Tenant's failure to do so, Tenant shall give Landlord and its agents and employees access to the Demised Premises and Landlord shall have the right, but not the obligation, to remove such Asbestos. Tenant shall defend, indemnify and save Landlord harmless from and against any and all loss, cost, damage and expenses (including all attorney's fees and costs) asserted or proven against Landlord as a result of any claim in connection with such Asbestos. The foregoing indemnification is in addition to any other indemnification contained herein and shall survive any termination or expiration of the Lease. (d) In addition to any other indemnification contained herein, Tenant hereby agrees to indemnify Landlord (and its successors and assigns) and hold Landlord (and its successors and assigns) harmless from and against any and all claims, demands, losses, costs, damages, liabilities, fines, penalties, charges, administrative and judicial proceedings and orders, judgments, remedial action requirements, enforcement actions of any kind, and all costs and expenses of any and every kind and nature whatsoever (including, but not limited to, reasonable attorney's fees and expenses, whether at trial level or on appeal) which Landlord shall or may, at any time, sustain or incur by reason of, in connection with, arising from it otherwise relating to any one of the following (collectively, the "Conditions"): (i) any breach of the representations and warranties or covenants set forth, respectively, in subparagraphs (b) and (c) of this Paragraph 33, or (ii) The presence on or under the Demised Premises, Building Area of any asbestos or Hazardous Material which is caused by Tenant, its employees, agents, contractors or subcontractors; (iii) any activity carried on or undertaken on or off the Demised Premises, prior to or during the term of the Lease, by Tenant or any employees, agents, contractors or subcontractors of Tenant or any third persons occupying or present on the Demised Premises, the Building, or the Building Area in connection with the handling, treatment, removal, storage, decontamination, cleanup, transport or disposal of any Hazardous Materials at any time located or present on or under the Demised Premises, the Building, or the Building Area, or (iv) the presence of Asbestos in the Demised Premises or any activity carried on or undertaken in the Demised Premises in connection with the elimination and removal of Asbestos from the Demised Premises or to otherwise comply with applicable laws, regulations or orders concerning Asbestos in the Demised Premises caused by Tenant, its employees, agents, contractors or subcontractors;, or (v) the filing of any lien by or on behalf of any New Jersey regulatory authority relating to the existence or removal of any Hazardous Material related to the Demised Premises, the Building, or the Building Area caused by Tenant, its employees, agents, contractors or subcontractors;, or (vi) the failure of Tenant to comply in all respects with all of the provisions of any and all Federal, State and Local statute, law, ordinance, code, rule, regulations, order, decree or other Governmental Authority regulating, relating to or imposing liability or standards of conduct concerning any Hazardous Material. The foregoing indemnity shall further apply to any residual contamination on or under the Demised Premises, the Building, or the Building Area, or affecting any natural resources, and to any contamination of any property or natural resources arising in connection with the generation, use handling, storage, transport or disposal of such Hazardous Materials and Asbestos, and irrespective of whether any such activities were or will be undertaken in accordance with applicable laws, regulations, codes or ordinances. (e) The Tenant agrees to pay, reimburse or make whole any loss that Landlord may suffer as a result of the occurrence of any of the Conditions as and when such amounts are incurred by Landlord. (f) The liability of Tenant under this Paragraph 33 shall in no way be limited, impaired or otherwise affected by any amendment or modification of the provisions of this Lease. (g) Tenant further covenants and agrees to pay all fees and expenses, including reasonable attorney's fees and expenses and court costs, which may be incurred by Landlord, its successors or assigns, in enforcing any of the terms of provisions of this Paragraph 33, in addition to all other amounts due hereunder. (h) The indemnification and other covenants and terms contained in this Paragraph 33 shall survive in perpetuity, notwithstanding any termination or expiration of the Lease. 34. PARAGRAPH HEADINGS. The paragraph headings in this Lease and position of its provisions are intended for convenience only and shall not be taken into consideration in any construction or interpretation of this Lease or any of its provisions. 35. APPLICABILITY TO HEIRS AND ASSIGNS. The provisions of this Lease shall apply to, bind and inure to the benefit of Landlord and Tenant and their respective heirs, successors, legal representatives and assigns. It is understood that the term "Landlord" as used in this Lease means only the owner, a mortgagee in possession or a term lessee of the Building, so that in the event of any sale of the Building or of any lease thereof or if a mortgagee shall take possession of the Premises, Landlord named herein shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord hereunder accruing thereafter, and it shall be deemed without further agreement that the purchaser, the term lessee of the Building, or the mortgagee in possession has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder and Tenant shall upon receipt of notice from the owner of the reversion attorn thereto. 36. PARKING SPACES. Tenant's occupancy of the Demised Premises shall include the use of those Assigned and Unassigned parking spaces as enumerated in the Preamble. Tenant shall, upon request, promptly furnish to Landlord the license numbers of the cars operated by Tenant and its subtenants, licensees, invitees, concessionaires, officers and employees. If any vehicle of Tenant, or of any subtenant, licensee, concessionaire, or of their respective officers, agents or employees, is parked in any part of the Common Facilities other than the employee parking area(s) designated therefor by Landlord, Tenant shall pay to Landlord such penalty as may be fixed by Landlord from time to time. All amounts due under the provisions of this Paragraph shall be deemed to be Additional Rent. Landlord reserves the right to substitute assigned parking spaces reasonably similar to the ones initially occupied by Tenant at any time and from time to time during the Term as may be reasonably required by Landlord. 37. LANDLORD'S LIABILITY FOR LOSS OF PROPERTY. Landlord shall not be liable for any loss of property from any cause whatsoever, including, but not limited to, theft or burglary, fire and other casualty, from the Demised Premises, and any such loss arising from the negligence of Landlord, its agents, servants or invitees, or from defects, errors or omissions in the construction or design of the Demised Premises and/or the Building including the structural and non-structural portions thereof, and Tenant covenants and agrees to make no claim for any such loss at any time, except Landlord shall be liable for its gross negligence, willful acts or omission.. 38. PARTIAL INVALIDITY/GOVERNING LAW. If any provisions of this Lease, or the application thereof to any person or circumstances, shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such provision or provisions to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and every provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. This Lease agreement shall be governed by and construed in accordance with the laws of the State of New Jersey. 39. BROKER. Each party represents and warrants to the other that the Broker, as defined in the Preamble, is the sole broker with whom they have negotiated in bringing about this Lease, and each party agrees to indemnify and hold the other and Landlord's mortgagee(s) harmless from any and all claims of other brokers and expenses in connection therewith arising out of or in connection with the negotiation of or the entering into this Lease by Landlord and Tenant claiming a relationship with the non-disclosing party. In no event shall Landlord's mortgagee(s) have any obligation to any broker involved in this transaction. Landlord shall pay the Broker's commission pursuant to a separate agreement; the Broker shall not be deemed a third-party beneficiary of this provision. In the event that no broker was involved as aforesaid, then each party represents and warrants to the other that no broker brought about this transaction, and each party agrees to indemnify and hold the other harmless from any and all claims of any broker arising out of or in connection with the negotiations of or the entering into of this Lease by Tenant and Landlord and to that end shall indemnify each other for all loss, costs or damage including reasonable attorney's fees arising therefrom. 40. PERSONAL LIABILITY. (a) Notwithstanding anything to the contrary provided in this Lease, it is specifically understood and agreed, such agreement being a primary consideration for the execution of this Lease by Landlord, its constituent members (to include, but not be limited to, officers, directors, partners and trustees), their respective successors, assigns or any mortgagee in possession (for purposes of this Paragraph, collectively referred to as "Landlord"), with respect to any of the terms, covenants and conditions of this Lease, Tenant shall look solely to the equity of Landlord in the Building for the satisfaction of each and every remedy of Tenant in the event of any breach by Landlord of any of the terms, covenants and conditions of this Lease to be performed by Landlord, such exculpation of liability to be absolute and without exceptions whatsoever. (b) With respect to any provision of this Lease which provides that Tenant shall obtain Landlord's prior consent or approval, Landlord may withhold such consent or approval for any reason at its sole discretion, unless the provision specifically states that the consent or approval will not be unreasonably withheld. Should Landlord unreasonably withhold its consent, Tenant's sole remedy shall be Tenant's right to seek specific performance and no money damages shall be sought or allowed. 41. NO OPTION. The submission of this Lease for examination does not constitute a reservation of, or option for, the Premises, and this Lease becomes effective only upon execution and delivery thereof by Landlord and Tenant. 42. DEFINITIONS. (a) "Affiliate". Affiliate shall mean any corporation related to Tenant as a parent, subsidiary or brother-sister corporation so that such corporation and such party or such corporation and such party and other corporations constitute a controlled group as determined under Section 1563 of the Internal Revenue Code of 1986, as amended and as elaborated by the Treasury Regulations promulgated thereunder or any business entity in which Tenant has more than a fifty percent (50%) interest. (b) "Building Hours". As used in this Lease, Building Hours shall be Monday through Friday, 8:00 a.m. to 6:00 p.m., and Saturdays from 8:00 a.m. to 1:00 p.m., excluding those holidays as set forth on Exhibit E annexed hereto and made a part hereof, except that Common Facilities lighting in the Building and Building Area shall be maintained for such additional hours as, in Landlord's sole judgment, is necessary or desirable to insure proper operation of the Building and Building Area. Notwithstanding the foregoing, Tenant has the right to operate its business subject to all federal, state and local law in the Building 24 hours a day, 365 days a year, provided it reimburses the Landlord as Additional Rent for all costs incurred by Landlord for providing such access, including, but not limited to, HVAC, water, sewer, gas, electric and other utilities by providing said access. (c) "Common Facilities". Common Facilities shall mean the parking areas; lobby; elevator(s); fire stairs; public hallways; public lavatories; all other general Building facilities that service all Building tenants, including, without limitation intended, air conditioning rooms; fan rooms;janitors' closets; electrical closets; boiler rooms; telephone closets; elevator shafts and machine rooms; flues; stacks; pipe shafts; and vertical ducts with their enclosing walls. Landlord may at any time close temporarily any of the Common Facilities to make repairs or changes therein or to effect construction, repairs or changes within the Building, or to discourage non-tenant parking, and may do such other acts in and to the Common Facilities as in its judgment, reasonably exercised, may be desirable to improve the convenience thereof, but Landlord will use its best efforts so not to cause any interruption that will materially harm Tenant's business. (d) "Force Majeure". Force Majeure shall mean and include those situations beyond Landlord's control, including by way of example and not by way of limitation, acts of God; accidents; repairs; strikes; shortages of labor, supplies or materials; inclement weather; or, where applicable, the passage of time while waiting for an adjustment of insurance proceeds. (e) "Tenant's Percentage". The parties agree that Tenant's Percentage, as defined and stipulated in the Preamble, reflects the ratio of the gross square feet of the area rented to Tenant (including an allocable share of all Common Facilities) as compared with the total number of gross square feet of the entire Building measured outside wall to outside wall but excluding therefrom any storage areas. Landlord shall have the right to make changes or revisions in the Common Facilities of the Building so as to provide additional leasing area so long as same does not deprive the Tenant of the use of the Premises. Landlord shall also have the right to construct additional buildings in the Building Area for such purposes as Landlord may deem appropriate and subdivide the lands for that purpose if necessary. Tenant's Percentage shall be adjusted accordingly, it being understood that Tenant's Percentage is currently based upon the Building having 67,000 square feet. (f) "Lease Year". Lease Year shall mean the twelve (12) month period commencing on the Commencement Date, and each twelve (12) month period thereafter. 43. LEASE COMMENCEMENT. (a) Notwithstanding anything contained herein to the contrary, if Landlord, for any reason whatsoever not in Landlord's control and excluding an inability to deliver possession of the Premises to the Tenant because they might be otherwise occupied, except as provided for in Paragraph 27(b), cannot deliver possession of the Premises as provided for in Paragraph 27(a) to Tenant at the commencement of the Term as set forth in Paragraph 2,this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom, but in that event, the Term shall be for the full term as specified above to commence from and after the date Landlord shall have delivered possession of the Premises to Tenant or from the date Landlord would have delivered possession of the Premises to Tenant but for Tenant's acts or omissions(herein the "Commencement Date") and to terminate on the Termination Date, and if requested by Landlord, Landlord and Tenant shall, by a writing signed by the parties, ratify and confirm said commencement and termination dates. (b) Immediately following execution of this Lease, the Tenant shall have access to the Premises for the sole purpose of completing its work. Such access shall be subject to all of the terms and conditions of this Lease, excluding the Tenants obligation to pay Fixed Basic Rent and Additional Rent other than the payment of all utilities for which the Tenant shall be 100% liable. 44. NOTICES. Any notice, demand, consent, approval, request and any instrument or document ("Notice") by this Lease required to be given or served upon or by either party to the other shall be in writing and shall be deemed to have been duly given only if delivered personally or sent by registered or certified mail, return receipt requested, in a postpaid envelope addressed, if to Tenant, at the Building (except, prior to the Commencement Date, at Tenant's address set forth above); if to Landlord, at Landlord's address as set forth above; or, to either at such other address as Tenant or Landlord, respectively, may designate in writing. Notice shall be deemed to have been duly given, if delivered personally, on delivery thereof, and if mailed, upon the second (2nd) business day after the mailing thereof. 45. ACCORD AND SATISFACTION. No payment by Tenant or receipt by Landlord of a lesser amount than the Rent payable hereunder shall be deemed to be other than a payment on account of the earliest stipulated Rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment for Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Rent or pursue any other remedy provided herein or by law. 46. EFFECT OF WAIVERS. No failure by Landlord to insist upon the strict performance of any covenant, agreement, term or condition of this Lease, or to exercise any right or remedy consequent upon a breach thereof, and no acceptance of full or partial rent during the continuance of any such breach, shall constitute a waiver of any such breach or of such covenant, agreement, term or condition. No consent or waiver, express or implied, by Landlord to or of any breach of any covenant, condition or duty of Tenant shall be construed as a consent or waiver to or of any other breach of the same or any other covenant, condition or duty, unless in writing signed by Landlord. 47. LEASE CONDITION. (a) This Lease is expressly conditioned upon Landlord receiving the consent and approval of Landlord's mortgagee to its terms and provisions and executing the subordination, non-disturbance and attornment agreements in favor of Tenant as set forth in Paragraph 15 of this Lease, not later than thirty (30) days after its execution and delivery by both parties. (b) This lease is further conditioned upon the Tenant receiving approval from the New Jersey Economic Development Authority on its pending application for financial assistance on or before July 15, 1997. In the event said approval is not forthcoming, this lease shall be rendered null and void and shall have no further effect, except that the Landlord shall be entitled to retain the full amount of the Security Deposit heretofore tendered by the Tenant. 48. MORTGAGEE'S NOTICE AND OPPORTUNITY TO CURE. Tenant agrees to give any mortgagees and/or trust deed holders, by registered or certified mail, a copy of any notice of default served upon Landlord, provided that, prior to such notice, Tenant has been notified in writing (by way of notice of assignment of rents and leases or otherwise) of the address of such mortgagees and/or trust deed holders. Tenant further agrees that, if Landlord shall have failed to cure such default within the time provided for in this Lease, then the mortgagees and/or trust deed holders shall have an additional thirty (30) days within which to cure such default, or if such default cannot be cured within that time, then such additional time as may be necessary, if within such thirty (30) days, any mortgagee and/or trust deed holder has commenced and is diligently pursuing the remedies necessary to cure such default (including, but not limited to, commencement of foreclosure proceedings if necessary to effect such cure), in which event this Lease shall not be terminated while such remedies are being so diligently pursued. 49. LANDLORD'S RESERVED RIGHT. Landlord and Tenant acknowledge that the Premises are in a Building which is not open to the general public. Access to the Building is restricted to Landlord, Tenant, their agents, employees, and contractors and to their invited visitors. In the event of a labor dispute, including a strike, picketing, informational or associational activities directed at Tenant or any other tenant, Landlord reserves the right unilaterally to alter Tenant's ingress and egress to the Building or make any other change in operating conditions to restrict pedestrian, vehicular or delivery ingress and egress to a particular location. 50. CORPORATE/PARTNERSHIP AUTHORITY. (a) If Tenant is a corporation, Tenant represents and warrants that this Lease, and the undersigned's execution of this Lease, has been duly authorized and approved by the board of directors. The undersigned officers and representatives of the corporation executing this Lease on behalf of the corporation represent and warrant that they are officers of the corporation with authority to execute this Lease on behalf of the corporation, and, within ten (10) days of execution hereof, Tenant will provide Landlord with a corporate resolution confirming the aforesaid. (b) If Tenant is a partnership, Tenant shall deliver to Landlord, at the time of execution of this Lease, a duly executed Consent of Partners confirming the authority of the General Partner(s) to execute this Lease, together with a certified copy of the filed Certificate of Partnership. 51. RECORDING. Tenant covenants that it will not place this Lease on record without the prior written consent of Landlord. 52. NUMBER AND GENDER. The terms "Landlord" and "Tenant" wherever used herein shall be applicable to one or more persons, as the case may be, and the singular shall include the plural and neuter shall include the masculine and/or feminine, and if there be more than one, the obligations hereof shall be joint and several. 53. MISCELLANEOUS. (a) If, in connection with obtaining financing for the Building, a bank, insurance company or other recognized institutional Lender shall request reasonable modifications in this Lease as a condition to such financing, Tenant hereby consents to said modifications provided that such modifications do not materially increase the obligations of Tenant hereunder, or materially decrease the obligations of Landlord hereunder. Furthermore, Tenant agrees to furnish to Landlord, upon request, or to any mortgagee or proposed mortgagee of the Building, copies of Tenant's latest financial statement duly certified by an independent Certified Public Accountant, or if no such certified statement is available, then such statement shall be certified by the Managing Partner or Chief Financial Officer of Tenant. (b) No sign, advertisement or notice shall be affixed to or placed upon any part of the Demised Premises by Tenant, except in such manner, and of such size, design and color as shall be approved in writing in advance by Landlord which approval Landlord shall not unreasonably withhold. Subject to the foregoing and notwithstanding anything set forth in Exhibit B to the contrary, Landlord hereby grants the Tenant the right, at its sole cost and expense, to place its name on the Building on an exclusive basis. As to all other signs, both interior and exterior, Landlord shall have the right to place the names of other tenants of the Building along with Tenant's name. . (c) This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted, since the respective parties have been afforded an opportunity to submit revisions to the text hereof. 54. ADDITIONAL SERVICES. Notwithstanding anything to the contrary contained in Paragraph 20 of this Lease Agreement or elsewhere herein, Tenant hereby covenants and agrees to compensate Landlord for any additional services provided to Tenant by Landlord which services are in addition to those services to which Tenant is entitled pursuant to Paragraph 20 of this Lease Agreement. Tenant shall compensate Landlord pursuant to a rate schedule to be provided for by Landlord's managing agent, which rate schedule may be amended from time to time in the sole discretion of Landlord or Landlord's managing agent. Said monthly charges shall be due and payable when rendered, said charges to be treated for all purposes under the Lease as Additional Rent. 55. ATTORNEY'S FEES. Tenant agrees that it shall be liable for reasonable attorneys' fees and, if necessary, costs of suit incurred by the Landlord in enforcing the provisions of this Lease, and agrees to pay the Landlord for same within ten (10) days of written demand therefor, and same shall be deemed Additional Rent. 56. OPTION. (a) Providing Tenant is not in default of its obligations during the term of this Lease, Tenant shall be entitled to extend the term of this Lease for one (1) successive extension period of five (5) years to commence upon the day following the Termination Date and the Annual Fixed Basic Rent shall be the greater of ninety-five (95%) percent of Fair Market Value as defined below, or $948,750.00 per annum. (b) Fair Market Value shall be determined by mutual agreement between Landlord and Tenant. However, if Landlord and Tenant cannot agree on the Fair Market Value for the extension period at least ninety (90) days prior to the beginning of the applicable extension period, then Fair Market Value shall be determined by an MAI appraiser selected by mutual agreement of Landlord and Tenant (and the cost of which shall be shared equally). If Landlord and Tenant cannot agree on an appraiser, Fair Market Value shall be determined by two (2) MAI appraisers, one selected by Landlord and one selected by Tenant. The appraisers shall determine Fair Market Value based upon the then Fair Market Value for comparable buildings in Leonia, New Jersey. If the two (2) MAI appraisers cannot agree on the Fair Market Value, the two (2) MAI appraisers shall select a third MAI appraiser, or if they are unable to agree upon the third MAI appraiser, then application shall be made to the Assignment Judge of Bergen County, New Jersey, for the selection of the third MAI appraiser, who shall make the determination of Fair Market Value. Landlord shall pay for its appraiser, and Tenant shall pay for its appraiser, and the third appraiser shall be paid by Landlord and Tenant jointly and equally. (c) If Tenant elects to exercise its Option to extend the term of this Lease, it shall do so by notifying Landlord, in writing, certified mail, return receipt requested, not more than fifteen (15) months and not less than twelve (12) months before the Termination Date. If the Tenant fails to so notify Landlord, its rights to the Option shall terminate and be null and void and of no further effect. 57. CHANGE OF USE APPROVAL AND CERTIFICATE OF OCCUPANCY. (a) It shall be the obligation of the Tenant to obtain a certificate of occupancy which may be required pursuant to local law. (b) As soon as possible after execution of this Lease by both parties, Tenant, at its sole cost and expense, agrees to make immediate bona fide efforts to obtain the requisite change of use or occupancy approval from the Planning Board of the Borough of Leonia so as to allow Tenant's use and/or occupancy of the Demised Premises. In the event Tenant is unable to obtain said approval despite having made good faith efforts to do so on or before September 1, 1997,, either Landlord or Tenant, upon notice to the other, has the right to terminate this Lease. In that event all monies paid by Tenant to Landlord for Rent or Additional Rent shall be returned forthwith. Subject to the foregoing, in the event Tenant has not obtained such approval by July 15, 1997, the Commencement Date and the Termination Date shall be extended for the number of days after July 15, 1997 it takes for the Tenant to receive such approval. 58. USE OF EXISTING COMPUTER EQUIPMENT AND SYSTEMS. Provided Tenant is not in default of this Lease, Tenant shall have the right to use all existing computer equipment and systems located within the Demised Premises. Landlord makes no representation to Tenant in respect to such equipment and systems and Tenant agrees to accept them in their "as is" condition. Tenant shall be responsible for all maintenance, repairs and replacement of such equipment and systems at its sole cost and expense. 59. RIGHT OF FIRST REFUSAL. (A) As of the Commencement Date and for the Term hereof, Tenant shall have the right of first refusal to lease additional space in the Building which is or hereafter shall become vacant (the "Vacant Space"). In the event Landlord receives a bona fide offer to lease any Vacant Space, Landlord shall forward to Tenant a written letter setting forth the proposed tenant for the Vacant Space, all economic terms offered, the term of the proposed lease and the propsed commencement date of the term of the proposed lease (the "Notice"). Within seven (7) business days of Tenant's receipt of the Notice, Tenant shall advise Landlord in writing if Tenant wishes to lease the Vacant Space. (B) In the event Tenant exercises its option to lease any Vacant Space, this Lease shall be modified in writing to reflect that the Vacant Space shall be added to and become part of the Demised Premises. Such written modification shall contain, among other things, the following terms and conditions: (i) The Vacant Space shall be leased to tenant in its "as is" condition and Landlord shall not be obligated to make any repairs or modifications to the Vacant Space prior to Tenant's taking occupancy except if the Notice contains provisions for Landlord's Work in the Vacant Space or a work allowance or any other obligation Landlord agreed to do in such bona fide offer. (ii) The Fixed Basic Rent for the Vacant Space shall be the same as set forth in the Notice. (iii) The Commencement Date for the Vacant Space shall be the Commencement Date of the term set forth in the Notice. (iv) The Termination Date for Tenant's occupancy of the Vacant Space shall be the same as the Termination Date of this Lease. (C) In the event Tenant either fails to advise Landlord in writing if Tenant wishes to lease the Vacant Space within seven (7) business days of Tenant's receipt of the Notice or fails to enter into a Lease Modification Agreement within fourteen (14) days of advising Landlord that Tenant wishes to lease the Vacant Space, the right of first refusal contained herein shall become null and void and of no further effect. 60. SATELLITE DISHES, MICROWAVE TRANSMITTERS. (A) Landlord consents to the installation and maintenance by Tenant, at Tenant's sole cost and expense, of one (1) satellite dish, microwave mast (with antenna) or electronic sending device (hereinafter the "Installations" on the roof of the Building, and to the repair, upgrading and/or replacement (including, without limitation, substitution of equipment) of the Installations provided that Tenant shall comply with the provisions of subparagraph (B) hereof. No additional Installations shall be installed by Tenant in, on or about the Building without the prior written consent of Landlord in each and every instance. All Installations shall conform, at Tenant's sole cost and expense, to all applicable governmental laws, rules, codes and regulations either now existing or hereafter amended, enacted or codified. (B) Tenant shall, at Tenant's sole cost and expense, erect and maintain a raised walkway from the roof entrance to and around the Installations (so as to permit access to the dishes, masts and antennas), so as to preserve and protect the roof membrane and shall extend such walkway in the future to similarly accommodate any additional Installations as may be reasonably required because of anticipated substantial pedestrian traffic in connection with the additional Installations (the parties acknowledge that if any post installation pedestrian traffic is likely to be only sporadic or occasional, rather than frequent, and not likely to damage the roof of the Building, that the cost of extending the walkway may not be justified and, therefore,would not be required; but further acknowledge that, to the extent Landlord in its sole discretion so requires, if one (1) or more additional Installations installed are not reachable by the then existing walkway, an extension of the walkway to each such additional Installations will be made by Tenant). (C) Tenant shall give reasonable prior notice to Landlord, which may be by telephone to Landlord or Landlord's management office at the Building or to the Building maintenance personnel, except in cases of emergency (in which case such notice will be given as soon as reasonably practicable following commencement of the activity), for any access to the roof which may be required or desirable by Tenant for installations, replacements, repairs of other actions concerning any of Tenant's Installations that involve a substantial amount of activity. Notice of routine inspection, maintenance and repair is not required. (D) Any additional Installations installed by Tenant on the roof of the Building: (i) shall not exceed a load factor of 30 pounds per square foot or shall be placed on load bearing beams and columns only (with a load factor that would not overburden those beams or columns); and (ii) if, and to the extent necessary to maintain the integrity of the roof, shall be mounted on a superstructure with appropriate pitch pockets installed at all points necessary to maintain the integrity of the roof of the Building. (E) Tenant hereby agrees to indemnify and save Landlord harmless from and against any and all loss, costs, damage, claims, or other liability whatsoever arising out of damage to (i) any person or persons, (ii) the property of Landlord or Landlord's other tenants at the Building as a result of Tenant's (or its agents', servants' or employees') use of the roof of the Building or Tenant's maintenance of Installations thereon of additional Installations thereon, whether or not such use of the roof of the building was consented to by landlord. The preceding obligation extends to the payment of any insurance premiums for any insurance that may be maintained by or for the benefit of Landlord. (F) Tenant hereby covenants and agrees that it will, at its sole cost and expense, remove all of its walkways and Installations and other devices or installations of any nature whatsoever, if any, from the roof of the Building and return the roof of the Building to its original, sound condition prior to the original installation by Tenant or Landlord of any of Tenant's Installations and other devices or installations of any nature whatsoever, if any, at such time, it at all, as Tenant should vacate the Building pursuant to the terms of this Lease Agreement or otherwise, reasonable wear and tear excepted. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals as of the day and year first above written. ATTEST LEONIA ASSOCIATES, L.L.C By: Jeffco Holding, Ltd. a NJ Corporation, Manager By /s/ JEFFREY E. COLE Jeffrey E. Cole, President COMPUTER OUTSOURCING SERVICES, INC. a New York Corporation By /s/ ROBERT WALLACH Robert Wallach, President EXHIBIT A FLOOR PLAN FIRST FLOOR EXHIBIT A FLOOR PLAN SECOND FLOOR EXHIBIT B 1. OBSTRUCTION OF PASSAGEWAYS The sidewalks entrances, passages, courts, elevators, vestibules, stairways, corridors and public parts of the Building shall not be obstructed or encumbered by Tenant or used by Tenant for any purpose other than ingress and egress. 2. PROJECTIONS FROM THE BUILDING No equipment or other fixtures shall be attached to the outside walls or the window sills of the Building or otherwise affixed so as to project from the Building, without the prior written consent of the Landlord not to be unreasonably withheld or delayed. 3. SIGNS No signs or lettering shall be affixed by Tenant to any part of the outside of the Premises or any part of the inside of the Premises so as to be clearly visible from the outside of the Premises without the prior written consent of Landlord not to be unreasonably withheld or delayed. Landlord shall place Tenant's name on the primary entry door to the Premises and on the directory in the lobby of the Building, in conformance with Building standards. Tenant shall not have the right to have additional names placed on the lobby directory without Landlord's prior written consent not to be unreasonably withheld or delayed. 4. WINDOWS Windows in the Premises shall not be covered or obstructed by Tenant. No bottles, parcels or other articles shall be placed on the window sills, in the halls, or in any other part of the Building other than the Premises. 5. FLOOR COVERINGS Tenant shall not lay linoleum or other similar floor covering so that the same shall come in direct contact with the floor of the Premises. If linoleum or other similar floor covering is desired to be used, an interlining of builder's deadening felt first shall be fixed to the floor by a paste or other material that may be easily removed with water, the use of cement or other similar material being expressly prohibited. 6. INTERFERENCE WITH OCCUPANTS OF THE BUILDING Tenant shall not make or permit to be made, any unseemly or disturbing noises and shall not interfere with other tenants or those having business with them. Canvassing, soliciting and peddling in the Building is prohibited and Tenant shall cooperate to prevent the same. 7. LOCKS AND KEYS No additional locks or bolts of any kind shall be placed on any of the doors by Tenant. Tenant shall, in the termination of Tenant's tenancy, deliver to Landlord all keys to any space within the Building, either furnished to or otherwise procured by Tenant. 8. MOVEMENT OF FREIGHT, FURNITURE OR BULKY MATTER The carrying in or out of freight, furniture or bulky matter of any description must take place during such hours as Landlord may from time to time reasonably determine and only after advance notice to Landlord. The persons employed by Tenant for such work must be reasonably acceptable to Landlord. Tenant may, subject to such provisions, move freight, furniture, bulky matter, and other material into or out of the Premises on Saturdays between the hours of 9:00 a.m. and 1:00 p.m., provided Tenant pays additional costs, if any, incurred by Landlord for elevator operators or security guards and for other expenses occasioned by such activity of Tenant [but during the initial move-in of Tenant, there shall be no such additional costs]. If, Landlord so requests, Tenant shall deposit with Landlord, as security for Tenant's obligations to pay such additional costs, a sum which Landlord reasonably estimates to be the amount of such costs. All damage done to the Building by taking in or out such freight or furniture or any damage done to the Building while any of said property shall be therein, shall be made good and paid for by Tenant on demand. There shall not be used in any space, nor in the public halls of the Building, either by Tenant, or by jobbers or by others in the delivery or receipt of merchandise, any hand trucks, except those with rubber tire and side guards. 9. SAFES AND OTHER HEAVY EQUIPMENT Landlord reserves the right to prescribe the weight and position of all safes and other heavy equipment so as to distribute properly the weight thereof and to prevent any unsafe condition from arising. Business machines and other equipment shall be placed and maintained by Tenant at Tenant's expense in settings sufficient in Landlord's reasonable judgment to absorb and prevent unreasonable vibration, noises and annoyance. 10. NON-OBSERVANCE OR VIOLATION OF RULES BY OTHER TENANTS Landlord reserves the right to rescind, alter or waive any rule or regulation at any time prescribed for the Building, and no alteration or waiver of any rule or regulation in favor of one tenant shall operate as an alteration or waiver in favor of any other tenant. Landlord shall not be responsible to Tenant for the non-observance or violation of any of these rules and regulations by any other tenant. 11. AFTER HOURS USE Landlord reserves the right to exclude from the Building between the hours of 6:00 p.m. and 8:00 a.m., and at all hours on Saturdays, Sundays and Building Holidays, all persona who do not present a pass to the Building signed by Tenant. Tenant shall be responsible for all persons for whom such a pass is issued and shall be liable to Landlord for the acts of such person(s). 12. PLUMBING FACILITIES USE Tenant shall not use the Building's plumbing facilities for any purpose other than that for which they were constructed and will not permit any foreign substance of any kind to be thrown therein; the expense of repairing any breakage, seepage or damage, no matter where occurring, resulting from a violation of this provision by Tenant or Tenant's servants, employees, agents, invitees or licensees shall be borne by Tenant. Wasteful and excessive or unusual use or misuse of Building standard electrical service, water, sewer or other utilities is prohibited. 13. VEHICLES No bicycles, mopeds, motorcycles or other vehicles of any kind shall be brought into or kept in, on or about the Premises, Building or Building area, except in those locations specifically designated by Landlord for same. 14. ANIMALS No animal of any kind shall be brought into or kept in, on or about the Premises, Building or Building area. 15. LANDLORD'S RIGHTS Landlord hereby reserves it itself any and all rights not granted to Tenant hereunder, including, but not limited to, the following rights which are reserved to Landlord for its purposes in operating the Building and Building area. (a) the right to change the name of the Building at any time and from time to time without incurring any liability to Tenant for so doing; (b) the right to install and maintain a sign or signs on the exterior of the Building and/or anywhere in the Building area; (c) the exclusive right to use or dispose of the use of all or part of the roof of the Building and Building area, except as otherwise specifically set forth in this Lease; and (d) the right to grant anyone the right to conduct any particular business or undertaking in the Building or Building area. 16. MOVING Moving in or out of the building must be coordinated with Landlord. In the discretion of Landlord, reasonably exercised, moving may be required to be done under supervision of management's personnel. No furniture will be moved in the Building's elevators without the permission of Landlord and until necessary pads have been installed. 17. SERVICES No Tenant shall obtain or accept for use in its premises ice, drinking water, food, beverages, towels, barbering, boot blacking, floor polishing, lighting maintenance, cleaning or other similar services from any person not authorized by Landlord in writing to furnish such services. Such services shall be furnished only at such hours, in such places within the Tenant's premises and under such regulations as may be fixed by Landlord. 18. DELIVERIES Landlord shall have the right to require that all messengers and other persons delivering packages, papers and other materials to Tenant (i) be directed to deliver such packages, papers and other materials to a person designated by landlord who will distribute the same to Tenant, or (ii) be escorted by a person designated by landlord to deliver the same to Tenant. EXHIBIT C 1. Renovate Lobby with new paint and wall covering; 2. Stripe and seal parking lot including visitors' spaces and reserved parking; 3. Plant ten (10) trees along the south side of the parking lot, subject to municipal approvals. 4. Employ best efforts with the appropriate municipal, county or administrative agency to cause the roadway leading to the Building to be paved with asphalt or blacktop. The foregoing shall not be a condition precedent to the completion of Landlord's Work and shall not delay the Commencement Date in any manner. 5. Replace existing sinks and vanities in the downstairs men's room and lower the urinal in the upstairs and downstairs men's room. The Tenant specifically agrees and acknowledges that the Landlord shall not have any further liability in respect to making the Building ADA compliant. Notwithstanding anything contained herein or in the Lease Agreement to the contrary, Landlord shall have no obligation to perform any work for Tenant in connection with the preparation of the space for the Tenant's occupancy other than as is specifically set forth above. INITIALS ______________ ______________ EXHIBIT D CLEANING SERVICES NIGHTLY CLEANING SERVICES: (Daily) Common Areas - Vacuum, dust and sweep flooring as appropriate; - Sweep all stairways; - Wipe drinking fountains; - Clean cigarette and garbage urns and replace sand or water as necessary; and - Remove wastepaper and waste materials to garbage dumpster as necessary Demised Premises - Empty and clean ashtrays as necessary; and - Empty wastebaskets and garbage receptacles as necessary. The Nightly Cleaning Services will apply to the entire premises, including all office space, entrance lobbies, public corridors, elevator cabs, stairways and public lavatories. WEEKLY CLEANING SERVICES: (Weekly) Common Areas - Spot clean carpeting as necessary; - Clean scuff marks from wall coverings as necessary; - Clean elevator openings and door tracks as necessary; - Clean and polish directories as necessary; and - Dust common area doors and clean fingerprints and smudges as necessary. Demised Premises - Dust furniture, fixtures, desk equipment, telephones and window sills, baseboards, chair rails, trim and doors within reach as necessary; - Vacuum carpeted areas and rugs as necessary; and - Clean public corridor entrance as necessary. OCCASIONAL SERVICE: (Quarterly) Common Areas - Damp mop tile flooring as necessary; - Dust exterior of lighting fixtures and vents as necessary; - Shampoo public corridors and lobby carpeting as necessary; - Clean interior walls of elevator cabs as necessary; - Damp mop all stairways and landings as necessary; - Sweep outside all building entry ways as necessary; and - Remove debris outside all entrances. Demised Premises - Dust picture frames, pictures and similar wall hangings not reached in Nightly Cleaning Service; - Dust exterior of lighting fixtures and venetian blinds; and - Dust surfaces not reached in Weekly Cleaning Services such as ventilating louvers, glass partition frames, etc. COMMON RESTROOM AREAS Daily - Sweep and sanitize floors as necessary; - Wash and polish mirrors and powder shelves, bright work as necessary; - Clean and sanitize commodes, toilet seats, sinks and urinals as necessary; - Clean and polish all dispensers, doors and trash receptacles as necessary; - Dust partitions; - Clean all countertops as necessary; - Empty and clean sanitary disposal receptacles as necessary; - Remove wastepaper and refuse as necessary; - Fill toilet tissue, soap, towel and feminine napkin dispenser, if any, with supplies as necessary. Monthly - Wash partitions, tile walls and enamel surfaces as necessary; - "High" dust wall and ceilings as necessary; - Dust exterior of lighting fixtures as necessary; and - Polish all stainless steel and chrome fixtures as necessary. ENTRANCE LOBBIES AND PUBLIC AREAS, AS REQUIRED - Sweep and wash flooring and vacuum carpeting as necessary; - Clean cigarette and garbage receptacles as necessary; - Clean elevator cabs, both entry and exterior as necessary; - Clean and polish all metal and wood surfaces as necessary; - Clean stairways, office and utility room doors as necessary; - Clean loading dock and receiving areas as necessary; - Remove paper and debris around exterior of building as necessary; - Clean interior side of exterior windows, glass and partition surfaces as necessary, but at least two (2) times yearly; - Clean and polish all directories as necessary; - Clean scuff marks from corridor walls and doors as necessary; - Clean all corridor, stairway, vestibule, mechanical room and lobby light fixture covers and reflectors as necessary; and - Clean and remove paper and debris from all mechanical rooms as necessary. OUTSIDE SERVICE, AS REQUIRED - Sweep driveways, curbs and parking areas as necessary - Sweep and clean sidewalks, steps and ramps as necessary; - Remove snow from driveways, sidewalks, steps, ramps and parking areas as necessary; and - Clean all parking areas and exterior windows as necessary, but at least two (2) time yearly. Initials ________ ________ EXHIBIT E BUILDING HOLIDAYS Building Holidays shall be as follows: 1. Memorial Day 2. Independence Day 3. Labor Day 4. Thanksgiving Day and the day after 5. Christmas Day 6. New Year's Day 7. Monday before or Friday after, if July 4th falls on a Tuesday or Thursday * * * * Initials __________ __________ EX-10 19 ex10-18b_k.txt 1ST AMENDMENT TO LEONIA LEASE FIRST AMENDMENT OF LEASE ------------------------ DATE: January 16th, 1998 LANDLORD: LEONIA ASSOCIATES, L.L.C. a New Jersey Limited Liability Company ADDRESS OF LANDLORD: c/o Sterling Management Corp. 72 Essex Street Lodi, NJ 07644 TENANT: COMPUTER OUTSOURCING SERVICES, INC., a New York Corporation, ADDRESS OF TENANT: 2 Christie Heights Leonia, New Jersey 07605 LEASE DATE: June 2, 1997 BUILDING: 2 Christie Heights Leonia, NJ 07605 Landlord and Tenant, being bound unto a lease, dated the Lease Date, for a portion of the Building (the "Lease"), hereby agree to modify and amend the Lease in the following manner: 1. DEMISED PREMISES OR PREMISES. As of January 1, 1998 (the "Effective Date"), Paragraph (7) of the Preamble to the Lease shall be deleted in its entirety and the following is substituted therefor: "(7) Demised Premises or Premises: Approximately SIXTY SEVEN THOUSAND (67,000) gross rentable square feet on the First (1st) and Second (2nd) Floors (the entire Building) delineated on Exhibit A annexed hereto, which includes an allocable share of the Common Facilities as defined in Paragraph 42(c), which size is stipulated and agreed to by the parties here- to." 2. EXHIBIT A. As of the Effective Date, Exhibit A annexed to the Lease is hereby deleted in its entirety and revised Exhibit A annexed hereto shall be substituted therefor for all purposes under the Lease. 3. FIXED BASIC RENT. Paragraph (9) of the Preamble to the Lease is hereby modified to provide that Fixed Basic Rent for the remainder of the Term shall be payable as follows: I. Fixed Basic Rent for January 1, 1998 through March 31, 1998 shall mean: (A) Yearly Rate: SEVEN HUNDRED TWENTY FIVE THOUSAND AND 00/100 ($725,000.00) DOLLARS plus an amount equal to twenty-five point four (25.4%) percent of the Real Estate Taxes for the Building. (B) Monthly Installment: SIXTY THOUSAND FOUR HUNDRED SIXTEEN AND 66/100 ($60,416.00) DOLLARS plus an amount equal to twenty-five point four (25.4%) percent of the Real Estate Taxes for the Building, which shall be payable monthly on the first day of each month, in advance, in the amount of $2,750.00. In the event the actual amount of the Real Estate Taxes for the building for the first quarter of 1998 is greater or less than that paid by Tenant pro rata for the Additional Space, the appropriate adjustment shall be made by and between Landlord and Tenant as soon as practicable after the final 1998 bill is issued. II. Fixed Basic Rent for April 1, 1998 through June 30, 1998 shall mean: (A) Yearly Rate: SEVEN SIXTY SEVEN THOUSAND FIVE HUNDRED AND 00/00 ($767,500.00) DOLLARS plus an amount equal to twenty-five point four (25.4%) percent of the Real Estate Taxes for the Building. (B) Monthly Installment: SIXTY THREE THOUSAND NINE HUNDRED FIFTY-EIGHT AND 33/100 ($63,958.33) DOLLARS plus an amount equal to twenty-five point four (25.4%) percent of the Real Estate Taxes for the Building, which shall be payable monthly on the first day of each month, in advance, in the amount of $2,750.00. In the event the actual amount of the Real Estate Taxes for the building for the second quarter of 1998 is greater or less than that paid by Tenant pro rata for the Additional Space, the appropriate adjustment shall be made by and between Landlord and Tenant as soon as practicable after the final 1998 bill is issued. III. Fixed Basic Rent for July 1, 1998 through September 30, 1998 shall mean: (A) Yearly Rate: EIGHT HUNDRED TWENTY SEVEN THOUSAND AND 00/100 ($827,000.00) DOLLARS plus an amount equal to twenty-five point four (25.4%) percent of the Real Estate Taxes for the Building. (B) Monthly Installment: SIXTY EIGHT THOUSAND NINE HUNDRED SIXTEEN AND 66/100 ($68,916.66) DOLLARS plus an amount equal to twenty-five point four (25.4%) percent of the Real Estate Taxes for the Building, which shall be payable monthly on the first day of each month, in advance, in the amount of $2,750.00. In the event the actual amount of the Real Estate Taxes for the building for the third quarter of 1998 is greater or less than that paid by Tenant pro rata for the Additional Space, the appropriate adjustment shall be made by and between Landlord and Tenant as soon as practicable after the final 1998 bill is issued. IV. Fixed Basic Rent for Four Years and Three Months, commencing October 1, 1998 through December 31, 2002, shall mean THREE MILLION EIGHT HUNDRED THREE THOUSAND SEVEN HUNDRED FIFTY AND 001/00 ($3,803,750.00) DOLLARS. (A) Yearly Rate: EIGHT HUNDRED NINETY FIVE THOUSAND AND 00/100 ($895,000.OO) DOLLARS. (B) Monthly Installment: SEVENTY FOUR THOUSAND FIVE HUNDRED EIGHTY THREE AND 33/100 ($74,583.33) DOLLARS. V. Fixed Basic Rent for Six Years, commencing January 1, 2003 through December 31, 2008 shall mean SIX MILLION ONE HUNDRED SEVENTY FOUR THOUSAND AND 00/100 ($6,174,000.00) DOLLARS. (A) Yearly Rate: ONE MILLION TWENTY NINE THOUSAND AND 00/100 ($1,029,000.00) DOLLARS. (B) Monthly Installment: EIGHTY FIVE THOUSAND SEVEN HUNDRED FIFTY 00/100 ($85,750.00) DOLLARS. 4. TENANT'S PERCENTAGE. Commencing January 1, 1998, Paragraph (10) of the Preamble to the Lease shall be deleted in its entirety and the following is substituted therefor: "(10) Tenant's Percentage: One hundred (100%) percent, which percentage is stipulated and agreed to by the parties hereto, subject to adjustment as provided for in Paragraph 42(e)." 5. PARKING SPACES. As of the Effective Date, Paragraph 12 of the Preamble of the Lease shall be deleted in its entirety and the following substituted therefor: "(12) Parking Spaces shall mean all of the parking spaces reserved for the Building." 6. MONTHLY OPERATING COSTS ESTIMATES. Commencing January 1, 1998, the amount of estimated monthly payments for Operating Costs paid by Tenant pursuant to Paragraph 23(B)(b) of the Lease shall be changed from TEN THOUSAND and 00/100 ($10,000.00) DOLLARS to THIRTEEN THOUSAND SEVEN HUNDRED FIFTY and 00/100 ($13,750.00) DOLLARS. 7. LANDLORD'S WORK - Landlord agrees, that at Landlord's expense, it will do substantially all of the work in the additional Seventeen Thousand (17,000) gross rental square feet (the "Additional Space") to be occupied by Tenant hereunder in accordance with Exhibit B, annexed hereto and made a part hereof ("Landlord's Work"). Except as set forth in Exhibit B, Landlord shall have no obligation to perform any other Landlord's Work in the Additional Space, and Tenant specifically agrees that it will accept the Additional Space in its current "as is" condition. In the event the cost of Landlord's Work, inclusive of all hard and soft costs, is less than ONE HUNDRED EIGHTY FIVE THOUSAND ($185,000.00) DOLLARS, the amount of differential between Landlord's actual cost and said amount will be paid to Tenant by Landlord in the form of a rent credit to be applied to the Fixed Basic Rent for October 1998 or sixty (60) days after the substantial completion of Landlord's Work, whichever is later. 8. RENT CREDIT FOR CHECK METER. In lieu of the check meters to have been provided by Landlord pursuant to Paragraph 22 of the Lease, prior to this agreement, the Landlord grants Tenant a rent credit of TEN THOUSAND ($10,000.00) DOLLARS to be applied to the monthly rent installment for Fixed Basic Rent for the month of October 1998. 9. ACKNOWLEDGMENT OF PRIOR BUILDOUT CONTRIBUTION. Tenant acknowledges receipt and payment of Landlord's obligation to contribute EIGHT HUNDRED THOUSAND ($800,000.00) DOLLARS towards Tenant's buildout as provided in Paragraph 27(b) of the Lease. 10. SCOPE OF CLEANING SERVICES. Anything contained in Paragraphs 20 and 22 to the contrary notwithstanding, the Tenant shall have the right, upon written notice to the Landlord, to increase or decrease the scope of cleaning services to be provided by Landlord, in which event the cost of same to be paid by Tenant shall be adjusted accordingly. 11. BUILDING STANDARD ELECTRIC SERVICE. I. Paragraph 22(a)(i) of the Lease is hereby deleted in its entirety and the following substituted therefor: "(a) Landlord agrees to redistribute Building Standard Office Electrical Service (as hereinafter defined) to the Premises consistent with the requirements as set forth in this Lease (not exceeding the present electrical capacity at the Premises) upon the following terms and conditions: (i) Tenant shall pay to Landlord all of the electrical power consumed in the Demised Premises and Building as determined by the rate structure then existing for the utility company supplying the electrical energy to the Demised Premises and the Building, inclusive of common areas. Said payments shall be due as Additional Rent with the next installment of Fixed Basic Rent therefor becoming due." II. Paragraph 22(b) of the Lease is hereby deleted in its entirety and the following substituted therefor: "(b) The "Building Standard Electric Service" shall, unless otherwise provided by agreement in writing between the parties, be defined as the provision by Landlord of electrical current for usual office requirements, equipment and heating, ventilating and air-conditioning systems, twenty-four (24) hours a day, seven (7) days a week. In no event shall Building Standard Electric Service include electrical current for any computer room installation, data processing center, or for any requirements needing greater than a 15-amp line. All installments of electrical fixtures, appliances and equipment within the Demised Premises shall be subject to Landlord's prior written approval which approval shall not be unreasonably withheld or unduly delayed. Nothing herein shall be construed as conferring on Landlord the right or option to cut off electric service to the Building, except in instances requiring emergency or necessary repairs, it being intended that electrical service to the elevators and Demised Premises shall be available on a twenty-four (24) hours basis. III. The following provision is hereby added to Paragraph 22 of the Lease: (d) At Tenant's sole and exclusive cost and option, to be exercised upon reasonable written notice to the Landlord and the utility company furnishing electrical service and energy to the Building (the "Utility Company"), the Tenant shall arrange to obtain all electric, energy and utility service directly from the Utility Company, and may utilize the then existing electric feeders, risers and wiring used for such purpose and only to the extent of Tenant's then authorized connected load. In this event, (i) Landlord shall not be obligated to supply or pay any part of any cost required for Tenant's electric, energy and utility service; (ii) the Tenant shall provide Landlord with proof of payment to the Utility Company of its monthly utility bill; (iii) the failure by the Tenant to make payment in full of its monthly utility bill from the Utility Company within thirty (30) days of the rendering of such bill shall constitute a default under this Lease. 12. OPTION. Paragraph 56(a) of the Lease is hereby amended so that "$1,183,350.00" is substituted for "$948,750.00" in the last line thereof. 13. DELETIONS. The following provisions of the Lease are hereby deleted and deemed null and void and of no further force and effect: (a) Paragraph 27 (a) (b) Paragraph 47 (c) The last sentence of Paragraph 36. (d) Paragraph 57 (b) (e) Paragraph 59 14. INTERPRETATION. In the event of any inconsistencies between this Amendment of Lease and the Lease, this Amendment of Lease shall govern and be binding. All words and terms used in this Amendment of Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this instrument to be drafted, since the Tenant has been afforded an opportunity to submit revisions to the text hereof. 15. COMPLETE AGREEMENT. This Agreement, together with instrument modified hereby, constitute the complete agreement and understanding between the parties hereto with respect to the matters set forth herein and therein, and supersede and terminate any and all prior negotiations or understandings between the parties hereto. No alteration, amendment or modification of any of the terms and provisions of this Agreement and the instruments modified hereby shall be valid unless made pursuant to an instrument in writing signed by each of the parties hereto. The parties do not intend to confer any benefit hereunder on any person, firm, corporation or other entity, other than the parties hereto. 16. RATIFICATION OF LEASE. Except as expressly modified and amended by the Amendment of Lease, all of the terms, provisions and conditions of the Lease are hereby ratified and confirmed by Landlord and Tenant. 17. BINDING EFFECT. This Amendment of Lease shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives, successors and permitted assigns. 18. CORPORATE AGREEMENT. Each party represents and warrants to the other that this Amendment of Lease has been duly authorized and approved by its Board of Directors or Members, as the case may be. The undersigned officer and representative of the corporation and Manager of the Limited Liability Company executing this Agreement represent and warrant that they have authority to execute this Amendment of Lease on behalf of their respective entities. IN WITNESS WHEREOF, Landlord and Tenant have hereunto set their hands and seals as of the day and year above first written; the parties affixing their signatures hereto warrant the one to the other that they possess the requisite authority to enter into this transaction and to sign this instrument. ATTEST: LEONIA ASSOCIATES, L.L.C By: Jeffco Holding Ltd. a NJ corporation, Manager By: /s/ JEFFREY E. COLE - ------------------------ ----------------------------------- Jeffrey E. Cole, President COMPUTER OUTSOURCING SERVICES, INC. a New York Corporation By: /s/ ROBERT WALLACH - ------------------------ ----------------------------------- Robert Wallach, President EXHIBIT A Page 1 of 2 (D R A W I N G) EXHIBIT A Page 2 of 2 (D R A W I N G) EXHIBIT B Landlord's Work Page 1 of 3 Landlord shall, at Landlord's sole cost and expense: 1. Build space as per attached plan. 2. Landlord shall replace the components of the existing VAV boxes located in the Additional Space with new components similar to those currently existing in the Building. 3. Carpet and paint space to match existing installation. 4. Replace damaged ceiling tiles. 5. Re-arrange lighting as per mutually agreeable construction drawings. 6. Add necessary electrical outlets as per a mutually agreeable construction drawings. 7. Art work in lobby subject to Tenant's approval. EXHIBIT B Page 2 of 3 (D R A W I N G) EXHIBIT B Page 3 of 3 (D R A W I N G) EX-10 20 ex10-18c_k.txt 2ND AMENDMENT TO LEONIA LEASE SECOND AMMENDMENT OF LEASE DATE: as of September 9,1999 LANDLORD: LEONIA Associates, L.I.C. a New Jersey limited liability company. Tenant: Computer Outsourcing Services,Inc. a New York corporation ADDRESS OF TENANT: 2 Christie Heights Leonia, New Jersey 07605 LEASE DATE: June 2, 1997 DATE OF PRIOR AMENDMENTS: January 16, 1998 BUILDING: 2 Christie Heights Leonia, New Jersey 07605 RECITALS WHEREAS, Landlord and Tenant entered into a lease agreement dated June 2, 1997 (the "Original Lease") wherein Tenant leased a portion of the Building: WHEAREAS, the first lease amendment dated January 16,1998("First Lease ("First Lease Amenment")provided for certain changes including an increase in the square footage of the Premises and an increase in Fixed Basic Rent, Additional Rent and number of parking spaces: WHERAS, the parties now intend to further modify the Lease. NOW,THEREFORE, in consideration of the mutual convenants herein contained it is hereby agreed as follows: 1. The Lease, For the purpose of this Second Lease Amendment, the term "Lease" shall be defined as the Original Lease as amended by the First Lease Amendment. Unless otherwise defined herein, the capitalized terms shall have the meaning ascribed to it in the Lease. 2. Tenant Renovations. Tenant desires to renovate the Premises and landlord is willing to allow Tenant to do so. Tenant shall have the right to perform the improvement indicated on Exhibit "A" attached hereto ("Tenant Renovations"), subject to Landlord's comments on Exhibit A-1. Landlord must approve any material modification to the attached plans. For the purposes of this paragraph, Tenant Renovations shall include all work in Exhibit "A" and shall be performed in a workmanlike manner and in compliance with all local and federal laws and ordiances. 3. Tenant's Restoration of the Demised Premises. Notwithstanding anything to the contary contained in this Amendment, Tenant hereby covenants and argees that it shall, at its sole cost and expense, return the Demised Premises to its original structurally sound condition, as per the attached plans shown on Exhibit "B" prior to Tenant's performance of any Tenant Renovations as same is set forth below, at such time, if at all, as the Tenant should vacate the Building pursuant to the terms of the Lease Agreement or otherwise, reasonable wear and tear exxpected. At Landlord's option, Tenant shall pay to Landlord the cost of such restoration and lANDLORD will be responsible to perform the necessary work. In the event, Landlord will provide Tenant with two proposals comparable in scope of work for the cost of such restoration and Tenant will obtain one comparable bid proposal. The amount of the payment by Tenant to Landlord shall be the lowest of three bids, provided same is comparable in scope of work.Regardless of the amount of the lowest bid proposal obtained, the maximum amount that the Tenant will be required to pay to Landlord is $300,000. If the lease should be extended to December 31,2021 or beyond and at the end of such period, Tenant is not in default under the Lease, this paragraph shall be null and void. 4. Tenant Renovations Budget. Tenant Renovations to be made in the aggregate amount of approximately $2,944,950 are set forth in Exhibit "C" attached hereto. Upon the later of the completion of $2,000,000 of Tenant Renovations of November 1,1999, Landlord shall pay for $2,000,000 of Tenant's Renovations (including delivery,installation,and sales tax) described in Exhibit "C" and be the owner of such items. The cost of the remaining Tenant Renovations shall be borne by Tenant. 5. Term. Paragraph (15) and (16) of the Preamble to the Lease is hereby modified to provide that the Term shall be extended and the termination date shall be December 31,2014. 6. Fixed Basic Rent. 1. Paragraph 3, Section IV, of the First Amendment of Lease is hereby modified to provide that Fixed Basic Rent for the period of November 1,1999 through December 31,2002 shall mean THREE MILLION NINE HUNDRED TWENTY FOUR THOUSAND FIVE HUNDREDFORTY-FIVE AND 76/100 ($3,924,545.76) DOLLARS. (A) Yearly Rate: ONE MILLION TWO HUNDRED THIRTY-NINE THOUSAND THREE HUNDRED THIRTY AND 21/100 ($1,239,330.24) Dollars. (B) Monthly Installment: ONE HUNDRED THREE THOUSAND TWO HUNDRED SEVENTY-SEVEN AND 52/00 ($103,277.52) DOLLARS. II. Paragraph 3, Section v, of the First Amendment of Lease is hereby modified to provide that Fixed Basic Rent for the period of January 1,2003 through December 31,2008, shall mean EIGHT MILLION TWO HUNDRED THIRTY-NINE THOUSAND NINE HUNDRED EIGHTY-ONE AND 68/100 ($8,239,981.68) Dollars. 2 (A) Yearly Rate: ONE MILLION THREE HUNDRED SEVENTY-THREE THOUSAND THREE HUNDRED THIRTY AND 28/100 ($1,373,330.28) DOLLARS. (B) Monthly Installment: ONE HUNDRED FOURTEEN THOUSAND FOUR HUNDRED FOURTY-FOUR AND 19/00 ($114,444.19) DOLLARS. III. Fixed Basic Rent for the period of January 1,2009 through October 31,2009, shall mean ONE MILLION TWO HUNDRED SEVENTY-THREE THOUSAND SIXTY-SIX AND 90/100 ($1,273,066.90) DOLLARS. (A) Yearly Rate: Not applicable. (B) Monthly Installment: ONE HUNDRED TWENTY-SEVEN THOUSAND THREE HUNDRED SIX AND 69/00 ($127,306.69) DOLLARS. IV. Fixed Basic Rent for the period of November 1,2009 through December 31,2014, shall mean SIX MILLION ONE HUNDRED THIRTEEN THOUSAND NINE HUNDRED SEVENTY-FIVE AND 00/100 ($6,113,975.00) DOLLARS. (A) Yearly Rate: ONE MILLION ONE HUNDRED EIGHTY-THREE THOUSAND THREE HUNDRED FIFTY AND 00/100 ($1,183,350.00) DOLLARS. (B) Monthly Installment: NINETY EIGHT THOUSAND SIX HUNDRED TWELVE AND 50/00 ($98,612.50) DOLLARS. 7. Extension Fee: As an inducement and consideration to Landlord to allow Tenant to extend the Term of the Lease and Landlord's payment as described in Paragraph 4, Tenant agrees to pay to Landlord $320,503.50 as follows: Due Date Amount 11/1/99 $ 72,000.00 1/1/09 248,503.50 8. Option. Paragraph 12 of the First Amendment of Lease and paragraph 56 (a)of the Lease are hereby null and void and deleted in their entirety. 9. Successor-in-Interest, This Second Amendment of Lease shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives, successors and permitted assigns. 3 10 Broker, Landlord and Tenant represent and warrant to each other than no broker except for MRH Real Estate Services,Inc. and Cushman & Wakefield, Inc. brought about this transaction and Landlord and Tenant agree to indemnify and hold each other harmless from any and all claims of any broker arising out of or in connection with the negotiations of or the entering into this Second Amendment of Lease by the parties hereto. If such claim arises out of a breach of the foregoing warranty to that end Landlord or Tenant shall indemnify the other party for all loss, costs or damage including reasonable attorney's fees arising therefrom. These representations and warranties shall survive the termination of the Lease,as amended. 11. Definitions,Inconsistencies, In the event of any inconsistencies between this Second Amendment of Lease and the Lease,the Second AMENDMENT OF LEASE shall govern and be binding. All words and terms used in this Second Amendment of Lease and not otherwise defined herein shall have the respective meanings ascribed to them under the Lease or unless the context clearly requires otherwise. This Second Amendment of Lease was drafted by Landlord as a matter of convenience and it shall be constructed for or against either party on that account since Tenant had the opportunity to review same and make changes thereto. 12. Ratification of Lease: Except as expressly modified and amended by the Second Amendment of Lease, all of the terms,provisions and conditions of the Lease are hereby ratified and confirmed by Landlord and Tenant. Tenant hereby releases and discharges Landlord from any and all claims or liability now arising out of the Lease prior to the date hereof, including, but in no way limited to, any and all charges as billed by Landlord to Tenant pursuant to the terms of the Lease. This does not apply to any estimated billings charged to the Tenant. In the event of a conflict between the terms of the Lease and the terms of the Second Amendment,the terms of the Second Amendment shall control. 13. Contingency. (I) Paragraphs 4, 6, and 7 of the Second Amendment of Lease will only be effective, if the following contingencies are met, otherwise such paragraphs shall be deemed null and void at Landlord's option. (i) Tenant shall not be in default of the Lease: (ii) Landlord is able to close on additional financing in the amount of $1,700,000 by November 1,1999, and (iii) If landlord extends the foregoing contingency period on written notice to Tenant all time periods and rental amounts set forth in Paragraph 6 and the date in Paragraph 4 shall be adjusted accordingly. (II) In addition,if the contingencies are not met, Paragraph 3 of the First Amendment of Lease shall be modified to provide that Fixed Basic Rent for the period of January 1,2009 through December 31,2014 shall mean SEVEN MILLION ONE HUNDRED THOUSAND ONE HUNDRED AND 00/100 ($7,100,100.00) DOllars. 4 (A) Yearly Rate: ONE MILLION ONE HUNDRED EIGHTY-THREE THOUSAND THREE HUNDRED FIFTY AND 00/00 ($1,183,350.00) DOLLARS. (B) Monthly Installment: NINETY-EIGHT THOUSAND SIX HUNDRED TWELVE AND 50/100 ($98,612.50) DOLLARS. IN WITNESS WHEREOF, the parties have set their hands and seals the date above first written. WITNESS: LEONIA ASSOCIATES,L.I.C. By: Jeffco Holding Ltd. its Managing Member /s/ DAWN MAYER By: /s/ JEFFREY COLE ---------------------- --------------------------------- Jeffrey E.Cole,President WITNESS: COMPUTER OUTSOURCING SERVICES,INC. By: NICHOLAS J. LETIZIA ---------------------- ------------------------------- Name: Nicholas J.Letizia Title: CFO 5 EX-10 21 ex10-18d_k.txt 3RD AMENDMENT TO LEONIA LEASE INFOCROSSING, INC. AND SUBSIDIARIES EXHIBIT 10.7D THIRD AMENDMENT OF LEASE DATE: as of 8/28/00 --------------- LANDLORD: Leonia Associates, L.L.C. a New Jersey limited liability company TENANT: Infocrossing, Inc. f/k/a Computer Outsourcing Services, Inc. a Delaware corporation ADDRESS OF TENANT: 2 Christie Heights Leonia, New Jersey 07605 LEASE DATE: June 2, 1997 DATE OF PRIOR AMENDMENTS: January 16, 1998 and September 9, 1999 BUILDING: 2 Christie Heights Leonia, New Jersey 07605 RECITALS WHEREAS, Landlord and Tenant entered into a lease agreement dated June 2, 1997 (the "Original Lease") wherein Tenant leased a portion of the Building; WHEREAS, the first lease amendment dated January 16, 1998 ("First Lease Amendment") provided for certain changes including an increase in the square footage of the Premises and an increase in Fixed Basic Rent, Additional Rent and number of parking spaces; WHEREAS, the second lease amendment dated September 9, 1999 ("Second Lease Amendment") provided for certain Tenant Renovations to the Premises and an increase in Fixed Basic Rent; WHEREAS, the parties now intend to further modify the Lease. NOW, THEREFORE, in consideration of the mutual covenants herein contained, it is hereby agreed as follows: 1. The Lease. For the purpose of this Third Lease Amendment, ---------- the term, "Lease" shall be defined as the Original Lease as amended by the First Lease Amendment and Second Lease Amendment. Unless otherwise defined herein, the capitalized terms shall have the meaning ascribed to it in the Lease. 2. Tenant Renovations. Tenant desires to renovate a portion of the Premises and Landlord is willing to allow Tenant to do so. Tenant shall have the right to perform the improvements indicated on Exhibit "A" attached hereto ("Supplemental Tenant Renovations"). Landlord must approve any material modification to the attached plans. For the purposes of this paragraph, Supplemental Tenant Renovations shall include all work in Exhibit "A" and shall be performed in a workmanlike manner and in compliance with all state, local and federal laws and ordinances. 3. Tenant's Restoration of the Demised Premises. Notwithstanding anything to the contrary contained in this Amendment, Tenant hereby covenants and agrees that at Landlord's option Tenant shall, at its sole cost and expense, return the portion of the Demised Premises to which the Supplemental Tenant Renovations relate to its original, structurally sound condition that existed prior to Tenant's performance of any Supplemental Tenant Renovations as same are set forth on Exhibit "A", at such time, if at all, as Tenant should vacate the Building pursuant to the terms of the Lease or otherwise, reasonable wear and tear excepted. At Landlord's option, Tenant shall pay to Landlord the cost of such restoration and Landlord will be responsible to perform the necessary work. In this event, Landlord will provide Tenant with two proposals comparable in scope of work for the cost of such restoration and Tenant will obtain one comparable bid proposal. The amount of the payment by Tenant to Landlord shall be the lowest of the three bids, provided same is comparable in scope of work. The parties specifically agree that the maximum amount of $300,000 provided in Section 3 of the Second Lease Amendment does not apply with respect to the restoration of the portion of the Demised Premises to which the Supplemental Tenant Renovations relate. 4. The terms and provisions of the last two sentences of Paragraph 4 and Paragraphs 6, 7 and 13 of the Second Lease Amendment dated December 9, 1999 are hereby deemed null and void. 5. Paragraph 3 of the First Lease Amendment shall be modified to provide that Fixed Basic Rent for the period of January 1, 2009 through December 31, 2014 shall mean SEVEN MILLION ONE HUNDRED THOUSAND ONE HUNDRED AND 00/100 ($7,100,100.00) DOLLARS (A) Yearly Rate: ONE MILLION ONE HUNDRED EIGHTY-THREE ----------- THOUSAND THREE HUNDRED FIFTY AND 00/100 ($1,183,350.00) DOLLARS. (B) Monthly Installment: NINETY-EIGHT THOUSAND SIX -------------------- HUNDRED TWELVE AND 50/100 ($98,612.50) DOLLARS. 6. Successor-in-Interest. This Third Amendment of Lease shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives, successors and permitted assigns. 7. Definitions, Inconsistencies. In the event of any inconsistencies between this Third Amendment of Lease and the Lease, the Third Amendment of Lease shall govern and be binding. All words and terms used in this Third Amendment of Lease and not otherwise defined herein shall have the respective meanings ascribed to them under the Lease or unless the context clearly requires otherwise. This Third Amendment of Lease was drafted by Landlord as a matter of convenience and it shall not be construed for or against either party on that account since Tenant had the opportunity to review same and make changes thereto. 8. Ratification of Lease. Except as expressly modified and amended by this Third Amendment of Lease, all of the terms, provisions and conditions of the Lease are hereby ratified and confirmed by Landlord and Tenant. Tenant hereby releases and discharges Landlord from any and all claims or liability now arising out of the Lease prior to the date hereof, including, but in no way limited to, any and all charges as billed by Landlord to Tenant pursuant to the terms of the Lease. This does not apply to any estimated billings charged to the Tenant. In the event of a conflict between the terms of the Lease and the terms of the Third Amendment, the terms of the Third Amendment shall control. IN WITNESS WHEREOF, the parties have set their hands and seals the date above first written. WITNESS: LEONIA ASSOCIATES, L.L.C. By: Jeffco Holding, Ltd., its Managing Member /s/ DAWN MEYER By: /s/ JEFFREY E. COLE - ---------------------------------------- ----------------- Jeffrey E. Cole, President WITNESS: INFOCROSSING, INC. /s/ KATHRYN A. WADE By: /s/ NICHOLAS J. LETIZIA - ------------------------------------- ------- Name: Nicholas J. Letizia Title: CFO EXHIBIT "A" The following work is to be performed in the existing loading dock area on the first floor, south side of the building (see Exhibit "A-1" attached hereto): 1. Add approximately 92 lineal feet of exterior wall, finished on both sides. 2. Add fifteen 2 ft. x 4 ft. fluorescent lights. 3. Six HVAC ducts. 4. Additional sprinkler heads and exit lights, etc., to meet code. 5. Surface mounted semi-portable ECOA/Bishamon hydraulic scissor lift (model #TAD-52-50-606). 6. One pair of new exterior entrance doors with appurtenant hardware. EX-10 22 ex10-18e_k.txt 4TH AMENDMENT TO LEONIA LEASE FOURTH AMENDMENT OF LEASE DATE: as of April 19, 2004 -------------------- LANDLORD: Leonia Associates, L.L.C. a New Jersey limited liability company TENANT: Infocrossing, Inc. f/k/a Computer Outsourcing Services, Inc. a Delaware corporation ADDRESS OF TENANT: 2 Christie Heights Leonia, New Jersey 07605 LEASE DATE: June 2, 1997 DATE OF PRIOR AMENDMENTS: January 16, 1998, September 9, 1999 and August 28, 2000 BUILDING: 2 Christie Heights Leonia, New Jersey 07605 RECITALS WHEREAS, Landlord and Tenant entered into a lease agreement dated June 2, 1997 (the "Original Lease") wherein Tenant leased a portion of the Building; WHEREAS, the first lease amendment dated January 16, 1998 ("First Lease Amendment") provided for certain changes including an increase in the square footage of the Premises and an increase in Fixed Basic Rent, Additional Rent and number of parking spaces; WHEREAS, the second lease amendment dated September 9, 1999 ("Second Lease Amendment") provided for certain Tenant Renovations to the Premises and an increase in Fixed Basic Rent and an extension of the Term; WHEREAS, the third lease amendment dated August 28, 2000 ("Third Lease Amendment") provided for certain Supplemental Tenant Renovations to the Premises and to modify the Fixed Basic Rent; WHEREAS, the parties now intend to further modify the Lease. NOW, THEREFORE, in consideration of the mutual covenants herein contained, it is hereby agreed as follows: 1. The Lease. For the purpose of this Fourth Lease Amendment, the term, "Lease" shall be defined as the Original Lease as amended by the First Lease Amendment, Second Lease Amendment and the Third Lease Amendment. Unless otherwise defined herein, the capitalized terms shall have the meaning ascribed to it in the Lease. 4 2. Tenant Renovations. Tenant desires to renovate a portion of the Premises and Landlord is willing to allow Tenant to do so. Tenant shall have the right to perform the improvements indicated on Exhibit "A" attached hereto ("Second Supplemental Tenant Renovations"). Landlord must approve any material modification to the attached plans. For the purposes of this paragraph, Second Supplemental Tenant Renovations shall include all work in Exhibit "A" and shall be performed in a workmanlike manner and in compliance with all state, local and federal laws and ordinances. 3. Tenant's Restoration of the Demised Premises. Notwithstanding anything to the contrary contained in this Amendment, Tenant hereby covenants and agrees that at Landlord's option Tenant shall, at its sole cost and expense, return the portion of the Demised Premises to which the Second Supplemental Tenant Renovations relate to its original, structurally sound condition that existed prior to Tenant's performance of any Second Supplemental Tenant Renovations as same are set forth on Exhibit "A", at such time, if at all, as Tenant should vacate the Building pursuant to the terms of the Lease or otherwise, reasonable wear and tear excepted. At Landlord's option, Tenant shall pay to Landlord the cost of such restoration and Landlord will be responsible to perform the necessary work. In this event, Landlord will provide Tenant with two proposals comparable in scope of work for the cost of such restoration and Tenant will obtain one comparable bid proposal. The amount of the payment by Tenant to Landlord shall be the lowest of the three bids, provided same is comparable in scope of work. The parties specifically agree that there is no maximum amount for such restoration and that this restoration is in addition to other existing restoration requirements of Tenant. 4. Term. Paragraphs (15) and (16) of the Preamble to the Lease and Paragraph 5 of the Second Lease Amendment are hereby modified to provide that the Term shall be extended for an additional term commencing January 1, 2015 and ending December 31, 2019 so that the Termination Date shall be December 31, 2019. 5. Fixed Basic Rent. The Lease shall and is hereby modified so that Fixed Basic Rent for the Period of January 1, 2015 through December 31, 2019 shall mean SIX MILLION TWO HUNDRED FIFTY-ONE THOUSAND SEVEN HUNDRED FIFTY AND 00/100 ($6,251,750.00) DOLLARS. (A) Yearly Rate: ONE MILLION TWO HUNDRED FIFTY THOUSAND THREE HUNDRED FIFTY AND 00/100 ($1,250,350.00) DOLLARS. (B) Monthly Installment: ONE HUNDRED FOUR THOUSAND ONE HUNDRED NINETY-FIVE AND 83/100 ($104,195.83) DOLLARS. 6. Landlord's Work Allowance. As an inducement to Tenant for entering into this Fourth Lease Amendment, Landlord shall reimburse Tenant for Second Supplemental Tenant Renovations in the amount of $200,000. Landlord will reimburse Tenant in the amount of $50,000.00 per month for four (4) months commencing at the earlier of the first full month after Tenant commences the Second Supplemental Tenant Renovations or July 1, 2004. 7. Successor-in-Interest. This Fourth Amendment of Lease shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives, successors and permitted assigns. 8. Definitions, Inconsistencies. In the event of any inconsistencies between this Fourth Amendment of Lease and the Lease, the Fourth Amendment of Lease shall govern and be binding. All words and terms used in this Fourth Amendment of Lease and not otherwise defined herein shall have the respective meanings ascribed to them under the Lease or unless the context clearly requires otherwise. This Fourth Amendment of Lease was drafted by Landlord as a matter of convenience and it shall not be construed for or against either party on that account since Tenant had the opportunity to review same and make changes thereto. 9. Ratification of Lease. Except as expressly modified and amended by this Fourth Amendment of Lease, all of the terms, provisions and conditions of the Lease are hereby ratified and confirmed by Landlord and Tenant. Tenant hereby releases and discharges Landlord from any and all claims or liability now arising out of the Lease prior to the date hereof, including, but in no way limited to, any and all charges as billed by Landlord to Tenant pursuant to the terms of the Lease. This does not apply to any estimated billings charged to the Tenant. In the event of a conflict between the terms of the Lease and the terms of the Fourth Amendment, the terms of the Fourth Amendment shall control. IN WITNESS WHEREOF, the parties have set their hands and seals the date above first written. WITNESS: LEONIA ASSOCIATES, L.L.C. By: Jeffco Holding, Ltd., its Managing Member DAWN MOYER By: /s/ Jeffrey E. Cole - -------------------------- -------------------------------- Jeffrey E. Cole, President WITNESS: INFOCROSSING, INC. /s/ WILLIAM J. MCHALE By: /s/ NICHOLAS J. LETIZIA - -------------------------- -------------------------------- William J. McHale Name: Nicholas J. Letizia Title: Senior Vice President EXHIBIT "A" Those certain improvements as set forth on a Site Plan and Construction Drawing prepared Dahn & Krieger, for Job No. 00245 and revised through January 21, 2004, as subsequently amended and approved by the Planning Board of the Borough of Leonia on March 3, 2004, and such working drawings and specifications upon which a subsequent building permit is to be issued by the Building Inspector of the Borough of Leonia, pursuant to the aforesaid approved site plan. EX-10 23 ex10-20_k.txt BREA LEASE EXHIBIT 20 - ------------- ------------ Landlord's Tenant's Initials Initials - ------------- ------------ - ------------- ------------ - ------------- ------------ LEASE AGREEMENT BETWEEN BIRCH WINDELL, LLC ("LANDLORD") AND ITO ACQUISITION CORP. ("TENANT") LEASE AGREEMENT TABLE OF CONTENTS 1. TERMS AND DEFINITIONS ................................................1 2. PREMISES AND COMMON AREAS.............................................3 3. TERM .................................................................5 4. POSSESSION ...........................................................5 5. MONTHLY BASIC RENT....................................................5 6. OPERATING EXPENSES....................................................6 7. SECURITY DEPOSIT .....................................................8 8. USE...................................................................8 9. NOTICES...............................................................9 10. BROKERS ..............................................................9 11. HOLDING OVER ........................................................10 12. TAXES ON TENANTS PROPERTY ...........................................10 13. CONDITION OF PREMISES ...............................................10 14. ALTERATIONS .........................................................10 15. REPAIRS .............................................................11 16. LIENS ...............................................................12 17. ENTRY BY LANDLORD ...................................................12 18. UTILITIES AND SERVICES ..............................................13 19. BANKRUPTCY ..........................................................13 20. INDEMNIFICATION AND EXCULPATION OF LANDLORD......................... 13 21. DAMAGE TO TENANTS PROPERTY ..........................................14 22. TENANT'S INSURANCE ..................................................14 23. DAMAGE OR DESTRUCTION ...............................................15 24. EMINENT DOMAIN ......................................................17 25. DEFAULTS AND REMEDIES................................................17 26. ASSIGNMENT AND SUBLETTING ...........................................20 27. SUBORDINATION........................................................22 28. ESTOPPEL CERTIFICATE ................................................22 29. HAZARDOUS MATERIALS..................................................23 30. RULES AND REGULATIONS ...............................................26 31. CONFLICT OF LAWS ....................................................26 32. SUCCESSORS AND ASSIGNS ..............................................26 33. SURRENDER OF PREMISES ...............................................26 34. ATTORNEY'S FEES .....................................................26 35. PERFORMANCE BY TENANT ...............................................26 36. MORTGAGE PROTECTION .................................................27 37. DEFINITION OF LANDLORD ..............................................27 38. WAIVER ..............................................................27 39. IDENTIFICATION OF TENANT ............................................27 40. PARKING .............................................................27 41. FORCE MAJEURE .......................................................28 42. TERMS, HEADING AND CONSTRUCTION......................................28 43. TIME ................................................................28 44. PRIOR AGREEMENT; AMENDMENTS..........................................28 45. SEVERABILITY ........................................................28 46. RECORDING............................................................28 47. LIMITATION OF LIABILITY AND TIME ....................................28 48. TRAFFIC IMPACT ......................................................29 49. MODIFICATIONS FOR LENDER OR GOVERNMENT ..............................29 50. FINANCIAL STATEMENTS ................................................29 51. QUITE ENJOYMENT .....................................................29 52. TENANT'S SIGNS.......................................................29 53. NO LIGHT, AIR OR VIEW EASEMENT.......................................30 54. TENANT AS CORPORATION, PARTNERSHIP, OR LIMITED LIABILITY COMPANY.....30 55. DEVELOPMENT AND EASEMENTS ...........................................30 56. COUNTERPARTS ........................................................30 57. NO OFFER ............................................................30 58. CONSENT TO ASSIGNMENT/TERMINATION OF EXISTING LEASE..................30 59. JOINT AND SEVERAL LIABILITY .........................................31 EXHIBITS: A. Legal Description of the Land B. Standards for Utilities and Services C. Sample Form of Tenant Estoppel Certificate D. Rules and Regulation E. Traffic and Parking Rules and Relation F. Depiction of Build Area LEASE AGREEMENT THIS LEASE AGREEMENT, ("Lease") is made as of December 19, 2002, between BIRCH WINDELL LLC, a California limited liability company ("Landlord"), and ITO ACQUISITION CORP. a California Corporation ("Tenant"), for all of the space (collectively, the "Premises") contained within the data processing building containing approximately 68,807 square feet of space and located at 3300 Birch Street, Brea, California (the "Building"). The Building is part of the Building site, which includes the parking areas and other improvements on the land ("Land") described on attached Exhibit A (collectively, the "Project"). 1. TERMS AND DEFINITIONS. For the purposes of this Lease, the following terms shall have the following definition: (a) Addresses: Landlord's Address: c/o Windell Investments, Inc. 3070 Bristol Street, Suite 615 Costa Mesa, California 92626. Tenant's Address: All notices to Tenant hereunder shall be delivered to the Premises. (b) Approximate Square Feet: The parties agree that the Building contains approximately 68,807 square feet ("Square Foot/Feet") and that the square footage is not subject to revision notwithstanding the fact that the actual square footage of the Building may be more or less than 68,807. (c) Broker(s): None. (d) Commencement Date: December 20, 2002. (e) Exhibits: "A" through "E", inclusive, all of which are attached to this Lease and are incorporated herein by this reference. Defined or initially capitalized terms in the attached document have the same meaning as in this Lease unless otherwise expressly provided in those documents. [END OF PAGE] (f) Monthly Basic Rent:
- ------------------------------------- ----------------------------------- ----------------------------------- Period Rent Per Rentable Square Foot Monthly Basic Rent - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- From 1/1/03 until 12/31/03 $1.35 $92,899.45 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- From 1/1/04 until 12/31/04 $1.425 $98,049.98 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- From 1/1/05 until 12/31/05 $1.50 $103,210.50 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- From 1/1/06 until 12/31/06 $1.575 $108,371.03 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- From 1/1/07 until 12/31/07 $1.65 $113,531.55 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- From 1/1/08 until 12/31/08 $1.725 $118,692.08 - ------------------------------------- ----------------------------------- ----------------------------------- - ------------------------------------- ----------------------------------- ----------------------------------- From 1/1/09 until 12/31/09 $1.80 $123,852.60 - ------------------------------------- ----------------------------------- -----------------------------------
Concurrently with Tenant's execution of this Lease, Tenant shall pay Landlord the first month of Monthly Basic Rent in the amount $92,889.45. Notwithstanding anything to the contrary contained herein, Tenant shall have no obligation to pay rent and all rent shall be abated from the Commencement Date through December 31, 2002. (g) Parking: Tent shall have the right without cost or expense to use the 160 vehicle Parking spaces most closely adjacent to the Building at the Project during the term and any extended term of this Lease. (h) Security Deposit: $121,478.33, which shall be payable concurrently with Tenant's execution of this Lease. (i) Tenant's Percentage: 100%, based on the Rentable Square Feet contained in the Premises set forth in Subparagraph 1) and the Rentable Square Feet contained in the Project ("Project Rentable Square Feet"). Subject to the provisions of Subparagraph 6(a)(i), Tenant's Percentage shall be adjusted, if ever, upon completion of the New Building (as defined below) and determination of the exact number of Rentable Square Feet WITHIN the New Building to equal a fraction whose numerator is the number of Rentable Square Feet within the Premises and whose denominator is the Project Rentable Square Feet (which shall include the Building and the New Building) The rentable square footage of the New Building shall be determined by a third party space accountant selected by Landlord in its sole and absolute discretion. Tenant shall have the right to remeasure the rentable square footage of the New Building if in its reasonable discretion it does not agree with the determination of such third party space accountant (j) Term: Eighty-four (84) calendar months (plus the applicable fraction of a month if the actual Commencement Date is other than the first day of a calendar month). (k) Option(s) to Extend: Landlord hereby grants to Tenant the option to extend the term of this Lease for two (2) additional sixty (60) month period(s) commencing when the prior term expires upon each and all of the following terms and conditions.: (i) Tenant gives to Landlord and Landlord actually receives on a date which is prior to the date that the option period would commence (if exercised) by at least six (6) months, and not more than nine (9) months an unconditional written notice of the exercise of the option(s) to extend this Lease for said additional term(s), time being of essence. If said notification of the exercise of said option(s) is (are) not so given and received, the option(s) shall automatically expire; said option(s) may (if more than one) only be exercised consecutively; (ii) All of the terms and conditions of this Lease except where specifically modified by this option shall apply; The Monthly Basic Rent for each month of the option period shall be adjusted on the first day of the Extension (the "Adjustment Date") to the "fair rental value" of the Premises on the Adjustment Date as follows: (a) At least one hundred eighty (180) days before the Adjustment Date, Landlord and Tenant shall meet in an effort to negotiate in good faith, the fair rental value of the Premises as of the Adjustment Date. If Landlord and Tenant have not agreed on the fair rental value of the Premises at least one hundred (100) days before the Adjustment Date, Landlord and Tenant shall attempt to agree in good faith upon a single appraiser not later than seventy-five (75) days before the Adjustment Date. If Landlord and Tenant are unable to agree upon a single appraiser within this time period, then Landlord and Tenant shall each appoint One (1) appraiser not later than sixty-five (65) days before the Adjustment Date. Within ten (10) days thereafter the two appointed appraisers shall appoint a third appraiser. If either Landlord or Tenant fails to appoint its appraiser within the prescribed time period, the single appraiser appointed shall determine the fair rental value of the Premises. If both parties fail to appoint appraisers within the prescribed time periods, then the first appraiser thereafter selected by a party shall determine the fair rental value of the Premises. Each party shall bear the cost of its own appraiser, and the parties shall share equally the cost of a single or a third appraiser, if applicable. Each appraiser shall have at least five (5) years experience in the appraisal of comparable buildings in Southern California and shall be a member of one or more professional organizations such as MAI or an equivalent. (b) For purposes of such appraisal, "fair rental value" shall mean the price that a ready and willing tenant would pay, as of the Adjustment Date, as monthly rent to a ready and willing landlord of a comparable buildings in Orange County, California for space comparable to the Premises if that property were exposed for lease on the open market for a reasonable period of time with a lease comparable to the Lease and with tenant improvements comparable to those in the Premises. If a single appraiser is chosen, then such appraisal shall determine the fair rental value of the Premises. Otherwise, the fair rental value of the Premises shall be the arithmetic average of the two of the three appraisals which are closest in amount, and the third appraisal shall be disregarded. In no event, however, shall the then-existing monthly rent ever be reduced by reason of such computation, nor shall there be any rent concession or additional tenant improvement allowance for the extension term. Landlord and Tenant shall instruct the appraiser(s) to complete their determination of the fair rental value not later than thirty (30) days before the Adjustment Date. If the fair rental value is not determined before the Adjustment Date, then Tenant shall continue to pay to Landlord the monthly rent in effect immediately prior to such Extension until the fair rental value is determined. When the fair rental value of the Premises is determined, Landlord shall deliver notice of that amount to Tenant, and Tenant shall pay to Landlord, within ten (10) days after receipt of such notice, the difference between the monthly rent actually paid by Tenant to Landlord and the new monthly rent determined under this paragraph. (l) Use: Data processing facility and general office use. 2. PREMISES AND COMMON AREAS. Subject to all the provisions of this Lease, Landlord leases to Tenant and Tenant leases from Landlord the Premises, which Premises are improved for use as a data processing facility and for office use, those Premises being agreed to have the Approximate Rentable Square Feet designated in Subparagraph 1(b). (b) Tenant shall have the nonexclusive right to use, in common with other present and future tenants in the Project, the following areas ("Common Areas") appurtenant to the Premises, subject to the Rules and Regulations referred to in Paragraph 30 and to other reasonable rules and regulations which Landlord may deem advisable for the Common Areas: (i) The Project's common entrances, ramps and drives; (ii) Loading and unloading areas, trash areas, parking areas, and similar areas and facilities appurtenant to the Building; (iii) The roadways, sidewalks, walkways, parkways, driveways and landscaped areas and similar areas and facilities within the Project which are made available for the use or benefit of all Project tenants and their invitees and other visitors; and (iv) The parking areas, including driveways and alleys. (c) Landlord reserves the right from time to time without unreasonable interference with Tenant's use or security: (i) To install, use, maintain, repair and replace pipes, ducts, conduits, wires and appurtenant meters and equipment for service within the Building above the ceiling surfaces, below the floor surfaces, and within the walls, and to relocate any pipes, ducts, conduits, wires and appurtenant meters and equipment included in the Premises which are located in the Premises or located elsewhere outside the Premises, and to expand the Project; provided, however, that notwithstanding anything to the contrary contained herein, the Building shall not be expanded and Landlord shall have no right to construct or locate the New Building on any portion of the Project except for that portion of the Project which is labeled as the "Build Area" on Exhibit F attached hereto; (ii) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas and walkways provided that Tenant shall at all times have the right to use the number of parking spaces designated in Subparagraph 1(g); (iii) To temporarily close or designate for other uses any of the Common Areas for purposes of improvement, maintenance or repair, so long as reasonable access to the Premises remains available; (iv) To designate other land outside the boundaries of the Building to be a part of the Common Areas; (v) To add additional buildings and improvements (collectively, "New Building") to the Build Area, including, without limitation an office and/or R&D building containing up to 70,000 square feet of space; (vi) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Building or the Project, or any portion thereof; and (vii) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas as Landlord may deem to be appropriate. The preceding reservation of rights to Use the Common Areas shall not impose on Landlord any obligation to maintain or repair the Common Areas or any other portion of the Premises except as expressly set forth in this Lease. In making any additions, repairs alterations or improvements to the Project, Landlord shall use all commercially reasonable efforts to minimize any interference with Tenant, its business and its use. Landlord acknowledges that Tenant intends to use the Premises as a data processing facility and that any interruption to Tenant's business or in Tenant's use or access to the Premises could have a material adverse effect on Tenant and its business. Landlord shall indemnify, defend and hold Tenant and its officers directors, shareholders, agents employees and contractors (the "Tenant Parties" or, individually, a "Tenant Party") harmless from all damages, costs and expenses (including attorneys' fees), judgments loss, damage injury, liability, claims and losses, including, without limitation, injury to Tenant's business and loss of income and profit (collectively, "Tenant Claims") arising from any additions, repairs, alterations or improvements to the Project made by or for Landlord except to the extent that such Tenant Claims arise out of the Tenant's negligence. In case any action or proceeding shall be brought against the Tenant Parties or any of them by reason of any such Tenant Claim, Landlord, upon notice from Tenant, shall defend the same at Landlord's expense by counsel approved in writing by Tenant. 3. TERM. Subject to the provisions of Subparagraph 1(k), The Terms shall be for the period designated in Subparagraph 1(j), beginning on the Commencement Date under Subparagraph 1(d) and ending on the expiration of that period, unless the Lease shall be terminated sooner as hereinafter provided 4. POSSESSION. Landlord and Tenant agree that Systems Management Specialists Inc., a Delaware corporation ("SMS") is currently in possession of the Premises. Tenant agrees to accept delivery directly from SMS. 5. MONTHLY BASIC RENT (a) Tenant agrees to pay Landlord as Monthly Basic Rent for the Premises the Monthly Basic Rent designated in Subparagraph 1(f) in advance on the first day of each calendar month during the Term. If the Term commences or ends on a day other than the first day of a calendar month, then the rent for such period shall be prorated in the proportion that the number of days this Lease is in effect during such period bears to thirty (30). In addition to the Monthly Basic Rent, Tenant agrees to pay as additional rental the amount of rental and other charges required by this Lease. In no event shall Monthly Basic Rent ever be less than the initial Monthly Basic Rent. All rental shall be paid to Landlord, without prior demand and without any deduction or offset, in lawful money of the United States of America at the address of Landlord designated in Subparagraph 1(a) or to such other person or at such other place as Landlord may from time to time designate in writing. (b) Rent and all other payments required to be made by Tenant to Landlord under this Lease shall be deemed to be and treated as rent and payable and recoverable as "rent", and Landlord shall have the same rights against Tenant for default in any such payment as in the case of nonpayment of Monthly Basic Rent. (c) If Tenant fails to pay any installment of rent within ten (10) days following the date due (which ten days is not intended to be a grace period) or if Tenant fails to make any other payment for which Tenant is obligated under this Lease when due, then Tenant shall pay to Landlord as additional rent a late charge equal to six percent (6%) of the amount due to compensate Landlord for the extra costs incurred as a result of such late payment. The parties agree that such late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of late payment by Tenant. Acceptance of any late charge shall not constitute a waiver of the Tenant's default with respect to the overdue amount, or prevent Landlord from exercising any other rights and remedies available to Landlord. (d) If the amount of rent or any other payment due under this Lease now or in the future violates the terms of any government restrictions on such rent or payment, then the rent or payment due during the period of such restrictions shall be the maximum amount allowable under those restrictions. Upon termination of the restrictions, Landlord shall, to the extent it is legally permitted, recover from Tenant the difference between the amounts received during the period of the restrictions and the amounts Landlord would have received had there been no restrictions. 6. OPERATING EXPENSES (a) For purposes of this Lease, the following terms are defined as follows: (i) "Tenant's Percentage" shall have the meaning set forth in Subparagraph 1(h). However, upon completion of any New Building, Tenant's Percentage shall remain at 100% with respect to Operating Expenses relating exclusively to the Building and any facilities in or portion of the Project exclusively serving the Building. In addition, any Operating Expenses relating exclusively to the New Building and any facilities or portion of the Project exclusively serving the New Building shall be excluded from Operating Expenses. (ii) "JIVAC Costs" means all costs incurred in the operation, repair and maintenance and replacement of the systems for heating ventilating and air conditioning the buildings in the Project including, without limitation, supplies, materials, equipment, tools, and contracted services. (iii) "Taxes and Assessments shall mean: (1) Real property taxes and fees and expenses incurred in contesting the amount or validity of any real property tax; (2) Any assessment fee, tax, levy, charge, penalty or similar imposition imposed by any authority, improvement district or special assessment district upon or in respect of the Premises, Building, Project, or Common Areas, or any potion thereof, including any such charges imposed for the use or occupancy of the Building, Project, or Premises, or upon this transaction or any document to which Tenant is a party; and (3) Any new or increased assessment, tax, fee, levy or charge in substitution, partially or totally, of any assessment, tax, fee, charge previously included under Subparagraphs 6(a)(iii)(l) and (2), including without limitation, increases due to tax rate increases or reassessment of the Premises, Building, Common Areas, or Project or any portion thereof for any reason; provided however that Taxes and Assessments shall not include any inheritance personal income or estate taxes. Upon any reassessment of the Project in connection with development of the New Building, Taxes and Assessments shall include Taxes and Assessments relating to the New Building but shall be equitably adjusted as reasonably determined by Landlord so that the amount of Taxes and Assessments which Tenant is liable for or required to pay (which is equal to Tenant's Percentage times Taxes and Assessments) shall not increase as the result of such reassessment except to the extent that Tenant is materially benefited by any improvements to the Common Areas or other facilities serving the Project. (iv) "Insurance Costs" means all costs of premiums for insurance that Landlord procures under Section 22(c) of this Lease. (v) "Capital Costs" means all costs incurred to make any capital improvements, replacements or repairs to the Building, Project, or Common Areas, or any portion thereof, including, without limitation, structural additions or repairs, which: (1) are now or may hereafter be required by any statute, ordinance or regulation of any governmental or enforcement agency; or (2) are needed to operate and maintain the Building, Project, or Common Areas, or any portion thereof, at the same quality levels as prior to the improvement or repair. Capital Costs shall not include the cost of constructing the New Building. (b) "Operating Expenses" shall consist of all direct costs of ownership, operation, repair or maintenance (including necessary supplies, material tools and equipment) of the Building Project, or Common Areas, including any expansions of the Project, or Common Areas by Landlord or any portion thereof, and all indirect costs that are reasonably attributable to the operation, repair and maintenance of the Building, Project, and Common Areas, or any portion thereof, for any calendar year, including costs for the following by way of illustration, but not limitation: HVAC Costs; Taxes and Assessments; Insurance Costs; Capital Costs; costs connected with providing electrical telephone, cable and other electronic data transmission services (including, without limitation, any costs (whether or not Capital Costs) arising from the maintenance, repair and/or replacement of all or any component of electrical, plumbing, mechanical lighting, HVAC or other building systems, and/or the maintenance, repair and/or replacement of lighting fixtures, light bulbs, air filtration or distribution devices (provided that Landlord shall have no obligation to provide any utilities), window panes, window coating and/or other energy-saving measures); janitorial service and window cleaning; waste disposal; parking facilities; Common Areas signage; landscaping and gardening; security; and accounting legal, administrative and consulting fees. Notwithstanding anything to the contrary contained herein, Tenant shall have no obligation to reimburse Landlord for any capital improvements made by Landlord except to the extent that such capital improvements are included within the definition of Capital Costs. Notwithstanding anything to the contrary contained herein, Operating Expenses shall not include any costs incurred in the management of the Building, Project, and Common Areas. (c) Except only for (i) any interest, points and fees on debts or amortization on any mortgage or mortgages or other debt instrument evidencing indebtedness of Landlord and (ii) costs arising from the payment of any claims against Landlord (for which Tenant is not responsible) secured by judgments or liens against the Premises, this Lease is and shall be construed as an absolute "triple net" lease arrangement, the Monthly Basic Rent shall be completely net to the Landlord, and Tenant shall be directly responsible for and pay Tenant's Percentage of all Operating Expenses as set forth in clauses (i) through (v), below: (i) beginning with the Commencement Date and on or before the expiration of each one (1) year period thereafter (each, a "Lease Year"), Landlord shall deliver to Tenant an estimate of Tenant's Percentage of annual Operating Expenses payable in twelve (12) equal monthly installments on the first day of every month as additional rent together with Tenant's payment of Monthly Basic Rent. Landlord may from time to time during the Lease Year revise Landlord's estimate of annual Operating Expenses and Tenant's monthly estimated payments. If after the first Lease Year Landlord has not furnished Tenant with a written estimate for any Lease Year, Tenant shall continue to pay monthly installments of Tenant's Percentage of Operating Expenses at the rate established for the immediately preceding Lease Year (if applicable), provided that, when a written estimate of Operating Expenses for the current Lease Year is delivered to Tenant, Tenant shall, on or before the next monthly payment date, pay all accrued and unpaid monthly estimates based on the new estimate. (ii) On or before May 1 of each Lease Year after the first Lease Year (or as soon thereafter as is practical) Landlord shall deliver to Tenant a statement (the "Statement") setting out Tenant's Percentage of actual Operating Expenses for the immediately preceding Lease Year. If Tenant's Percentage of actual Operating Expenses for the previous Lease Year differs from the total estimated monthly payments of Tenant's Percentage of Operating Expenses made by Tenant for such Lease Year, Tenant shall pay the amount of the deficiency within thirty (30) days of receipt of the Statement or Landlord shall credit the difference, as the case may be; in the case of a credit due, Landlord shall credit against Tenant's next ensuing installment(s) of Monthly Basic Rent an amount equal to the difference until the credit is exhausted. If a credit is due from Landlord on the last day of the Term, Landlord shall credit against any payments due from Tenant under this Lease an amount equal to the credit or, if no payments are due, or may become due from Tenant, Landlord shall pay Tenant the amount of the credit. The obligations of Tenant and Landlord to make payments required under this Paragraph 6 shall survive the termination of this Lease. (iii) If any dispute arises as to the accuracy of Operating Expenses as set forth in the Statement, Tenant shall nevertheless make the payment in accordance with any notice given by Landlord, but Tenant shall have the right, after reasonable notice and at reasonable times, to inspect Landlord's accounting records at Landlord's accounting office and, if after such inspection, Tenant still disputes the amount of Operating Expenses owed, Landlord shall immediately refer the matter for prompt certification by third party certified public accountants selected by Landlord and reasonably acceptable to Tenant, who shall be deemed to be acting as experts and not arbitrators, which certification shall be conclusive and binding on both parties. Any adjustment required to any previous payment made by Tenant or Landlord by reason of any such decision shall be made within ten (10) days of such certification. Tenant agrees to pay the cost of such certification unless it is determined that Landlord's original Statement overstated Operating Expenses by more than five percent (5%). (iv) Operating Expenses due from Tenant in any Lease Year which has less than 365 days because the Term expires on other than the last day of that Lease Year shall be prorated on a per-day basis. (v) Without limiting the foregoing, including Landlord's right to adjust the estimate of Operating Expenses from time to time, should Landlord incur any Capital Costs, Landlord may elect, in Landlord's sole and absolute discretion, to require payment of such Capital Costs within thirty (30) business days following demand therefor together with such supporting documentation as Tenant may reasonably require. (d) Notwithstanding anything to the contrary contained immediately above, as to each specific category of expense which one or more tenants of the Project either pays directly to third parties or actually reimburses Landlord (for example, separately metered utilities, property taxes directly reimbursed to Landlord, etc.) then each such expense which is actually paid or reimbursed shall not be included in "Operating Expenses" for purposes of this Paragraph 6. Tenant's Percentage for each such category of expense shall be adjusted by excluding from the denominator thereof the Rentable Square Feet of all such tenants paying such category of expense directly to third parties or actually reimbursing same directly to Landlord. Moreover, if Tenant directly pays a third party or actually reimburses Landlord for any such category of expense, each such category of expenses which is paid or actually reimbursed by Tenant shall be excluded from the determination of Operating Expenses for Tenant to the extent such expense (after deduction of that portion paid or directly reimbursed by Tenant) was incurred with respect to space in the Project actually leased to other tenants. 7. SECURITY DEPOSIT. The Security Deposit designated in Subparagraph 1(h) shall be held by Landlord as security for the faithful performance by Tenant of all of Tenant's obligations under this Lease. If Tenant breaches any obligation under this Lease, including, without limitation, under provisions relating to the payment of rent, 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 rent or any other sun in default, or for the payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to help 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, upon demand, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount. Tenant's failure to do so shall be a material breach of this Lease. Upon any increase in Monthly Basic Rent, Tenant shall, upon written notice from Landlord, deposit with Landlord such additional funds to be added to the security deposit in an amount equal to the proportionate increase in Monthly Basic Rent. 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. If Tenant shall fully and faithfully perform all of its obligations under this Lease, the Security Deposit or any balance thereof shall be returned to Tenant (or, at Landlord's option, to the last permitted assignee of Tenant's interests under s Lease) at the expiration of the Term, provided that Landlord may retain the Security Deposit until such time as any amount due from Tenant in accordance with Paragraph 6 has been determined and paid in full. If Landlord sells its interest in the Premises during the Term and if Landlord deposits with the purchaser of the Premises the then unappropriated portion of the Security Deposit, Landlord shall be discharged from any further liability with respect to the Security Deposit. 8. USE. (a) Tenant shall use the Premises only for the use set forth in Subparagraph 1(1), and shall not use or permit the Premises to be used for any other purpose without Landlord's prior written consent, which may be withheld in Landlord's sole and absolute discretion. Nothing contained herein shall be deemed to give Tenant any exclusive right to such use in the Building or Project or shall be deemed to be a warranty by Landlord that the Premises are suitable for a particular use. Tenant shall not use or occupy the Premises in violation of any present or future applicable law, and shall, upon written notice from Landlord, discontinue any use of the Premises which is declared by any applicable authority to be a violation of law. Tenant shall comply with any direction of any such governmental authority which shall, by reason of the nature of Tenant's use or occupancy of the Premises, impose any duty upon Tenant or Landlord with respect to the Premises or with respect to the use or occupation thereof. Notwithstanding any circumstantial factors judicially developed as a means of allocating the obligation to make alterations to the Premises in order to comply with present or future laws, it is the intention of the parties that such obligations with respect to the Premises are those of the Tenant and are accordingly reflected in rental payments and other consideration under this Lease. Tenant shall comply with all rules, orders, regulations and requirements of such generally recognized fire rating organization(s) as Landlord may specify from time to time. Tenant shall promptly, upon demand, reimburse Landlord for any additional insurance premium charged by reason of Tenant's failure to comply with the provisions of this Paragraph 8. Tenant shall take all steps required to ensure that neither Tenant nor its contractors or invitees (i) Violate any governmental regulations, ordinances, or laws applicable to the Premises, (ii) 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 Project, or injure or annoy them, (iii) use or allow the Premises to be used for any improper immoral, unlawful or objectionable purpose, or (iv) cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall comply with all present and future covenants conditions and restrictions or other restrictive covenants and obligations, whether or not of record, which affect the use and operation of the Premises, the Building, the Common Areas or the Project, or any portion thereof. Tenant shall not commit or suffer to be committed any waste in or upon the Premises and shall keep the Premises in good order, condition and repair. Tenant shall not place a load upon the Premises exceeding the average pounds of live load per square foot of floor area specified for the Building by Landlord's architect, with partitions to be considered a part of the live load. Landlord reserves the right to prescribe the weight and position of all files, safes and heavy equipment which Tenant desires to place in the Premises so as to properly distribute the weight thereof. Further, Tenant's business machines and mechanical equipment which cause vibration or noise that may be transmitted to the Building structure or to any other space in the Building or Project shall be so installed, maintained and used by Tenant as to eliminate such vibration or noise. Tenant shall be responsible for all structural engineering required to determine structural load in the Premises. (b) Landlord and Tenant acknowledge that the Americans With Disabilities Act of 1990 (42 U.S.C. Section 12101 et seq.) and regulations and guidelines promulgated thereunder, as all of the same may be amended and supplemented from time to time (collectively, "ADA") establish requirements for business operations, accessibility and barrier removal and that such requirements may or may not apply to the Premises, the Building and the Project depending on, among other things: (1) whether Tenant's business is deemed a "public accommodation or "commercial facility", (2) whether such requirements are "readily achievable", and (3) whether a given alteration affects a "primary function area" or triggers "path of travel" requirements. The parties hereby agree that: (a) Landlord shall be responsible for ADA Title III compliance in the Common Areas in connection with any development of the New Building (b) Tenant shall be responsible for ADA Title III compliance in the Premises, including any tenant improvements or other work to be performed in the Premises under or in connection with this Lease, (c) Landlord may perform, or require that Tenant perform, and Tenant shall be responsible for the cost of ADA Title III "path of travel" requirements triggered by Tenant Alterations in the Premises, and (d) Landlord may perform, or require Tenant to perform, and Tenant shall, except as provided in Clause (a), above, be responsible for the cost of ADA Title III compliance in the Common Areas. Tenant shall be solely responsible for requirements under Title I of the ADA relating to Tenant's employees. 9. NOTICES. Any notice, consent, or approval required or permitted to be given under this Lease must be in writing and may be given by personal delivery or by mail, and shall be deemed sufficiently given when actually received by the intended party, whether personally delivered or mailed by registered or certified mail, if to Tenant at the address designated in Subparagraph l(a) until the commencement of the Term only, and thereafter at the Premises, and if to Landlord at the addresses designated in Subparagraph 1(a). Either party may specify a different address for notice purposes by written notice to the other, except that Landlord may in any event use the Premises as Tenant's address for notice purposes. 10. BROKERS. Each party warrants that it has had no dealings with any real estate broker or agent in connection with the negotiation of this Lease. Each party agrees to indemnify and defend the other from any cost, expense or liability for any compensation, fee, commission or charge claimed by any other party claiming by, through or on behalf of the other with respect to this Lease. 11. HOLDING OVER. Tenant shall vacate the Premises upon the expiration or earlier termination of this Lease. Tenant shall reimburse Landlord for and indemnify Landlord against all damages and liability which Landlord incurs from Tenant's delay in vacating the Premises, including, without limitation, claims by and liability to any succeeding tenant founded on such delay and any attorneys' fees and costs. If Tenant does not vacate the Premises Upon the expiration or earlier termination of the Lease and Landlord thereafter accepts rent from Tenant, Tenant's occupancy of the Premises shall be a "month-to-month" tenancy, subject to all of the terms of this Lease applicable to a month-to-month tenancy, except that the Monthly Basic Rent then in effect shall be increased by fifty percent (50%). 12. TAXES ON TENANT'S PROPERTY (a) Tenant shall be liable for and shall pay, at least ten (10) days before delinquency, all taxes levied against any personal property or trade fixtures placed by Tenant in or about the Premises. If any such taxes on Tenant's personal property or trade fixtures are levied against Landlord or Landlord's property or if the assessed value of the Premises is increased by the inclusion therein of a value placed upon such personal property or trade fixtures of Tenant and if Landlord, after thirty (30) days prior notice to Tenant, pays the taxes based upon such increased assessment, which Landlord shall have the right to do regardless of the validity thereof, but only under proper protest if requested by Tenant, Tenant shall, upon demand, repay to Landlord the taxes so levied against Landlord, or the portion of such taxes resulting from such increase in the assessment. (b) If the tenant improvements in the Premises, whether installed by Landlord or Tenant, or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for real property tax purposes at a valuation higher than the valuation at which tenant improvements conforming to Landlord's standards for other space in the Building are assessed, then the real property taxes and assessments levied against the Building by reason of such higher assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of Subparagraph 12(a). If the records of the County Assessor are not available or sufficiently detailed to serve as a basis for determining whether the tenant improvements are subject to a higher valuation than improvements conforming to Landlord's Building standards, the actual cost of construction shall be used. (c) Any assessment, tax, fee, levy or charge allocable to or measured by the area of the Premises or by any payments to be made by Tenant under this Lease, including without limitation, any gross income tax or excise tax levied by any governmental agency or political subdivision thereof with respect to the receipt of rent or other payments under a lease, or upon or with respect to the possession, leasing, operating, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof, shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of Subparagraph 12(a). 13. CONDITIONS OF PREMISES AND PROPERTY. Except as expressly set forth in this Lease, Landlord's lease of the Premises to Tenant shall be on an "AS IS" basis without representations or warranties express or implied, and Tenant's taking of possession of the Premises shall conclusively establish that the Premises and the Building were in satisfactory condition at the time of that possession. Subject to the limitations on Landlord set forth in Section 2, Tenant accepts that from time to time there may be construction and improvement work by Landlord on the Build Area. 14. ALTERATIONS (a) Tenant shall make no alterations, additions, repairs or improvements to the Premises (collectively, "Alteration(s)") except as expressly permitted by this Paragraph 14. Tenant shall have no right to make any Alterations to the structural portions of the Building which shall include the foundation, floor/ceiling slabs, roof, curtain walls, exterior glass and mullions columns, beams, shafts, stairs, stairwells, escalators, plazas, artwork, sculptures, washrooms, mechanical, electrical and telephone closets and all Common Areas and public areas and the mechanical electrical, life safety, plumbing, sprinkler systems and HVAC systems (collectively, "Building Structure and Systems") Landlord's consent to any other Alteration (i.e., other than to an Alteration to any portion or component of the Building Structure and Systems or that, in Landlord's reasonable judgment, could adversely affect any portion of the Building Structure and Systems) shall not be unreasonably withheld. Notwithstanding the other provisions of this Paragraph 14, Tenant may install nominal office decorations (e.g., paintings) in the Premises without obtaining Landlord's consent. (b) Landlord may condition its consent to any type of Alteration on such requirements as Landlord may deem necessary in its subjective, good faith discretion, including without limitation: (i) the manner in which the work is to be done, (ii) the right of approval over the entity which shall perform or contract to perform the work (which approval may be withheld if, among other things, that entity is not properly licensed under all applicable laws or if Landlord deems the insurance carried by that entity to be inadequate), (iii) the times during which the work is to be accomplished, (iv) the issuance at Tenant's sole cost of a performance or labor and material payment bond ensuring lien-free completion of the proposed Alterations, or (v) delivery to Landlord of preliminary and final sets of plans for the proposed Alterations. Tenant shall give Landlord at least ten (10) business days prior written notice of the expected commencement date of any work related to the Premises. Tenant shall be responsible for obtaining all permits required by law for all work done by Tenant under this Lease and Tenant warrants that such work shall comply with all applicable governmental laws, codes, or ordinances, including without limitation, the ADA. Notwithstanding anything to the contrary contained herein, Tenant may, however, make non-structural installations to the interior of the Premises (excluding the roof), as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during the term of this Lease does not exceed $25,000. (c) Upon the expiration or earlier termination of this Lease, (1) all or any part of the Alterations to or in connection with the Premises shall, at the option of Landlord, either (a) become the property of Landlord and remain and be Surrendered with the Premises, or (b) be removed from the Premises and the Premises restored to their condition immediately before those Alterations were made, all by and at the expense of Tenant. (d) All articles of personal property and all business and trade fixtures, machinery and equipment, furniture and movable partitions owned by Tenant ("Tenant's Effects") shall be and remain the property of Tenant and may be removed by Tenant at any time during the Term. If Tenant fails to remove all of Tenant's Effects from the Premises upon termination of this Lease, Landlord may, at its option, remove Tenant's Effects and store Tenant's Effects without liability to Tenant for loss of Tenant's Effects. Tenant agrees to pay Landlord upon demand any and all expenses incurred by Landlord in removing Tenant's Effects, including court costs, attorneys' fees and storage charges on Tenant's Effects, for any length of time that Tenant's Effects shall be in Landlord's possession. Landlord may, at its option, without notice, sell Tenant's Effects, or any of the same, at a private sale and without legal process, for such price as Landlord may obtain, and apply the proceeds of such sale to any amounts due under this Lease from Tenant to Landlord and to the expenses incident to the removal and sale of Tenant's Effects. Tenant waives the provisions of California Civil Code sections 1980-1991. 15. REPAIRS (a) Tenant shall keep, maintain and preserve the Premises in good order, condition and repair, and shall, when and if needed, at Tenant's sole cost and expense, make all repairs to the Premises and every part thereof, including, without limitation, the interior surfaces of the ceilings, walls and floors, all doors, all interior windows, all non-standard plumbing, pipes, electrical wiring, light fixtures and bulbs, switches, furnishings, signs and special items and equipment installed by or at the expense of Tenant. Landlord shall have no obligation to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof. Tenant and Landlord affirm that Landlord has made no representations to Tenant respecting the condition of the Premises, the Building, the Common Areas, or the Project except as specifically set forth in this Lease. (b) Anything Contained in Paragraph 15(a) to the contrary notwithstanding, Landlord shall repair (including any necessary replacements) and maintain the Common Areas, including the landscaping, parking areas and exterior lighting, and the structural portions of the Building and the Building plumbing, heating, ventilating, air conditioning and electrical systems and the costs of such repairs and maintenance shall be included in Operating Expenses. Landlord shall not be liable for any failure to make any such repairs or to perform any maintenance unless such failure shall persist for any unreasonable time after written notice of the need of such repairs or maintenance is given to Landlord by Tenant. Except as provided in Paragraph 23, there shall be no abatement of rent to the extent of any insurance proceeds payable to Tenant under insurance policies which Tenant maintains or is required to carry under this Lease and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Building, the Premises, the Common Areas, or the Project or in or to fixtures, appurtenances and equipment therein. Tenant waives the right to make repairs at Landlord's expense under any law, state or ordinance flow or hereafter in effect. No provisions of this Lease shall be construed as obligating Landlord to perform any repairs, alterations or decorations except as otherwise expressly provided under this Lease. (c) Tenant shall be responsible for the maintenance of all telephone cable, and any fiber optic wiring serving the Premises (collectively the "Building Cable"). Landlord shall not be responsible and shall have no liability for interruption in or failure of telephone or electronic data transmission services. Tenant shall abide by all reasonable written and nondiscriminatory rules and regulations hereafter promulgated by Landlord regarding access to the Building Cable. Tenant shall indemnify, defend and hold Landlord harmless from and against any and all claims, losses, liabilities, costs and expenses, including without limitation, actual attorneys' fees, incurred by Landlord and related to Tenant's access to or work performed in connection with the Building Cable. (d) At Landlord's election as part of Operating Expenses, Landlord may elect from time to time to procure and keep in effect as part of Operating Expenses, the following maintenance and service contacts: (i) landscaping, (ii) heating, ventilation and air conditioning equipment (iii) boiler, fired or unfired pressure vessels, (iv) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems including fire alarm and/or smoke detection systems, (v) roof covering and drain maintenance, and (vi) asphalt and parking lot maintenance. 16. LIENS. Tenant shall not pet any mechanics', materialmens' or other liens to be filed against any portion of the Building or the Project or against Tenant's leasehold interest in the Premises as a result of work performed by or for Tenant. Landlord shall have the right at all reasonable times to post and keep posted on the Premises any notices which it deems necessary for protection from such liens. If any such liens are filed, Landlord may, without waiving its rights and remedies based on such breach of Tenant and without releasing Tenant from any of its obligations, cause such liens to be released by any means it shall deem proper, including payments in satisfaction of the claim giving rise to such lien. Tenant shall pay to Landlord at Once, upon notice by Landlord, any sum paid by Landlord to remove such liens, together with interest on that sum at (a) the maximum rate permitted by then-existing usury law, if applicable or (b) the then-existing usury law is not applicable, one and one-half percent (1-1/2%) per month ("Lease Interest Rate") from the date of Landlord's payment. 17. ENTRY BY LANDLORD. Landlord reserves and shall at all reasonable times have the right to enter the Premises to inspect the same, to supply janitor service and any other service to be provided by Landlord to Tenant under this Lease, to show the Premises to prospective Purchasers or tenants, to post notices of non-responsibility to improve or repair the Premises or any other portion of the Building, without any such act being deemed an eviction of Tenant and without abatement of rent. Landlord shall have the right, but not the obligation, to enter on the Premises and into the Building for the purpose of performing any obligation on Tenant's part to be performed following a Tenant default pursuant to Paragraph 25, below, and Tenant shall pay all costs incurred by Landlord at the Lease Interest Rate. Landlord may, order to carry out all such purposes, erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed. Subject to the limitations set forth in Section 2, Tenant waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss in, upon and about the Premises resulting from any entry permitted under this paragraph. Landlord shall at all times have and retain a key with which to unlock all doors in the Premises, excluding Tenant's vaults and safes. Landlord shall have the right to use any and all means which Landlord may deem proper to open any door in an emergency in order to obtain entry to or within the Premises. Any entry to the Premises obtained by Landlord by any means shall not be deemed to be a forcible or unlawful entry into the Premises or an eviction of Tenant from the Premises or any portion thereof; and any damages caused on account thereof shall be paid by Tenant if that entry was caused by the acts or omissions of Tenant, its agents or contractors. 18. UTILITIES AND SERVICES. Tenant represents that it is familiar with the standards for all utilities servicing the Premises, including, without limitation, the capacity of the feeders to the Building and the risers and wiring installations. Tenant shall contract directly with all utility companies and similar providers for utilities and services to the Premises and pay directly for all such services (which shall include, without limitation, all water, sewer, electrical, cable and other electronic data transmission services), and Landlord shall have no obligation to provide any such services. Notwithstanding the foregoing, any installation of utility lines, including, without limitation, Building Cable whether or not through any existing conduits or risers, and any trenching over the Premises to install wiring or cable, whether or not over existing utility easements, shall be considered an alteration to the Building Structure and Systems. Unless directly caused by the gross active negligence or the intentional misconduct of Landlord, the interruption of any utilities or services to the Building shall not result in any liability of Landlord, Tenant shall not be entitled to any abatement or reduction of rent by reason of such failure (whether such failure affects HVAC services or otherwise), no eviction of Tenant shall result from such failure, and Tenant shall not be relieved from the performance of any covenant or agreement in this Lease because of such failure. Any such interruption shall include, without limitation, failure of services caused by (i) accident, breakage or repairs; (ii) strikes, lockouts or other labor disturbance or labor dispute of any character; (iii) governmental regulation moratorium or other action; (iv) inability despite the exercise of reasonable diligence to obtain electricity, water or fuel; or (v) any other cause beyond Landlord's reasonable control. Landlord shall, at Tenant's expense, take all reasonable actions as Tenant may reasonably request to restore or cause the restoration of services which have been interrupted 19. BANKRUPTCY. If Tenant shall file a petition in bankruptcy under any provision of the Bankruptcy Code as then in effect, or if Tenant shall be adjudicated a bankrupt in involuntary bankruptcy proceedings and such adjudication shall not have been vacated within sixty (60) days from the date thereof; or if a receiver or trustee of Tenant's property shall be appointed and the order appointing such receiver or trustee shall not be set aside or vacated within sixty (60) days after the entry thereof, or if Tenant shall assign Tenant's estate or effects for the benefit of creditors (collectively, "Acts of Insolvency"), or if this Lease shall, by operation of law or otherwise, pass to any person or persons other than Tenant, then in any such event Landlord may terminate this Lease, if Landlord so elects, with or without notice of such election and with or without entry or action by Landlord. In such case, notwithstanding any other provisions of this Lease, Landlord, in addition to any and all rights and remedies allowed by law or equity, shall, upon such termination, be entitled to recover damages in the amount provided in Subparagraph 25(b), and neither Tenant nor any person claiming through or under Tenant or by virtue of any statute or order of any court shall be entitled to possession of the Premises but shall immediately surrender the Premises to Landlord. Nothing contained herein shall limit or prejudice the right of Landlord to recover, by reason of any such termination, damages equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such damages are greater, equal to or less than the amount of damages otherwise recoverable under the provisions of this Paragraph 19. 20. INDEMNIFICATION AND EXCULPATION OF LANDLORD (a) Tenant shall indemnify, defend and hold Landlord and its officers, directors, shareholders, agents, employees and contractors (the "Landlord Parties" or, individually a "Landlord Party") harmless from all damages, costs and expenses (including attorneys' fees), judgments, loss, damage, injury, liability, claims and losses (collectively, "Claims") arising from Tenant's use of the Premises or the conduct of its business or from any activity, work or thing done, permitted or suffered by Tenant in or about the Premises, the Building, the Common Areas, any portion thereof, or any other part of the Project except to the extent that such Claims arise out of the Landlord's negligence. Tenant shall further indemnify, defend and hold the Landlord Parties harmless from all Claims arising from any breach or default in the performance of any obligation to be performed by Tenant under this Lease, or arising from any act, neglect, fault or omission of Tenant or of its agents, employees or contractors, and from and against all Claims incurred in, or arising out of, such claim or any action or proceeding brought thereon except to the extent of Landlord's negligence. In case any action or proceeding shall be brought against the Landlord Parties or any of them by reason of any such Claim, Tenant, upon notice from Landlord, shall defend the same at Tenant's expense by counsel approved in writing by Landlord. Except as is otherwise provided in Section 2, Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of damage to property or injury to persons in, upon or about the Premises from any cause whatsoever except that which is caused by the gross active negligence or willful conduct of the Landlord Parties or any of them or Landlord's breach of this Lease. Except as is otherwise provided in Section 2, Tenant hereby waives all its Claims in respect thereof against Landlord. (b) Except as is otherwise provided in Section 2, Landlord shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Tenant, Tenant's employees contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Landlord shall not be liable for any damages arising from any act or neglect of any other tenant of Landlord. Notwithstanding Landlord's negligence or breach of this Lease, except as otherwise provided in Section 2, Landlord shall not be liable for injury to Tenant's business or for any loss of income or profit therefrom. 21. DAMAGE TO TENANT'S PROPERTY. Tenant shall give prompt notice to Landlord in case of fire or accidents in the Premises or in the Building or of defects in the Premises or the Building or in any fixtures or equipment. 22. TENANT'S INSURANCE (a) Tenant shall, during the Term and any other period of occupancy, at its sole cost and expense, keep in full force the following insurance: (i) Standard form property insurance insuring against all-risk perils ("All-Risk") and sprinkler leakage. This insurance policy shall be upon all property owned by Tenant, for which Tenant is legally liable or that was installed at Tenant's expense, and which is located in the Building including, without limitation, furniture, fittings, installations, fixtures (other than tenant improvements installed by Landlord) and any other personal property, in an amount not less than the full replacement cost thereof. If there is a dispute as to the amount which comprises full replacement cost, the decision of Landlord or any mortgagees of Landlord shall be conclusive. (ii) Commercial General Liability Insurance insuring Tenant against any liability arising out of the lease, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be in the amount of $1,000,000 Combined Single Limit for injury to, or death of one or more persons in an occurrence, and for damage to tangible property in an occurrence. The policy shall insure the hazards of the Premises and Tenant's operations thereon, independent contractors, and contractual liability (covering the indemnity contained in Paragraph 20), and shall (1) name Landlord and Landlord's lender(s) and mortgagee(s) as additional insureds, (2) contain a cross-liability provision, and (3) contain a provision that the insurance provided Landlord under this Subparagraph 22(a)(ii) shall be primary and non-contributing with any other insurance available to Landlord. (iii) Workers' Compensation and Employer's Liability insurance as required by state law. (iv) Business interruption insurance coverage for all Basic Monthly Rent and Operating Expenses for a period of at least twelve (12) months. (b) All policies to be procured by Tenant shall be written in a form satisfactory to Landlord and shall be maintained with insurance companies holding a General Policyholders Rating of "B+, V", as set forth in the most current issue of Best's Insurance Guide or such other rating as may be required by a lender having a lien on the Project. Within ten (10) days after the execution of this Lease and before occupying the Premises, Tenant shall deliver to Landlord copies of certificates evidencing the existence of the amounts and forms of coverage satisfactory to Landlord. No such policy shall be cancelable or reducible in coverage without at least thirty (30) days prior written notice to Landlord. Tenant shall, at least ten (10) days before the expiration of such policies, furnish Landlord with renewals or "binders" thereof; or Landlord may order such insurance and charge the cost thereof to Tenant as additional rent. If Landlord obtains any insurance that is the responsibility of Tenant under this Paragraph 22, Landlord shall deliver to Tenant a written statement setting forth the cost of any such insurance and showing in reasonable detail the manner in which it has been computed, and Tenant shall reimburse Landlord such amount at the Lease Interest Rate until paid. (c) During the Term, Landlord shall insure the Project (excluding any property which Tenant is obligated to insure under Subparagraph 22(a)) against damage with All-Risk insurance in an amount equal to the full replacement cost of the Project. Landlord shall also maintain the insurance described in Section 22(a)(ii) above, in addition to, and not in lieu of, the insurance required to be maintained by Tenant. Tenant acknowledges that Tenant's insurance shall in any event provide primary coverage and that it has no right to receive any proceeds from any insurance policies carried by Landlord. (d) Tenant will not keep, use, sell or offer for sale in or upon the Premises any article which may be prohibited by any insurance policy periodically in force covering the Building. If Tenant's use of the Premises, whether or not Landlord has consented to the same, results in any increase in premiums for the insurance periodically carried by Landlord with respect to the Building, Tenant shall pay any such increase in premiums as additional rent within ten (10) days after being billed therefor by Landlord. In determining whether increased premiums are a result of Tenant's use of the Premises, a schedule issued by the organization computing the insurance rate on the Building or the Tenant Improvements showing the various components of such rate shall be conclusive evidence of the several items and charges which make up such rate. Tenant shall promptly comply with all reasonable requirements of the insurance authority or any present or future insurer relating to the Premises. (e) If any of Landlord's insurance policies shall be canceled or cancellation shall be threatened or the premium or coverage thereunder changed or threatened to be changed in any way because of the use of the Premises or any part thereof by Tenant or any assignee or subtenant of Tenant or by anyone Tenant permits on the Premises and, if Tenant fails to remedy the condition giving rise to such threatened or actual cancellation, or threatened or actual change in coverage or premiums, then, (a) within forty-eight (48) hours after notice thereof, Landlord may, at its option, enter upon the Premises and attempt to remedy such condition, and Tenant shall promptly pay the cost thereof to Landlord as additional rent and (b) within ten (10) business days after notice thereof, Landlord may, at its option, terminate this Lease. Landlord shall not be liable for any damage or injury caused to any property of Tenant or of others located on the Premises resulting from such entry. If Landlord is unable or elects not to remedy such condition, then Landlord shall have all of the remedies for a Tenant default provided for in this Lease. (f) All policies of insurance required hereunder shall include a clause or endorsement denying the insurer any rights of subrogation against the other party to the extent rights have been waived by the insured before the occurrence of injury or loss. Landlord and Tenant Waive any rights of recovery against the other for injury or loss due to hazards covered by policies of insurance containing such a waiver of subrogation clause or endorsement to the extent of the injury or loss covered thereby. 23. DAMAGE OR DESTRUCTION (a) Definitions (i) "Project Partial Damage" shall mean damage or destruction to the improvements on the Project, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Project immediately prior to such damage or destruction. (ii) "Project Total Destruction" shall mean damage or destruction to the Project, the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Project immediately prior to such damage or destruction. (iii) "Insured Loss" shall mean damage or destruction to improvements on the Premises which was caused by an event required to be covered by the insurance described in Paragraph 22, irrespective of any deductible amounts or coverage limits involved. (iv) `Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Landlord and stated at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (b) Partial Damage -- Insured Loss. If a Project Partial Damage that is an Insured Loss occurs, then Landlord shall, at Landlord's expense, repair such damage (but not Tenant's trade fixtures) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Tenant shall, at Tenant's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Landlord shall make the insurance proceeds available to Tenant on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the "Insuring Party" which for purposes of this Lease shall be deemed to be Landlord shall promptly contribute the shortage in proceeds as and when required to complete said repairs. In the event, however, the shortage in proceeds was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Landlord shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Tenant provides Landlord with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Landlord receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Landlord does not receive such funds or assurance within said period, Landlord may nevertheless elect by written notice to Tenant within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Landlord paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If in such case Landlord does not so elect, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Tenant shall in no event have any right to reimbursement from Landlord for any funds contributed by Tenant to repair any such damage or destruction. Project Partial Damage due to flood or earthquake shall be subject to the following paragraph rather than this paragraph, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either party. (c) Partial -- Uninsured Loss. If a Project Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Tenant (in which event Tenant shall make the repairs at Tenant's expense and this Lease shall continue in full force and effect), Landlord may at Landlord's option, either, (i) repair such damage as soon as reasonably possible at Landlord's expense, in which event this Lease shall continue in full force and effect, or (ii) provided that Landlord terminates all other similarly situated leases, give written notice to Tenant within thirty (30) days after receipt by Landlord of knowledge of the occurrence of such damage of Landlord's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Landlord elects to give such notice of Landlord's intention to terminate this Lease, Tenant shall have the right within the (10) days after the receipt of such notice to give written notice to Landlord of Tenant's commitment to pay for the repair of such damage totally at Tenant's expense and without reimbursement from Landlord. Tenant shall provide Landlord with the required funds or satisfactory assurance thereof within thirty (30) days following Tenant's said commitment. In such event, this Lease shall continue in full force and effect, and Landlord shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Tenant does not give such notice and provide the funds or assurance thereof within the times specified above this Lease shall terminate as of the date Specified in Landlord's notice of termination. (d) Total Destruction. Notwithstanding any other Provision hereof, if a Project Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate as of such Project Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Tenant. In the event, however, that the damage or destruction was caused by Tenant, Landlord shall have the tight to recover damages from Tenant except as otherwise released and waived herein. (e) Damage Near End of Term. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (I) month's Monthly Basic Rent, whether or not an Insured Loss, Landlord may, at Landlord's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Tenant of Landlord's election to do so within thirty (30) days after the date of occurrence of such damage; provided, however, that if Tenant at that time has an exercisable option to extend this Lease or to purchase the Premises then Tenant may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("Exercise Period") (i) exercising such option and (ii) providing Landlord with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Tenant duly exercises such option during said Exercise period and provides Landlord with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Landlord shall, at Landlord's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Tenant fails to exercise such option and provide such funds or assurance during said Exercise Period, then Landlord may at Landlord's Option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Tenant of Landlord's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term of provision in the grant of option to the contrary. 24. EMINENT DOMAIN. If the Project or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the Land not occupied by any building, is taken by condemnation, Tenant may, at Tenant's option, to be exercised in writing within ten (10) days after Landlord shall have given Tenant written notice of such taking (or in the absence of such notice, with ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Tenant does not terminate this Lease in accordance with the foregoing, this Lease shall remain in fill force and effect as to the portion of the Premises remaining, except that the Monthly Basic Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Monthly Basic Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Project under the Power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Landlord, whether such award shall be made as compensation for diminution in value of the leaseholder for the taking of the fee, or as severance damages; provided, however, that Tenant shall be entitled to any compensation separately awarded to Tenant for Tenant's relocation expenses and/or loss of Tenant's trade fixtures. In the event that this Lease is not terminated by reason of such condemnation, Landlord shall to the extent of severance damages received, over and above the legal and other expenses incurred by Landlord in the Condemnation matter, repair any damage to the Project caused by such condemnation, except to the extent that Tenant has been reimbursed therefore by the condemning authority. 25.DEFAULTS AND REMEDIES (a) The occurrence of any one or more of the following events shall constitute a default hereunder by Tenant: (I) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (ii) The failure by Tenant to make any payment of rent or additional rent or any other payment required to be made by Tenant under this Lease, as and when due, provided that Tenant may cure such default by making such payment to Landlord within three (3) days after written notice thereof from Landlord to Tenant; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under Code of Civil Procedure Section 1161 regarding unlawful detainer actions. (iii) The failure by Tenant to observe or perform any of the express or implied covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in Subparagraphs 25(a)(i) or (II), provided that Tenant may cure such default by curing such failure within thirty (30) days after written notice thereof from Landlord to Tenant. Any such notice shall be in lieu of, and not in addition to, any notice required under Code of Civil Procedure Section 1161 regarding unlawful detainer actions. If the nature of Tenant's default is such that it is reasonably capable of being cured but more than thirty (30) days are required for its cure, then Tenant shall be deemed to have cured such default if Tenant shall commence such cure within the thirty (30) day period and thereafter diligently prosecutes such cure to completion. (iv) (1) Acts of Insolvency; or (2) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, provided that such default shall be deemed to be cured where such seizure is discharged within thirty (30) days. (v) The death, incapacity or Act of Insolvency of any guarantor or the termination, cancellation or anticipatory breach or repudiation in whole or in part of any guaranty. (vi) The discovery by Landlord that any financial statement given to Landlord by Tenant, or its successor in interest, or by any Transferee (defined below) or sublessee pursuant to a Transfer or sublease, or by any guarantor, is materially false. (vii) Any breach or repudiation by any guarantor of the provisions of, or obligations of such Guarantor under, any guaranty of this Lease. (b) If any such default by Tenant occurs,, in addition to any other remedies now or later available to Landlord at law or in equity, Landlord can terminate Tenant's right to Possession of the Premises and terminate this Lease and all rights of Tenant under this Lease. No act by landlord other than giving notice thereof to Tenant shall terminate this Lease. Upon termination, Landlord may recover from Tenant: (i) the worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided, plus (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the Term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease or which in the ordinary course of things would be likely to result therefrom As used in Subparagraphs 25(b)(i) and (ii), the "WORTH AT THE TIME OF AWARD" is computed by allowing interest at the Lease Interest Rate. As used in Subparagraph 25(b)(iii), the "WORTH AT THE TIME OF AWARD" is Computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). (c) If any such default by Tenant occurs, Landlord may utilize the remedy described in California Civil Code Section 1951.4 (which says landlord may continue the lease in effect after a tenant's breach and abandonment and recover rent as it becomes due, if tenant has the right to sublet or assign subject to reasonable limitations). (d) If an abandonment of the Premises by Tenant occurs or if Landlord elects to reenter as provided above or shall take possession of the Premises pursuant to legal proceeding or pursuant to any notice provided by law, then if Landlord does not elect to terminate this Lease as provided above, Landlord may from time to time, without terminating this Lease, either recover all rent as it becomes due or relet the Premises or any part thereof for the Term on terms and conditions as Landlord in its sole discretion may deem advisable with the right to make alterations and repairs to the Premises. If Landlord elects to relet, then rentals received by Landlord from that reletting shall be applied: first, to the payment of any indebtedness other than rent due under this Lease from Tenant to Landlord; second, to the payment of any cost of such reletting; third, to the payment of the cost of any alterations and repairs to the Premises; fourth, to the payment of rent due and unpaid under this Lease; and the residue, if any, shall be held by Landlord and applied to payment of future rent as the same may become due and payable under this Lease. Should that portion of such rentals received from such reletting during any month, which is applied to the payment rent under this Lease, be less than the rent payable during that month by Tenant under this Lease, then Tenant shall pay such deficiency to Landlord immediately upon demand therefor by Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as ascertained, any costs and expenses incurred by Landlord in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. (e) All rights, options and remedies of Landlord contained in this Lease shall be construed and held to be cumulative, and no one of them shall be exclusive of the other, and Landlord shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided by law, whether or not stated in this Lease. Without limitation, Tenant acknowledges that Tenants failure to timely comply with the requirements of Paragraphs 27, 28, 49, 50 and 55 may result in a lender refusing to loan Landlord funds or a buyer refusing to purchase the Building on favorable terms (or at all), causing Landlord substantial monetary damages. No waiver of any default of Tenant under this Lease shall be implied from any acceptance by Landlord of any rent or other payments due under this Lease (whether that acceptance occurs before or after (i) a default has occurred or (ii) a three-day or other notice of default has been given) or from any omission by Landlord to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect defaults other than as specified in the waiver. The consent or approval of Landlord to or of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent or approval to or of any subsequent similar acts by Tenant. (f) Landlord shall be in default in the performance of any obligation required to be performed by Landlord under the Lease if Landlord has failed to perform such obligation within thirty (30) days after actual receipt of written notice from Tenant specifying in detail Landlord's failure to perform; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for Landlord's performance, Landlord shall not be deemed in default if Landlord commences such Performance within such thirty (30) day period and thereafter diligently pursues the same to completion. Upon any such default by Landlord, Tenant may exercise any of its rights provided at law for a default by a landlord under a commercial lease. (g) Landlord and Tenant waive all rights to a jury trial and agree that any action or proceeding arising out of this Lease shall be heard by a court sitting without a jury. LANDLORD AND TENANT EACH ACKNOWLEDGES THAT IT HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE WITH RESPECT TO ITS RIGHTS TO TRIAL BY JURY UNDER THE CONSTITUTIONS OF THE UNITED STATES AND THE STATE OF CALIFORNIA. EACH PARTY EXPRESSLY AND KNOWINGLY WAIVES AND RELEASES ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY AGAINST THE OTHER ON ANY MATTERS ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, TENANT'S USE OR OCCUPANCY OF THE PREMISES, OR ANY CLAIM FOR INJURY OR DAMAGE. 26. ASSIGNMENT AND SUBLETTING. (a) Tenant shall not assign, encumber, or otherwise transfer (collectively, "TRANSFER") all or any part of its interest in this Lease or in the Premises or sublease all or any part of the Premises, or allow any other person or entity to occupy or use all or any part of the Premises, without obtaining Landlord's prior written consent which consent shall not be unreasonably withheld or delayed. Any Transfer or sublease without Landlord's prior written consent shall be voidable at Landlord's election and shall constitute a default. (b) If Tenant is a partnership or a limited liability company, a withdrawal or change, in one or more transactions, of partners or members owning in the aggregate a fifty percent (50%) or more interest in the profits of the partnership or limited liability company, or any transaction or event which results in a change in control of the partnership or limited liability company, or if Tenant is a corporation, any change or transfer in the aggregate of fifty percent (50%) or more of its voting stock or beneficial interest, whether in one or more transactions, shall constitute a Transfer and shall be subject to these provisions. If Tenant is a corporation, partnership, or limited liability company a sale, encumbrance or other transfer of fifty percent (50%) or more of its assets in the aggregate, in one or more transactions, shall also be a Transfer under this Lease and in addition shall be void as to Landlord without Landlord's prior written consent. No consent to a Transfer or sublease shall constitute a future waiver of the provisions of this Paragraph 26. (c) Tenant shall notify Landlord in writing of Tenant's intent to Transfer or sublease all or part of this Lease or the Premises, the name of the proposed assignee or sublessee, information concerning the financial responsibility of the proposed assignee or sublessee and all the terms of the proposed Transfer or subletting; within thirty (30) days after receipt of all such information and all additional information requested by Landlord concerning the proposed Transfer or sublease, Landlord shall elect by notice to Tenant ("Landlord's Election") to do one of the following: (a) consent to such proposed Transfer or sublease; or (b) refuse such consent, which refusal shall be on reasonable grounds; .or, (c) effective within sixty (60) days after the date Landlord gives its notice, terminate this Lease, or in the case of a partial sublease, terminate this Lease as to the portion of the Premises proposed to be sublet. However, if within thirty (30) days after Landlord gives Landlord's Election of the alternative in clause "(C)" Landlord receives written notice from Tenant that Tenant has rescinded its proposed Transfer or sublease, this Lease shall continue in effect. As conditions to granting its consent to any Transfer or sublease, Landlord may require: (i) delivery to and approval by Landlord of a true copy of the fully executed instrument of Transfer or sublease, and the delivery to Landlord of an agreement executed by the transferee or sublessee in form and substance satisfactory to Landlord and expressly enforceable by Landlord, whereby the transferee or sublessee assumes and agrees to be bound by all of the terms and provisions of this Lease and to perform all of the obligations of Tenant under this Lease; (ii) that any sublease provide that it is subject and subordinate to this Lease and to all mortgages, that Landlord may enforce the provisions of the sublease, including collection of rent, and that in the event of termination of this Lease for any reason, including without limitation a voluntary surrender by Tenant, or in the event of any reentry or repossession of the Premises by Landlord, Landlord may, at its option, either (x) terminate the sublease or (y) take over all of the right, title and interest of Tenant, as sublessor, under such sublease, in which latter case such sublessee shall attorn to Landlord, but that nevertheless Landlord shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior defaults or breaches of such sublessor under such sublease (d) Landlord shall have the right to approve or disapprove any proposed assignee or subtenant. In exercising such right of approval or disapproval, Landlord shall be entitled to take into account any fact or factor which Landlord reasonably deems relevant to such decision, including but not necessarily limited to the following, all of which are agreed to be reasonable factors for Landlord's consideration: (c) The financial strength of the proposed assignee or subtenant, including the adequacy of its working capital to pay all expenses anticipated in connection with any proposed remodeling of the Premises. (d) (ii) The proposed use of the Premises by such proposed assignee or subtenant and the compatibility of such proposed use within the quality and nature of the other uses in the Project. (e) (iii) Any violation which the proposed use by such proposed assignee or subtenant would cause of any other rights granted by Landlord to other tenants of the Project. (f) (iv) Any adverse impact of the proposed use of the Premises by such proposed assignee or subtenant upon the parking or other services provided for Project tenants generally. (g) (v) Whether there then exists any default by Tenant pursuant to this Lease or any non-payment or non-perfonce by Tenant under this Lease which, with the passage of tine or the giving of notice, would constitute a default under this Lease. (h) (vi) The business reputation, character, history and nature of the business of the proposed assignee or subtenant. (vii) Whether the proposed assignee or subtenant is a tenant or existing subtenant, or is an affiliate of or associated with any tenant or existing subtenant of the Project or is a person with whom Landlord has negotiated for space in the Project during the twelve (12) month period ending with the date Landlord receives notice of such proposed assignment or subletting. (i) (viii) Whether the proposed assignee or subtenant is a governmental entity or agency. (j) Tenant's remedy for any breach of this Section shall be limited to compensatory damages and injunctive relief. Landlord and Tenant acow1edge that the express standards and provisions set forth in this Lease dealing with assignment and subletting, including those set forth in this Subparagraph (d), have been freely negotiated and are reasonable at the date hereof taking into account Tenant's proposed use of the Premises and the nature and quality of the Building and Project. (e) Whether or not Landlord shall consent to a Transfer or sublease under the provisions of this Paragraph 26, (i) Tenant shall pay Landlord's Processing fees and attorneys' fees incurred in determining whether or not to so consent, and (ii) Tenant shall not be relieved of any responsibility under this Lease without Landlord's express written release, which Landlord may grant or withhold in its sole, subjective discretion. If Land1ord shall consent to any Transfer, Tenant shall pay to Landlord, as additional rent, one hundred percent (100%) of all net sums or other consideration payable to and for the benefit of Tenant by the transferee in consideration of the right to be the tenant, assignee or sublessee of the Premises, as and when such sums and other consideration are due and payable to or for the benefit of Tenant (or, if Landlord so requires, and without any release of Tenant's liability for the same, Tenant shall instruct the transferee to pay such sums and other consideration directly to Landlord). If in connection with any proposed sublease Tenant receives net sums or other consideration, either initially or over the term of the sublease, in excess of the rent called for under this Lease or, in case of the sublease of a portion of the Premises, in excess of such rent fairly allocable to such portion, after appropriate adjustments to assure that all other payments called for under this Lease are taken into account, Tenant shall pay to Landlord as additional rent one hundred percent (100%) of the net sums or other consideration received by Tenant promptly after its receipt. As used in this paragraph, "NET SUMS OR OTHER CONSIDERATION" shall include without limitation the then fair value of any non-cash consideration and shall be calculated after first deducting reasonable costs incurred by Tenant in connection with the Transfer or sublease, including without limitation commissions payable to a broker not affiliated with Tenant, space modification costs in connection with the Transfer or sublease, reasonable legal costs, free rent concessions to the transferee or sublessee, and lease take-over costs. Landjord's waiver of or consent to any Transfer or subletting shall not relieve Tenant or any transferee or sublessee from any obligation under this Lease whether or not accrued. 27. SUBORDINATION. Unless Landlord or any beneficiary or mortgagee with a lien on the Building or any ground lessor with respect to the Building elects otherwise as provided below in this Paragraph 27, this Lease shall be subject and subordinate at all times to the following without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination:. (a) the lien and provisions of any mortgage, deed of trust, or declaration of covenants, conditions and restrictions which may now exist or hereafter be executed by which the Building, Project, any ground lease, or Landlord's interest or estate in any of those items, is encumbered; and (b) all ground leases which may now exist or hereafter be executed affecting the Building. Landlord, any such beneficiary or mortgagee, or any such ground lessor, shall at any time have the right to elect to subordinate or cause to be subordinated to this Lease any such liens and provisions or ground lease. Any election under this Paragraph 27 may be made by giving notice thereof to Tenant at least sixty (60) days before the election is to become effective. If any ground lease terminates for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, at the election of any successor-in-interest to Landlord and regardless of any subordination, attorn to and become the Tenant of the successor-in-interest to Landlord. Tenant waives any tight to declare this Lease terminated or otherwise ineffectual because of any such foreclosure, conveyance or ground lease termination. Tenant shall execute and deliver, upon demand by Landlord and in the form and content requested by Landlord, any additional documents evidencing the priority or subordination of this Lease and Tenant's obligation to attorn to and become the Tenant of any successor-in-interest to Landlord as provided for under this Paragraph 27. Tenant's failure to sign and return any such documents within ten (10) days of request shall constitute a material default by Tenant under this Lease and Landlord may, at Landlord's option, terminate the Lease provided written notice of such termination (which shall be in lieu of and not in addition to the notice and cure period otherwise provided for under Subparagraph 25(a)(iii) is received by Tenant prior to Landlord's receipt of such documents (c) Landlord represent and warrants to Tenant that as of the date first set forth above there are no mortgages or deeds of trust encumbering the Porject except for a loan and deed of trust currently held by California National Bank ("CNB"). Notwithstanding anything to the contrary contained in this Lease, this Lease shall not be subordinate to any monetary encumbrance recorded after the date of this Lease unless Landlord shall have provided Tenant with a non-disturbance agreement in favor of Tenant from the holder of any such encumbrance hereafter placed upon the Land. Any such non-disturbance agreement shall be in form reasonably acceptable to Tenant and the holder of such encumbrance and shall be signed by Landlord, Tenant and the holder of such encumbrance. Landlord shall use all commercially reasonable efforts (without any obligation to incur costs in excess of One Thousand Dollars ($1,000) or initiate or pursue any legal action) to obtain, within forty-five (45) days after the parties' execution of this Lease, a commercially reasonable non-disturbance agreement from CNB for Tenant's benefit . (d) ESTOPPEL CERTIFICATE. (a) Within ten (10) days following any written request which Landlord or Tenant may make from time to time, the other party shall execute and deliver to the other party an "Estoppel Certificate", in a form substantially similar to the form of attached Exhibit C or in any other form reasonably required by such party. Landlord and Tenant intend that any statement delivered pursuant to this Paragraph 28 may be relied upon by any mortgagee, beneficiary, purchaser, third party or prospective purchaser of the Building or any interest therein. If Tenant fails to provide the estoppel certificate within ten (10) days after receipt of a second notice from Landlord requesting the estoppel certificate, Landlord's second notice shall be in lieu of and not in addition to the notice and cure period otherwise provided for under Subparagraph 25(a)(III). Tenant's failure to comply with its obligations (100043966) - -fl under this Paragraph 28(a) within ten (10) days after receipt of Landlord's second notice shall constitute a material default by Tenant under this Lease. (b) A party's failure to deliver such Estoppel Certificate within such time shall be conclusive upon such party (i) that this Lease is in full force, without modification except as may be represented by the other party, (ii) that there are no uncured defaults in the requesting party's performance, and (iii) that not more than one (I) month's rental has been paid in advance. 29. HAZARDOUS MATERIALS. 30. (a) As used in this Lease, the following words or phrases shall have the following meanings: 31. (i) "Agents" means Tenant's partners, officers, directors, shareholders, employees, agents, contractors and any other third parties entering upon the Project at the request or invitation of Tenant. (ii) "Claims" means claims, liabilities, losses, actions, environmental suits, causes of action, legal or administrative proceedings damages, fines, penalties, loss of rents, liens, judgments, costs and expenses (including, without limitation, attorneys' fees and costs of defense, and consultants', engineers' and other professionals' fees and costs) (III) "Hazardous" means: (a) hazardous; (b) toxic; (c) reactive; (d) corrosive. (e) ignitable; (f) carcinogenic; (g) reproductive toxic; (h) any other attribute of a Substance now or IN the future referred to in, or regulated by, any Hazardous Materials Laws; and (i) potentially injurious to health, safety or welfare, the environment, the Premises, the Building, the Project, or any portion thereof. (iv) "Hazardous Materials" means any: (a) Substance which is Hazardous regardless of whether that Substance is Hazardous by itself or in combination with any other Substance; (b) Substance which is regulated by any Hazardous Material Laws; (c) asbestos and asbestos-containing materials; (d) urea formaldehyde; (e) radioactive substance; (f) flammable explosives; (g) petroleum, including crude oil or any fraction thereof; (h) polychlorinated biphenyls; and (i) "hazardous substances," "hazardous substances," "hazardous materials" or "hazardous wastes" under any Hazardous Materials Laws. (v) "Hazardous Materials Laws" means: (a) any existing or future federal, state or local law, ordinance, regulation or code which protects hea1th, safety or welfare, or the environment; (b) any existing or future administrative or legal decision interpreting any such law, ordinance, regulation or code; and (c) any common law theory which may result in Claims against Landlord, the Premises or any portion thereof. (vi) "Permits" means any permit, authorization, license or approval required by any applicable governmental agency. (VII) "PREMISES" for purposes of this Paragraph 29 only, shall mean the Premises, the air about the Premises and the soil, surface water and ground water under the surface of the Project (viii) "SUBSTANCE" means any substance, material, product, chemical, waste, contaminant or pollutant. (ix) "USE" means use, generate, manufacture, produce, store, release or discharge. (b) (i) Without limiting the generality of Paragraph 8 of this Lease, and except as provided in Paragraphs 29(b)(ii) and 29(b)(iii), Tenant covenants and agrees that Tenant and its Agents shall not bring into, maintain upon, engage in any activity involving the Use of, or Use in or about the Project, or transport to or from the Project, any Hazardous Materials. Notwithstanding the provisions of Paragraphs 29(b)(ii) or 29(b)(iii), in no event shall Tenant or its Agents release or dispose of any Hazardous Materials in, on, under or about the Project. (II) Notwithstanding the provisions of Paragraph 29(b)(i), if Tenant or its Agents proposes to Use any Hazardous Materials, or to install or operate any equipment which will or may Use Hazardous Materials ("Equipment"), then Tenant shall first obtain Landlord's prior written consent, which consent may be given or withheld by Landlord in its subjective, good faith judgment, within thirty (30) days of Landlord's receipt of the last of documents or information requested by Landlord as set forth in this Paragraph. Tenant's failure to receive Landlord's consent within such thirty (30) day period shall be conclusively deemed Landlord's withholding of consent. Tenant's request for Landlord's consent shall include the following documents or information. (a) a Hazardous Materials list pursuant to Paragraph 29(c) regarding the Hazardous Materials Tenant proposes to Use or Equipment Tenant proposes to install and operate; (b) reasonably satisfactory evidence that Tenant has obtained all necessary Permits to Use those Hazardous Materials or to install and operate the proposed Equipment; (c) reasonably satisfactory evidence that Tenant's Use of the Hazardous Materials or installation and operation of the Equipment shall comply with all applicable Hazardous Materials Laws, Tenant's permitted use under this Lease and all restrictive covenants encumbering the Project; (d) reasonably satisfactory evidence of Tenant's financial capability and responsibility for potential Claims associated with the Use of the Hazardous Materials or installation and operation of the Equipment; and (e) such other documents or information as Landlord may reasonably request. Landlord may, at its option, condition its consent upon any terms that Landlord, in its subjective, good faith judgment, deems necessary to protect itself, the public and the Project against potential problems, Claims arising out of Tenant's Use of Hazardous Materials or installation and operation of Equipment including, without limitation, (i) changes in the insurance provisions of the Lease, (ii) installation of equipment, fixtures or personal property or alteration of the Premises (all at Tenant's sole cost) to minimize the likelihood of a violation of Hazardous Materials Laws as a result of Tenant's Use of the Hazardous Materials or installation and operation of Equipment, or (iii) increasing the amount of the security deposit. Neither Landlord's consent nor Tenant's obtaining any Permits shall relieve Tenant of any of its obligations pursuant to this Paragraph 29. Landlord's granting of consent to one request to Use Hazardous Materials or install and operate Equipment shall not be deemed Landlord's consent to any other such request. If Landlord grants its consent to Tenant's request, no subtenant, assignee or successor of Tenant shall have the tight to Use those Hazardous Materials or install or operate that Equipment without again complying with the provisions of this Paragraph 29(b)(ii). (iii) Notwithstanding the provisions of Paragraphs 29(b)(i) and 29(b)(ii), Tenant may Use any Substance typically found or used in applications of the type permitted by this Lease so long as: (a) any such Substance is typically found only in such quantity as is reasonably necessary for Tenant's permitted use under Paragraph 8 of this Lease; (b) any such Substance and all equipment necessary in connection with the Substance are Used strictly in accordance with the manufacturers' instructions therefor; (c) no such Substance is released or disposed of in or about the Project; (d) any such Substance and all equipment necessary in connection with the Substance are removed from the Project and transported for Use or disposal by Tenant in compliance with any applicable Hazardous Materials Laws upon the expiration or earlier termination of this Lease; and (e) Tenant and its Agents comply with all applicable Hazardous Materials Laws. (iv) Tenant shall not use or install in or about the Premises any asbestos or asbestos-containing materials. (c) Tenant shall deliver to Landlord, within thirty (30) days after Tenant's receipt of Landlord's written request, a written list identifying any Hazardous Materials that Tenant or its Agents then Uses or has Used WITHIN the last twelve (12) month period in the Project. Each such list shall state: (i) the use or purpose of each such Hazardous Material; (ii) the approximate quantity of each such Hazardous Material Used by Tenant; (iii) such other information as Landlord may reasonably require; and (iv) Tenant's written certification that neither Tenant nor its Agents have released, discharged or disposed of any Hazardous Materials in or about the Project, or transported any Hazardous Materials to or from the Project, in violation of any applicable Hazardous Materials Laws. Landlord shall not request Tenant to deliver a Hazardous Materials list more often than once during each twelve (12) month period, unless Tenant or its Agents have violated the provisions of this Paragraph 29 (in which case (a) Landlord may request such lists as often as Landlord determines is necessary until such violation is cured, and (b) Tenant shall provide such lists within ten (10) days of each of Landlord's requests, or if an emergency exists, such lists shall be immediately provided). (d) Tenant shall furnish to Landlord copies of all notices, claims, reports, complaints, warnings, asserted violations, documents or other communications received or delivered by Tenant, as soon as possible and in any event within five (5) days of such receipt or delivery, with respect to any Use, disposal or transportation of Hazardous Materials in or about the Premises, the Building or the Project. Whether or not Tenant receives any such notice, claim, report, complaint, warning, asserted violation, document or communication, Tenant shall immediately notify Landlord, orally and in writing, if Tenant or any of its Agents knows or has reasonable cause to believe that any Hazardous Materials, or a condition involving or resulting from the same, is present, in Use, has been disposed of, or transported to or from the Premises, the Building or the Project other than as previously consented to by Landlord in strict accordance with Paragraph 29(b). (e) Tenant acknowledges that it, and not Landlord, is in possession and control of the Premises for purposes of all reporting requirements under any Hazardous Materials Laws. If Tenant or its Agents violate any provision of this Paragraph 29, then Tenant shall immediately notify Landlord in writing and shall be obligated, at Tenant's sole cost, to abate, remediate, clean-up or remove from the Project, and dispose of, all in compliance with all applicable Hazardous Materials Laws, all Hazardous Materials Used by Tenant or its Agents. Such work shall include, but not be limited to, all testing and investigation required by any governmental authorities having jurisdiction, and preparation and implementation of any remedial action plan required by any governmental authorities having jurisdiction. All such work shall, in each instance, be conducted to the satisfaction of all governmental authorities having jurisdiction. If at any time Landlord determines that Tenant is not complying with the provisions of this Paragraph 29 (e), then Landlord may, without prejudicing, limiting, releasing or waiving Landlord's rights under this Paragraph 29, separately undertake such work, and Tenant shall reimburse all costs incurred by Landlord upon demand. (f) Landlord's right of entry pursuant to Paragraph 17 shall include the right to enter and inspect the Premises, and the tight to inspect Tenant's books and records, to verify Tenant's compliance with, or violations of, the Provisions of this Paragraph 29. Furthermore, Landlord may conduct such investigations and tests as Landlord or Landlord's lender or ground lessor may require. If Tenant has violated the provisions of this Paragraph 29, or any applicable governmental agency requires any such inspection, investigation or testing because Tenant or its Agents have released Hazardous Materials, then Tenant, in addition to its other obligations set forth in this Paragraph 29, shall immediately reimburse Landlord for all costs incurred therewith. (g) Tenant shall indemnify, protect, defend (with legal counsel acceptable to Landlord in its subjective, good faith judgment) and hold harmless Landlord, its partners and its and their respective successors, assigns, partners, officers, shareholders, employees, agents, lenders, ground lessors and attorneys, and the Project, from and agaimt any and all Claims incurred by such indemnified persons, or any of them, in connection with, or as the result of: (a) the presence, Use or disposal of any Hazardous Materials into or about the Project, or the transportation of any Hazardous Materials to or from the Project, by Tenant or its Agents; (b) any injury to or death of persons or damage to or destruction of property resulting from the presence, Use or disposal of any Hazardous Materials into or about the Project, or the transportation of any Hazardous Materials to or from the Project, by Tenant or its Agents; (c) any violation of any Hazardous Materials Laws by Tenant or its Agents; and (d) any failure of Tenant or its Agents to observe the provisions of this Paragraph 29; and (e) any storage tanks now located in, on or under the Project or hereafter installed at the Project by Tenant. Payment shall not be a condition precedent to enforcement of the foregoing indemnification provision. In the event Tenant or its Agents releases any Hazardous Materials, then Tenant's obligations hereunder shall include, without limitation, and whether foreseeable or unforeseeable, all costs of any required or necessary testing, investigation, studies, reports, repair, clean-up, detoxification or decontamination of the Project, and the preparation and implementation of any closure, removal, remedial action or other required plans in connection therewith, and shall survive the expiration or earlier termination of the term of this Lease. For purposes of these indemnity provisions, any acts or omissions of Tenant, its assignees, sublessees, Agents or others acting for or on behalf of Tenant (regardless of whether they are negligent, intentional, willful, or unlawful) shall be strictly attributable to Tenant. (h) Upon any violation of the provisions of this Paragraph 29, Landlord shall be entitled to exercise any or all remedies available to a landlord against a defaulting tenant including, but not limited to, those set forth in Paragraph 25. (i) Notwithstanding any other provision of this Lease, Tenant shall be solely responsible for the operation, maintenance and compliance with all applicable laws of all storage tanks currently located in, on or under the Project and any such tanks hereafter installed by Tenant at the Project. Tenant shall not add or replace any storage tanks at the Project without Landlord's prior written consent, which shall not be unreasonably withheld. (j) By its signature to this Lease, Tenant confirms that: (i) Landlord has not made any representation or warranty regarding the environmental condition of the Premises, the Building or the Project; and (ii) Tenant has conducted its own examination of (a) any storage tanks now located in, on or under the Project and (b) the Premises, the Building and the Project with respect to Hazardous Materials and accepts all of the same "AS IS". (k) No termination, cancellation or release agreement entered into by Landlord and Tenant shall release Tenant from its obligations under this Paragraph 29 unless specifically agreed to by Landlord in writing at the time of such agreement. (l) Tenant's covenants and obligations under this Paragraph 29 shall also apply to any assignee or sublessee of Tenant, and to any such assignee's or sublessee's partners, officers, directors, shareholders, employees, agents, contractors and any other third parties entering upon the Project at the request or invitation of such assignee or sublessee. 30. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with the "RULES AND REGULATIONS" attached hereto as Exhibit D, and all reasonable and nondiscriminatory modifications thereof and additions thereto from time to time put into effect by Landlord. Landlord shall not be responsible to Tenant for the violation or nonperformance by any other tenant or occupant of the Building or Project of any of the Rules and Regulations. 31. CONFLICT OF LAWS. This Lease shall be governed by and construed pursuant to the laws of the State of California. 32. SUCCESSORS AND ASSIGNS. Except as OTHERWISE provided in this Lease, all of the covenants, conditions and provisions of this Lease shall be binding upon and shall inure to the benefit of the parties to this Lease and their respective heirs, personal representatives, successors and assigns. 33. SURRENDER OF PREMISES. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation of this Lease, shall not work a merger, and shall, at the option of Landlord, operate as an assignment to it of any or all subleases or subtenancies. Upon the expiration or termination of this Lease, Tenant shall peaceably surrender the Premises and all Tenant Improvements, alterations and additions to the Premises, broom clean the Premises, leave the Premises IN good order, repair and condition (including the due completion by that expiration or termination of all repairs which Tenant is responsible for making under this Lease), reasonable wear and tear excepted, and comply with the provisions of Paragraph 14(C). The delivery of keys to any employee of Landlord or to Landlord's agent or any employee thereof shall not be sufficient to constitute a termination of this Lease or a surrender of the Premises. 34. ATTORNEYS' FEES. If any legal proceeding arises in connection with this Lease, in addition to any other remedy at law or in equity sought or obtained by the prevailing party, the losing party shall pay the reasonable legal and other fees and all costs of the prevailing party incurred in connection with those proceedings. 35. PERFORMANCE BY TENANT. All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement of rent. If Tenant shall fail to pay any sum of money owed to any party other than Landlord, for which it is liable under this Lease, or Tenant shall fail to perform any other act on ITS part to be performed under this Lease after any notice and applicable cure period, Landlord may, without waiving or releasing Tenant from Tenant's obligations, but shall not be obligated to, make any such payment or perform any such other act to be made or performed by Tenant. All sums so paid by Landlord and all necessary incidental costs incurred by Landlord together with interest thereon at the Lease Interest Rate, from the date of such payment by Landlord, shall be payable to Landlord on demand. Landlord shall have (in addition to any other right or remedy of Landlord) all rights and remedies in the event of the nonpayment thereof by Tenant as are set forth in Paragraph 25. 36. MORTGAGEE PROTECTION. In the event of any default on the part of Landlord, Tenant will give notice by register or certified mail to any beneficiary of a deed of trust or mortgage covering the Premises whose address shall have been furnished to Tenant and shall offer such beneficiary or mortgagee the opportunity to cure the default for thirty (30) days after expiration of any period provided to Landlord under this Lease to cure the default. 37. DEFINITION OF LANDLORD. The term "LANDLORD' as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners, at the time in question of the fee title of the Building or the lessees under any ground lease, if any. In the event of any transfer, assignment or other conveyance or transfers of any such title, Landlord (and in case of any subsequent transfers or conveyances the then-grantor) shall be automatically freed and relieved from and after the date of such transfer, assignment or conveyance of all liability as respects the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed. The transferee of such title shall be deemed to have assumed and agreed to observe and perform any and all obligations of Landlord under this Lease during its ownership of the Premises. Landlord may transfer its interest in the Premises without the consent of Tenant and such transfer or subsequent transfer shall not be deemed a violation on Landlord's part of any of the terms and conditions of this Lease. With respect to any indemnity by Tenant of Landlord under this Lease, "LANDLORD" shall include, and the indemnity shall run to, Landlord and its respective partners affiliates, shareholders directors, officers, agents, lenders, employees, partners, successors and assigns. 38. WAIVER. The waiver by Landlord of any breach of any term, covenant or condition contained in this Lease shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition contained in this Lease, nor shall any custom or practice to which the parties may have adhered in the administration of the terms of this Lease be deemed a waiver of or in any way affect the right of Landlord to insist upon the performance by Tenant in strict accordance with the terms of this Lease. The subsequent acceptance of rent under this Lease by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. No acceptance by Landlord of a lesser sum than the sum then due shall be deemed to be other than on account of the earliest installment of such rent or other amount due, nor shall any endorsement or statement on any check or any letter accompanying any check be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such installment or other amount or pursue any other remedy available to Landlord 39. IDENTIFICATION OF TENANT. If more than one person signs this Lease as Tenant the act of or notice from, or notice or refund to, or the signature of, any one or more of them with respect to this Lease shall be binding upon Tenant. 40. PARKING. Tenant shall be entitled to use, without cost or expense, the number of vehicle parking spaces designated in Subparagraph 1(f). Neither Tenant nor its employees or invitees shall use more parking spaces than designated in Subparagraph 1(f). If Landlord determines in its sole discretion that it is necessary for orderly and efficient parking, all or any portion of any unreserved or unassigned parking spaces which Tenant does not have the right to use may be assigned to, made available to or reserved by Landlord for other tenants or users of the Project. If Landlord has not assigned specific spaces to Tenant, neither Tenant nor its employees shall use any spaces which have been so specifically assigned by Landlord to other tenants or for other uses such as visitor parking or which have been designated by Landlord or governmental entities as being restricted to certain uses. (a) Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's employees, suppliers, shippers, contractors, customers or invitees to be loaded, unloaded or parked in areas other than those designated for such activities (b) If Tenant permits or allows any of the prohibited activities described in this Paragraph 40, then Landlord shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove, tow away, or impound the vehicle involved and charge the cost to Tenant, which cost shall be immediately payable upon demand by Landlord with interest thereon at the Lease Interest Rate from the date Landlord incurs that cost. (c) The use by Tenant, its employees and invitees, of the parking facilities of the Building shall be on the additional terms and conditions set forth in attached Exhibit E, and shall be subject to such other agreement between Landlord and Tenant as may hereinafter be established. 41. FORCE MAJEURE. Neither party shall have any liability whatsoever to the other on account of (a) the inability of such party to fulfill, or delay in fulfilling, any of such party's obligations under this Lease or any Lease attachment by reason of strike, other labor trouble, governmental preemption or priorities or other controls in connection with a national or other public emergency, or shortages of fuel, supplies or labor resulting therefrom, governmental permitting, or any other cause, whether similar or dissimilar to the above, beyond such party's reasonable control; or (b) any failure or defect in the supply, quantity or character of electricity or water furnished to the Premises, by reason of any requirement, act or omission of the public utility or others furnishing the Building with electricity or water, or for any other reason, whether similar or dissimilar to the above, beyond Landlord's reasonable control. If this Lease or any Exhibit specifies a time period for performance of an obligation of Landlord, that time period shall be extended by the period of any delay in Landlord's performance caused by any of the events of force majeure described above. The provisions of this Paragraph 41 shall not apply to either party's financial inability to perform its obligation under this Lease. 42. TERMS, HEADINGS AND CONSTRUCTION. The title paragraph headings are not a part of this Lease and shall have no effect upon the construction or interpretation of any part of this Lease. "OR" is not exclusive. Unless stated otherwise, references to paragraphs and subparagraphs are to those in this Lease. This Lease shall be strictly construed neither against Landlord nor Tenant. 43. TIME. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. 44. PRIOR AGREEMENT; AMENDMENTS. This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease, and no prior agreements or understanding or letter or proposal pertaining to any such matters shall be effective for any purpose. No provisions of this Lease may be amended or added to, whether by conduct, oral or written communications, or otherwise, except by an agreement in writing signed by the parties hereto or their respective successors-in-interest. No other provision of this Lease shall modify the effect of this paragraph. 45. SEVERABILITY. Any provision of this Lease which shall prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other provision of this Lease, and such other provisions shall remain in full force. 46. RECORDING. Neither this Lease nor a short form memorandum of this Lease shall be recorded. 47. LIMITATION ON LIABILITY AND TIME. In consideration of the benefits accruing under this Lease, Tenant and all successors and assigns agree that, in the event of any actua1 or alleged failure, breach or default under this Lease by Landlord: (a) the sole and exclusive remedy shall be against the Landlord's interest in the Project and the rents, insurance proceeds and condemnation proceeds therefrom, (b) no partner of Landlord shall be named as a party in any suit or proceeding (except as may be necessary to secure jurisdiction of the partnership, if applicable); (c) no partner of Landlord shall be required to answer or otherwise plead to any service of process; (d) no judgment will be taken against any partner of Landlord (if applicable); (e) no writ of execution will ever be levied against the assets of any partner of Landlord; and (f) the obligations of Landlord under this Lease do not constitute personal obligations of the individual partners, directors, officers or shareholders of Landlord, and Tenant shall not seek recourse against the individual partners, directors, officers or shareholders of Landlord or any of their personal assets for satisfaction of any liability in respect to this Lease. In addition, any claim, defense or other right of Landlord or Tenant arising in connection with s Lease or negotiations before this Lease was signed shall be barred unless the party making such claim files an action or interposes such defense within three hundred sixty-five (365) days after the date of the alleged event on which the party is basing its claim, defense or right. 48. TRAFFIC IMPACT. Tenant agrees that Tenant and its employees, invitees, and contractors shall comply with the provisions of Exhibit E. (Traffic and Parking Rules and Regulations) 49. MODIFICATION FOR LENDER OR GOVERNMENT. If, in connection with obtaining construction, interim or permanent financing or refinancing for the Building or all or part of the Project, a lender shall request reasonable modifications in this Lease as a Condition to such financing, Tenant will not unreasonably withhold, delay or defer its consent thereto, provided that such modifications do not increase the obligations of Tenant under this Lease or materially adversely affect the leasehold interest hereby created or Tenant's rights under this Lease. In addition, the parties agree to promptly sign all documents reasonably required by any agency from time to time in connection with the Premises, provided that those documents do not materially adversely affect the rights or obligations of the parties under this Lease. 50. FINANCIAL STATEMENTS. When reasonably requested by Landlord, Tenant shall, upon ten (10) days notice from Landlord, provide Landlord with a current financial statement and financial statements of the two (2) years prior to the current financial statement year. Such statement(s) shall be safeguarded by Landlord and shall be prepared in accordance with generally accepted accounting principles and, if such is the normal practice of Tenant, shall be audited by an independent certified public accountant. If Tenant fails to provide such financial statements within ten (10) days after receipt of a second notice from Landlord requesting Tenant's financial statements, Landlord's second notice shall be in lieu of and not in addition to the notice and cure period otherwise provided for under Subparagraph 25(a)(iii). Tenant's failure to comply with its obligations under this Paragraph 50 within ten (10) days after receipt of Landlord's second notice shall constitute a material default by Tenant under this Lease. 51. QUIET ENJOYMENT. Landlord covenants that upon Tenant paying the rent required under this Lease and paying all other charges and performing all of the covenants and provisions on Tenant's part to be observed and performed under this Lease, Tenant shall and may peaceably and quietly have, hold and enjoy the Premises in accordance with this Lease. 52. TENANTS SIGNS. (a) Tenant may, at its sole cost and expense, place its signs displaying its logo and graphics on the entrance doors to the Premises and in Landlord designated locations in the hallways on floors wholly leased by Tenant. (b) Subject to Landlord's reasonable approval of the sine, appearance, method of installation, text and logo, Tenant may install signage on the exterior of the Building or on any Building sign monument or other device constructed for the placement of tenant signs. Subject to Landlord's prior reasonable approval, Tenant shall have the right to maintain and make such reasonable modifications to any sign that is currently located on the Project and which is being used by SMS. (c) All Tenant signs installed by Landlord or Tenant shall comply with all applicable requirements of all governmental authorities having jurisdiction and shall be installed in a good and workmanlike manner. Such signs shall be maintained and kept in good repair at Tenant's sole cost and expense, and, on expiration or earlier termination of the Term, removed, and all damage caused by such removal repaired, at Tenant's sole cost and expense. 53. NO LIGHT, AIR OR VIEW EASEMENT. Any diminution or shutting off of light, air or view by any structure which may be erected on the Land or on lands adjacent to the Project shall in no way affect this Lease, abate any payment owed by Tenant under the Lease, or otherwise impose any liability on Landlord. 54. TENANT AS CORPORATION, PARTNERSHIP, OR LIMITED LIABILITY COMPANY. If Tenant executes this Lease as a corporation or limited liability company, then Tenant and the persons executing this Lease on behalf of Tenant represent and warrant that the individuals executing this Lease on Tenant's behalf are duly authorized to execute and deliver this Lease on its behalf. If tenant is a corporation, Tenant further represents and warrants that this Lease has been authorized in accordance with a duly adopted resolution of the board of directors of Tenant, a copy of which is to be delivered to Landlord on execution of this Lease, and accordance with the bylaws of Tenant and that this Lease is binding Upon Tenant in accordance with its terms. If Tenant executes this Lease as a partnership, (a) each general partner shall be jointly and severally liable for keeping, observing and performing all the provisions of this Lease to be kept, observed or performed by Tenant and (b) the term "Tenant" shall mean and include each general partner jointly and severally and the act of or notice from, or notice or refund to, or the signature of, any one or more of them with respect to this Lease shall be binding on Tenant and each and all of the general partners of Tenant with the same effect as if each of them had so acted or so given or received such notice or refund or so signed. Dissolution of any partnership which is a Tenant under this Lease shall be deemed to be an assignment jointly to all of the partners who shall thereafter be subject to the terms of this Lease as if each such former partners had initially signed this Lease as individuals 55. DEVELOPMENT AND EASEMENTS. Landlord reserves the right, from time to time, to grant such easements, rights and dedications that Landlord deems necessary or desirable, and to cause the recordation of parcel and subdivision maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Tenant. Tenant shall reasonably cooperate with Landlord, at Landlord's sole cost and expense, in Landlord's efforts to develop the New Building and will, within ten (10) days after request of Landlord, sign any of the aforementioned documents and any other documents reasonably requested by Landlord in connection with development of the New Building or any other development permitted under this Lease (collectively, "Documents"). If Tenant fails to execute any Document within ten (10) days after receipt of a second notice from Landlord requesting the execution of the Document, Landlord's second notice shall be in lieu of and not in addition to the notice and cure period otherwise provided for under Subparagraph 25(a)(iii). Tenant's failure to comply with its obligations under this Paragraph 55 within ten (10) days after receipt of Landlord's second notice shall constitute a material default by Tenant under this Lea 56. COUNTERPARTS. This Lease may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument 57. NO OFFER The submission of this Lease and any ancillary documents to Tenant shall not constitute an offer to Lease, and Landlord shall have no obligation of any kind, express or implied, to lease the Premises to Tenant until Landlord has approved, executed and returned to Tenant a fully signed copy of this Lease together with any ancillary documents Landlord may require. 58. TERMINATION OF EXISITNG LEASE. Notwithstanding anything to the contrary Contained in this Agreement, Landlord and Tenant agree that this Lease and the terms and conditions contained herein are expressly conditioned upon satisfaction of the following conditions ("Termination Conditions") on or before 5:00 P.M. (California time) on December 23, 2002 ("Deadline"): (a) Landlord and SMS entering into a Lease Termination Agreement with respect to that American Industrial Real Estate Association Industrial/Commercial Single-Tenant Lease-Net, dated December 13 , 1996, between Landlord and SMS, as amended by the March 21, 2002 First Amendment to Industrial/Commercial Single-Tenant Lease-Net on terms and conditions acceptable to each party to the Lease Termination Agreement in their subjective discretion; and (b) Closingshall have occurred under that certain Asset Purchase Agreement, between SMS and Tenant. If any of the Termination Conditions is not satisfied by the Deadline, this Lease shall automatically terminate and neither party shall have any further rights, obligations or liabilities under this Lease. 59. JOINT AND SEVERAL LIABILITY. This Lease and the obligations set forth herein shall be the joint and several obligations of all persons, entities or parties to this Lease and shall be binding upon them and their heirs, personal representatives, and permitted successors and assigns, if any. THEREFORE, the parties have executed this Lease as of the date first written above. LANDLORD: TENANT: BIRTH WINDELL LLC, ITO ACQUISITION CORP., a California a California liited liability corporation company By: /s/ MICHAEL S. MARTIN By: MURRAY RUDIN Michael S. Martin, President Name: Murray Rudin Title: Executive Vice President EX-21 24 ex21_k04.txt SUBSIDIARY LIST EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Registrant's Name: Infocrossing, Inc. Subsidiaries of the Registrant: ETG, Inc., a Delaware corporation Infocrossing Services, Inc., a Delaware corporation Infocrossing Southeast, Inc., formerly AmQUEST, Inc., a Georgia corporation Infocrossing West, Inc., formerly ITO Acquisition Corp, a California corporation Infocrossing Healthcare Services, Inc., a Delaware corporation Subsidiary of Infocrossing Southeast, Inc. Infocrossing Services Southeast, Inc, formerly AmQUEST Services, Inc., a Georgia corporation Subsidiary of Infocrossing West, Inc. Infocrossing Services West, Inc., a California corporation EX-10 25 ex10-20b_k.txt 1ST AMENDMENT TO BREA LEASE FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE (this "AMENDMENT") is made and effective as of January 1, 2004 ("EFFECTIVE DATE") by and between GLOBAL BREA, LLC, a Delaware liability company ("LANDLORD"), and ITO ACQUISITION CORPORATION, dba Systems Management Specialists, a California corporation ("TENANT"). RECITALS A. Landlord is the owner of that certain building located at 3300 Birch Street, Brea, California (the "BUILDING"). Pursuant to that certain Lease Agreement (the "LEASE") dated as of December 19, 2002 between Birch Windell, LLC, predecessor-in-interest to Landlord, as landlord, and Tenant, as tenant, Tenant has certain rights to use and occupy approximately 68,807 square feet of space (the "PREMISES") located in the Building, as more particularly described in the Lease. B. All capitalized terms used herein without definition are defined as set forth in the Lease. D. Landlord and Tenant hereby desire by this Amendment to amend the Lease upon and subject to each of the terms, conditions, and provisions set forth herein. NOW, THEREFORE, in consideration of the Recitals set forth above, the agreements set forth below and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows: 1. AMENDMENT OF LEASE. The Lease is hereby modified in accordance with the following: 1.1 EXTENSION OF TERM. The parties hereto acknowledge that the Term of the Lease is due to expire on December 31, 2009 (the "EXPIRATION DATE"). Landlord and Tenant hereby agree to extend the Term of the Lease for an additional five (5)-year period (the "EXTENDED TERM") commencing on January 1, 2010 (the "EXTENDED TERM COMMENCEMENT DATE") and expiring on December 31, 2014 (the "EXTENDED TERM EXPIRATION DATE"). From and after the Effective Date, the term "TERM" shall include the Extended Term. 1.2 ALTERATIONS. Landlord shall provide Tenant with an allowance in the amount of Four Hundred Thousand and NO/100 Dollars ($400,000.00) (the "TENANT ALLOWANCE") solely for the payment of costs associated with the alteration, addition, repair and/or improvement of the Premises (the "TENANT IMPROVEMENTS"). The Tenant Allowance shall be used only to reimburse Tenant for the costs of the design, construction, permits, consultants, fixtures, and expenses directly associated with the Tenant Improvements. In no event shall Tenant be entitled to any credit or benefit for any unused portion of the Tenant Allowance over the amount expended for completion of the Tenant Improvements, and any sums not applied to the Tenant Improvements by January 31, 2005, shall be deemed forfeited by Tenant. Any and all Tenant Improvements shall be made in accordance with the terms and conditions applicable to Alterations, as set forth in the Lease including, without limitation, Paragraph 14 and Landlord's prior written approval in accordance with Paragraph 14 of any Alterations prior to commencing construction of the same. Prior to commencing construction of the Tenant Improvements, Tenant shall (a) provide to Landlord for Landlord's written approval the name of the contractor which Tenant proposes to engage for construction of the Tenant Improvements (together with evidence of insurance, references and such other documentation as Landlord may reasonably request), and (b) submit to Landlord for Landlord's written approval in accordance with Paragraph 14 working drawings and plans (collectively, the "WORKING PLANS") for the Tenant Improvements, which shall be compatible with the design, construction and equipment of the Building, and shall comply with all applicable governmental laws, codes or ordinances including, without limitation, the ADA. If Landlord disapproves the Working Plans, then Tenant shall correct any problem or deficiency and shall re-submit the revised Working Plans to Landlord for approval. Tenant shall allow sufficient time prior to the commencement of the Tenant Improvements for Landlord to enter the Premises and post appropriate notices to avoid liability to contractors or material suppliers for payment for any of the Tenant Improvements. Landlord shall, from time to time, disburse the Tenant Allowance, or portions thereof, within twenty (20) days following (i) Landlord's receipt of a written statement and accompanying sufficiently detailed evidence showing the work has been completed along with copies of lien releases and waivers from all contractors who completed work on the Tenant Improvements, and (ii) Landlord's inspection of the Premises and verification of the completion of such work. Notwithstanding anything in the Lease to the contrary, upon the expiration or earlier termination of the Lease, Tenant shall not be required to remove any of the Tenant Improvements constructed with the Tenant Allowance. 1.3 BASE RENT. Landlord and Tenant hereby acknowledge and agree that, effective as of January 1, 2005, Paragraph 1(f) of the Lease Agreement shall be deleted in its entirety and substituted in its place with the following: "1(f). MONTHLY BASIC RENT: (i) Commencing on January 1, 2005 and continuing on the first day of each successive one (1)-year anniversary thereafter during the Lease Term (each such date, an "ADJUSTMENT DATE"), Tenant's Monthly Basic Rent shall be increased ("RENT INCREASE") by an amount equal to the greater of (a) three percent (3%) of the Monthly Basic Rent for the calendar year immediately preceding the Adjustment Date, or (b) one hundred percent (100%) of the percentage of increase ("CPI INDEX INCREASE") shown by the Consumer Price Index ("CPI INDEX") for "All Items, All Urban Consumers (Base years 1982 - 1984 = 100)" for Los Angeles - Anaheim - Riverside, as published by the United States Department of Labor, Bureau of Labor Statistics ("BUREAU"), for the month immediately preceding the Adjustment Date as compared with the CPI Index for the same month of the immediately preceding calendar year; provided, however, in no event shall the annual Rent Increase exceed five percent (5%). By way of example, if the CPI Index Increase for the period from December 2003 to December 2004 is less than three percent (3%), then the annual Rent Increase applicable to Monthly Basic Rent for the period commencing on the January 1, 2005 Adjustment Date shall be three percent (3%). Thus, applying the foregoing example to the Lease for calendar year 2005 would result in an increase to 2004 Monthly Basic Rent (which amount is $98,049.98 per month) of three percent (3%), such that 2005 Monthly Basic Rent would be $100,991.48 per month (the product of $98,049.98 and 1.03). (ii) Landlord shall calculate the amount of the CPI Index Increase after the United States Department of Labor publishes the statistics on which the amount of the increase will be based. Tenant shall pay this amount, together with the Monthly Basic Rent next becoming due under this Lease and shall thereafter pay the Monthly Basic Rent due under this Lease at the increased rate, which shall constitute Monthly Basic Rent. Landlord shall give to Tenant written notice of the amount of the increase, multiplied by the number of installments of Monthly Basic Rent due under the Lease since the Adjustment Date. If the Bureau shall cease publishing the CPI Index, or publish the CPI less frequently or on a different schedule, or alter the CPI Index in some other manner (including, without limitation, changing the name of the CPI Index or the geographic area covered by the CPI Index), Landlord, in its good faith discretion shall adopt a substitute index or procedure that reflects and monitors consumer prices for the Lease year(s) at issue. In the event that the provisions of this Section 1(f) are partially or totally suspended as a result of governmental regulation, they shall be re-instituted upon termination or reinstitution of such regulation. Furthermore, upon termination or reinstitution of such regulation, Monthly Basic Rent shall be adjusted, commencing with the next regular monthly payment of rent, to the amount that it would have been had the governmental regulation not been imposed. Landlord's failure to make the required calculations promptly shall not be considered a waiver of Landlord's rights to adjust the Monthly Basic Rent based on the Rent Increase, nor shall it affect Tenant's obligations to pay the increased Monthly Basic Rent." 2. BROKERS. Tenant warrants and represents to Landlord that Tenant has had no dealings with any brokers or agents (collectively, "BROKERS") in negotiating and consummating this Amendment. Tenant shall indemnify, defend and hold Landlord free and harmless against any claim, cost, obligation, damage, liability or expense (including attorney's fees) suffered or incurred by Landlord by reason of any claim asserted by any Broker or other party claiming to represent Tenant. 3. EXECUTION AND ENFORCEMENT. 3.1 AUTHORITY. Each individual executing this Amendment on behalf of Tenant or Landlord hereby covenants and warrants that such party has full right and authority to enter into this Amendment and that the person signing on behalf of such party is authorized to do so. 3.2 LIMITATION OF LIABILITY. Notwithstanding any provision of the lease or this Amendment to the contrary, the liabilities and obligations of Landlord hereunder (and under the Lease) shall be the liabilities of Landlord only, and shall not be the liabilities or obligations of the State of California Public Employees' Retirement System, a unit of the State and Consumer Services Agency of the State of California ("CALPERS"), Global Innovation Partners, LLC, a Delaware limited liability company ("GIP"), Global Innovation Manager, LLC, a Delaware limited liability company ("GIM"), Global Innovation Contributors, LLC, a Delaware limited liability company ("GIC") any affiliate of either of such parties, or any present or future officer, director, employee, trustee, member, retirant, beneficiary, internal investment contractor, manager, investment manager or agent of any of the same. Any recourse by Tenant for any breach or default of Landlord under this Amendment (or under the Lease) or with respect to any liability or obligation related thereto shall be solely against Landlord and the assets of Landlord and there shall be no recourse on account of any such breach or default (or with respect to any such liability or obligation) against CalPERS, GIM, GIC, any affiliate of either of such parties, or any present or future officer, director, employee, trustee, member, retirant, beneficiary, internal investment contractor, manager, investment manager or agent of any of the same. 3.3 LANDLORD'S LEASE UNDERTAKINGS. Notwithstanding anything to the contrary contained in the Lease or in any amendment (including this Amendment) thereto or any exhibits, riders or addenda thereto or hereto attached (collectively the "LEASE DOCUMENTS"), it is expressly understood and agreed by and between the parties hereto that: (a) the recourse of Tenant or its successors or assigns against Landlord, CalPERS, GIP, GIM, GIC or against any of its respective directors, officers, shareholders, members, employees, agents, constituent partners, beneficiaries, trustees or representatives (collectively, the "LANDLORD PARTIES") (and the liability of Landlord to Tenant, its successors and assigns) with respect to (i) any actual or alleged breach or breaches by or on the part of Landlord of any representation, warranty, covenant, undertaking or agreement contained in any of the Lease Documents or (ii) any matter relating to Tenant's occupancy of the Premises (collectively, "LANDLORD'S LEASE UNDERTAKINGS") shall be limited to solely an amount equal to the lesser of (x) Landlord's interest in the Project and (y) the equity interest Landlord would have in the Project if the Project were encumbered by independent secured financing equal to fifty percent (50%) of the value of the Project; (b) Tenant shall have no recourse against any other assets of Landlord or the Landlord Parties; and (c) at no time shall Landlord be responsible or liable to Tenant for any lost profits, lost economic opportunities or any form of consequential damage as the result of any actual or alleged breach by Landlord of Landlord's Lease Undertakings. 3.4 ENTIRE AGREEMENT. The Lease, as amended by this Amendment, contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Amendment. No prior agreement, understanding, or representation pertaining to any such matter shall be effective for any purpose. 3.5 REMAINDER OF LEASE TO CONTINUE IN EFFECT. Except as amended hereby, the Lease, as hereby amended, shall in all other particulars, terms and conditions remain in full force and effect and is hereby ratified and confirmed by the parties hereto; in the event of any inconsistency between said Lease, as amended, and this Amendment, the provisions of this Amendment shall prevail. It is acknowledged that no changes other than those herein specifically set forth have been made. 4. ASSIGNMENT. Notwithstanding anything in the Lease to the contrary, Tenant may assign the Lease without Landlord's consent in connection with a sale of all or substantially all of Tenant's assets to InfoCrossing, Inc., a Delaware corporation ("InfoCrossing"), or an affiliate thereof, or NaviSite, Inc., a Delaware corporation ("NaviSite"), or an affiliate thereof (in either case so long as InfoCrossing or NaviSite, as applicable, guarantees the Lease), provided that (i) this exception to Section 26 of the Lease shall terminate on July 31, 2004, and (ii) this exception to Section 26 of the Lease shall terminate if, at any time prior to such assignment, InfoCrossing or NaviSite, as applicable, becomes the subject of bankruptcy or insolvency proceedings (whether of a voluntary or involuntary nature). Notwithstanding anything to the contrary in this Amendment, (a) the conditions set forth in Section 26(c)(i) of the Lease shall apply with respect to any assignment of the Lease to InfoCrossing or NaviSite, (b) Landlord hereby waives any obligation of Tenant (or InfoCrossing or NaviSite) under Section 26(e) of the Lease with respect to any such assignment to InfoCrossing or NaviSite and (c) the rights granted to ITO Acquisition Corporation, dba Systems Management Specialists, a California corporation, in this Section 4 shall be personal to Tenant, and may not be assigned, transferred or otherwise assigned to any assignee, sublessee, successor or other transferee thereof. IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the date first written above. LANDLORD: GLOBAL BREA, LLC, a Delaware limited liability company By: Global Innovation Partners, LLC, a Delaware limited liability company, Its Member By: Global Innovation Manager, LLC a Delaware limited liability company, Its Manager By: /s/ MICHAEL F. FOUST, VICE PRESIDENT Michael F. Foust, Vice President TENANT: ITO ACQUISITION CORP., a California corporation By: /s/ PATRICK A. DOLAN ----------------------------------- Name: Patrick A. Dolan ----------------------------------- Its: ----------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----