U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 2000.
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: 000-30326
VSOURCE, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 95-3538903
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5740 RALSTON STREET, SUITE 110 93003
VENTURA, CALIFORNIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (805) 677-6720
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
[ X ]
State issuer's revenues for the fiscal year ended January 31, 2000 $3,500
Aggregate market value of the Registrant's Common Stock (based on the price at
which such equity was sold on April 17, 2000) held by non-affiliates of the
Registrant. -- $244,611,680.
Number of shares of common stock outstanding as of April 17, 2000 15,905,977
Number of shares of Series 1-A Convertible Preferred Stock outstanding as of
April 17, 2000 2,802,000
Documents Incorporated By Reference
The information required by Part III of this report, to the extent not set forth
herein, is incorporated herein by reference from the issuer's definitive proxy
statement relating to the annual meeting of stockholders to be held in 2000,
which definitive proxy statement will be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year to which this Report
relates. The Independent Auditors' Report on the financial statements dated
May 15, 1999 except for Note 10 to the financial statements which is as of
September 3, 1999, is incorporated herein by reference from the issuer's
Registration statement of Form 10SB previously filed with Securities and
Exchange Commission (SEC File. No. 000-26563).
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TABLE OF CONTENTS
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PART I
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Item 1. DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . .1
Item 2. DESCRIPTION OF PROPERTY . . . . . . . . . . . . . . . . . . . . . . 20
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . 20
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS . . . . . .20
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . 24
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . 28
REPORT OF INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . .28
CONSOLIDATED BALANCE SHEET . . . . . . . . . . . . . . . . . . . .29
CONSOLIDATED STATEMENTS OF OPERATIONS . . . . . . . . . . . . . . 30
CONSOLIDATED STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . 31
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY . . . . . . . . . 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . .33
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . .40
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT . . . . . . . . 40
Item 10. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . 40
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . 40
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . 40
Item 13. EXHIBITS, REPORTS ON FORM 8-K, AND FINANCIAL STATEMENT SCHEDULES . 40
EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . .41
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
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PART I
Item 1. DESCRIPTION OF BUSINESS
This Annual Report on Form 10-KSB and the documents incorporated herein by
reference contain forward-looking statements based on current expectations,
estimates and projections about the Company's industry, management's beliefs and
certain assumptions made by management. All statements, trends, analyses and
other information contained in this report relative to trends in net sales,
gross margin, anticipated expense levels and liquidity and capital resources, as
well as other statements including, but not limited to, words such as
"anticipate," "believe," "plan," "estimate," "expect," "seek," "intend," and
other similar expressions, constitute forward-looking statements. These
forward-looking statements are not guarantees of future performance and are
subject to certain risks and uncertainties that are difficult to predict.
Accordingly, actual results may differ materially from those anticipated or
expressed in such statements. Potential risks and uncertainties include, among
others, those set forth in this Item 1 as well as under "Item 6. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
LIQUIDITY AND CAPITAL RESOURCES." PARTICULAR ATTENTION SHOULD BE PAID TO THE
CAUTIONARY STATEMENTS INVOLVING THE COMPANY'S LIMITED OPERATING HISTORY, THE
UNPREDICTABILITY OF ITS FUTURE REVENUES, THE COMPANY'S NEED FOR AND THE
AVAILABILITY OF CAPITAL RESOURCES, THE EVOLVING NATURE OF ITS BUSINESS MODEL,
THE INTENSELY COMPETITIVE MARKET FOR BUSINES-TO-BUSINESS ELECTRONIC PROCUREMENT,
AND THE RISKS ASSOCIATED WITH SYSTEMS DEVELOPMENT, MANAGEMENT OF GROWTH AND
BUSINESS EXPANSION. Except as required by law, the Company undertakes no
obligation to update any forward-looking statement, whether as a result of new
information, future events or otherwise. Readers, however, should carefully
review the factors set forth in other reports or documents that the Company
files from time to time with the Securities and Exchange Commission ("SEC").
OVERVIEW
Vsource, Inc. (the "Company") is positioning itself to be a leading
provider of business-to-business electronic procurement services (eProcurement).
The Company's Virtual Source Network (VSN) allows buyers and suppliers to
conduct business transactions on the Internet in an efficient and cost-effective
manner. The Company creates and markets its eProcurement services via a "pure"
Internet-based Application Service Provider (ASP) model which enables the
Company's clients to access computer software and data that reside on a remote
server rather than the user's own computer or local area network server. The
clients may access the Company's software on a rental basis through an Internet
browser and, therefore, are not required to invest in the ownership of a
perpetual right to use the software, nor do the clients have to procure any
hardware to operate the software application. Using the ASP model, the Company
charges an initial set-up fee to use the software and then charges on a time or
transaction basis for usage of the software depending on the requirements of the
individual client.
The Company's objective is to create the leading pure Internet-based ASP
electronic commerce network platform for the business-to-business customer and
supplier. The Company intends to create the leading virtual marketplace for
business-to-business goods and services, and feels that the ASP technology
provides customers an advantage not presently offered by competitive
eProcurement providers.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET AND E-COMMERCE
The Internet has emerged as the fastest growing communication medium in
history. eMarketer, a leading Internet consulting firm, has estimated that the
number of Internet users in the United States will reach 66 million in 2000,
with projected growth to more than 100 million users by 2002. The Internet is
dramatically changing how businesses and individuals communicate, share
information and conduct business, such as business-to-consumer and
person-to-person electronic commerce. Recently, the widespread adoption of
intranets and the acceptance of the Internet as a business communications medium
have created a foundation for business-to-business electronic commerce that will
enable organizations to streamline complex processes, lower costs and improve
productivity.
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INEFFICIENCIES IN TRADITIONAL BUSINESS PROCUREMENT
Historically, most organizations have purchased goods and services through
paper-based or semi-automated processes. These processes are costly, time
consuming, complex and often include the re-keying of information, lengthy
approval cycles and significant attention of financial and administrative
personnel. Furthermore, corporate purchasing has historically been highly
fragmented and decentralized, thus making it difficult for businesses to manage
employee purchases, control spending and prevent duplicative or unauthorized
ordering. The cost of each corporate purchasing transaction generally ranges
from $75 to $175, often exceeding the cost of the items being purchased. Facing
increasing competitive pressures to lower costs and improve productivity,
businesses are seeking to replace these traditional paper-based transactions
with centralized eProcurement solutions that provide cost-effective and
efficient networks for the purchase of goods and services. Beyond the time and
expense associated with manual processing costs, organizations suffer even
greater costs when they cannot fully exploit procurement economies of scale.
Most businesses lack the systems that enable them to monitor purchases and
compile data necessary to negotiate better volume discounts with preferred
suppliers. When preferred suppliers are not used, the cost of items purchased
tends to be higher. With the increasingly widespread use of the Internet,
businesses are now in a position to further automate purchasing activities. The
availability of this technology creates a significant market opportunity for
Internet-based business-to-business electronic commerce solutions. With this
foundation, management believes that Internet-based, business- to-business
electronic commerce is poised for rapid and substantial growth and represents a
significantly larger opportunity than business-to-consumer or person-to-person
electronic commerce. Numerous well-regarded market research organizations, such
as the GartnerGroup and Yankee Group, have projected that business-to-business
e-commerce will grow substantially during the next few years. The GartnerGroup,
for example, has projected that business-to-business e-commerce will grow from
$145 billion worldwide in 1999 to $7.4 trillion worldwide in 2004.
TRADITIONAL ELECTRONIC PROCUREMENT SOLUTIONS
Currently a number of companies provide traditional eProcurement solutions
that attempt to reduce the inefficiencies of corporate purchasing through the
implementation of information technology. However, while these solutions do
facilitate eProcurement transactions, the Company believes that each of these
solutions has limitations that will prevent widespread adoption of the platforms
by business consumers and suppliers.
- Businesses have historically looked to electronic data interchange
("EDI") systems to address procurement cycle inefficiencies. EDI has
gained wide acceptance in automating the sale and procurement of
goods, principally in environments characterized by high dollar-volume
transactions with a limited number of suppliers. EDI systems involve a
uniform set of formats for commercial documents used in procurement
that are exchanged across private networks without human intervention.
Because the EDI model relies on the uniformity of documentation, and
therefore transactions, it is not well suited to address the
requirements of a dynamic procurement environment involving a large
community of buyers and sellers of a wide variety of goods and
services. Furthermore, the EDI model does not provide real-time
interaction between the buyer and seller, thus leaving the buyer with
supplier information that may not be up to date. Lastly, the EDI model
involves a high-cost of installation and maintenance in addition to
significant transaction fees making it an unsuitable solution for most
businesses.
- Many vendors have developed purchasing software systems to coordinate
the purchasing of goods and services across large enterprises.
However, theses systems tend to be cost-prohibitive due to up-front
licensing fees that can exceed $1 million and maintenance fees.
Furthermore, these systems tend to be very complex, thus requiring a
lengthy and expensive implementation process.
Neither of these current solutions provides the full spectrum of online
functions, such as placing simultaneous bid requests with multiple suppliers,
that is needed to create an open electronic marketplace for the procurement of
goods and services. Furthermore, both solutions are too costly for all but the
largest businesses. The Internet, on the other hand, provides the
cost-effective medium through which an open and interoperable trading community
can be established and grown. With the widespread adoption of the Internet as a
business communication platform, a significant market opportunity exists for an
Internet-based business-to-business electronic commerce solution.
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THE VSOURCE SOLUTION
The VSN Network ("VSN") is the Company's flagship product. It is an
Internet-based application that requires no software on the client side beyond
an Internet browser. VSN allows organizations to establish central control --
and either centralized or decentralized implementation - of procurement for
indirect and direct goods and services. These include maintenance, repair and
operations (MRO), capital equipment, services, travel and entertainment and all
of the finished goods and raw materials required by any business. VSN
accommodates 100% of the procurement process within the supply chain. Because
customers do not have to install software on their servers and client computers,
the average cost to test the effectiveness of VSN is less than $25,000. If the
Company then elects to deploy VSN, they can select from five levels ranging in
both cost and complexity.
With VSN, the inefficiencies associated with paper-based procurement
processes are significantly reduced. Information only needs to be entered once,
and a continuous audit trail follows all transactions. This means that clerical
activities, such as re-keying information, are substantially reduced or
eliminated. Further, since VSN automatically tracks data, such as volume of
purchases from each supplier, much less time is required from financial and
administrative personnel to monitor results. Approval cycle times are reduced,
since the application provides user-specific access controls, such as budget
limits, item purchase authorization limits, and restricted supplier
availability. This enables organizations to reduce or eliminate the complex
approval processes that slow the purchase cycle, and it greatly reduces the
likelihood of unauthorized ordering from non-approved suppliers.
When VSN is employed throughout an organization, the purchasing process
becomes much more uniform and streamlined than with paper-based or
semi-automated processes. Each user can place orders directly, based on
individual authorization limits. While procurement can be implemented in a
decentralized manner, it can be controlled centrally, along with the flow of
information. Organizations are able to better utilize historical and current
purchasing information to negotiate more cost effective agreements with
preferred suppliers and achieve much greater economies of scale. Finally,
organizations can focus resources on developing improved supply strategies
rather than conducting transactional procurement.
BENEFITS OF THE VSOURCE SOLUTION
- Greater Access for Businesses of All Sizes. VSN provides all of its
members access to new customer and supplier relationships through its
eProcurement network. The system provides an extremely easy and
efficient way for members to communicate with a broad array of
companies at a low cost and with little risk. Furthermore, because VSN
only requires an Internet browser as an interface, it is an innovative
platform for offering eProcurement solutions to small-to-medium sized
businesses that might not otherwise be able to afford such a system.
- Speed to Implement. Typical procurement implementation cycles can
range from 6 to 18 months and require significant human resources.
Conversely, depending on the number of users being entered into the
system, a procurement client can implement VSN in just 1 week. More
complex organizations could take up to 2 to 3 months, not including
systems integration between legacy systems and VSN. However, VSN is
fully functional in parallel with the integration effort, so there is
no waiting time or opportunity cost to using VSN.
- Cost Flexibility. The VSN pricing structure is highly flexible and
accommodates how companies want to manage their business. The low cost
makes it a truly "disposable" solution for companies who prefer not to
make large capital expenditures in technology that is rapidly
changing. Components of VSN can be selected according to a company's
current needs, yet offer a way for companies to stay with VSN by
adding capability as their needs grow. Likewise, companies that have
already invested in other procurement processes can leverage the
Request For Quote (RFQ) and product development capabilities of VSN by
utilizing it as a front-end system.
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- True Scalability. VSN can accommodate an unlimited number of users and
can access an unlimited number of suppliers.
- Improved Management and Control. Every user in VSN can have a unique
profile along with associated permissions and workflow assigned by a
manager. Therefore, users can only purchase items that are previously
approved for their profile and fall within a specified dollar value
threshold.
- Ease of Use and Configuration. VSN is easily configured by the client
and has pre-determined default configurations that companies can opt
to use. The entire configuration process is menu and "checkbox"
driven. All forms, defaults and user access/workflow can be edited
online.
- Access to All Products/Services. VSN enables direct and indirect
purchasing of products and services. VSN accommodates fixed catalog
content similar to competitors, as well as additional catalog content
provided by RFQ responses previously requested by the company.
- World Class Systems Integration. The Company uses IBM and
PricewaterhouseCoopers as the preferred providers of procurement
consulting and systems integration services for its clients for most
Enterprise Resource Planning (ERP) and legacy systems integration.
- Training and After Sales Support. The Company has contracted with IBM
Global Services to provide full training services for up front system
planning, user training, ongoing training design and help desk
services.
- Platform Independence. VSN is not software-based, thus systems
integration only consists of mapping the VSN database to share
information with the client's systems. VSN is compatible with Windows,
Unix and Apple operating systems.
- Project Management. VSN can embed project codes into a user profile so
that all costs associated with a project can be tracked.
- Formation of Consortiums/Trading Communities. VSN easily and
economically enables companies to form consortiums among their chosen
trading communities or across multiple industries. Companies can host
consortiums for their suppliers and customers or can align with other
companies who buy similar items. VSN offers the security,
affordability and configuration flexibility of the Company's solution
that make it a viable solution for any company seeking to capitalize
on the opportunities presented by consortium purchases.
THE VSOURCE GROWTH STRATEGY
The Company's objective is to create the leading pure Internet-based ASP
electronic commerce network platform for the business-to-business customer and
supplier. Key strategies to achieve this objective include:
- Market and sell VSN through direct sales to private and public
organizations in a variety of industries on a global basis. VSN is
being marketed to this group as a cost-effective new process to
replace traditional software-based procurement systems. Large and
medium sized organizations are seeking alternatives to expensive
software systems, and they are looking for ways to significantly
reduce total procurement costs.
- Develop joint marketing programs with alliance partners, consisting of
companies that offer complementary technology, products or services to
VSN. Alliance relationships are also formed with companies that plan
to market VSN directly to their own customer bases as part of
comprehensive electronic business application packages.
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- Develop relationships with marketplace hosts, who will use VSN as the
engine for a variety of electronic marketplaces. VSN would act as the
eProcurement engine for industry-specific electronic procurement
marketplaces, or VSN may be the eProcurement portion of a broader
electronic business marketplace.
PRODUCTS AND SERVICES
VIRTUAL SOURCE NETWORK(VSN)
Currently all financial, technical and marketing resources of the Company
are dedicated to VSN. The Company plans to sell VSN through a direct sales
force, through independent resellers, and through strategic partnerships in
which VSN will be offered to the partner's base of customers. VSN is designed to
be sold initially through a pilot program for on-going transaction fees and an
initial set-up fee of $25,000. During the pilot program, the client is expected
to test the functionality of VSN and determine how much customization of the
system, if any, is required for a full implementation. The costs to the client
of a full implementation may be significant, particularly if the client requires
sophisticated integration with internal ERP or accounting systems. Most of the
costs will result from the use of outside systems consultants (non-Company
employees) to perform the integration. Management expects that these costs will
vary significantly from client to client.
While VSN is accessed by the Internet, all customer-specific data, such as
special catalogs and purchasing-related data, is kept confidential by means of
encryption and other data security features. Clients only know of other VSN
clients if they have reason to do business with each other. Clients use VSN to
purchase items by generating electronic purchase orders directly after shopping
in online catalogs. Clients may also initiate RFQs, Requests for Proposals
(RFPs) or Requests for Information (RFIs) which are electronically distributed
to vendors via the Internet. Vendors respond, via the Internet, with appropriate
information, proposals or price quotations for the items requested. At that
point, the client may select one of the vendor quotations and send an electronic
purchase order, or the buyer may communicate electronically with the vendor
regarding counter-proposals or to request additional information.
All buying processes are completed by issuing electronic purchase orders,
receiving electronic invoices from the suppliers, verifying that the invoiced
goods or services have been received, and issuing payment authorizations.
Clients also can have VSN data exported to requisite internal ERP or accounting
systems, although this will require the use of customized interfaces or
third-party interconnection products.
During 1997 and early 1998, the Company offered an earlier version of VSN,
which was a software application installed on client computers. The company has
discontinued the sale and use of this product. Vsource's Internet version of VSN
has just recently been made available for use by clients. The Company is
presently hiring a direct sales force and creating relationships with
independent resellers and strategic partners.
VIRTUAL SOURCE PUBLISHER
In addition to VSN, the Company also owns Virtual Source Publisher (VSP), a
do-it-yourself web site builder that allows users to establish their own
Internet web site. At this time, VSP is a secondary priority of the Company.
Financial, technical and marketing resources will be dedicated to VSP only after
the needs of VSN are addressed. There can be no assurances, furthermore, that
the Company will decide to implement VSP at some later point because of changing
market requirements. As a result, the Company does not anticipate deriving any
revenues from VSP during its current fiscal year.
TECHNOLOGY
Companies handle their procurement processes on VSN using the
Internet-based browser available on their personal computers. The VSN
application itself is hosted by the Company on servers that reside on the
Internet. The VSN system has a three-tier database-driven architecture that has
been built for reliability and scalability. As more companies use the system,
the Quality of Service associated with using VSN can be maintained at a constant
level by adding additional processing resources required by each tier of the
architecture. By adding more servers at multiple processing locations, the
overall system has a virtually unlimited ability to scale.
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An important technological capability is improved control and enhancement
of the application. Because the application resides on company-controlled
computers, bug fixes and new features can be added on a continual basis as they
become available, rather than released on a periodic basis as is done with
virtually all software that resides on customer-controlled computers, requiring
no maintenance effort on the part of the customers to upgrade the system.
Because the application is accessed via the Internet, all client data is
stored centrally at the Company's host site. Such data can be downloaded to the
customer's internal processing systems as required, although this typically
requires a customized integration with the client's existing internal software
systems.
All data is transmitted securely on the Internet via Secure Socket Layers
(SSL). Data transfers are performed using industry standard formats.
Localization of the product is performed with language translation of all
prompts and content. A software tool has been developed allowing direct
modification of prompts and content in the system by third-party linguists.
STRATEGIC RELATIONSHIPS
In April 2000, the Company signed a letter of intent with NeTune
Corporation of Los Angeles, California, in which the Company will provide its
electronic purchasing service to companies in the film and television production
industries that use NeTune's satellite based communications services. NeTune
allows film and television companies to perform a series of electronic services
directly from remote production locations by using two-way satellite
communications.
In March 2000, the Company formed a strategic marketing and technical
alliance with Internet Commerce Corp. (ICC) of New York City, New York, where
ICC will connect its Internet electronic data interchange (EDI) network with
VSN. The interconnection will allow VSN customers to exchange purchase-related
documents with companies that accept such documents in the EDI standard. ICC
estimates that more than 400,000 companies worldwide have the ability to accept
purchasing-related documents via the EDI standards.
In February 2000, the Company entered into a strategic relationship with
U.S. West, Inc. of Denver, Colorado, in which the two firms agreed to make VSN
available to U.S. West's business customers. U.S. West also agreed to take a
minority equity stake in Vsource. VSN is the first component of a comprehensive
collection of services that U.S. West said it intends to launch in 2000. U.S.
West provides telecommunications and related services, wireless services,
high-speed data and Internet services and directory services principally to
customers in the states of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana,
Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and
Wyoming.
In February 2000, the Company entered a strategic alliance with Vitria
Technology Inc. of Sunnyvale, California, in which Vitria's eBusiness platform,
BusinessWare, can be used by Vsource customers to speed the development of links
between VSN and existing internal processing systems. Vitria is a provider of
eBusiness infrastructure software that enables incompatible information
technology systems to exchange information over corporate networks and the
Internet.
In January 2000, the Company entered a strategic alliance with ZoomON, Inc.
of San Jose, California, in which ZoomON's vector graphics visualization and
design software will be used to develop sophisticated product catalogs based on
product drawings. Customers can use the ZoomON-based catalogs over the Internet
to click on a product drawing and then select specific parts to be ordered.
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In November 1999, the Company entered into a strategic alliance with
Corporate Express, Inc. of Bloomfield, Colorado, in which Corporate Express's
extensive catalog of office and computer products and services will be made
available as part of VSN. Corporate Express, a wholly-owned subsidiary of
Buhrmann NV, has operations in more than 300 locations worldwide, including 89
distribution centers.
The Company is a paying client of IBM, which has developed the training
program for VSN users. Clients of the Company may retain the services of IBM in
order to train their staffs to use the VSN system. In addition, IBM and the
Company have each agreed informally to make their respective clients aware of
the other firm's services, where it seems appropriate for the client in
question. Further, both firms will work together as a team for a particular
client. IBM services include consulting to help clients improve their
procurement practices, and consulting to assist a client with integration of VSN
into existing computer systems used by the client. Neither IBM nor the Company
pay each other for services rendered. The clients being served make payments.
Finally, IBM provides the Company and its VSN customers with translation
services through its Polar Bear business unit. Both the Company and the clients
served pay for these services.
The Company has an informal relationship with PricewaterhouseCoopers,
pursuant to which each firm has agreed to make its clients and potential clients
aware of the other firm's services, in those instances where it seems
appropriate for the client. In certain situations, both firms will work together
as a team for a particular client. PricewaterhouseCoopers services include
consulting to help clients improve their procurement practices, and consulting
to assist a client with integration of VSN into existing computer systems used
by the client. Neither PricewaterhouseCoopers nor the Company pay each other for
services rendered. The clients being served make payments.
SALES AND MARKETING
The Company sells its services through two primary channels. First, a
direct sales force, consisting of five sales professionals as of December 31,
1999, is organized geographically into four regions. These Sales Professionals
focus on selling VSN to large enterprise class organizations, typically
companies with annual sales of at least $1 billion per year. Sales professionals
receive a base salary and earn commissions based on achieving quarterly and
annual sales goals. The Company has also developed an indirect channel through
various alliance relationships to leverage and accelerate market adoption of
VSN. Alliance companies provide leverage through joint marketing programs with
Vsource and through direct sales to their customer base, using their own company
sales force.
The alliance program identifies and proactively approaches leading
companies whose products/services are complementary to its own. Current
alliance partners include PricewaterhouseCoopers and IBM. Additional
consulting firms and systems integrators will be selectively added as alliance
members as appropriate. Alliance members share in transaction fees if they are
involved in the sale of VSN to a client as well as in the ongoing management of
the client relationship. Additionally, alliance member services, such as
systems integration or training, are charged directly to the clients as
required.
The VSN associate program is designed to identify individuals or companies
who are interested and capable of helping sell VSN services to potential clients
globally. These individuals will also share in the transaction fees for any
clients where they have played a role in completing a sale.
CUSTOMER SERVICE, TRAINING AND SUPPORT
The Company uses IBM and PricewaterhouseCoopers as its preferred providers
of procurement consulting and systems integration services for its clients for
most ERP and legacy systems integration. The Company has also contracted IBM
Global Services to provide full training services for up front system planning,
user training, ongoing training design and help desk services. IBM's Polar Bear
business unit provides custom translation of VSN's system commands and
instructions, so that it can be used in other languages as requested by clients.
All alliance and associate program members are required to attend, complete
and become certified at a VSN boot camp before working with VSN at the client
level. The boot camp is an intensive 2 to 3 day training session developed in
association with IBM Global Services and includes training for sales and
technical certifications.
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RESEARCH AND DEVELOPMENT
In fiscal year 2000, the company spent $3,458,933 on research and
development. In fiscal year 1999, the Company spent $1,263,720. The increase is
the result of the Company's decision to change VSN from a PC-based to an
Internet-based application. The Company is presently performing research and
development in four major functional areas: application functionality, security,
external integration and global Quality of Service. In the area of application
functionality, the Company is continuing to add new features and improve the
operational reliability of the system. In the area of security, the Company is
working on improved methods of secure data transmission, storage and fraud
detection.
In the area of external integration, the Company is continuing to explore
improved ways of connecting the procurement processes performed by VSN with a
client's back end computing systems, including the use of Electronic Data
Interchange (EDI), custom integration with Enterprise Resource Planning (ERP)
systems, and the potential use of the RosettaNet transaction standards that are
under development. In the area of global Quality of Service, the Company is
exploring advanced system architectures that will allow virtually unlimited
processing capability. The Company is also exploring alternative technologies to
land-based communications, such as satellite and cellular wireless communication
technologies.
COMPETITION
The market for VSN is very competitive and likely to become more so, and is
subject to rapid technological change. Increased competition is likely to result
in price reductions, to some extent caused by VSN pricing which management
believes is below current industry averages (see "FACTORS THAT MAY AFFECT FUTURE
PERFORMANCE - COMPETITIVE "BUSINESS-TO-BUSINESS" INTERNET COMMERCE MARKET;
EFFECT ON MARKET SHARE AND BUSINESS)." Although management believes that VSN
compares favorably with respect to competitive offerings (several having greater
financial capability than VSN), and favorably with respect to overall cost,
VSN does not yet have a large referral base, nor large numbers of buyers or
vendors using the network, and its performance has yet to be proven with
regard to the new Internet version of VSN. As a result, it is yet to be seen
whether VSN can compete successfully.
GOVERNMENT APPROVALS
While there are no governmental approvals required specifically related to
the licensing or use of VSN or Virtual Source Publisher, and no direct
governmental regulation, that could change. In those circumstances, competitors
with larger administrative staffs and more financial resources will be in a
better position to comply with this regulation and obtain any necessary
approvals. However, management is not aware of any pending or anticipated
government regulations that will negatively impact the Company in a material
way.
DEPENDENCE UPON SUPPLIERS
The Company is not dependent on suppliers of raw materials, although it is
dependent on the Internet, including the ability to communicate with its remote
servers. The Company's clients are also dependent on the Internet for this
communication, without which clients would be unable to use any of the Internet-
based services provided by the Company. Should the Company and its clients not
be able to access the Internet for an extended period of time, it could have an
adverse material effect on the Company's operations.
TRADEMARKS
Vsource has been awarded the trademark VIRTUAL SOURCE. It also has
applications pending for the trademark VSOURCE and the service mark DELIVERING
ON THE PROMISE OF THE INTERNET.
Vsource does not have patents or patent applications pending. Vsource
technology is protected by the security of the Company-maintained Web site in
which Vsource software code resides, by confidentiality agreements it has with
its development personnel, and by the separation of development responsibilities
and access authorities.
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EMPLOYEES
As of April 15, 2000, the Company employed 42 full-time employees and 3
part-time employees, consisting of 8 executives, 6 general and administrative, 5
marketing and sales, and 26 research, development, operations and customer
relationship management personnel. The Company believes that its future success
will depend in part on its ability to attract, hire and maintain qualified
personnel. There can be no assurance that the Company will be able to do so.
Competition for such personnel in the online industry is intense. None of the
Company's employees are represented by a labor union, and the Company has never
experienced a work stoppage. The Company believes its relationship with its
employees to be good.
The following table sets forth the names, ages, and positions of the
directors and officers of the Company as of April 10, 2000.
NAME AGE POSITION
Robert C. McShirley 45 President, Chief Executive Officer and Chairman of
the Board
Scott T. Behan 38 Director, Member of the Audit Committee
Samuel E. Bradt 61 Director, Member of the Audit Committee
Ramin Kamfar 36 Director, Member of the Audit Committee
Robert N. Schwartz 60 Director
P. Scott Turner 33 Chief Operating Officer
Sandford T. Waddell 59 Chief Financial Officer, Treasurer, and Secretary
Jeri D. Sessler 46 Executive Vice President, Client Operations
Dennis W. McQuilliams 58 Vice President, Chief Technology Officer
Richard S. McShirley 43 Vice President, Business Development
Daniel J. Jinguji 46 Vice President, Product Development
Ronald J. Sanderson 53 Vice President, Marketing
ROBERT C. MCSHIRLEY. Mr. McShirley has served as President and Chief
Executive Officer of the Company since May 1997, as a director since January
1998, and as Chairman since June 1999. From 1995 to May 1997, he was an
independent consultant specializing in the field of manufacturing, with his most
recent assignment being with AML Communications, Inc., a manufacturer of
wireless amplifiers. Prior to that, he was the founder of Virtual Source, Inc.
(formerly Buyer/Seller Interactive Software, Inc., which was acquired by the
Company in 1995). Robert C. McShirley and Richard S. McShirley are brothers.
SCOTT T. BEHAN. Mr. Behan has served on the Company's board since January
1998. For the past five years, Mr. Behan has been employed as the Executive
Vice President of AML Communications, Inc., a manufacturer of wireless
amplifiers. He has been a director of AML since February 1999. Mr. Behan has a
B.S. in Electrical Engineering from Worcester Polytechnic Institute.
SAMUEL E. BRADT. Mr. Bradt has served on the Company's board since 1996.
From December 1996, through March 6, 2000, he served as Chief Financial Officer
and Secretary of the Company. He is currently a director of six private
companies and one other public company, Lunar Corporation of Madison,
Wisconsin. Mr. Bradt has a B.S. from Stanford University, and an M.B.A. from
the University of Chicago Graduate School of Business.
RAMIN KAMFAR. Mr. Kamfar has served on the Company's board since April
2000. Mr. Kamfar is a Managing Partner at New World Venture Partners, Inc., an
investment banking boutique focusing on technology and new economy companies.
Since 1993, Mr. Kamfar has also served in various capacities at New World Coffee
- - Manhattan Bagel, Inc., a company he founded. Most recently he has served as
Chairman and Chief Executive Officer. From 1988 to 1993 Mr. Kamfar worked in the
investment banking department of Lehman Brothers, Inc., most recently as a Vice
President in private placements. Mr. Kamfar has a B.S. in Finance from the
University of Maryland and an M.B.A. in Finance from The Wharton School at the
University of Pennsylvania.
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ROBERT N. SCHWARTZ. Mr. Schwartz has served on the Company's board since
January 1998. From 1981 to the present, Mr. Schwartz has been a Senior Research
Scientist at HRL Laboratories LLC, Malibu, California. From 1979 to the
present, Mr. Schwartz has been a visiting professor at U.C.L.A. He has a B.A. in
Mathematics, Chemistry and Physics, and an M.S. in Chemical Physics from the
University of Connecticut, and a PhD. in Chemical Physics from the University of
Colorado.
P. SCOTT TURNER. Mr. Turner has served as the Company's Chief Operating
Officer since March 2000. Mr. Turner was a member of Company board from January
1998 to March 2000. From July 1997 to March 31, 2000, Mr. Turner was Vice
President of Operations for Holbrook Design LLC, a company engaged in product
realization. From January 1990 to June 1997, Mr. Turner served as the Vice
president of Operations of SCICON Technologies Corp., a company engaged in rapid
prototyping and product development automation. He is presently a director of
SCICON Technologies Corp. Mr. Turner has a B.S. in Computer Science and
Engineering from the Milwaukee School of Engineering.
SANDFORD T. WADDELL. Mr. Waddell has served as the Company's Chief
Financial Officer and Secretary since March 2000. From October 1999 to March
2000 , Mr. Waddell as the Chief Financial Officer for Snyder Diamond, Inc., a
privately owned retail company. From March 1998 to October 1999, Mr. Waddell
served as Chief Financial Officer for Rampage Clothing Company, a privately held
clothing manufacturer which was in bankruptcy, and which he helped to restore to
profitability and effected a successful reorganization. From October 1966 to
March 1988, Mr. Waddell served initially as Chief Financial Officer and later
also as Interim Chief Executive Officer at Reddi Brake Supply Corporation, a
wholesale auto parts distributor, where he directed a reorganization of the
company's operating subsidiary. From February 1992 to October 1996, Mr. Waddell
served as Interim Chief Financial Officer or Financial Consultant for
approximately twelve privately held companies. Mr. Waddell holds a B.S. in
Engineering from Michigan Technological University and an M.B.A. from University
of Minnesota.
DENNIS W. MCQUILLIAMS. Mr. McQuilliams has served as the Company's Chief
Technology Officer since June 1999. Since October 1997, Mr. McQuilliams was
served as president of Wpg.Net, Inc. Wpg.Net was acquired by the Company in
June 1998. Prior to October 1997, Mr. McQuilliams was self-employed as a
consultant in software design and construction and project management. Mr.
McQuilliams has a background in finance, and over fifteen years experience in
design, development and implementation of business application software for mini
and microcomputers. He has developed multi-user programs for municipal entities
and the vision health industry, as well as accounting systems, payroll systems
and other custom applications.
JERI D. SESSLER. Ms. Sessler has been Executive Vice President, Client
Operations with the Company since March 2000. From August 1999 to March 2000,
Ms. Sessler served as the Chief Operating Officer of the Company. From 1996 to
1999, Ms. Sessler was principal consultant with PricewaterhouseCoopers in their
Center of Excellence, Full Value Procurement Practice, Western Region, where her
responsibilities included leading edge procurement practices and technologies,
working with Fortune 1000 companies. Prior to 1996, she spent fifteen years
with A.T. Kearney, Inc. where she was Director, Practice Development, Supply
Chain Integration Practice. Ms. Sessler has a M.B.A. from the Lake Forest
Graduate School of Management, and a B.A. from Northern Illinois University.
RICHARD S. MCSHIRLEY. Richard McShirley has served the Company as Vice
President of Business Development since 1995. Mr. McShirley has more than
fifteen years experience developing and implementing marketing and sales
programs. Prior to working for the Company, he worked with the creators of King
World Productions, and the creators of the television series "Wild America". He
led the development of a merchandising and licensing program related to that
television series. He has a B.A. in International Relations from the University
of Southern California. Robert C. McShirley and Richard S. McShirley are
brothers.
DANIEL J. JINGUJI. Since April 1999, Mr. Jinguji has served as the
Company's Vice President of Product Development. From 1993 to March 1999, Mr.
Jinguji was a Software Design Engineer at Microsoft. Mr. Jinguji spent fifteen
years with Microsoft Corporation, where he co-authored "Learn Microsoft Visual
J++ 6.0" to help explain the Microsoft version of the Java programming language.
He attended the University of Washington in Seattle where he received his B.A.
in Mathematics, B.S. in Biology and M.S. in Computer Science.
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RONALD J. SANDERSON. Since September 1999, Mr. Sanderson has served as the
Company's Vice President of Marketing. From June 1998 to September 1999, Mr.
Sanderson was principal consultant with Netsource Management, Inc., focusing on
strategic sourcing, supply chain and marketing. From March 1986 to June 1998,
Mr. Sanderson was a consultant with A.T. Kearney, Inc. He has a B.S. in
Mechanical Engineering from Northwestern University and an M.B.A. from
Northwestern University.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this document constitute forward-looking
statements. These statements involve known and unknown risks, uncertainties, and
other factors that may cause actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these
forward-looking statements. Although management believes that the expectations
reflected in the forward-looking statements are reasonable, there is no
guarantee that future results, levels of activity, performance or achievements
will be attained. Moreover, neither management nor any other person assumes
responsibility for the accuracy and completeness of these statements.
The Company's business, financial condition and results of operations may
be impacted by a number of factors including, without limitation, the factors
discussed below.
RISKS RELATED TO THE COMPANY'S BUSINESS
NEED FOR ADDITIONAL CAPITAL: The Company has recorded substantial operating
losses and, as of January 31, 2000, has an accumulated deficit of $9.8 million.
As discussed in Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND RESOURCES, if the Company
is to sustain its current rate of development and operating expenditures, it
must generate additional capital in the second quarter or third quarter of the
fiscal year ending January 31, 2001, from client revenues, private equity sales,
or both. The Company is currently implementing contracts with five clients.
These clients, and others that are near the implementation stage, are expected
to produce revenues in the second quarter of this year. In March 2000, the
Company retained a full time Chief Financial Officer and engaged a major
investment bank to help the Company raise additional equity. The investment
bank is currently working on the private placement of equity capital
sufficient to fund the Company's operations until such time as a public equity
offering is practicable.
ANTI-TAKEOVER PROVISIONS: Provisions in Nevada law and the Company's
Articles of Incorporation and Bylaws could delay or prevent a third party from
acquiring the Company, even if doing so would be beneficial to the stockholders.
In addition, such provisions may affect the price that some investors may be
willing to pay for the Company's stock. Such provisions include the issuance of
preferred stock by the board of directors without prior stockholder approval,
commonly referred to as "blank check" preferred stock, with rights senior to the
Company's common stock. The Company has 5,000,000 shares of preferred stock
authorized. The Company has designated 2,900,000 shares of the preferred stock
"Series 1-A Convertible Preferred Stock" of which 2,802,000 shares are issued
and outstanding. There remains 2,100,000 shares of preferred stock which may be
issued with rights, preferences and privileges to be designated by the board of
directors. While such shares of preferred stock may not have rights or
preferences senior to the Series 1-A Convertible Preferred Stock, they may be
senior to the common stock of the Company.
In addition, the Company is seeking stockholder approval to reincorporate
in the State of Delaware. In connection with the reincorporation, the Company
is seeking an increase in the number of shares of common stock authorized for
issuance, which could be used to prevent or discourage a change of control.
LIMITED OPERATING HISTORY: VSN, the Company's primary service offering,
began operations in October 1996 when the earlier version of VSN, a software
application for personal computers rather than an Internet application, was
successfully installed and used at a private company in southern California. The
Company has had a limited operating history since then, although it did
successfully install the earlier VSN version (personal computer application) for
several clients, and was paid the annual subscription rate then in effect. This
limited history makes an evaluation of the Company's future prospects very
difficult. The new Internet version of VSN is now available for evaluation and
use by customers, but does not yet have any fully operational customers. As
such, because of the limited operational history of VSN, there can be no
assurances that the product will meet the needs of potential customers or that
the product will operate correctly.
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RISKS OF EARLY STAGE COMPANY; NEW, RAPIDLY CHANGING MARKET; NEED TO ATTRACT
LARGE CORPORATIONS: The market for Internet applications and services is at an
early stage, and changing rapidly. Internet procurement is a relatively new
market. Its rate of growth and change is unpredictable, as is the nature of this
change. The Company will encounter the risks and difficulties often encountered
by early-stage companies in new and rapidly evolving markets. The Company's
initial success will depend upon attracting several large, technologically
advanced corporations to use VSN, and their favorable results from this usage.
Subsequent success will depend on the Company's ability to communicate these
early successes to the marketplace, thus attracting significant numbers of other
businesses and buying organizations. No assurance can be given that the Company
will be successful in the marketplace, or if successful, that it will attract
significant numbers of clients. There can be no assurance that an adequate
demand for, and usage of, the Company's products will develop.
COMPLEX IMPLEMENTATION AND INTEGRATION OF VIRTUAL SOURCE NETWORK MAY IMPEDE
MARKET PENETRATION: The installation of VSN, including integration with a
client's systems currently in use, can be a complex, time consuming and
expensive process. While the Company is designing a simplified version for use
by smaller organizations with limited enhancement capabilities and, as a result,
a low cost associated with its implementation, the Company anticipates that its
initial customers will be mid-sized or larger organizations that will require
that VSN undergo substantial customization to meet their needs. These firms will
also likely require that VSN be integrated with existing internal ERP and other
operational systems. The Company's management estimates that the installation
and integration process may take anywhere from one month to six weeks or longer
in some cases, depending on the size of the client, the complexity of its
operations, the configurations of its current computer systems, and other
systems projects that compete for the time and attention of the Information
Technology departments of the clients. Management also expects that most
integration projects in larger companies will involve various integrators as
outside systems consultants to the client. The Company's ability to continually
enhance the features of VSN, in response to client's widely differing needs, is
yet to be proven. The Company's ability to develop a simplified version for
smaller businesses that is inexpensive to implement is also unproven. As a
result, VSN may not achieve significant market penetration in the near future,
or ever.
LARGE OPERATING LOSSES EXPECTED TO CONTINUE: The Company has accumulated
net losses of $9.8 million through January 31, 2000. Since inception, the
Company has not had material revenues, and has recognized no revenues at all
from the Internet version of VSN. The Company expects to derive the majority of
its revenues from VSN fees over the next five years. In addition, provided that
revenues develop more or less as expected, the Company expects to spend a
substantial portion of revenues during the next two or three years on marketing,
sales, technology development, training and administration. There can be no
assurance that the Company will be able to fund these expenses.
FAILURE TO ACHIEVE LISTING ON MAJOR STOCK MARKET: In March 2000, the
Company applied for listing on the Nasdaq National Market System. Management
believes that it meets the stated requirements for listing on Nasdaq. Presently,
the Company's stock is traded on the over-the-counter bulletin board system
under the stock symbol, VSRC (see Item 5. MARKET FOR COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS). While the listing of the Company's stock does not have a
direct effect on the Company's operations, it has an effect on the perception of
the Company amongst potential investors and can have an effect on the ability of
the Company to raise additional funds. It can also impact the dilution
associated with any financing. There can be no assurances that the Company's
application will be accepted by Nasdaq or that the Company will have its shares
listed on a major exchange.
Until the Company's securities are listed on a major exchange, the
securities of the Company are subject to a Securities and Exchange Commission
rule that imposes special sales practice requirements upon broker-dealers who
sell such securities to persons other than established customers or accredited
investors. For purposes of the rule, the phrase "accredited investors" means, in
general terms, institutions with assets in excess of $5,000,000, or individuals
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having a net worth in excess of $1,000,000 or having an annual income that
exceeds $200,000 (or that, when combined with a spouse's income, exceeds
$300,000). For transactions covered by the rule, the broker-dealer must make a
special suitability determination for the purchaser and receive the purchaser's
written agreement to the transaction prior to the sale. Consequently, the rule
may affect the ability of broker-dealers to sell the securities of the Company
and also may affect the ability of any shareholder to sell their securities in
any market that might develop for the common stock.
EFFECT OF INCREASED OPERATING EXPENSES ON OPERATIONS AND PRICE OF COMMON
STOCK: The Company plans to increase operating expenses to expand its sales and
marketing operations, establish new strategic relationships, fund additional
systems development, and increase its business and technical staff. These
planned expenses will increase operating losses during reporting periods before
significant revenues develop. These increased losses could have a negative
effect on the price of the Company's common stock.
DEPENDENCE ON VIRTUAL SOURCE NETWORK ANTICIPATED REVENUES: The Company
expects that when revenues do develop, substantially all of those revenues will
come from VSN clients. Although VSN fees are believed by management of the
Company to be below those currently charged for leading competitive systems and
services, future reductions in competitive prices could negatively impact the
demand for, or usage of, VSN. These changes may impede VSN's ability to achieve
broad market acceptance, thus negatively impacting the Company's opportunity to
eventually become profitable. There can be no assurance that broad and timely
acceptance of VSN, which is critical to the Company's future success, will be
achieved. Failure to achieve anticipated revenues would have adverse
consequences for the Company.
DEPENDENCE ON ONE PRODUCT: At the present time all of the Company's
resources are being devoted to the development and marketing of VSN. The
Company expects to depend on VSN for substantially all of the Company's revenues
for the foreseeable future. Accordingly, if VSN is not accepted by customers or
potential customers, or does not generate the demand or revenues necessary to
the Company, the Company may face serious or irreparable harm.
DEPENDENCE ON SALES AND MARKETING RELATIONSHIPS FOR GROWTH.: Our business
model includes generating sales through our alliance and affiliate programs.
Consequently, the Company will depend, in part, on sales and marketing strategic
relationships for growth. The Company has established and plans to continue to
establish sales and marketing strategic relationships with large organizations
as part of our growth strategy. Such relationships may not contribute to
increased use of the Company's services, help the Company add new clients, or
increase the Company's revenue. The Company may not be able to enter into new
relationships or renew existing relationships on favorable terms, if at all. In
addition, the Company may not be able to recover costs and the expenses
associated with the formation of these programs.
THIRD PARTY IMPLEMENTATION/INTEGRATION OF VIRTUAL SOURCE NETWORK; NEGATIVE
IMPACT UPON REVENUE GOALS IF THIRD PARTIES UNAVAILABLE OR DO NOT PERFORM: The
Company expects to rely, to a large degree, on a number of third parties to
propose and explain VSN to prospective clients, to sell pilot projects to the
clients, and to integrate VSN with clients' existing systems, and to train users
when VSN is rolled out for general usage. The Company itself is planning to work
with clients and third-parties to implement the pilot projects. The Company's
ability to support its strategic partners, in pursuit of large numbers of buyers
and suppliers, is yet to be proven. If the Company is unable to establish and
maintain effective, long-term relationships with these third parties, if these
third parties are unable to meet the needs and expectations of VSN clients, or
if the Company cannot properly implement pilot projects, the Company will likely
have difficulty achieving its revenue goals.
UNSUCCESSFUL ACQUISITIONS COULD HARM OUR OPERATING RESULTS, BUSINESS AND
GROWTH.: The Company may acquire businesses, products and technologies that
complement or augment the Company's existing businesses, services and
technologies. The inability to integrate any newly acquired entities or
technologies effectively could harm the Company's operating results, business
and growth. Integrating any newly acquired businesses or technologies may be
expensive and time consuming. To finance any acquisitions, the Company may need
to raise additional funds through public or private financings. Any equity or
debt financings, if available at all, may be on terms that are not favorable to
the Company and, in the case of equity financings, may result in dilution to the
Company's stockholders. The Company may not be able to operate any acquired
businesses profitably or otherwise implement the Company's business strategy
successfully.
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LONG SALES CYCLE FOR LARGE CORPORATE ACCOUNTS COULD CAUSE DELAYS IN REVENUE
GROWTH: The Company's sales cycles for large corporate accounts may take many
months to complete and may vary from contract to contract. Further, the Company
expects that a large number of then Company's clients may be introduced to VSN
through such large accounts. Lengthy sales cycles for large corporate accounts
could cause delays in revenue growth, and result in significant fluctuations in
the Company's quarterly operating results. The length of the sales cycle may
vary depending on a number of factors over which the Company may have little or
no control, including the internal decision-making process of the potential
customer and the level of competition that the Company encounters in its selling
activities. Additionally, since the market for business-to-business e-commerce
is relatively new, the Company believes that it will have to educate many
potential customers about the use and benefits of the Company's products and
services, which can in turn prolong the sales process. The Company has provided
access to VSN on a trial basis for customer evaluation, which can again may
prolong the sales process. Sales made through third parties, such as the
Company's alliance partners, can further extend sales cycles
QUARTERLY RESULTS MAY BE SUBJECT TO SIGNIFICANT FLUCTUATIONS; EXPECTATIONS
OF INVESTORS AND ANALYSTS MAY NOT BE MET: The Company expects that its
quarterly operating results will fluctuate significantly due to many factors,
many of which are outside the control of the Company. Such factors include:
. demand for and market acceptance of VSN
. inconsistent growth, if any, of the Company's client base
. loss of key customers or strategic partners
. timing of the recognition of revenue for large contracts
. variations in the dollar volume of transactions effected through VSN
. intense and increased competition
. introductions of new services or enhancements, or changes in pricing
policies, by us and our competitors
. the Company's ability to control costs
. reliable continuity of VSN availability.
The Company believes that quarterly revenues, expenses and operating
results are likely to vary significantly in the future, that period-to-period
comparisons of results of operations are not necessarily meaningful and that, as
a result, such comparisons should not be relied upon as indications of future
performance. Due to these and other factors, it is likely that the Company's
operating results will be below market analysts' expectations in some future
quarters, which would cause the market price of the Company's stock to decline.
COMPETITIVE "BUSINESS-TO-BUSINESS" INTERNET COMMERCE MARKET; EFFECT ON
MARKET SHARE AND BUSINESS: The market for VSN is very competitive, evolving and
subject to rapid technological change. Intensity of competition is likely to
increase in the future. Increased competition from new competitors is likely to
result in loss of market share, which could negatively impact the Company's
business. Competitors vary in size, and in the scope and breadth of the products
and services offered. VSN will encounter competition from Ariba, Clarus,
Commerce One, Concur Technologies, Extricity, GE Information Services, i2
Technologies, Intelisys, Netscape Communications, PurchasePro, and TRADE'ex
Electronic Commerce Systems. VSN may also encounter competition from several
major enterprise software developers, such as Oracle, PeopleSoft and SAP who are
not presently considered to be direct competitors, but who have announced
intentions to enter into the market. In addition, because there are relatively
low barriers to entry in this market, additional competition from other
established and emerging companies may develop.
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Many current and potential competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources than
the Company, significantly greater name recognition, and a larger installed base
of customers. In addition, many of the competitors have well-established
relationships with the Company's clients and potential clients, and have
extensive knowledge of the industry. Current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address customer
needs. Accordingly, it is possible that new competitors, or alliances among
competitors, may emerge and rapidly acquire significant market share. Actions
taken by the Company competitors, including price cuts, new product
introductions and enhancements could have material adverse consequences for the
Company. There can be no assurance that the Company will be able to compete with
price cuts, or develop, introduce and market enhancements to its service on a
timely basis to compete successfully in this market.
VIRTUAL SOURCE NETWORK REVENUES EXPECTED FROM A LIMITED NUMBER OF CLIENTS,
MEANING INCREASED POTENTIAL IMPACT OF CUSTOMER LOSS: The Company expects that
VSN revenues, if any, during the current fiscal year will come from a small
number of clients, perhaps as few as 20 or less. The loss of any few customers
or a change in a client's budget could have a substantial negative impact on the
business of the Company.
VENDORS ARE ESSENTIAL TO SUCCESS OF VIRTUAL SOURCE NETWORK; NEGATIVE IMPACT
OF VENDORS' FAILURE TO JOIN THE NETWORK: In order to operate, VSN requires that
vendors (suppliers) be able to access the network and that client buyers be able
to communicate their requirements electronically to vendors. Currently, vendors
can access VSN even if they have not joined the network, but it is far more
efficient if a vendor does join the network and sets up a catalog online. It is
necessary, furthermore, that a client's key vendors join the network in order to
achieve the full benefits of the system, such as buying from an electronic
catalog. The Company, furthermore, expects that vendors will join VSN upon
invitation from their respective buyers. Network membership is now free for any
vendor. Client buyers operating on VSN make direct requests of their key vendors
that they join. When a large corporation requests that its vendors adapt to a
new purchasing process, and that change is free, the Company believes that there
is a strong incentive for those vendors to make that change to protect their
customer relationships.
To date there has been no significant vendor resistance to joining the new
Internet version of VSN. During 1996 and 1997, however, the Company found
significant vendor resistance to joining the PC version of VSN. Vendors, at the
time, viewed VSN as increasing competitive price pressure. They also saw an
increased possibility of losing customers to lower cost vendors not previously
competing for the business. Vendors also resisted annual subscription fees of
$980. Finally, the non-Internet version was more difficult for vendors to
operate.
Since 1997 the Company believes that important changes have occurred in the
procurement environment. Electronic commerce, and the resultant increased
competition, have become more accepted by vendors. It is management's opinion
that most vendors believe that they will eventually be required to do business
electronically, if they have not already started. The Company also believes that
the Internet version of VSN is easier for vendors to use. As a final incentive,
the Company no longer charges subscription fees to vendors. Despite these
changes, there can be no assurance that vendors will not resist participating in
VSN. Should significant new vendor resistance develop, that could slow adoption
of VSN by clients, and negatively impact potential revenues of the Company.
ABILITY TO ENHANCE FEATURES AND FUNCTIONALITY OF PRODUCTS; CHANGE IN THE
MARKET: The success of the Company will depend on its ability to tailor VSN to
meet the requirements of its clients, not only as such requirements are
presently known and understood by the Company and its client base, but also as
such requirements evolve. Such requirements may be driven by competitive
products or the changing preferences of the Company's client base. An inability
to offer enhanced products or features which anticipate or meet such
requirements in a timely and efficient manner may result in a loss of sales and
revenues and the obsolescence of the Company's products. There can be no
assurance that the Company can make the changes and enhancements to its products
necessary to meet and satisfy the demands of its clients.
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In addition, the rapid technological changes and rapidly changing industry
standards which have characterized the Internet and companies doing business on
the Internet may have the effect of rendering the Company, its business model
and products obsolete. Making the adjustments, changes and adaptations
necessary in this market may also require significant expenditures in equipment,
infrastructure and product development. There can be no assurance that the
Company will be able to adapt to such rapid changes.
FAILURE TO MAINTAIN ACCURATE DATABASES: The Company must update and
maintain extensive databases of the products, services and procurement network
transactions for its clients. The Company's computer systems and databases must
allow for expansion as a client's business grows without losing performance.
Database capacity constraints may result in data maintenance and accuracy
problems which could cause a disruption in service and the Company's ability to
provide accurate information to its clients. These problems may result in a
loss of clients which could severely harm the Company's business.
DEFECTS IN SOFTWARE: VSN is complex software. Software often contains
defects, particularly when first introduced or when new versions are released.
The Company's testing procedures may not discover software defects that affect
new or current services or enhancements until after they are deployed. Such
defects could cause service interruptions, which could damage the Company's
reputation or increase its service costs, cause it to lose revenue, delay market
acceptance or divert development resources, any of which could severely harm the
Company's business.
SYSTEM FAILURES, SERVICE DELAYS AND INTERRUPTIONS: The Company's ability to
provide acceptable levels of customer service largely depends on the efficient
and uninterrupted operation of the Company's computer and communications
hardware and procurement network systems. Any interruptions could severely harm
the Company's business and result in a loss of customers. The Company's
computer and communications systems are located in the state of Washington. The
Company does not maintain a redundant site, although is currently planning to do
so. The Company's systems and operations are vulnerable to damage or
interruption from a variety of sources including human error, sabotage, fire,
flood, earthquake, power loss, telecommunications failure and similar events.
The Company cannot give assurances that it will not experience system failures
in the future. The occurrence of any system failure or similar event could harm
the Company's business dramatically.
NO DISASTER RECOVERY PLAN: The Company does not have a disaster recovery
plan and does not yet have redundant systems at an alternate site to permit the
company to continue to provide services on the event of a failure in its
computer and communications systems. Accordingly, any such failure would cause
severe harm to the Company's business.
SUBSTANTIAL COSTS OF ANY PRODUCT LIABILITY CLAIMS; NO PRODUCT LIABILITY
INSURANCE: Errors, defects or other performance problems with VSN could result
in financial or other damages to our clients. Management believes that the
contractual limits of liability, indemnification provisions and disclaimers of
warranties should minimize the exposure of the Company in the event of a product
liability claim. A product liability claim, however, even if not successful,
would likely be time consuming and costly and could seriously harm the Company.
The Company presently does not maintain product liability insurance. Although
the terms and conditions in VSN user agreements contain disclaimers of any
warranties designed to limit exposure to these claims, existing or future laws,
or unfavorable judicial decisions, could weaken or negate these provisions and
have materially adverse consequences for the Company.
LEGAL LIABILITY FOR COMMUNICATION ON PROCUREMENT NETWORK: The Company may
be subject to legal claims relating to the content in its procurement network,
or the downloading and distribution of such content. Claims could involve
matters such as fraud, defamation, invasion of privacy and copyright
infringement. Providers of Internet products and services have been sued in the
past, sometimes successfully, based on the content of material. Even if the
Company was ultimately successful in its defense of these claims, any such
litigation is costly and these claims could harm the Company's reputation and
business.
SUCCESS DEPENDS ON KEY PERSONNEL; NO "KEY MAN" LIFE INSURANCE: Future
performance depends on the continued service of key personnel, and the ability
to attract, train, and retain additional technical, marketing, customer support,
and management personnel. The loss of one or more key employees could negatively
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impact the Company, and there is no "key man" life insurance in force at this
time. However, the Company does plan to obtain this insurance. Competition for
qualified personnel is intense, and there can be no assurance that the Company
will retain key employees, or attract and retain other needed personnel.
PROTECTION OF INTELLECTUAL PROPERTY; LACK OF PATENTS; POTENTIAL PIRATING:
The Company's success depends to a large extent on its exclusive technology, and
relies on a combination of contractual provisions, confidentiality procedures,
trade secrets, copyrights and trademark protections. The Company has no patents
at this point, and the Company's technologies may not be patentable. Despite
efforts to protect its exclusive rights, unauthorized parties may attempt to
copy aspects of that technology, or to obtain and use our exclusive information.
Policing unauthorized use of this technology is difficult. While the Company
does not suspect that any of the Company's software has been subject to piracy,
there can be no assurances that such piracy will not occur. Further,
competitors may independently develop similar technology, or duplicate the
Company's services without violating intellectual property rights.
At present, the Company's technologies are owned outright by the Company.
However, the Company may in the future have to license or otherwise obtain
access to intellectual property of third parties in order to remain competitive
in the marketplace.
STRAIN ON LIMITED RESOURCES DUE TO NEED TO MANAGE GROWTH AND EXPANSION: The
Company anticipates a period of significant expansion and growth, which most
likely will place significant strain upon management, employees, systems, and
resources. Because the market is developing rapidly, furthermore, it is
difficult to project the rate of growth, if any. Failure to properly manage
growth and expansion, if and when it occurs, will jeopardize the ability of the
Company sustain its third party and customer relationships. There can be no
assurances that the Company will properly be able to manage growth, especially
if such growth is more rapid than anticipated.
INACCURATE PREDICTIONS OF USAGE RATES: Traffic in the Company's
procurement network may increase to the point where the Company must expand and
upgrade some of its transaction processing systems and procurement network
hardware and software. While the Company's systems are scalable and can be
expanded, the Company may not be able to accurately predict the rate of increase
in the usage of its procurement network. This may affect the Company's timing
and ability to expand and upgrade its systems and procurement network hardware
and software capabilities to accommodate increased use of its procurement
network. If the Company does not upgrade its systems and procurement network
hardware and software appropriately, the Company may experience downgraded
service, interruptions or delays which could damage its business reputation,
relationship with clients and its operating results.
RISKS OF INTERNATIONAL OPERATION: The Company is exploring international
markets and considering the expansion of its operations and marketing efforts to
include international markets. If the Company should elect to expand into such
markets, it would be confronted with risks including:
- increased impact of recessions in economies outside of the United
States
- difficulties staffing and managing foreign operations
- political instability
- the burdens of compliance with a wide variety of foreign laws and
legal regimes
- unexpected changes in regulatory requirements
- tariffs, export controls and other barriers to trade
- potentially adverse tax consequences
- fluctuations in currency exchange rates
- longer payment cycles and difficulties in collecting accounts
receivables
- seasonal fluctuations in business activity.
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RISKS RELATED TO THE INTERNET AND ECOMMERCE
YEAR 2000 RISK: Although management believes that its internally developed
systems and technology are Year 2000 compliant, certain other technologies
nevertheless could be substantially impaired, or cease to operate, due to Year
2000 problems (See Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF
OPERATIONS-IMPACT OF Y2K). The Company relies on information technology supplied
by third parties as well, and strategic partners may also be dependent on
information technologies not Year 2000 compliant, and on their own third-party
vendor systems that may be at risk. These Year 2000 problems could adversely
affect the Company. Further, the Internet itself could face serious disruptions
arising from Year 2000 problems, although none have surfaced to date. Many
potential VSN clients, furthermore, may have implemented policies that prohibit
or strongly discourage making changes or additions to their internal computer
systems until after the impact of Year 2000 has been assessed. Further, in 1999,
some technology budgets of prospective customers were diverted from other
projects to deal with Year 2000 issues. While the Year 2000 issue has generally
been considered resolved, there can be no assurances that the issue will not
impact the rate at which VSN will be implemented inside client organizations.
VOLATILITY IN STOCK PRICE: The stock market and especially the stock
prices of Internet related companies have been very volatile. This volatility
may not be related to the operating performance of the companies. The broad
market volatility and industry volatility may reduce the price of the Company's
stock without regard to the Company's operating performance. The market price
of the company's stock could significantly decrease at anytime due to this
volatility. The uncertainty that results from such volatility can itself
depress the market price of the company's stock.
SUBSTANTIAL COSTS OF ANY SECURITIES LITIGATION COULD DIVERT LIMITED
RESOURCES OF THE COMPANY: In the past, securities class action litigation has
often been brought against a company following periods of volatility in the
market price of its securities. The Company could become a target of similar
securities litigation based upon the volatility of its stock in the marketplace.
Litigation of this type could result in substantial costs and divert
management's attention and resources.
SUBSTANTIAL COSTS OF ANY INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS: There
has been a substantial amount of litigation in the software industry and the
Internet industry regarding intellectual property rights. It is possible that in
the future, third parties may claim that the Company's technology may infringe
their intellectual property. Management is not aware of any infringement or
claim of infringement by a third party. It is expected, however, that software
product developers and providers of electronic commerce solutions will
increasingly be subject to infringement claims as the number of products and
competitors grows and the functionality of products in different industry
segments overlaps. Any claims, with or without merit, could be time-consuming
and result in costly litigation.
DEPENDENCE UPON, AND RISKS RELATED TO, THE INTERNET: The use of VSN and
other ASP-based products (see Item 1. DESCRIPTION OF BUSINESS - OVERVIEW)
depends on the increased acceptance and use of the Internet as a medium of
commerce and communication. While management believes that acceptance and use of
the Internet will continue to increase at very rapid rates, there can be no
assurances that such increase will continue to develop, or that use of the
Internet as a means of conducting business will continue or increase. If
growth in the use of the Internet does not continue, clients may not adopt
or use these new Internet technologies at the rates or for the purposes
management has assumed. This could, in turn, adversely impact the Company
and the results of its business operations. Further, even if acceptance and
use of the Internet does increase rapidly, but the technology underlying the
Internet and other necessary technology and related infrastructure does not
effectively support that growth, the Company's future would be negatively
impacted.
POTENTIAL BREACHES OF THE COMPANY'S SECURITY SYSTEMS: A significant barrier
to electronic commerce and communications is the secure transmission of
confidential information over public networks. Advances in computer
capabilities, new discoveries in the field of cryptography or other events or
developments could result in compromises or breaches of the Company's security
systems or those of other web sites to protect the Company's exclusive
information. If any well-publicized compromises of security were to occur, it
could have the effect of substantially reducing the use of the web for commerce
and communications. Anyone who circumvents the Company's security measures could
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misappropriate its exclusive information or cause interruptions in services or
operations. The Internet is a public network, and data is sent over this network
from many sources. In the past, computer viruses, software programs that disable
or impair computers, have been distributed and have rapidly spread over the
Internet. Computer viruses could theoretically be introduced into the Company's
systems, or those of our clients or vendors, which could disrupt VSN or another
ASP-based product offered by the Company, or make it inaccessible to clients or
vendors. Although language in its user agreement places responsibility with
users to protect VSN from such threats, the Company may be required to expend
significant capital and other resources to protect against the threat of
security breaches or to alleviate problems caused by breaches. To the extent
that the Company's activities may involve the storage and transmission of
exclusive information, such as credit card numbers, security breaches could
expose the Company to a risk of loss or litigation and possible liability.
Despite provisions to the contrary in its user agreements, the Company's
security measures may be inadequate to prevent security breaches, and the
Company's business could be seriously impacted if they are not prevented.
GOVERNMENT REGULATION: As Internet commerce continues to grow, the risk
that federal, state or foreign agencies will adopt regulations covering issues
such as user privacy, pricing, content and quality of products and services,
increases. It is possible that legislation could expose companies involved in
electronic commerce to liability, which could limit the growth of electronic
commerce generally. Legislation could dampen the growth in Internet usage and
decrease its acceptance as a communications and commercial medium. If enacted,
these laws, rules or regulations could limit the market for the Company's
services.
One or more states, furthermore, may seek to impose sales tax collection
obligations on out-of-state companies like the Company that engage in or
facilitate electronic commerce throughout numerous states. These proposals, if
adopted, could substantially impair the growth of electronic commerce and could
adversely affect the Company's opportunity to derive financial benefit from
these activities.
HISTORY
The Company was incorporated in the state of Nevada on October 22, 1980,
and ultimately adopted the name Vsource, Inc. on December 16, 1999.
On June 1, 1998, the Company acquired all of the outstanding stock of
Wpg.Net, Inc. for 500,000 shares of common stock plus stock options for 500,000
shares. The options vest ratably, on a monthly basis, over the 3 years
subsequent to the purchase. If Wpg.Net, Inc. division revenues reach $500,000
before the 3-year vesting period has expired, the 500,000 options vest
immediately. The former shareholders of Wpg.Net, Inc. (Wpg.Net, Inc.
Shareholders) are entitled to a commission of 50% of revenue generated by the
Wpg.Net, Inc. division. However, no Wpg.net, Inc. revenues have been recorded
since it was acquired and no revenue producing activities are contemplated.
Wpg.net, Inc. shareholders are entitled to 25% of revenues produced by Virtual
Source, Inc. relating to sales of the currently inactive Virtual Source
Publisher. In the event that Vsource is sold, the Wgp.Net, Inc. shareholders are
entitled to a one-time payment of $3,000,000, the options vest immediately, and
all commission obligations cease at that time. The Company guaranteed a minimum
stock price of $7.00 per share for the stock held by Wpg.Net, Inc. shareholders
upon the sale of the Company. The acquisition was accounted for as a purchase
and was included with the combined operations for the dates subsequent to June
1, 1998. As a result of the acquisition, goodwill was recorded in the amount of
$1,186,555. During the year ended January 31, 2000, the Company determined that
the present value of future cash flows related to the acquisition of Wpg.Net was
not material. Consequently, the remaining unamortized goodwill has been written
off as of January 31, 2000.
Subsequent to the year ended January 31, 2000, the Company raised
approximately $7 million through the sale of approximately 2.8 million shares of
the Company' s Series 1-A Convertible Preferred Stock. The Company's Board of
Directors has authorized the reincorporation of the Company under Delaware law.
The resulting Delaware corporation will have 100 million authorized common
shares.
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Item 2. DESCRIPTION OF PROPERTY
The Company, through its subsidiary Virtual Source, Inc., leases
approximately 5,500 square feet of standard office space at its principal
location in Ventura, California. The lease expires on March 21, 2002. Rent is
$8,307 per month.
The Company rents approximately 6,700 square feet of standard office in
Bothell, Washington. The lease expires on October 21, 2002, under a 36-month
lease. Rent is $11,117 per month.
The Company's main servers are housed in a Seattle facility especially
designed for mission-critical computers. The cost is $3,200 per month, and is
available on a month-to-month basis. This facility maintains back-up electrical
power, fire protection, and other security features. Data communications
connections available within this facility provide direct access to the
Internet, without the need to connect through T-1, T-2, or T-3 high volume
telephone lines. Alternative sites in Seattle are available, and redundant
servers at other Internet access sites are under development.
Item 3. LEGAL PROCEEDINGS
There are currently no legal proceedings involving the Company, and none
threatened. However, because of the rapidly changing environment surrounding the
Internet, and the rapid pace with which new businesses enter or attempt to enter
Internet related businesses, it is possible that disagreements will develop
regarding business names, relationships, markets, technologies, and other
subjects. Any future disagreement could lead to legal action.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended January 31, 2000, shareholders
approved a change of the Company's name to Vsource, Inc. Of the 13,589,752
issued and outstanding shares of common stock of the Company entitled to vote,
7,896,344 shares were voted in favor of an amendment to the Articles of
Incorporation and no shares were voted against the amendment.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
Beginning January 4, 2000, the Company's common stock began trading under
the symbol "VSRC" in the over-the-counter securities market. Prior to January
4, 2000, the Company's common stock traded under the symbol "IBNL" in the
over-the-counter securities market. The over-the-counter quotations reflect
interdealer bid prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions. The over-the-counter market does not
constitute active trading and trading in the Company's common stock is limited
and sporadic. The following table sets forth the range of high bid and low bid
quotations and the closing price for the fiscal quarters within the last two
years. The source for this information is the Nasdaq OTC Bulletin Board.
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<TABLE>
<CAPTION>
Common Stock
- -------------
<S> <C> <C> <C>
For Fiscal Year Ended January 31, 1999 High Low Close
- -------------------------------------- ------ ----- ------
Quarter ended April 30, 1998 $ 3.25 $0.40 $ 1.78
Quarter ended July 31, 1998 $ 2.94 $1.06 $ 1.31
Quarter ended October 31, 1998 $ 1.31 $0.63 $ 0.78
Quarter ended January 31, 1999 $ 3.00 $0.69 $ 2.00
For Fiscal Year Ended January 31, 2000 High Low Close
- -------------------------------------- ------ ----- ------
Quarter ended April 30, 1999 $ 2.38 $1.38 $ 1.41
Quarter ended July 31, 1999 $ 2.13 $1.38 $ 2.13
Quarter ended October 31, 1999 $ 2.88 $1.53 $ 1.88
Quarter ended January 31, 2000 $19.88 $1.88 $15.19
</TABLE>
SHAREHOLDERS
As of April 17, 2000, there were 1,054 stockholders of record of the
Company's common stock. Of the 15,905,977 million outstanding shares of the
Company's common stock at April 17, 2000, 9,578,907 shares were held in "street
name" by Cede, Inc. on behalf of shareholders.
As of April 17, 2000, there were 46 holders of the Company's Series 1-A
convertible preferred stock.
DIVIDENDS
The Company has never declared or paid cash dividends on its common stock.
The Company currently intends to retain all future earnings to finance future
growth and, therefore, does not anticipate paying any cash dividends in the
foreseeable future.
RECENT SALE OF UNREGISTERED SECURITIES
The following are all securities sold by the Company or issued as warrants
within the fiscal year ending January 31, 2000 which were not registered under
the Securities Act:
During January and February of 1997, the Company sold 2,918,653 shares of
restricted common stock and received proceeds of $583,731 before expenses.
Since no underwriters were used and no commissions were paid, expenses were
limited to legal fees approximating $10,000. This offering was a private
placement made in accordance with Regulation D, and in the opinion of legal
counsel for the Company, was exempt from registration under the Securities Act.
There were less than 25 offerees. The recipients of these shares, except one
who was a senior sales executive of the Company, were accredited investors. The
investors, approximately ten in total, were primarily existing Company
investors, or friends, relatives and business associates of the Company
officers, directors or investors. The chief executive officer and the former
chief financial officer were included as investors. The investors represented
their intention to acquire the shares for investment purposes only, and not with
a view to resale or distribution, and appropriate restrictive legends were
placed on each stock certificate issued pursuant to this offering. Each
investor had ample access to the kind of information from the Company that a
registration statement would include.
From August through November of 1997, the Company sold 1,487,763 shares of
unrestricted common stock, and received $346,721 before offering costs. As
before, no underwriters were used, and no commissions paid. Offering costs were
limited to approximately $4,000 for legal fees. This offering was a private
placement and in the opinion of legal counsel for the Company, was exempt from
registration under the Securities Act and made in accordance with Regulation D.
Further, the Company was eligible under Securities and Exchange Commission Rule
504, which allowed the shares sold in this private placement to be issued
without restrictive legend. The recipients of these shares, primarily existing
Company investors, or friends, relatives and business associates of the Company
officers, directors and investors, represented their intention to acquire the
shares for investment purposes only, and not with a view to resale or
distribution.
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In June 1998, the Company issued 500,000 shares of its common stock and
granted an option to purchase an additional 500,000 shares in exchange for all
of the shares of Wpg.Net, Inc., a Washington corporation. The shares and
options were issued to DX3, Inc., a Washington corporation wholly owned by the
three Wpg.Net shareholders. The options have an exercise price of $0.59 per
share and vest ratably each month over a three year period subject to
acceleration upon the achievement of certain revenue goals. No underwriters
were used, and no commissions were paid. The issuances were a private placement
and exempt from registration under Section 4(2) of the Securities Act. The
transactions did not involve a public offering. There were three shareholders
of Wpg.Net who were also the sole shareholders of DX3, each of whom was familiar
with the Company. DX3 represented its intention to acquire the shares and
option for investment purposes only, and not with a view to resale or
distribution, and appropriate stop transfer instructions and restrictive legends
indicating the transfer restrictions were placed on each stock certificate
issued and will be placed on each stock certificate issued upon exercise of the
options. Each individual had ample access to the kind of information from the
Company that a registration statement would include.
During March and April of 1999, the Company sold 737,493 shares of
unrestricted common stock for $999,942. No underwriters were used, and no
commissions were paid. This offering was a private placement and, in the opinion
of counsel, was exempt from registration under Rule 504 of Commission
Regulation D. No form of general solicitation or general advertising was used
for any offer or sale. The recipients of these shares, primarily existing
Company investors, or friends, relatives and business associates of the Company
officers, directors and investors, represented their intention to acquire the
shares for investment purposes only, and not with a view to resale or
distribution.
On May 15, 1999, the Company issued an aggregate of 636,100 shares of
common stock upon the exercise of options held three of the Company's executive
officers. The exercise prices ranged from $0.18 to $0.625. No underwriters
were used, and no commissions were paid. The issuances were exempt pursuant to
Rule 701 promulgated by the Securities and Exchange Commission under the
Securities Act. The option grants were made under written compensatory
contracts. Appropriate stop transfer instructions and restrictive legends
indicating the transfer restrictions were placed on each stock certificate when
issued.
During the period May 1999 to October 1999, the Company granted options to
purchase 1,039,500 shares of its common stock to officers, employees and
consultants. The exercise prices ranged from $0.75 to $1.10. The options vest
over periods of 27 to 36 months from date of grant. No underwriters were used,
and no commissions were paid. The issuances were exempt pursuant to Rule 701
promulgated by the Securities and Exchange Commission under the Securities Act.
The consultants were natural persons and the option grants were made under
written compensatory contracts. Appropriate stop transfer instructions and
restrictive legends indicating the transfer restrictions will be placed on each
stock certificate when issued.
During the period July 1, 1999 to December 31, 1999, the Company sold
757,720 shares of restricted common stock, for $1,140,000. No underwriters
were used, and no commissions were paid. The sales were a private placement
and, in the opinion of counsel, exempt from registration under Section 4(2) of
the Securities Act. The transactions did not involve a public offering.
There were eleven offerees and nine purchasers, each of whom was an accredited
investor, and familiar with the Company and four of whom were existing
shareholders. The investors represented their intention to acquire the shares
for investment purposes only, and not with a view to resale or distribution,
and appropriate stop transfer instructions and restrictive legends indicating
the transfer restrictions will be placed on each stock certificate when issued.
Each individual had ample access to the kind of information from the Company
that a registration statement would include.
As of July 31, 1999, the Company converted all $971,553 of its outstanding
convertible debt
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into an aggregate of 2,210,201
shares of the company's common stock. No underwriters were used, and no
commissions were paid. The issuance of the Company's common stock upon the
conversion of the notes was a private placement to 22 investors and exempt from
registration under Section 4(2) of the Securities Act. No Form of general
solicitation or general advertising was used for any offer or sale. The
investors represented their Intention to acquire the shares for investment
purposes only, and not with a view to resale or distribution, and appropriate
stop transfer instructions and restrictive legends indicating the transfer
restrictions will be placed on each stock certificate when issued. Each investor
had ample access to the kind of information from the Company that a registration
statement would include.
In November 1999, the Company issued an aggregate of $150,000 of 10%
convertible demand notes due on demand after December 2000 to two accredited
investors. The notes, principal and interest, are convertible into restricted
shares of the Company's common stock at a rate of $2.50 per share. None of
these notes have been converted. No underwriters were used, and no commissions
were paid. The issuance of the Company's notes was a private placement exempt
from registration under Section 4(2) of the Securities Act. No Form of
general solicitation or general advertising was used for any offer or sale.
Prior to conversion, the investors must represent their intention to acquire the
conversion shares for investment purposes only, and not with a view to resale or
distribution, and appropriate stop transfer instructions and restrictive legends
indicating the transfer restrictions will be placed on each stock certificate
when issued. Each investor had ample access to the kind of information from the
Company that a registration statement would include.
During the period November 1999 to February 2000, the Company issued or
committed to issuing warrants to purchase an aggregate of 870,000 shares of
common stock to one consultant and four corporations at exercise prices which
range from $2.00 to $25.00 in exchange for financial consulting and distribution
and marketing services. No underwriters were used, and no commissions were
paid. The warrants were issued or will be issued as a private placement exempt
from registration under Section 4(2) of the Securities Act. No Form of general
solicitation or general advertising was used for any offer or sale. The warrant
holders represented their intention to acquire the warrants for investment
purposes only, and not with a view to resale or distribution, and appropriate
stop transfer instructions and restrictive legends indicating the transfer
restrictions will be placed on each warrant and each stock certificate when
issued. Each warrant holder had ample access to the kind of information from
the Company that a registration statement would include.
During the period December 1, 1999 to February 24, 2000, the Company sold
2,802,000 shares of Series 1-A Convertible Preferred Stock to 46 accredited
investors for $7,005,000. Each share of preferred stock is initially convertible
into one share of common stock. Offering costs were approximately $151,269
including transfer agent fees, printing costs, legal fees and commissions or
finders' fees. The offering was a private placement made in accordance with
Regulation D. All of the purchasers were accredited investors. No form of
general solicitation or general advertising was used for any offer or sale.
The investors represented their intention to acquire the shares for investment
purposes only, and not with a view to resale or distribution, and appropriate
restrictive legends were placed on each stock certificate issued pursuant to
this offering.
In connection with the sales of the Series 1-A Convertible Preferred Stock,
the Company issued or will issue warrants to purchase an aggregate 386,691
shares of common stock as additional finder's fees and commissions and for
other services in connection with the offering. The warrants were issued, or
will be issued, to five consultants and as a private placement exempt from
registration under Section 4(2) of the Securities Act. No Form of general
solicitation or general advertising was used for any offer or sale. The warrant
holders represented their intention to acquire the warrants for investment
purposes only, and not with a view to resale or distribution, and appropriate
stop transfer instructions and restrictive legends indicating the transfer
restrictions will be placed on each warrant and each stock certificate when
issued. Each investor had ample access to the kind of information from the
Company that a registration statement would include.
On January 17, 2000, the Company granted options to purchase an aggregate
of 78,750 shares of common stock to 6 key employees exercisable at $1.66 per
share. No underwriters were used, and no commissions were paid. The grants
were intended to be private placements exempt from registration under Section
4(2) of the Securities Act. The option grants were made under written
compensatory contracts. Appropriate stop transfer instructions and restrictive
legends indicating the transfer restrictions will be placed on each stock
certificate when issued.
See "Notes to Consolidated Financial Statements."
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<PAGE>
On February 23, 2000, the Company granted options to purchase an aggregate
of 125,000 shares of common stock to an executive officer exercisable at $2.50
per share. No underwriters were used, and no commissions were paid. The grants
were a private placement exempt from registration under Section 4(2) of the
Securities Act. The option grants were made under written compensatory
contracts. Appropriate stop transfer instructions and restrictive legends
indicating the transfer restrictions will be placed on each stock certificate
when issued.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
financial statements and the related notes thereto appearing elsewhere herein.
FORWARD LOOKING STATEMENTS
The statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations include "forward looking"
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1934, as amended,
and are subject to the safe harbor created by those sections. The actual future
results of the Company could differ materially from those projected in the
forward-looking information. For a discussion of certain factors that could
cause actual results to differ materially from those projected by the
forward-looking information, please refer to "Item 1. DESCRIPTION OF BUSINESS -
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE."
OVERVIEW
The Company creates and markets "pure" Internet-based applications using an
Application Service Provider (ASP) model. An ASP model is best described as
providing the ability on a rental basis for clients to access by an Internet
browser, such as Internet Explorer or Netscape Communicator, computer software
and data that reside on a remote server on the Internet, rather than the user's
computer or a server on the user's local area network. The Company intends to
generate fees by charging a small set-up fee to use its software and then
charging based upon time or transactions, depending upon the situation.
Currently, the Company offers one application, Virtual Source Network (VSN),
which may be used by corporate clients to purchase goods and services via the
Internet.
Currently all financial, technical and marketing resources of the Company
are dedicated to VSN. The Company plans to sell VSN through a direct sales
force, through independent resellers, and through strategic partnerships in
which VSN will be offered to the partner's base of customers. VSN is designed to
be sold initially through a pilot program for on-going transaction fees and an
initial set-up fee of $25,000. During the pilot program, the client is expected
to test the functionality of VSN and determine how much customization of the
system, if any, is required for a full implementation.
During 1997 and early 1998, the Company offered an earlier version of VSN,
which was a software application installed on client computers. The Company has
discontinued the sale and use of this product. The Company's Internet version of
VSN has just recently been made available for use by clients. The Company is
presently hiring a direct sales force and creating relationships with
independent resellers and strategic partners.
The Internet version of VSN is now being used on a trial basis by initial
customers. As a result, the limited operating history makes the prediction of
future operating results very difficult. In particular, the Company believes
that period-to-period comparisons of operating results should not be relied upon
as predictive of future performance. Operating results are expected to vary
significantly from quarter to quarter and are difficult or impossible to
predict. The Company's operating prospects must be considered in relationship to
the risks, expenses and difficulties encountered by any company at an early
-24-
<PAGE>
stage of development, particularly companies in new and rapidly evolving
markets. The Company may not be successful in addressing such risks and
difficulties. For more information, please refer to "Item 1. DESCRIPTION OF
BUSINESS - FACTORS THAT MAY AFFECT FUTURE PERFORMANCE."
RECENT EVENTS
In April 2000, the Company signed a letter of intent with NeTune
Corporation of Los Angeles, California, pursuant to which the Company will
provide its electronic purchasing service to companies in the film and
television production industries that use NeTune's satellite based
communications services. NeTune allows film and television companies to perform
a series of electronic services directly from remote production locations by
using two-way satellite communications.
In March 2000, the Company formed a strategic marketing and technical
alliance with Internet Commerce Corp. (ICC) of New York City, New York, where
ICC will connect its Internet electronic data interchange (EDI) network with
VSN. The interconnection will allow VSN customers to exchange purchase-related
documents with companies that accept such documents in the EDI standard. ICC
estimates that more than 400,000 companies worldwide have the ability to accept
purchasing-related documents via the EDI standards.
In February 2000, the Company entered into a strategic relationship with
U.S. West, Inc. of Denver, Colorado, pursuant to which the two firms agreed to
make VSN available to U.S. West's business customers. U.S. West also agreed to
take a minority equity stake in Vsource. VSN is the first component of a
comprehensive collection of services that U.S. West said it intends to launch in
2000. U.S. West provides telecommunications and related services, wireless
services, high-speed data and Internet services and directory services
principally to customers in the states of Arizona, Colorado, Idaho, Iowa,
Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota,
Utah, Washington and Wyoming.
In February 2000, the Company entered a strategic alliance with Vitria
Technology Inc. of Sunnyvale, California, pursuant to which Vitria's eBusiness
platform, BusinessWare, will be used by Vsource customers to speed the
development of links between VSN and existing internal processing systems.
Vitria is a provider of eBusiness infrastructure software that enables
incompatible information technology systems to exchange information over
corporate networks and the Internet.
In January 2000, the Company entered a strategic alliance with ZoomON, Inc.
of San Jose, California, pursuant to which ZoomON's vector graphics
visualization and design software will be used to develop sophisticated product
catalogs based on product drawings. Customers can use the ZoomON-based catalogs
over the Internet to click on a product drawing and then select specific parts
to be ordered.
In November 1999, the Company entered into a strategic alliance with
Corporate Express of Bloomfield, Colorado, pursuant to which Corporate Express's
extensive catalog of office and computer products and services will be made
available as part of VSN. Corporate Express, a wholly-owned subsidiary of
Buhrmann NV, has operations in more than 300 locations worldwide, including 89
distribution centers.
The Company is a paying client of IBM, which has developed the training
program for VSN users. Clients of the Company retain the services of IBM in
order to train their staffs to use the VSN system. In addition, IBM and the
Company have each agreed informally to make their respective clients aware of
the other firm's services, where it seems appropriate for the client in
question.
RESULT OF OPERATIONS - FISCAL YEAR 2000 VERSUS FISCAL YEAR 1999
REVENUES: Revenues for the year ended January 31, 2000 decreased to $3,500
from revenues of $60,527 for the year ended January 31, 1999, a decrease of
$57,027, or 94%. Revenues decreased primarily because the Company ceased its
sales of subscriptions to the software version of VSN in the year ended January
3, 1999, and because the new Internet version of VSN did not generate revenues
in the year ended January 31, 2000.
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<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
increased to $1,167,328 for the year ended January 31, 2000 from $298,468 for
the year ended January 31, 1999, an increase of $868,860, or 291%. The increase
was due primarily to expenses associated with an increase in personnel,
including payroll, rent and travel.
RESEARCH AND DEVELOPMENT: Research and development expenses of $3,458,933
for the year ended January 31, 2000 grew from $1,263,720 for the year ended
January 31, 1999, an increase of $2,195,213, or 174%. The increase was due to
increased costs associated with the development of the Company's Internet
version of its VSN electronic purchasing system. Such increased costs include
additional personnel and personnel-related expenses as well as increased
licensing fees for development-related tools and systems.
TOTAL EXPENSES: Total expenses of $4,626,261 for the year ended January 31,
2000 increased from $1,562,368 for the year ended January 31, 1999, an increase
of $3,063,893, or 196%. The increase in total expenses was due primarily to the
increases in both research and development and general and administrative
expenses.
LOSS FROM OPERATIONS: The Company had a loss from operations of $4,622,761
for the year ended January 31, 2000 versus a loss of $1,501,841 for the year
ended January 31, 1999, an increase of $3,120,920, or 207%. The loss increased
because of increased costs associated with developing the Internet version of
VSN versus a decline in revenues associated with discontinuing the software
version of VSN.
INTEREST EXPENSE: Interest expenses of $388,571 for the year ended January
31, 2000 grew from $351,499 for the year ended January 31, 1999, an increase of
$37,072, or 11%. The increase was due primarily to the difference between the
conversion rates of Convertible Demand Notes issued by the Company, and the
market prices of the Company's unrestricted common stock on or about the dates
such Notes were issued. Since the Notes are convertible into restricted common
stock, however, investors require discounted conversion rates which reflect the
illiquid nature of restricted stock, and Generally Accepted Accounting
Principles require that interest expense be charged for any such price
difference.
LOSS ON IMPAIRMENT OF INTANGIBLE ASSETS: The Company incurred a loss of
$527,356 for the year ended January 31, 2000 versus no impairment losses in the
year ended January 31, 1999. The Company determined that its June 1998
investment in Wpg Net, Inc., and its technology, did not continue to carry the
value originally anticipated. As a result, the goodwill remaining on the books
as of January 31, 2000 was eliminated and charged to expense.
OTHER INCOME: Other Income of $15,394 for the year ended January 31, 2000
declined from $91,110 for the year ended January 31, 1999, a decrease of
$75,716, or 83%. Other income in 1999 was derived primarily from the settlement
of a lawsuit against the Company's landlord in which the Company received free
rent.
NET LOSS: The net loss of $5,523,294 for the year ended January 31, 2000
increased from $1,762,230 for the year ended January 31, 1999, an increase of
$3,761,064, or 213%, almost entirely as a result of increased loss from
operations, and loss on impairment, as noted above.
BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: The weighted
average number of shares of 13,931,634 for the year ended January 31, 2000 grew
from 10,529,147 for the year ended January 31, 1999, an increase of 3,402,487
shares, or 32%. The increase resulted from issuing 2,210,201 shares upon
conversion of Convertible Demand Notes, 1,500,213 shares in return for cash
invested in the company during the year, 636,100 shares upon exercise of stock
options, and 64,165 shares in return for services provided to the Company.
NET LOSS PER COMMON SHARE: The net loss per common share of $0.40 for the
year ended January 31, 2000 grew from $0.17 per share for fiscal 1999, an
increase of $0.23, or 135%, as a result of the increased net loss for the year,
partially offset by the increase in outstanding Common Shares, as noted above.
-26-
<PAGE>
CHANGES IN CONSOLIDATED STATEMENT OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES: The Company had a decrease in cash of
$2,863,183 from operating activities in the year ended January 31, 2000 versus a
decrease in cash of $811,229 in the year ended January 31, 1999, an increase of
$2,051,954, or 252%, in the use of cash. The increased use of cash resulted from
a net loss of $5,523,294 offset by non-cash items affecting income and changes
in operating assets and liabilities of $2,660,111. The net loss was primarily
due to increases in general and administrative and research and development
expenses associated with the development of the Company's Internet version of
its VSN eProcurement software, while the Company generated no offsetting
revenues.
CASH FLOWS FROM INVESTING ACTIVITIES: For the year ended January 31, 2000,
cash flows from investing activities decreased $282,028 because of advances to
employees of $41,820 and purchase of equipment of $240,208. For the year ended
January 31, 1999, cash flows from investing activities decreased $9,400 for
advances to employees.
CASH FLOWS FROM FINANCING ACTIVITIES: For the year ended January 31, 2000,
cash flows from financing activities increased by $8,292,441, consisting of
$6,002,500 from a private placement, $2,139,941 from the issuance of common
stock, and $150,000 from borrowings. See Item 5. MARKET FOR COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS - RECENT SALE OF UNREGISTERED SECURITIES.
For the year ended January 31, 1999, cash flows from financing activities
increased $825,160 from borrowings. This debt has all been converted into equity
See Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS - RECENT
SALE OF UNREGISTERED SECURITIES.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of cash and cash equivalents were derived
from private sales of the Company's equity and debt securities. The sole source
of funds for the Company from the date of inception through January 31, 2000,
other than the sale of equity and debt securities, has been from sales of the
earlier software products. No cash was derived from such sales made in the year
ended January 31, 2000.
The Company completed the year ended January 31, 2000 with cash and cash
equivalents totaling approximately $5.2 million. As of March 31, 2000 the total
of cash and cash equivalents was approximately $4.0 million.
The Company is currently expending approximately $800,000 per month of
cash and cash equivalents. At this rate, without addition capital or revenues,
the Company cannot continue operations much beyond the early part of the third
quarter beginning August 1, 2000.
The Company anticipates material client revenues to begin during the second
quarter. Also, the Company has initiated a private equity offering through its
investment bank that is anticipated to fund, fully or in part, during the second
quarter.
If revenues or the private equity offering do not materialize on schedule,
the Company has a contingent plan of cash conservation that will allow it to
operate through the remaining quarters of the current year.
-27-
<PAGE>
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
VSource, Inc.
We have audited the accompanying consolidated balance sheet of VSource, Inc. (a
Nevada corporation) as of January 31, 2000 and the related consolidated
statements of operations, shareholders' deficit and cash flows for the year
ended January 31, 2000. The consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of VSource, Inc. as of
January 31, 2000 and the results of its operations, and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Los Angeles, California
April 7, 2000
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<PAGE>
VSOURCE, INC.
CONSOLIDATED BALANCE SHEET
January 31, 2000
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $5,124,399
Restricted cash 82,768
------------
Total current assets 5,207,167
PROPERTY AND EQUIPMENT
Equipment and fixtures 240,208
Less - accumulated depreciation (17,708)
------------
222,500
EMPLOYEE AND OTHER RECEIVABLES 110,728
------------
$5,540,395
============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $247,472
Accrued expenses 100,937
Amounts related to in-process
private placement of preferred stock 6,002,500
Convertible notes payable 150,000
------------
6,500,909
SHAREHOLDERS' DEFICIT
Preferred stock ($0.01 par value, 5,000,000
shares authorized; no shares issued) --
Common stock ($0.01 par value, 50,000,000
shares authorized; 15,807,130 issued
and outstanding) 158,071
Additional paid-in capital 10,645,934
Deferred Compensation (1,780,817)
Accumulated deficit (9,804,904)
------------
(781,716)
Less: Notes receivable from the sale of stock (178,798)
------------
(960,514)
------------
$5,540,395
============
</TABLE>
The accompanying notes are an integral part of this statement.
-29-
<PAGE>
<TABLE>
<CAPTION>
VSOURCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended January 31,
2000 1999
------------- ------------
<S> <C> <C>
Revenue $3,500 $60,527
General and administrative expenses 1,167,328 298,648
Research and development 3,458,933 1,263,720
------------- ------------
Total expenses 4,626,261 1,562,368
------------- ------------
Loss from operations (4,626,761) (1,501,841)
Other income (expense):
Interest expense (388,571) (351,499)
Loss on impairment of intangible asset (527,356) -
Other income 15,394 91,110
------------- ------------
Net loss $(5,523,294) $(1,762,230)
============= ============
Basic weighted average number of
common shares outstanding 13,931,634 10,529,147
============= ============
Net loss per common share $(0.40) $ (0.17)
============= ============
</TABLE>
The accompanying notes are an integral part of this statement.
-30-
<PAGE>
<TABLE>
<CAPTION>
VSOURCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended January 31,
2000 1999
------------ ------------
<S> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities:
Net loss $(5,523,294) $(1,762,230)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 436,671 285,340
Interest expense related to
the beneficial conversion feature 349,710 290,657
Interest expense converted to equity 36,568 --
Impairment of intangible asset 527,356 --
Compensation expense from stock option grants 424,266 155,112
Services paid with equity 548,513 192,235
Settlement of rent litigation 37,500 (37,500)
Changes in assets and liabilities:
Accounts receivable 3,590 (3,590)
Prepaid expenses -- 27,562
Other assets -- 877
Accounts payable 198,250 16,735
Deferred revenue (3,250) (25,469)
Accrued liabilities 100,937 49,042
------------ ------------
Net cash used in operating activities (2,863,183) (811,229)
Cash flows from investing activities:
Advances to employees (41,820) (9,400)
Purchase of equipment (240,208) --
------------ ------------
Net cash used in investing activities (282,028) (9,400)
Cash flows from financing activities:
Proceeds from issuance of common stock 2,139,941 --
Proceeds from private placement 6,002,500 --
Proceeds from borrowings 150,000 825,160
------------ ------------
Net cash provided by financing activities 8,292,441 825,160
------------ ------------
Net increase in cash 5,147,230 4,531
------------ ------------
Cash at beginning of period 59,937 55,406
------------ ------------
Cash at end of period $5,207,167 $59,937
============ ============
Supplemental disclosure of non-cash financing activities:
Issuance of warrants in exchange for services $435,000 --
Conversion of debt to equity $971,553 $319,007
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
-31-
<PAGE>
<TABLE>
<CAPTION>
VSOURCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
Common Stock Additional Deferred Notes Accumulated Stockholder's
Shares Amount Paid-in-Capital Compensation Receivable Deficit Equity/(Deficit)
----------- --------- --------------- ------------ ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1998 10,804,295 $108,043 $2,310,724 $ - $ - $(2,519,380) $(100,613)
Common stock surrendered (1,000,000) (10,000) 10,000 --
Issuance of common stock-
Acquisition of WPG.net 500,000 5,000 1,181,555 1,186,555
Issuance of common stock upon
conversion of demand notes 778,656 7,786 311,221 319,007
Beneficial conversion feature 290,657 290,657
Granting of common stock
options for services 45,725 45,725
Issuance of common stock
for services 318,500 3,185 146,510 149,695
Net loss (1,762,230) (1,762,230)
----------- --------- --------------- ------------ ---------- ------------ ----------------
Balance at January 31, 1999 11,401,451 114,014 4,296,392 (4,281,610) 128,796
Issuance of common stock,
net of issuance costs 1,495,213 14,952 2,124,990 2,139,942
Issuance of common stock
upon conversion of
demand notes 2,210,201 22,102 949,451 971,553
Issuance of common
stock for services 64,165 642 112,735 113,377
Granting of common stock
options for services 2,123,382 (1,780,817) 343,015
Issuance of warrants -
related party 435,136 435,136
Beneficial conversion feature 349,710 349,710
Modification in terms
of stock options 81,251 81,251
Exercise of stock options 636,100 6,361 172,437 (178,798) --
Net loss (5,523,294) (5,523,294)
----------- --------- --------------- ------------ ---------- ------------ ----------------
Balance at January 31, 2000 15,807,130 $158,071 $10,645,934 $(1,780,817) $(178,798) $(9,804,904) $(960,514)
=========== ========= =============== ============ ========== ============ ================
</TABLE>
The accompanying Notes are an integral part of this statement.
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<PAGE>
VSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
ORGANIZATION AND BUSINESS
VSource, Inc. (VSource or the "Company") creates and markets Internet-based
applications for businesses. An Internet-based application is best described as
computer software and data that reside on a remote server, rather than the
user's computer, where that software and data are accessed over the Internet.
The Company intends to generate fees by licensing its Internet-based
applications for use by businesses. Currently, the Company offers VSN as its
primary application. VSN may be used by corporate clients to purchase goods and
services via the Internet. The Company has also developed and has previously
offered Virtual Source Publisher, a do-it-yourself Internet web site builder.
Virtual Source Publisher is currently inactive but is being retained for future
use as a supporting application.
VSource was incorporated in Nevada on October 22, 1980 as Cinema-Star
Corporation and, in September 1989, was renamed Dyna-Seal Corporation. Prior to
February 1, 1995, the Company's name was changed several times, and its former
line of business (manufacturing, packaging and distribution of coatings,
sealants and adhesive for use in aircraft and marine industries) was completely
discontinued. In July 1995, the Company changed its name to Interactive Buyers
Network International, Ltd., and acquired all of the outstanding shares of
Buyer/Seller Interactive Software, Inc., a Nevada corporation whose name was
subsequently changed to Virtual Source, Inc., ("VSI"). The Company changed its
name to VSource, Inc. in December 1999.
On June 1, 1998, the Company acquired all of the outstanding stock of Wpg.Net,
Inc. ("Wpg.Net"). See Note 3.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of VSource, Inc. and
its wholly owned subsidiaries Virtual Source, Inc. and Wpg.Net, Inc. Significant
intercompany accounts have been eliminated.
REVENUE RECOGNITION
The Company accounts for revenue in accordance with the American Institute of
Certified Public Accountants (the AICPA) Statement of Position (SOP) No. 97-2
"Software Revenue Recognition," which provides guidance on applying generally
accepted accounting principles for software revenue recognition transactions.
When the Internet version of the Company's software is fully functional and
available for sale, the Company plans on charging initial license fees and user
fees.
The initial license fees are charged in return for granting the client access to
the network and the Interactive Buyer's servers where the system resides. The
Company has not yet received revenue related to the Internet version of the
software. The revenue related to the initial license fees will be amortized over
the service life of a customer relationship, currently estimated to be five
years.
In addition to the initial fees, the Company plans on charging a transaction fee
for each transaction consummated by the licensee on the network.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as incurred.
SOFTWARE DEVELOPMENT COST
Software development costs have been accounted for in accordance with Statement
of Financial Accounting Standard (SFAS) No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed. Under that standard,
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<PAGE>
VSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2000
capitalization of software development costs begins upon the establishment of
technological feasibility, subject to net realizable value considerations.
Capitalized software costs are amortized over the greater of: 1) the amount
computed using the ratio that current gross revenues for a product bear to the
total current and anticipated future gross revenues for that product; or 2) the
straight-line method over the remaining estimated useful life of the product in
which the life is generally estimated to be three years. The Company has not
incurred any significant capitalization costs after technological feasibility
was achieved and thus does not have any capitalized software development costs
for the years ended January 31, 1999 and 2000.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The assets are depreciated using the
straight-line method over their estimated useful lives of five years. Carrying
values are reviewed periodically for impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable.
The policy of the Company is to capitalize significant improvements and to
expense repairs and maintenance.
Depreciation expense for the years ended January 31, 1999 and 2000 was $21,661
and $40,275, respectively.
IMPAIRMENT OF LONG LIVED ASSETS
The Company evaluates its long lived assets by measuring the carrying amount of
the assets against the estimated undiscounted future cash flows associated with
them. If such evaluations indicate that the future undiscounted cash flows of
certain long lived assets are not sufficient to recover the carrying value of
such assets, the assets are adjusted to their fair values.
INTANGIBLE ASSETS
Intangible assets, principally goodwill, are amortized on the straight-line
method over a period of 3 years. The carrying amounts of intangible assets are
assessed for impairment when operating profit from the related business
indicates the carrying amounts of the assets may not be recoverable. Carrying
values are reviewed periodically for impairment whenever events or changes in
circumstances indicate that the carrying amounts of intangible assets may not be
recoverable. The Company recorded an impairment of goodwill in the amount of
$527,356 for the year ended January 31, 2000. Amortization for the years ended
January 31, 1999 and 2000 was $263,757 and $396,396, respectively.
STOCK BASED COMPENSATION
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation. The
Company has chosen under the provisions of SFAS 123 to continue using the
intrinsic-value method of accounting for employee stock-based compensation in
accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees.
LOSS PER SHARE
Loss per share of common stock is computed using the weighted average number of
common shares outstanding during the period shown. Common stock equivalents are
not included in the determination of the weighted average number of shares
outstanding, as they would be antidilutive.
ADVERTISING COST
The Company charges advertising costs to expense as incurred. Advertising
expense for the years ended January 31, 1999 and 2000 was $1,073 and $245,680,
respectively.
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<PAGE>
VSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2000
STATEMENT OF CASH FLOWS
For the purpose of the statement of cash flows, cash includes amounts "on-hand"
and amounts deposited with financial institutions.
Supplemental disclosure of cash flow information is as follows:
Cash paid during the periods:
For the Years Ended January 31,
------------------------------------
2000 1999
------------------------------------
Interest $ - $ -
============== ====================
Income taxes $ 1,600 $ 1,600
============== ====================
Supplemental schedule of non-cash investing and financing transactions:
Issuance of common stock in connection with the following transactions:
For the Years Ended January 31,
------------------------------------
2000 1999
----------------------------------
Conversion of notes payable $996,553 $ 319,007
Purchase of Wpg.Net $ - $1,186,555
=============== ==============
For the year ended January 31, 2000, options for 636,100 shares of common stock
were exercised for notes receivable in the amount of $178,798.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities at the
date of the financial statements, and revenues and expenses during the reporting
period. Actual results could differ from estimates and assumptions made.
2. REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
company as a going concern. However, the company has sustained substantial
losses from operations in recent years, and such losses have continued through
the year ended January 31, 2000. In addition, the company has used, rather than
provided, cash in its operations.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the company, which in turn is
dependent upon the company's ability to meet its financing requirements on a
continuing basis, to maintain present financing, and to succeed in its future
operations. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the company be
unable to continue in existence.
-35-
<PAGE>
VSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2000
Management has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the company with the
ability to continue its operations: it has retained experienced operating and
financial management, it has concluded contracts with clients which will provide
revenues in future periods, and its has retained an investment bank to raise
additional capital.
3. ACQUISITION OF WPG.NET, INC.
On June 1, 1998, the Company acquired all of the outstanding stock of Wpg.Net,
Inc. for an aggregate purchase price of $1,186,555. VSource, Inc. issued 500,000
shares of common stock with a fair value of $625,000 ($1.25 per share), plus
stock options for 500,000 shares with a fair value of $561,555. The options vest
ratably, on a monthly basis, over the 3 years subsequent to the purchase. If
Wpg.Net, Inc. division revenues reach $500,000 before the 3-year vesting period
has expired, the 500,000 options vest immediately. The former shareholders of
Wpg.Net, Inc. (Wpg.Net, Inc. shareholders) are entitled to a commission of 50%
of revenue generated by the Wpg.Net, Inc. division. Wpg.Net, Inc. shareholders
are entitled to 25% of the revenues produced by Virtual Source, Inc. relating to
the sales of Virtual Source Publisher. As of January 31, 2000, no revenues have
been generated related to Wpg.Net, Inc. or the Virtual Source Publisher. In the
event that VSource is sold, the Wpg.Net, Inc. shareholders are entitled to a
one-time payment of $3,000,000, the options vest immediately, and all commission
obligations cease to accrue at that time. The Company guaranteed a minimum stock
price of $7.00 per share for stock held by Wpg.Net, Inc. shareholders upon the
sale of the Company.
The acquisition was accounted for as a purchase and was included with the
combined operations for the dates subsequent to June 1, 1998. As a result of the
acquisition, goodwill was recorded in the amount of $1,186,555. In conjunction
with the acquisition of Wpg.Net, three of Wpg.Net's executives signed one-year
employment agreements with the Company. The contracts guaranteed the Wpg.Net
executives salaries ranging from $49,500 to $77,250 per year. These contracts
have expired; however, these executives remain active employees of the Company.
During the year ended January 31, 2000, the Company determined that the present
value of future cash flows related to the acquisition of Wpg.Net was not
material. Consequently, the remaining unamortized goodwill has been written off
as of January 31, 2000.
4. NOTES RECEIVABLE - RELATED PARTIES
The Company has unsecured notes receivables from several officers which totaled
$178,798 as of January 31, 2000. The notes are due on demand and bear interest
at an annual rate of 6%. The notes were granted in connection with the exercise
of 636,100 stock options on May 15, 1999.
5. CONVERTIBLE NOTES PAYABLE
In July 1999, the company converted all of its outstanding convertible debt to
equity. To induce debt holders to convert prior to the 90-day notice period,
the Company offered a financial inducement. The total amount of the inducement,
charged to interest expense, was $19,860. The total amount of shares issued in
connection with the conversion of debt for the year ended January 31, 2000 was
2,210,201 shares.
In November 1999, the Company issued $150,000 of 10% convertible notes due
December 31, 2000 to certain investors. The notes are convertible into shares
of restricted common stock at a per share price of $2.50. None of these notes
were converted as of January 31, 2000.
The Company allocated a portion of the convertible notes to the embedded
beneficial conversion feature in the convertible notes and credited paid-in
capital. The portion allocated to the beneficial conversion feature was charged
-36-
<PAGE>
VSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2000
to interest expense at the date of issuance. The amount charged to interest
expense related to convertible notes issued during the year ended January 31,
2000 was $112,500.
6. STOCK OPTIONS AND WARRANTS
The Company has granted various non-qualified stock options to key executives,
management and other employees at exercise prices equal to or below the market
price at the date of grant. In general, options become exercisable from 8 months
to 3 years from the grant date.
On June 10, 1998, the Board of Directors granted options to shareholders' of
Wpg.Net, Inc. to purchase 500,000 shares of the Company's restricted common
stock at an exercise price of $0.59 per share. The options vest monthly over a
three-year period and have a term ending in June 2008.
The following table summarizes information about stock option transactions for
the years ended January 31, 1999 and 2000:
Weighted
Shares Average Exercise
Price
---------- -----------------
Outstanding at January 30, 1998 506,100 $0.19
Granted 630,000 0.73
Exercised - -
Cancelled - -
----------
Outstanding at January 31, 1999: 1,136,100 0.49
Granted 1,273,250 0.93
Exercised (636,100) 0.28
Cancelled (130,000) 1.25
----------
Outstanding at January 31, 2000 1,643,250 0.85
----------
Exercisable at January 31, 2000 676,856 0.72
----------
The following table summarizes information about stock options outstanding at
January 31, 2000:
<TABLE>
<CAPTION>
Weighted
Average Exercisable
Remaining Weighted Weighted
Range of Number of Years of Average Number Of Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
January 31, $0.59 - 1.66 1,643,250 8.76 $0.85 676,856 $0.72
2000
</TABLE>
The Company has elected to continue using the intrinsic-value method of
accounting for stock-based awards granted to employees in accordance with APB
25. For the year ended January 31, 2000, the Company recorded compensation
expense in the amount of $424,266.
The following table reflects pro forma net income and earnings per share had the
Company elected to adopt the fair value approach of SFAS 123 for the years
ended:
-37-
<PAGE>
VSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2000
January 31,
----------------------------------
2000 1999
------------- ----------------
Net loss as reported $(5,523,294) $(1,762,230)
Pro forma $(6,921,005) $(1,802,545)
Loss per share as reported $(0.40) $(0.17)
Pro forma $(0.50) $(0.17)
The estimated fair value of each option granted is calculated using the
Black-Scholes option-pricing model with a weighted average risk free rate of
6.5%, volatility of 219.4% and expected life of 1 to 5 years.
In connection with a financing transaction, the Company issued warrants to an
outside consultant to purchase 120,000 shares of the Company's common stock for
a purchase price of $2.00 per share. The warrants expire on November 7, 2000.
7. INCOME TAXES
Income taxes are provided pursuant to SFAS No. 109 Accounting for Income Taxes.
The statement requires the use of an asset and liability approach for financial
reporting for income taxes. If it is more likely than not that some portion or
all of a deferred tax asset will not be realized, a valuation allowance is
recognized. Accordingly, as the realization and use of the net operating loss
carryforward is not probable at January 31, 1999 or 2000, the tax benefit of the
loss carryforward has been offset by a valuation allowance of the same amount.
The composition of deferred tax assets is as follows:
January 31,
----------------------------------
2000 1999
------------- ----------------
Total deferred tax assets $2,424,637 $902,000
Total valuation allowance (2,434,637) (902,000)
Total deferred tax assets $ - $ -
The tax effects of temporary differences and carryforwards that give rise to
deferred assets are as follows:
January 31,
----------------------------------
2000 1999
------------- ----------------
Deferred tax assets:
Net operating loss carryforwards $ 9,149,575 $ 3,452,000
Stock option conversion 164,217 -
As of January 31, 2000, the Company had approximately $9,149,575 of federal and
state loss carryforwards available to reduce future federal and state tax
liability through the year 2020 for federal loss carryforwards and 2005 for the
state loss carryforwards.
-38-
<PAGE>
VSOURCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2000
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has used market information for similar instruments and applied
judgment to estimate fair values of financial instruments. At January 31, 1999
and 2000, the fair values of cash, accounts receivable, employee receivables,
notes payable and accounts payable approximated carrying values because of the
short-term nature of these instruments.
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its main office facilities under a noncancellable operating
lease agreement expiring March 31, 2002. The future minimum rent expense that
will be incurred under operating leases are as follows:
2001 $184,000
2002 206,000
2003 97,000
--------
$487,000
========
Rent expense for the years ended January 31, 1999 and 2000 was $35,063 and
$114,221, respectively.
10. SUBSEQUENT EVENTS
In February 2000, the company completed a private placement of non-cumulative
convertible preferred stock in the amount of $7,005,000. The convertible
preferred stock accrues dividends at a rate of $0.20 per share per annum and is
convertible into shares of common stock at any time at the election of the
holder. The preferred stock is automatically convertible upon an underwritten
public offering of shares of the Company with aggregate proceeds of at least
$10,000,000, or by a vote of the majority of the outstanding Series1-A preferred
stock. The amount as of January 31, 2000 in the in-progress offering,
$6,002,500, was included in current liabilities in the accompanying balance
sheet until the closing of the offering in February 2000 when stock certificates
were issued to subscribers.
In February 2000, the Company entered into a strategic relationship with a
vendor in which the two companies agreed to make the Company's Virtual Source
Network available to the vendor's business customers. In connection with this
agreement, the Company issued warrants to the vendor to purchase 600,000 shares
of the Company's common stock at a base exercise price of $5.00 per share. The
exercise price is subject to various adjustments, as defined in the agreement.
The warrants may be exercised in whole or in part through February 2007.
-39-
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Effective February 8, 2000, Vsource, Inc., a Nevada corporation
("Registrant" or the "Company"), agreed to retain Grant Thornton LLP as the
principal accountant to audit the Company's financial statements. Concurrently
with the agreement to engage Grant Thornton LLP, the Company's former
accountants, Lucas, Horsfall, Murphy & Pindroh, LLP resigned as the Company's
independent accountants. The Company's Board of Directors approved the decision
to change accountants.
Lucas, Horsfall, Murphy & Pindroh, LLP's report, dated May 15, 1999 (except
for Note 10 to the financial statements which is as of September 3, 1999), on
the consolidated financial statements as of and for the years ended January 31,
1999 and 1998 contained an additional paragraph adding emphasis to the matter of
the Company's ability to continue as a going concern.
During the Company's two most recent fiscal years and any subsequent
interim period, there were no disagreements between the Company and Lucas,
Horsfall, Murphy & Pindroh, LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to the satisfaction of Lucas, Horsfall,
Murphy & Pindroh, LLP, would have caused it to make a reference to the subject
matter of the disagreements in connection with its reports.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Incorporated by reference to the Registrant's definitive proxy statement to
be filed not later than 120 days after the end of the fiscal year.
Item 10. EXECUTIVE COMPENSATION
Incorporated by reference to the Registrant's definitive proxy statement to
be filed not later than 120 days after the end of the fiscal year.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Registrant's definitive proxy statement to
be filed not later than 120 days after the end of the fiscal year.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Registrant's definitive proxy statement to
be filed not later than 120 days after the end of the fiscal year.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
The Company will furnish a copy of any exhibit listed below upon written
request of any shareholder receiving these materials. The Company will charge
the requesting shareholder a fee covering the reasonable expenses incurred by
the Company in furnishing any such exhibit.
-40-
<PAGE>
Exhibit No. Description
- ---------- -----------
3.1(*) Articles of Incorporation. Incorporated herein by reference
from Exhibit 2.1 to Registrant's Registration Statement on Form
10-SB filed on September 21, 1999 (SEC File No. 000-26563).
3.2 Certificate of Designation of Series 1-A Convertible Preferred
Stock.
3.3(*) Bylaws of Vsource, Inc. Incorporated herein by reference from
Exhibit 2.2 to Registrant's Registration Statement on Form
10-SB filed on September 21, 1999 (SEC File No. No. 000-26563).
3.4 Certificate of Amendment to Bylaws of Vsource, Inc. dated April
26, 2000.
3.5 Certificate of Amendment of Bylaws of Vsource, Inc. dated May 2,
2000.
4.1(*) Form of Stock Certificate for Vsource, Inc. Incorporated herein
by reference from Exhibit 3.1 to Registrant's Registration
Statement on Form 10-SB filed on September 21, 1999 (SEC File
No. 000-26563).
4.2(*) Form of Series 3 Convertible Demand Note for Vsource, Inc.
Incorporated herein by reference from Exhibit 3.2 to Registrant's
Registration Statement on Form 10-SB filed on September 21, 1999
(SEC File No. 000-26563).
4.3(*) Form of Series 2 Convertible Demand Note for Vsource, Inc.
Incorporated herein by reference from Exhibit 3.3 to Registrant's
Registration Statement on Form 10-SB filed on September 21, 1999
(SEC File No. 000-26563).
10.1 Distribution and Marketing Agreement between Vsource, Inc. and
U.S. West Interprise America, Inc. dated February 15, 2000.
10.2 Ventura Professional Center First Amendment to Lease between
Virtual Source, Inc. and Security National Properties, LLC,
dated October 27, 1998.
10.3 Lease - Razore Land Company, Landlord and Interactive Buyers
Network International, Tenant, dated October 11, 1999.
21.1 Subsidiaries.
23.1 Consent of Independent Auditors
27.1** Financial Data Schedule.
* Previously filed with the Securities and Exchange Commission.
** Filed electronically via EDGAR.
REPORTS ON FORM 8-K
Report on Form 8-K - Change in Registrant's Certifying Accountant,
filed on February 14, 2000.
-41-
<PAGE>
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.
Vsource, Inc.
Date: May 10, 2000 /s/ Robert C. McShirley
--------------------------
Robert C. McShirley,
President and Chief Executive 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 dates indicated.
SIGNATURE TITLE DATE
Chief Executive Officer
President
/s/ Robert C. McShirley Director May 10, 2000
- ------------------------
Robert C. McShirley (Principal Executive Officer)
Chief Financial Officer
/s/ Sandford T. Waddell Secretary May 10, 2000
- ------------------------
Sandford T. Waddell (Principal Accounting Officer)
/s/ Samual E. Bradt Director May 10, 2000
- ------------------------
Samual E. Bradt
/s/ Scott T. Behan Director May 10, 2000
- ------------------------
Scott T. Behan
/s/ Robert N. Schwartz Director May 10, 2000
- ------------------------
Robert N. Schwartz
/s/ Ramin Kamfar Director May 10, 2000
- ------------------------
Ramin Kamfar
-42-
<PAGE>
EXHIBIT INDEX
The Exhibit Index shows the page numbers of all exhibits filed as part of this
10-KSB.
<TABLE>
<CAPTION>
Exhibit
- -------
<S> <C>
3.1(*) Articles of Incorporation incorporated herein by reference from Exhibit 2.1 to registrant's
Registration Statement on Form 10-SB Filed on September 21, 1999 (SEE File No. 000-26563).
3.2 Certificate of Designation of Series 1-A Convertible Preferred Stock
3.3(*) Bylaws of Vsource, Inc. Incorporated herein by reference from
Exhibit 2.2 to Registrant's Registration Statement on Form
10-SB filed on September 21, 1999 (SEC File No. No. 000-26563).
3.4 Certificate of Amendment to Bylaws of Vsource, Inc. dated April 26, 2000
3.5 Certificate of Amendment of Bylaws of Vsource, Inc. dated May 2, 2000
4.1(*) Form of Stock Certificate for Vsource, Inc. Incorporated herein
by reference from Exhibit 3.1 to Registrant's Registration
Statement on Form 10-SB filed on September 21, 1999 (SEC File
No. 000-26563).
4.2(*) Form of Series 3 Convertible Demand Note for Vsource, Inc.
Incorporated herein by reference from Exhibit 3.2 to Registrant's
Registration Statement on Form 10-SB filed on September 21, 1999
(SEC File No. 000-26563).
4.3(*) Form of Series 2 Convertible Demand Note for Vsource, Inc.
Incorporated herein by reference from Exhibit 3.3 to Registrant's
Registration Statement on Form 10-SB filed on September 21, 1999
(SEC File No. 000-26563).
10.1 Distribution and Marketing Agreement between Vsource, Inc. and U.S. West
Interprise America, Inc. dated February 15, 2000
10.2 Ventura Professional Center First Amendment to Lease between Virtual Source, Inc. and Security
National Properties, LLC, dated October 27, 1998
10.3 Lease - Razore Land Company, Landlord and Interactive Buyers Network International,
Tenant, dated October 11, 1999
21.1 Subsidiaries.
23.1 Consent of Independent Auditors
27.1** Financial Date Schedule
* Previously filed with Securities and Exchange Commission.
** Filed electronically via EDGAR
</TABLE>
-43-
<PAGE>
Exhibit 3.2
VSOURCE, INC.
Certificate of Designation
Robert C. McShirley and Ronald J. Sanderson, certify that:
A. They are the duly elected and acting President and Assistant Secretary,
respectively, of Vsource, Inc., a Nevada corporation (the "Company");
B. The following resolution, which sets forth the rights, preferences,
privileges and restrictions of the Series 1-A Convertible Preferred Stock
of the Company determined by the Board of Directors of the Company in
accordance with the authorization contained in the Company's Articles
of Incorporation, as amended, was duly adopted by the Board by unanimous
written consent dated as of February 17, 2000:
AUTHORIZATION OF SERIES 1-A CONVERTIBLE PREFERRED STOCK
Resolved that the Board of Directors hereby determines that 2,900,000
shares of Class A Preferred Stock shall be designated "Series 1-A
Convertible Preferred Stock" and that such Series 1-A Convertible Preferred
Stock shall have the rights, preferences, privileges and restrictions
hereinafter set forth:
DESIGNATION OF SERIES 1-A CONVERTIBLE PREFERRED STOCK
1. Designation.
-----------
This series of Class A Preferred Stock shall be designated "Series 1-A
Convertible Preferred Stock," par value $0.01 per share ("Series 1-A
Preferred").
2. Authorized Number.
------------------
The number of authorized shares of Series 1-A Preferred shall be two
million nine hundred thousand (2,900,000) shares.
-1-
<PAGE>
3. Dividends.
---------
The holders of shares of Series 1-A Preferred Stock shall be entitled
to receive, out of any assets legally available therefor, and when, as and
if declared by the Board of Directors, noncumulative dividends in an amount
equal to $0.20 cents per share annually. No dividend may be declared and
paid upon shares of Common Stock in any fiscal year of the Corporation
unless dividends of $0.20 per share has first been paid upon or declared
and set aside for payment to the holders of the shares of Series 1-A
Preferred Stock for such fiscal year of the Corporation. No undeclared or
unpaid dividend shall ever bear interest.
4. Liquidation Preference.
-----------------------
a. In the event of any liquidation, dissolution or winding up of
the Corporation, either voluntary or involuntary, the holders of the
Series 1-A Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds
of the Corporation to the holders of the Common Stock by reason of
their ownership thereof, a preference amount per share consisting of
the sum of (A) $2.50 for each outstanding share of Series 1-A
Preferred Stock (the "Original Issue Price") and (B) an amount equal
to declared but unpaid dividends on such share, if any. If upon the
occurrence of such event, the assets and funds thus distributed among
the holders of the Series 1-A Preferred Stock shall be insufficient to
permit the payment to such holders of the full aforesaid preferential
amounts, then the entire assets and funds of the Corporation legally
available for distribution shall be distributed among such holders in
proportion to the full preferential amount each such holder is
otherwise entitled to receive.
b. After payment to the holders of the Series 1-A Preferred Stock
of the amount set forth in the preceding Subparagraph 2a, the
remaining assets and funds of the Corporation legally available for
distribution, if any, shall be distributed among the holders of the
Common Stock and the Series 1-A Preferred Stock pro rata based on the
number of shares of Common Stock held by each (assuming conversion of
all such Series 1-A Preferred Stock pursuant to Paragraph 5 below).
-2-
<PAGE>
c. For purposes of this Paragraph 2, a liquidation, dissolution
or winding up of the Corporation shall be deemed to be occasioned by
or to include (i) the acquisition of the Corporation by another entity
by means of any transaction or series of related transactions
(including, without limitation, any reorganization, merger or
consolidation but, excluding any merger effected exclusively for the
purpose of changing the domicile of the Corporation), or (ii) a sale
of all or substantially all of the assets of the Corporation; unless
the Corporation's shareholders of record as constituted immediately
prior to such acquisition or sale will, immediately after such
acquisition or sale (by virtue of securities issued as consideration
for the Corporation's acquisition or sale or otherwise) hold a
majority of the voting power of the surviving or acquiring entity. In
any of such events, if the consideration received by the Corporation
received is other than cash, its value will be deemed its fair market
value. The fair market value of common stock which is publicly traded
on an exchange or the NASDAQ National Market System or Small Cap
Market shall be the average of the daily market prices of that stock
over the 20 consecutive trading days immediately preceding (and not
including) the date the Corporation or its shareholders receive such
stock. The daily market price for each trading day shall be: (A) the
closing price on that day on the principal exchange on which such
common stock is then listed or admitted to trading or on NASDAQ, as
applicable; or (B) if no sale takes place on that day on such exchange
or NASDAQ, the average of the official closing bid and asked prices
for that stock. Otherwise, the fair market value of such consideration
shall be determined in good faith by the Board of Directors and
provided in writing by the Corporation to the holders of the Series
1-A Preferred Stock within five (5) days of the date of such
determination; provided, however, that the fair market value of such
consideration shall be determined by appraisal in accordance with the
following provisions if the holders of at least two-thirds of then
outstanding Series 1-A Preferred Stock object in writing to the Board
of Director's determination within 15 days of their receipt of notice
of such determination by the Board of Directors. A single appraiser
shall selected jointly by the holders of a majority of the Series 1-A
Preferred Stock and the Corporation. If the holders of the Series 1-A
Preferred Stock and the Corporation are unable to agree on an
appraiser within twenty (20) days of the Board of Directors receiving
notice of such holders' objection to the Board of Directors'
determination, each shall immediately appoint an appraiser who shall
determine such fair market value. If the lower of the appraised fair
market values is not less than ninety percent (90%) of the higher
appraised fair market value, the final fair market value of such
consideration shall be the average of the appraised values. If the
lower of the appraised values is less than ninety percent (90%) of the
higher appraised values, the original appraisers shall appoint a final
appraiser who shall pick one of the two prior values determined by the
first two appraisers. All appraisal reports shall be completed no
later than sixty (60) days after the appointment of the appraiser
engaged to render such appraisal. All appraisal fees and costs shall
be paid by the Corporation; provided, however, that if the final
appraised value is no more than ten percent (10%) higher than that
determined by the Board, the appraisal fees and costs shall be
subtracted from the liquidation preference to be paid to the holders
of the Series 1-A Preferred Stock.
-3-
<PAGE>
5. Redemption.
----------
a. Redemption at the Option of the Corporation. The Corporation
shall -------------------------------------------- not have the right
to call or redeem any shares of the Series 1-A Preferred Stock.
b. Redemption at the Option of the Holders. The holders of the
Series ---------------------------------------- 1-A Preferred Stock
shall not have any right to require the Corporation to redeem all or
any part of the Series 1-A Preferred Stock held by them.
6. Voting Rights. The holder of each share of Series 1-A Preferred
--------------
Stock shall have the right to one vote for each share of Common Stock into
which such Series 1-A Preferred Stock could then be converted (with any
fractional share determined on an aggregate conversion basis being rounded
down to the nearest whole share), and with respect to such vote, such
holder shall have full voting rights and powers equal to the voting rights
and powers of the holders of Common Stock, and shall be entitled,
notwithstanding any provision hereof, to notice of any shareholders'
meeting in accordance with the by-laws of the Company, and shall be
entitled to vote, together with holders of Common Stock, with respect to
any question upon which holders of Common Stock have the right to vote.
7. Conversion.
----------
The holders of the Series 1-A Preferred Stock shall have conversion
rights as follows (the "Conversion Rights"):
a. Right to Convert. Each share of Series 1-A Preferred Stock
----------------
shall be convertible, at the option of the holder thereof, at any time
after the date of issuance of such share, at the office of the
Corporation or any transfer agent for such stock, into such number of
fully paid and nonassessable shares of Common Stock as is determined
by dividing the Original Issue Price by the then applicable Conversion
Price, determined as hereinafter provided, in effect on the date the
certificate evidencing such share is surrendered for conversion. The
initial Conversion Price per share for Series 1-A Preferred Stock (the
"Conversion Price") shall be the Original Issue Price. Such initial
Conversion Price shall be adjusted as hereinafter provided.
-4-
<PAGE>
b. Automatic Conversion. Each share of Series 1-A Preferred Stock
---------------------
shall automatically be converted into shares of Common Stock at the
then effective Conversion Price as provided in Subparagraph 5a above,
immediately upon the closing of a public offering of the Corporation's
Common Stock with aggregate gross proceeds of at least $10,000,000 and
a per share price to the public of at least five dollars ($5.00), or
at the election of the holders of a majority of the outstanding shares
of Series 1-A Preferred Stock.
c. Mechanics of Conversion. Before any holder of Series 1-A
------------------------
Preferred Stock shall be entitled to convert the same into shares of
Common Stock, such holder shall surrender the certificate or
certificates thereof, duly endorsed, at the office of the Corporation
or of any transfer agent for such stock, and shall give written notice
to the Corporation at such office that it elects to convert the same
and shall state therein the number of shares to be converted and the
name or names in which it wishes the certificate or certificates for
shares of Common Stock to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such
holder a certificate or certificates for the number of shares of
Common Stock to which such holder shall be entitled. Such conversion
shall be deemed to have been made immediately prior to the close of
business on the date of surrender of the shares of Series 1-A
Preferred Stock to be converted, and the person or persons entitled to
receive the shares of Common Stock issuable upon such conversion shall
be treated for all purposes as the record holder or holders of such
shares of Common Stock on such date.
d. Conversion Price Adjustments. The Conversion Price shall be
------------------------------
subject to the following adjustments:
(1) Adjustment for Stock Splits and Combinations. If the
----------------------------------------------
Corporation at any time or from time to time after the first
issuance of Series 1-A Preferred Stock (the "Purchase Date")
effects a subdivision of the outstanding Common Stock, by stock
split or otherwise, the Conversion Price then in effect
immediately before that subdivision shall be proportionately
decreased; and, conversely, if the Corporation at any time or
from time to time after the Purchase Date combines the
outstanding shares of Common Stock, by reverse stock split or
otherwise, the Conversion Price then in effect immediately before
that combination shall be proportionately increased. Any
adjustment under this Section d(1) shall become effective at the
close of business on the date the subdivision or combination
becomes effective.
-5-
<PAGE>
(2) Adjustment for Certain Dividends and Distributions. In
----------------------------------------------------
the event the Corporation at any time or from time to time after
the Purchase Date either makes, or fixes a record date for the
determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in additional shares of
Common Stock, then and in each such event the Conversion Price
then in effect shall be decreased as of the time of such issuance
or, in the event such a record date is fixed, as of the close of
business on such record date, by multiplying the Conversion Price
then in effect by a fraction (1) the numerator of which is the
total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance on the close of
business on such record date, and (2) the denominator of which
shall be (i) the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or
the close of business on such record date plus (ii) the number of
shares of Common Stock issuable in payment of such dividend or
distribution; provided, however, that if such record date is
fixed and such dividend is not fully paid or if such distribution
is not fully made on the date fixed therefor, the Conversion
Price shall be recomputed accordingly as of the close of business
on such record date or date fixed therefor and thereafter the
Conversion Price shall be adjusted pursuant to this Section d(2)
as of the time of actual payment of such dividend or
distribution. For purposes of the foregoing formula, "the total
number of shares of Common Stock issued and outstanding" on a
particular date shall include shares of Common Stock issuable
upon conversion of stock or securities convertible into Common
Stock and the exercise of warrants, options or rights for the
purchase of Common Stock which are outstanding on such date.
(3) Adjustments for Other Dividends and Distributions. In
----------------------------------------------------
the event the Corporation at any time or from time to time after
the Purchase Date makes, or fixes a record date for the
determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in securities of the
Corporation other than shares of Common Stock, then and in each
such event, provision shall be made so that each Holder of Series
1-A Preferred Stock shall receive upon conversion thereof, in
addition to the number of shares of Common Stock receivable
thereupon, the amount of securities of the Corporation which it
would have received had the Holder's shares of Series 1-A
Preferred Stock been converted into Common Stock as of the date
of such event and had it thereafter, during the period from the
date of such event to and including the date of exercise,
retained such securities receivable by it as aforesaid during
such period, subject to all other adjustments called for during
such period under this Section 5 with respect to the rights of
such Holder.
-6-
<PAGE>
(4) Adjustment for Recapitalization, Reclassification, or
--------------------------------------------------------
Exchange. If the Common Stock issuable upon the conversion of the
--------
Series 1-A Preferred Stock is changed into the same or a
different number of shares of any class or classes of stock of
the Corporation, whether by recapitalization, reclassification or
other exchange (other than a subdivision or combination of
shares, or a stock dividend or a reorganization, merger,
consolidation or sale of assets, provided for elsewhere in this
Section d), then and in any such event each Holder of Series 1-A
Preferred Stock shall have the right thereafter to convert the
Series 1-A Preferred Stock into the kind and amount of stock and
other securities and property receivable upon such
recapitalization, reclassification or other exchange by holders
of the number of shares of Common Stock into which the number of
shares of Series 1-A Preferred Stock then by such Holder could be
converted immediately prior to such recapitalization,
reclassification or other exchange, all subject to further
adjustment as provided herein.
(5) Reorganizations, Mergers, Consolidations or Sales of
-------------------------------------------------------
Assets. If at any time or from time to time there is a capital
------
reorganization of the Common Stock (other than a subdivision or
combination of shares or a stock dividend or a recapitalization,
reclassification or other exchange of shares, provided for
elsewhere in this Section d) or a merger or consolidation of the
Corporation with or into another corporation, or the sale of all
or substantially all of the Corporation's assets to any other
person, then, as a part of such capital reorganization, merger,
consolidation or sale, provision shall be made so that each
Holder of the Series 1-A Preferred Stock shall thereafter be
entitled to receive upon conversion of the Series 1-A Preferred
Stock the number of shares of stock or other securities or
property of the Corporation, or of the successor corporation
resulting from such capital reorganization, merger, consolidation
or sale, to which a holder of the number of shares of Common
Stock deliverable upon such exercise would have been entitled on
such capital reorganization, merger, consolidation or sale. In
any such case, appropriate adjustment shall be made in the
application of the provisions of this Section d with respect to
the rights of each Holder of Series 1-A Preferred Stock after the
capital reorganization, merger, consolidation or sale to the end
that the provisions of this Section d (including the number of
shares deliverable upon conversion of the Series 1-A Preferred
Stock) shall continue to be applicable after that event and shall
be as nearly equivalent to the provisions hereof as may be
practicable.
(6) Sale of Shares Below Conversion Price.
------------------------------------------
-7-
<PAGE>
(a) If at any time or from time to time after the
Purchase Date, the Corporation issues or sells, or is deemed
by the express provisions of this Section d(6) to have
issued or sold, Additional Shares of Common Stock (as
hereinafter defined), other than as a dividend or other
distribution on any class of stock as provided in Section
d(2) and other than upon a subdivision or combination of
shares of Common Stock as provided in Section d(1), for an
Effective Price (as hereinafter defined) less than the then
existing Conversion Price, then and in each such case the
then existing Conversion Price shall be reduced, as of the
opening of business on the date of such issue or sale, to a
price determined by multiplying that Conversion Price by a
fraction the numerator of which shall be (A) the number of
shares of Common Stock outstanding at the close of business
on the day next preceding the date of such issue or sale,
plus (B) the number of shares of Common Stock which the
aggregate consideration received (or by the express
provisions hereof is deemed to have been received) by the
Corporation for the total number of Additional Shares of
Common Stock so issued would purchase at such Conversion
Price, plus (C) the number of shares of Common Stock
underlying Other Securities (as hereinafter defined) and the
denominator of which shall be (X) the number of shares of
Common Stock outstanding at the close of business on the
date of such issue after giving effect to such issue of
Additional Shares of Common Stock, plus (Y) the number of
shares of Common Stock underlying the Other Securities at
the close of business on the date of such issue or sale.
-8-
<PAGE>
(b) For the purpose of making any adjustment required
under this Section d(6), the consideration received by the
Corporation for any issue or sale of securities shall (A) to
the extent it consists of cash be computed at the amount of
cash received by the Corporation, (B) to the extent it
consists of property other than cash, be computed at the
fair value of that property as determined in good faith by
the Board, and (C) if Additional Shares of Common Stock,
Convertible Securities (as hereinafter defined) or rights or
options to purchase either Additional Shares of Common Stock
or Convertible Securities are issued or sold together with
other stock or securities or other assets of the Corporation
for a consideration which covers both, be computed as the
portion of the consideration so received that may be
reasonably determined in good faith by the Board to be
allocable to such Additional Shares of Common Stock,
Convertible Securities or rights or options.
-9-
<PAGE>
(c) For the purpose of the adjustment required under
this Section d(6),if the Corporation issues or sells any
rights or options for the purchase of, or stock or other
securities convertible into, Additional Shares of Common
Stock (such convertible stock or securities being
hereinafter referred to as "Convertible Securities") and if
the Effective Price of such Additional Shares of Common
Stock is less than the Conversion Price then in effect, then
in each case the Corporation shall be deemed to have issued
at the time of the issuance of such rights or options or
Convertible Securities the maximum number of Additional
Shares of Common Stock issuable upon exercise or conversion
thereof and to have received as consideration for the
issuance of such shares an amount equal to the total amount
of the consideration, if any, received by the Corporation
for the issuance of such rights or options or Convertible
Securities, plus, in the case of such rights or options, the
minimum amounts of consideration, if any, payable to the
Corporation upon the exercise of such rights or options,
plus, in the case of Convertible Securities, the minimum
amounts of consideration, if any, payable to the Corporation
(other than by cancellation of liabilities or obligations
evidenced by such Convertible Securities) upon the
conversion thereof. No further adjustment of the Conversion
Price, adjusted upon the issuance of such rights, options or
Convertible Securities, shall be made as a result of the
actual issuance of Additional Shares of Common Stock on the
exercise of any such rights or options or the conversion of
any such Convertible Securities. If any such rights or
options or the conversion privilege represented by any such
Convertible Securities shall expire without having been
exercised, the Conversion Price adjusted upon the issuance
of such rights, options or Convertible Securities shall be
readjusted to the Conversion Price which would have been in
effect had an adjustment been made on the basis that the
only Additional Shares of Common Stock so issued were the
Additional Shares of Common Stock, if any, actually issued
or sold on the exercise of such rights or options or rights
of conversion of such Convertible Securities, and such
Additional Shares of Common Stock, if any, were issued or
sold for the consideration actually received by the
Corporation upon such exercise, plus the consideration, if
any, actually received by the Corporation for the granting
of all such rights or options, whether or not exercised,
plus the consideration received for issuing or selling the
Convertible Securities actually converted, plus the
consideration, if any, actually received by the Corporation
(other than by cancellation of liabilities or obligations
evidenced by such Convertible Securities) on the conversion
of such Convertible Securities.
-10-
<PAGE>
(d) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued by the Corporation after the
Purchase Date, whether or not subsequently reacquired or
retired by the Corporation, other than: (A) shares of Common
Stock issued upon conversion of the Series 1-A Preferred
Stock or any other options or warrants or convertible
securities outstanding or issuable on the Purchase Date; (B)
shares of Common Stock issuable or issued to the directors,
officers and employees of or consultants to the Corporation;
(C) shares of Common Stock issuable or issued as part of an
acquisition by the Corporation of all of or certain assets
(including technology rights) or shares of another company
or entity whether through a purchase, merger, exchange,
reorganization or the like; (D) shares of Common Stock
issuable or issued pursuant to equipment financing or
leasing arrangements; or (E) shares issued in a public
offering of the Corporation's securities. The "Effective
Price" of Additional Shares of Common Stock shall mean the
quotient determined by dividing the total number of
Additional Shares of Common Stock issued or sold, or deemed
to have been issued or sold by the Corporation under this
Section d(6), into the aggregate consideration received, or
deemed to have been received by the Corporation for such
issue under this Section d(6), for such Additional Shares of
Common Stock. "Other Securities" with respect to an issue or
sale of Additional Shares of Common Stock shall mean (i)
preferred stock, debentures and notes convertible into
Common Stock, and (ii) options or warrants to purchase
Common Stock at a price that is no greater than 95% of the
Effective Price of such issue or sale of Additional Shares
of Common Stock. The "number of shares of Common Stock
underlying Other Securities" on a particular date shall mean
the number of shares of Common Stock issuable upon the
exercise or conversion, as the case may be, of such Other
Securities at the close of business on such date but only to
the extent that the holders thereof have the fully vested
legal right to exercise or convert such Other Securities on
such date and to retain the Common Stock issued upon such
exercise or conversion.
(7) Upon the occurrence of each adjustment or readjustment of the
Conversion Price, the Corporation at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms
hereof, and shall prepare and furnish to the holders of the Series 1-A
Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such
adjustment or readjustment is based.
e. Notices of Record Date. In the event of any taking by the
-------------------------
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any security
or right convertible into or entitling the holder thereof to receive or any
right to subscribe for, purchase or otherwise acquire any shares of stock
of any class or any other securities or property, or to receive any other
right, the Corporation shall mail to each holder of Series 1-A Preferred
Stock at least twenty (20) days prior to the date specified therein, a
notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution, security or right, and the amount
and character of such dividend, distribution, security or right.
f. Reservation of Stock Issuable Upon Conversion. The Corporation
-----------------------------------------------
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series 1-A Preferred Stock, such number of
its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of the Series 1-A Preferred
Stock and if at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series 1-A Preferred Stock, the Corporation will
take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purpose, including,
without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to this Articles of
Incorporation.
-11-
<PAGE>
g. Fractional Shares. No fractional share shall be issued upon the
------------------
conversion of any share or shares of Series 1-A Preferred Stock. All shares
of Common Stock (including fractions thereof) issuable upon conversion of
more than one share of Series 1-A Preferred Stock by a holder thereof shall
be aggregated for purposes of determining whether the conversion would
result in the issuance of any fractional share. If, after the
aforemen-tioned aggregation, the conversion would result in the issuance of
a fraction of a share of Common Stock, the Corporation shall, in lieu of
issuing any fractional share, pay the holder otherwise entitled to such
fraction a sum in cash equal to the fair market value of such fraction on
the date of conversion (determined as provided in Subparagraph 5c).
h. Notices. Any notice required by the provisions of this Paragraph 5
-------
to be given to the holders of shares of Series 1-A Preferred Stock shall be
deemed given if deposited in the United States mail, postage prepaid,
return receipt requested, and addressed to each holder of record at his
address appearing on the books of the Corporation.
8. Amendment.
---------
Any term relating to the Series 1-A Preferred Stock may be amended and the
observance of any term relating to the Series 1-A Preferred Stock may be waived
(either generally or in a particular instance) only with the vote or written
consent of holders of a majority of the outstanding shares of the Series 1-A
Preferred Stock. Any amendment so effected shall be binding upon the
Corporation and any holder of the Series 1-A Preferred Stock.
9. Restrictions and Limitations.
------------------------------
So long as any shares of Series 1-A Preferred Stock remain outstanding, the
Corporation shall not, without the vote or written consent by the holders of a
majority of the outstanding shares of Series 1-A Preferred Stock, voting
together as a single class:
a. Increase or decrease (other than by conversion) the total number of
authorized shares of Series 1-A Preferred Stock; or
b. Amend the Articles of Incorporation of the Corporation to change
the rights, preferences, privileges or limitations of the Series 1-A
Preferred Stock.
10. No Reissuance of Series 1-A Preferred Stock.
-------------------------------------------------
No share or shares of Series 1-A Preferred Stock acquired by the
Corporation by reason of redemption, purchase, conversion or otherwise shall be
reissued, and all such shares shall be returned to the status of undesignated
shares of Preferred Stock.
-12-
<PAGE>
11. Residual Rights.
----------------
Holders of shares of Series 1-A Preferred Stock shall not have any
pre-emptive rights. All rights accruing to the outstanding shares of the
Company not expressly provided for to the contrary herein shall be vested in the
Common Stock.
C. That the number of shares of Series 1-A Preferred Stock is 2,900,000; and
D. That none of such shares of Series 1-A Preferred Stock has been issued.
-13-
<PAGE>
IN WITNESS WHEREOF Vsource, Inc. has caused this certificate to be executed
by Robert C. McShirley, its President and Ronald J. Sanderson, its Assisitant
Secretary, on the date set forth below.
Dated: 2/17, 2000
-------------
/s/ Robert C. McShirley
------------------------------
Robert C. McShirley,
President
/s/ Ronald J. Sanderson
------------------------------
Ronald J. Sanderson,
Assistant Secretary
STATE OF California )
---------------------- )
) ss:
COUNTY OF Ventura )
---------------------- )
On February 17, 2000 personally appeared before me, a Notary Public,
---------------------
Robert C. McShirley and Ronald J. Sanderson , who
----------------------- -------------------------
acknowledged that they executed the above instrument.
/s/ Carlene R. Ackley
------------------------------
(SEAL) Notary Public
-14-
<PAGE>
Exhibit 3.4
CERTIFICATE OF AMENDMENT
TO BYLAWS OF
VSOURCE, INC.
The undersigned, being the Secretary of Vsource, Inc., a Nevada
corporation, hereby certifies that Section 6, Article II of the bylaws of this
corporation was amended, effective April 18, 2000, by the board of directors to
provide in its entirety as follows:
"Section 6. The holders of a majority of the the stock issued and
outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise
provided by statute or by the articles of incorporation; provided,
however, that in no case shall such quorum be less than 33 1\3 percent
of the outstanding shares of the common voting stock. If, however,
such quorum shall not be present or represented at any meeting of the
stockholders, the stockholders entitled to vote thereat, present in
person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such
adjourned meeting at which a quorum shall be present or represented
any business may be transacted which might have been transacted at the
meeting as originally notified."
IN WITNESS WHEREOF, the undersigned has set forth his hand.
Date: 4/26/00 /s/ Sandford Waddell
-----------------------------
Sandford Waddell, Secretary
-1-
<PAGE>
EXHIBIT 10.1
DISTRIBUTION AND MARKETING AGREEMENT
US WEST Interprise America, Inc., a Colorado Corporation ("USW") with offices
located at 1801 California Street #3400, Denver, Co 80202 and Vsource, Inc.
("Vsource") with offices located at 5740 Ralston, Suite 110, Ventura, CA 93003,
("Party" or "Parties"), hereby execute this Distribution and Marketing Agreement
("Agreement") and agree as follows:
1. SCOPE: Vsource will provide the services and any resulting
deliverables (the "Services") according to the specifications ("Specifications")
which are described herein or attached hereto. USW's Affiliates and Assigns may
acquire Services under the terms and conditions of this Agreement.
2. DEFINITIONS: The terms defined in this Agreement shall have the
meanings set forth below whenever they appear in the Agreement, unless the
context in which they are used clearly requires a different meaning or a
different definition is described for a particular provision:
2.1 "AFFILIATES" means any entity, which directly or indirectly
controls, or is controlled by, or is under common control with, USW.
"Control" means (i) for corporate entities, direct or indirect ownership of
fifty percent (50%) or more of the stock or shares entitled to vote for the
election of the board of directors or other governing body of the entity;
and (ii) for non-corporate entities, direct or indirect ownership of fifty
percent (50%) or greater of the equity interest.
2.2 "CUSTOMER(S)" means USW's Customers, either potential or existing.
2.3 "SUPPORT MATERIALS" means all, applications, methods and other
documents (in any medium) customized by or for USW that Vsource's personnel
use in conjunction with the performance of Services under the Agreement.
Vsource shall not use Support Materials in conjunction with the performance
of Services hereunder unless USW first approves such Support Materials in
writing.
2.4 "DECISION MAKER(S)" means those persons that are eighteen (18)
years of age or older and authorized to purchase products and/or Services
for Customers.
2.5 "SALES ORDER(S)" means the information describing all Work
Products and/or Services that Customers have purchased during each contact
with Vsource.
2.6 "SERVICE SCHEDULE" an attachment to the Agreement specifying
details of projects to be performed under the terms of the Agreement.
3. [Redacted.]
4. WARRANTY: Services shall be performed in a professional manner,
consistent with industry standards and the requirements of this Agreement. USW
may inspect Services at any time with reasonable notice to Vsource.
5. CONFIDENTIAL INFORMATION AND PROPERTY: Confidential Information and
Property ("Confidential Information") shall mean any and all business, technical
or third-Party information (including but not limited to marketing plans,
financial data, specifications, drawings sketches, models, samples, computer
programs, logos, or documentation) marked as confidential or proprietary and
provided, disclosed or made available under this Agreement. The Parties shall
restrict access to the Confidential Information to employees or agents who have
a "need to know". The Parties', employees or agents, shall not disclose the
Confidential Information to any third Party and shall treat the Confidential
Information in the same way it treats its own Confidential Information of like
kind. This provision will not apply to information which is in the public
domain, is previously known to the receiving Party without obligation of
confidentiality, is independently developed by the receiving Party or is
obtained by the receiving Party from a third party that does not have an
obligation to keep the information confidential. The Parties will not make any
copies of the Confidential Information, except to facilitate the purpose for
which the information is provided.
Page 1 of 11
CONFIDENTIAL & PROPRIETARY. DISCLOSE & DISTRIBUTE SOLELY TO THOSE INDIVIDUALS
WHO HAVE A NEED TO KNOW.
<PAGE>
6. OWNERSHIP; INTELLECTUAL PROPERTY: Intellectual Property includes
inventions, discoveries, improvements, concepts, methods, processes, ideas,
information, software, and other intellectual property which is originated,
developed or prepared in connection with Service(s) under this Agreement. Unless
otherwise expressly provided in applicable Service Schedule(s) or other
attachments, "Intellectual Property" which is originated, developed or prepared:
(1) by employees, agents or independent contractors of one Party shall belong to
that Party; and/or (2) jointly by employees of both Parties shall belong jointly
to both, and each Party hereby grants the other an unrestricted, non-exclusive,
royalty-free, perpetual, irrevocable license to copy, use, disclose and
sublicense such jointly developed Intellectual Property in connection with its
business. At the request and expense of USW, Vsource will assist USW and sign
all appropriate documents, during and after the term of this Agreement, to
enable USW to obtain intellectual property protection for Intellectual Property.
USW will, at the request and expense of Vsource, provide the same assistance to
Vsource with respect to Intellectual Property. The assisting Party will not
charge any fees or other charges of any kind in connection with such activities.
7. PRIVACY: Vsource shall treat all Customer information gathered as a
result of this Agreement as Confidential Information, in accordance with the
provisions of Section 5 (confidential Information and Property) of this
Agreement.
8. INDEPENDENT CONTRACTOR: Each of the Parties certifies that it is engaged
in an independent business and will perform its obligations under this Agreement
as an independent contractor and not as the agent or employee of the other; that
it has no authority to act for or bind the other; that such Party may and does
work for other customers; that any persons provided by such Party shall be
solely the employees or agents of that Party under its sole and exclusive
direction and control. Each Party hereto is solely responsible for the hours of
work, methods of performance and payment of its employees and agents. Each Party
hereto is solely responsible for providing worker's compensation, unemployment,
disability insurance and social security withholding for its employees and
agents, and shall comply with all other federal, state and local, rules and
regulations. Each Party is responsible for and shall pay all assessable federal
and state income tax on amounts paid to it under this Agreement.
9. INDEMNIFICATION: Vsource warrants and represents that the Services shall
not infringe any third party patent, copyright, trademark, trade secret or other
proprietary rights. Vsource shall indemnify, hold harmless and defend, USW, its
officers, directors, Affiliates, agents and employees from any and all claims,
demands, litigation, expenses and liabilities (including costs and attorneys'
fees) ("Liabilities") arising from or incident to breach of this warranty.
Vsource shall indemnify and hold harmless USW, its parents, Affiliates,
subsidiaries, owners, agents, directors and employees from and against all
Liabilities arising from personal injury or property damage caused by Vsource,
its agents and employees and others under its direction or control. USW shall
indemnify and hold harmless Vsource, its owners, parents, affiliates,
subsidiaries, agents, directors and employees from and against all Liabilities
arising from personal injury or property damage caused by USW, its agents and
employees and others under its direction or control.
10. LIMITATION OF LIABILITY: Neither Party is liable to the other for
consequential, incidental, indirect, punitive or special damages, including
commercial loss and lost profits, however caused and regardless of legal theory
or foreseeability, directly or indirectly arising under this Agreement.
Page 2 of 11
CONFIDENTIAL & PROPRIETARY. DISCLOSE & DISTRIBUTE SOLELY TO THOSE INDIVIDUALS
WHO HAVE A NEED TO KNOW.
<PAGE>
11. INSURANCE: Vsource and any subcontractors shall maintain insurance as
follows: (a) Commercial General Liability covering claims for bodily injury,
death, personal injury or property damage with minimum limits of $1,000,000.00
each occurrence with a General Aggregate limit of $2,000,000.00; (b)
Comprehensive Automobile Liability covering ownership, operation and maintenance
of all owned, non-owned and hired automobiles used in connection with the
performance of this Agreement, with minimum limits of $1,000,000.00 each
occurrence; (c) Worker's Compensation with statutory limits as required in the
state where the Services are being provided. USW shall be given thirty (30) days
advance written notification of any cancellation or material change of the
policy. Vsource shall forward certificate(s) of insurance to USW prior to
commencement of Services and upon renewal of insurance during the term of this
Agreement.
12. SAFETY, HEALTH AND ACCIDENT REPORTS: The safety and health of the
employees and agents of a Party brought on premises the premises of the other
Party shall be the sole responsibility of the Party employing such employees or
agents. While the employees and agents of a Party are on the premises of the
other Party, the employing Party shall comply with all local, state and federal
environmental, health and safety requirements, including those relating to the
use and handling of hazardous materials. The employing Party shall report all
accidents, injury-inducing occurrences or property damage arising from the
performance of Services. The other Party may request copies of any reports filed
with the employing Party's insurer or others. The employing Party's employees
and agents shall comply with all plant rules and regulations while on the other
Party's premises.
13. COMPLIANCE WITH LAWS: Vsource shall, at its expense, obtain all permits
and licenses, pay all fees, and comply with all federal, state and local laws,
ordinances, rules, regulations and orders applicable to Vsource's performance
under this Agreement.
14. PERFORMANCE STANDARDS: Vsource agrees that the Services performed under
this Agreement shall be free from defects in performance or material, shall
conform to the requirements and specifications of the Agreement and attachments
hereto, and shall be fit and sufficient for the purposes expressed in, or
reasonably to be inferred from the Agreement and attachments hereto. Vsource
agrees to perform the Services with care, skill and diligence in accordance with
the applicable professional and industry standards currently recognized by
Vsource's profession and industry and shall be responsible for the quality,
technical accuracy, completeness and coordination of all reports, information,
specifications and other items and Services furnished under this Agreement.
Vsource shall comply with all applicable governmental laws, ordinances, codes
and regulations in performing the Services.
If Vsource fails to meet applicable performance standards set out in this
Agreement and attachments and Service Schedules, Vsource shall, at not cost to
USW or Vsource's customer, correct or revise any error or deficiencies in the
Services.
15. YEAR 2000 COMPLIANCE: Vsource represents and warrants that the Services
provided under this Agreement are Year 2000 Compliant and will lose no
functionality on or after January 1, 2000 or with respect to the introduction of
records containing dates falling on or after January 1, 2000. "Year 2000
Compliant" means that the Services will function or be usable properly in
accordance with the requirements of this Agreement and will record, store,
process, calculate and present calendar dates falling on and after January 1,
2000, and will calculate any information dependent on or relating to such dates
in the same manner and functionality as on or before December 31, 1999. Vsource
shall modify or replace any Services that are not Year 2000 Compliant. If
Vsource is unable to or fails to modify or replace Services, USW shall have the
right to make such modification or replacement and charge Vsource for any costs
incurred.
16. [Redacted.]
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CONFIDENTIAL & PROPRIETARY. DISCLOSE & DISTRIBUTE SOLELY TO THOSE INDIVIDUALS
WHO HAVE A NEED TO KNOW.
<PAGE>
17. DISPUTE RESOLUTION: If any claim, controversy or dispute between
the Parties, their agents, employees, officers, directors, or affiliates
("Dispute") cannot be settled through negotiation or mediation, it shall be
resolved by arbitration conducted by a single arbitrator engaged in the practice
of law, under the then current rules of the American Arbitration Association
("AAA"). The Federal Arbitration Act, 9 U.S.C. Sec. 1-16 shall govern the
arbitrability of all Disputes. The arbitrator shall not have authority to award
punitive damages. All expedited procedures prescribed by the AAA rules shall
apply. The arbitrator's decision and award shall be final and binding and
judgment may be entered in any court having jurisdiction thereof. Each Party
shall bear its own costs and attorneys' fees, and shall share equally in the
fees and expenses of the arbitrator. Notwithstanding the foregoing, either Party
may seek injunctive relief in an appropriate court of law until such time an
arbitrator is assigned. The laws of the State of California shall apply, and
any arbitration shall occur in San Francisco, California.
18. FORCE MAJEURE: Neither Party is liable to the other Party for any
delay, error, failure in performance or interruption of performance resulting
from causes beyond their control. The injured Party may elect to terminate this
Agreement and/or any Service Schedule upon written notice.
19. REMEDIES: Subject to the Article on Dispute Resolution contained in
this Agreement and as limited by Section 10 "Limitation of Liability" herein,
the remedies stated in this Agreement are cumulative and are in addition to any
other rights available in law or in equity.
20. RECORDS AND AUDITS: Vsource shall maintain complete and accurate
records as appropriate in accordance with generally accepted accounting
principles, for a period of twenty-four (24) months from the date of
termination, cancellation or expiration of this Agreement. USW may inspect and
keep copies of Vsource's records related to this Agreement upon reasonable
notice.
21. ASSIGNMENT AND DELEGATION: Neither Party shall not assign this
Agreement, in whole or in part, without the prior written consent of the other,
which shall not be unreasonably withheld; and any attempted assignment without
such consent shall be void. Either Party may assign this Agreement through its
merger or as part of the sale of substantially all of its assets to the
counterparty of any such merger or acquisition.
22. [Redacted.]
23. NOTICES: Any notices required under this Agreement shall be sent to the
addresses of the Parties stated in the first paragraph of this Agreement. Notice
will be deemed given (1) as of the day they are deposited with an overnight
courier, charges prepaid, return receipt requested, with a confirming telefax;
or (2) as of the day of receipt if they are deposited in certified U.S. Mail,
charges prepaid, return receipt requested; or (3) as of the day of receipt if
they are hand delivered. Copies of any such notices shall be sent to:
U S WEST, Inc. Sheppard, Mullin, Richter & Hampton LLP
Law Department 650 Town Center Drive, 4th Floor
1801 California Street #5100 Costa Mesa, CA 92626
Denver, CO 80202 Fax: 714-513-5130
Fax: 303-308-9455 Attn.: John J. Giovannone, Esq
Page 4 of 11
CONFIDENTIAL & PROPRIETARY. DISCLOSE & DISTRIBUTE SOLELY TO THOSE INDIVIDUALS
WHO HAVE A NEED TO KNOW.
<PAGE>
24. ADVERTISING, PUBLICITY: Neither Party shall use the other Party's
names, marks, codes, drawings or Specifications in any advertising, promotional
efforts or publicity of any kind without the expressed prior written permission
of the other Party.
25. WAIVERS: No waiver of any provision of this Agreement or any right
or obligation of a Party shall be effective unless in writing, signed by the
Parties. The failure of either Party to enforce a right shall not constitute a
waiver.
26. MODIFICATIONS OR AMENDMENTS: Modifications and amendments to this
Agreement shall be in writing and signed by the Parties.
27. NONEXCLUSIVE AGREEMENT: This Agreement is nonexclusive and USW does not
make any commitment or guarantee for any minimum or maximum amount of business
that it will engage in with Vsource.
28. SEVERABILITY: Any term of this Agreement which is held to be invalid,
illegal, unenforceable or void will in no way affect any other provision.
29. SEVERAL LIABILITY: If more than one party is referred to as USW, then
their obligations and liabilities shall be several, not joint.
30. ENTIRE AGREEMENT: This Agreement and any Service Schedule constitutes
the entire Agreement between the Parties for the Services to be provided. Any
prior oral or written communications or agreement of the Parties with respect to
the Services not expressly set forth in this Agreement or any attachment or
Service Schedule or the like, are of no force or effect.
The Parties, intending to be legally bound, have caused this Agreement to be
executed by their authorized representatives on the dates set forth below.
U S WEST INTERPRISE AMERICA, INC. VSOURCE, INC.
Page 5 of 11
CONFIDENTIAL & PROPRIETARY. DISCLOSE & DISTRIBUTE SOLELY TO THOSE INDIVIDUALS
WHO HAVE A NEED TO KNOW.
<PAGE>
SERVICE SCHEDULE #1 ("SS#1")
TO DISTRIBUTION AND MARKETING AGREEMENT
This SS#1 is issued pursuant to the terms and conditions of that certain
Marketing and Distribution Agreement ("Agreement"), effective April 15, 1999
("Agreement"), by and between U S WEST Interprise America, Inc. with offices
located at 1801 California Street #3400, Denver, CO 80202 ("USW") and Vsource,
Inc. ("Vsource") with offices located at 5740 Ralston, Suite 110, Ventura, CA
93003.
[Redacted.]
7. GENERAL:
This SS#1 and the Agreement shall be read so as to complement each other.
However, in the event of an irreconcilable conflict in the terms thereof,
the provisions of the Agreement shall have precedence over the terms of
this SS#1.
Page 10 of 11
CONFIDENTIAL & PROPRIETARY. DISCLOSE & DISTRIBUTE SOLELY TO THOSE INDIVIDUALS
WHO HAVE A NEED TO KNOW.
<PAGE>
The Parties intending to be legally bound have caused this SS#1 to Agreement to
be executed by their duly authorized representatives.
U S WEST INTERPRISE AMERICA, INC. VSOURCE, INC.
Page 11 of 11
CONFIDENTIAL & PROPRIETARY. DISCLOSE & DISTRIBUTE SOLELY TO THOSE INDIVIDUALS
WHO HAVE A NEED TO KNOW.
<PAGE>
EXHIBIT 10.2
VENTURA PROFESSIONAL CENTER --FIRST AMENDMENT TO LEASE
BETWEEN
VIRTUAL SOURCE, INC. AND SECURITY NATIONAL PROPERTIES, LLC
OCTOBER 27, 1998
THIS AGREEMENT, dated January 10,2000, is between Security National Properties,
---
LLC ("Landlord"), and Virtual Source, Inc.("Tenant"), and relates to the lease
--------------------
dated October 27,1998, by and between Landlord and Tenant ("the Lease") with
------------
respect to the premises identified as Ventura Professional Center ("the
Premises").
Landlord and Tenant herein agree to the following modifications to the above
referenced lease:
1. All terms defined in the Lease have the same meaning when used in this
First Amendment to Lease.
2. An area comprising approximately 2500 square feet on the first floor,
Suite 110, and 3038 square feet on the second floor, Suite 202,
of 5740 Ralston Street, Ventura, California. 5538 total square feet.
3. Tenant agrees to pay Landlord minimum monthly rental for said Premises,
payable monthly in advance, the amount of Eight Thousand Three Hundred
-------------------------------
SevenDollars ($8,307.00),for a term of Twenty Four (24)months, commencing
---------- ---------------
April 1,2000 and terminating on March 31 ,2002. If Tenant is unable to
------------ --------------
move into the second floor space prior to March 15, 2000, Landlord
will adjust rent commencement date accordingly. Tenant shall have one
(1), two (2) year option to extend the terms of Lease at market rate.
4. Landlord will reimburse Tenant up to $25,000.00 for verified Tenant
Improvements.
3. Tenant represents to Landlord that there are no defaults by Landlord
under the Lease and that Landlord has fully performed all obligations to
Tenant under the Lease which has accrued up to the date hereof.
As amended hereby, the Lease, and each and every provision thereof, is hereby
ratified and confirmed by Landlord and Tenant and shall remain in full force and
effect by and between Landlord and Tenant.
NOT WITHSTANDING THE FOREGOING, this First Amendment to Lease offer shall remain
in effect until 5:00 P.M. (PST), January 14, 2000
--------------------------------------
IN WITNESS WHEREOF, Landlord and Tenant have executed this First Amendment to
Lease the day and year first above written, although as a matter of convenience
it may be actually signed by parties on another day.
Executed on: 2/8/00
LANDLORD:
Security National Properties-Ventura,
LLC
BY:
Security National Properties Servicing,
LLC-It's Manager
By: /s/ Fred Griffith
--------------------
FRED GRIFFITH
Sr. Vice President, Real Estate
Date: 2/11/00
TENANT
Virtual Source, Inc.
By: /s/ Robert C. McShirley
--------------------------
ROBERT C. MCSHIRLEY
President
<PAGE>
MUTUAL RELEASE AND COMPROMISE AGREEMENT
---------------------------------------
This Mutual Release and Compromise Agreement ("agreement") is made and
entered into by Virtual Source, Inc., a Nevada corporation, ("releasor") and
Ingomar Limited Partnership, a Nevada limited partnership, Ingomar Properties,
LLC, an Alaska limited liability company, and Security National Servicing
corporation, an Alaska corporation (collectively "releasees").
NATURE AND EFFECT OF AGREEMENT
------------------------------
Releasor and releasees have agreed to a full compromise and settlement of
all disputes between them according to the terms and conditions of this
agreement. By executing this agreement, each of the parties intends to and does
hereby resolve and settle all disputes and differences between them with respect
to any and all rights and liability arising out of or related to the matters
described herein. This agreement is entered into solely for the purpose of
settling any and all disputed claims and avoiding the expenses and uncertainties
of litigation. This agreement does not constitute any admission by either
releasor or releasees of the lack of merit of that party's claims or defenses.
RECITALS
--------
1. On or about September 15, 1997, releasor, as lessee, and releasee
Ingomar Limited Partnership, as lessor, entered into a written lease (the
"current lease") for the space designated as Suites 310 and 312 at 5720 Ralston
Street (the "current space") in the office complex commonly known as 5720, etc.,
Ralston Street, Ventura, California 93003 (the "complex"). At that time,
releasee Ingomar Limited Partnership was the owner of the complex.
2. Subsequently, releasee Ingomar Limited Partnership conveyed
ownership of the complex to releasee Ingomar Properties, LLC.
3. At all times material to this agreement, releasee Security National
Servicing Corporation has been the duly authorized agent of releasees Ingomar
Limited Partnership and Ingomar Properties, LLC.
4. In or about July and August, 1998, a dispute arose between releasor,
on the one hand, and releasees, on the other hand, concerning the exercise by
releasor of an option to extend the term of the current lease, and concerning
the actions of the parties in connection with the negotiation of a potential new
lease.
5. On August 28, 1998, releasor filed a complaint against releasees
Ingomar Limited Partnership and Ingomar Properties, LLC, and against defendants
Does 1 through 100, in the Ventura County (California) Superior Court,
designated as Case No. CIV 183504, for specific performance, declaratory relief,
injunctive relief, and damages, arising out of the dispute between releasor and
releasees, reference to which is made for further particulars.
AGREEMENT
---------
NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL PROMISES AND
COVENANTS SET FORTH HEREIN, THE PARTIES AGREE AS FOLLOWS:
I. MUTUAL COMPROMISE AGREEMENT
-----------------------------
Each party hereby compromises and settles any and all past, present, or
future claims, demands, obligations, or causes of action, whether based on tort,
contract, or other theories of recovery, which that party has, or which may
later accrue to or be acquired by that party, against the other party and the
other party's predecessors and successors in interest, heirs, and assigns,
arising from the subject matter of the actions described herein, on the
following terms and conditions:
A. Releasor and releasee Ingomar Properties, LLC, shall forthwith
execute a lease (the "new lease") for Suite A at 5740 Ralston Street (the "new
space") in the complex, the form and content of said new lease being set forth
in Exhibit "A," attached hereto and incorporated herein by reference.
B. Releasees shall pay to releasor the sum of $30,000 as follows: Prior
to execution of this agreement by releasor, releasees shall cause to be
deposited to the client trust account of releasor's counsel, CLARKE & CLARKE, a
Professional Corporation, said sum of $30,000, and said counsel shall be
authorized and directed to release said sum from said trust account to the order
of releasor immediately upon releasor's execution of the original or a
counterpart of this agreement, and of the new lease.
C. In accordance with the terms and conditions of the new lease, releasor
shall vacate the current space and move into the new space.
D. Pending releasee moving into the new space, the terms and conditions
of the current lease shall continue in full force and effect, except that
releasees waive, and releasor shall not be required to pay, any rent pursuant to
the current lease, and releasees acknowledge that the rent paid by releasor at
the time of execution of the current lease is accepted by releasees as payment
in full for all rent due on account of releasor's occupation and use of the
current space. Upon releasor vacating the current space and moving into the new
space, the current lease shall terminate.
E. Upon presentation no later than February 28, 1999, of receipts,
invoices, and other sufficient documentation therefor, releasee Ingomar
<PAGE>
Properties, LLC, shall forthwith reimburse releasor up to the cumulative amount
of $10,000 for reasonable out-of-pocket expenses incurred by it in connection
with its move from the current space to the new space, including telephone and
utility installation charges, costs of wiring and connecting computers, printing
new stationary, business cards, and other business supplies in a quantity
similar to that on hand at the time releasor moves to the new space, and, in
addition thereto, releasee Ingomar Properties, LLC, shall forthwith reimburse
releasor up to the cumulative amount of $7,500 for attorney's fees and costs
incurred in connection with releasor's prosecution of the complaint described
herein, including services in connection with this settlement and mutual release
and waiver. In the event of any dispute between the parties concerning such
reimbursement, and notwithstanding any provision to the contrary in the new
lease, such dispute shall be submitted to binding arbitration pursuant to
California Code of Civil Procedure sections 1280 through 1288.8, before a single
arbitrator who regularly maintains offices in Ventura, California, as may be
mutually agreed upon by the parties, or in the event that they disagree, as may
be appointed by the then Presiding Judge of the Ventura County Superior Court,
acting as an individual upon the written application of any party.
F. Releasor agrees to dismiss with prejudice its complaint against
releasees Ingomar Limited Partnership and Ingomar Properties, LLC, herein.
G. Releasor and releasees each agree to waive any and all claims
against the other arising out of the subject matter of the complaint described
herein.
H. Releasor and releasees agree that this compromise and settlement
shall constitute a bar to all past, present and future claims arising out of the
subject matter of the actions described herein.
II. REQUIREMENT FOR THE FULFILLMENT OF ALL CONDITIONS
-------------------------------------------------------
Releasor and releasees agree that in the event one or more of the material
conditions listed as "A" through "H" under the heading "MUTUAL COMPROMISE
AGREEMENT" herein is not met within a reasonable time after written notice and
demand, this entire agreement shall be null and void, and without effect.
III. MUTUAL GENERAL RELEASE
------------------------
For the valuable consideration described herein, the receipt and
sufficiency of which is hereby acknowledged, each of the parties does hereby
expressly release and discharge each other from any and all rights, claims,
causes of action, obligations, costs, damages, losses, liabilities and demands
of whatsoever character to the date hereof, including, but without limiting the
generality of any of the foregoing provisions, any and all claims of whatsoever
character in any way arising out of or connected with, the matters described
herein except those matters and obligations expressly created or preserved as
provided in this agreement.
The parties hereto further expressly waive, to the fullest extent permitted
by law, the provisions and benefits of section 1542 of the California Civil
Code, which provides:
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.
The parties hereto agree and acknowledge that each may hereafter discover
facts different from or in addition to those he, she or it now knows or believes
to be true with respect to the matters contained in this agreement and the
claims released herein. The parties agree that this waiver shall be and will
remain effective in all respects notwithstanding such different or additional
facts.
It is the intention of the parties hereby fully, finally and forever to
settle and release all such matters, and all claims relative thereto, which do
now exist, may exist, or heretofore have existed between the parties hereto in
the matter specified herein. In furtherance of such intention, the releases
given herein shall be and will remain in effect as full and complete mutual
releases of any such matters notwithstanding the discovery of existence of any
additional claims of facts relative hereto.
IV. WARRANTY-
---------
The parties to this agreement hereby warrant and represent to each other
that they have not assigned or transferred, voluntarily, involuntarily, or by
operation of law, any matter released pursuant to this agreement, or any part or
portion thereof, to any person or entity not a party to this agreement. Each
party hereto agrees to indemnify and hold harmless the other party from and
against any claim, demand, damage, debt, liability or cause of action (including
the payment of attorney's fees and costs actually incurred, whether or not
litigation is commenced) based upon, in connection with, or arising out of any
such assignment or transfer by the indemnifying party.
V. AGREEMENT NOT AN ADMISSION
-----------------------------
This agreement is of a disputed claim and is not an admission of liability
by either releasor or releasees.
VI. EQUITABLE RELIEF
-----------------
The parties agree that failure of either party to carry out any obligation
under this agreement will constitute immediate and irreparable damage to the
other not compensable in money damages and will warrant preliminary and other
injunctive and equitable relief on a showing of the failure to carry out any
such obligation satisfactory to the court to which application for relief may be
made.
VII. COOPERATION
-----------
The parties hereto agree that they will execute any and all documents and
take any and all other actions as may be reasonably necessary to carry out the
terms of this agreement.
VIII. ADVICE OF ATTORNEY
--------------------
<PAGE>
Each party warrants and represents that in executing this agreement, he,
she or it has relied upon legal advice from the attorney of his or her choice;
that the terms of this agreement have been read and its consequences (including
risks, complications, and costs) have been completely explained to him or her by
that attorney; and that he, she or it fully understands the terms of this
agreement. Each party further acknowledges and represents that he, she or it has
executed this agreement freely and voluntarily without the undue influence of
any person, and he, she or it has not relied on any inducements, promises, or
representations made by any person not expressly set forth in this agreement.
IX. AUTHORITY TO CONSENT
----------------------
Each party to this agreement warrants that he, she or it has authority to
consent to this agreement.
X. BINDING ON HEIRS
------------------
This agreement shall be binding upon the spouses, heirs, legatees,
transferees, assigns, officers, directors, shareholders, representatives,
employees and agents of the parties hereto.
XI. ATTORNEY'S FEES
----------------
In the event any action, suit or proceeding is commenced under or in
connection with this agreement, or with respect to any matter released pursuant
to this agreement, the prevailing party shall be entitled to recover, and the
other party hereby agrees to pay, the prevailing party's costs and expenses in
connection therewith, including reasonable attorney's fees.
XII. ENTIRE AGREEMENT
-----------------
This agreement is the entire agreement between and among the parties and
supersedes all prior and contemporaneous agreements or understandings of the
parties. Any amendment to this agreement shall not be valid or binding unless in
writing and executed by each of the parties hereto.
XIII. EXECUTION
---------
This agreement may be executed in one or more counterparts (including
multiple signature pages), all of which shall be deemed to be one instrument.
True and correct copies may be used in lieu of the original.
XIV. CONFLICT WITH APPLICABLE LAW
-------------------------------
Should any portion of this agreement be determined by a court of competent
jurisdiction to be in conflict with any applicable law, the validity of the
remaining portions of this agreement shall not be affected thereby.
XV. CONSTRUCTION OF AGREEMENT
---------------------------
All questions with respect to the construction of this agreement and the
rights and liabilities of the parties hereto shall be governed by the laws of
the State of California. For purposes of construction, this agreement shall be
deemed to have been drafted by all parties, and no ambiguity shall be resolved
against any party by virtue of his participation in the drafting of the
agreement.
Dated: October _______, 1998
VIRTUAL SOURCE, INC.,
a Nevada Corporation
By: /s/ Samuel E. Bradt /s/ Robert C. McShirley
---------------------- --------------------------
SAMUEL E. BRADT ROBERT C. MCSHIRLEY
Chairman & CFO CEO
SECURITY NATIONAL SERVICING CORPORATION an Alaska corporation
BY: /s/ Fred S. Griffith /s/ Robin P. Arkley
----------------------- ----------------------
FRED S. GRIFFITH ROBIN P. ARKLEY
Sr. VP, Real Estate President
INGOMAR LIMITED PARTNERSHIP,
A Nevada Limited Partnership
BY: /s/ Robin P. Arkley
----------------------
ROBIN P. ARKLEY
President
Prepared by:
NORMAN, DOWLER, SAWYER, ISRAEL & HANCOCK
By: /s/ Robert M. Sawyer
------------------------
ROBERT M. SAWYER, Attorneys for releasees
Reviewed and approved by:
CLARKE & CLARKE,
A Professional Corporation
By: /s/ Kevin M. Clarke, Attorneys for releasees
<PAGE>
VENTURA PROFESSIONAL CENTER
OFFICE LEASE
THIS RENTAL AGREEMENT, executed in duplicate on the date herein set forth,
between Ingomar Properties, LLC (hereinafter referred to as "Landlord"), and
Virtual Source, Inc(hereinafter referred to as "Tenant").
------------------
IT IS AGREED between the parties hereto as follows:
ARTICLE 1. - PREMISES
1.01 Premises
- --------------
Landlord hereby leases to Tenant, and Tenant hereby hires and takes from
Landlord, for the term, at the rental and upon the conditions hereinafter set
forth, those certain Premises, herein after referred to as the "Premises",
described as follows:
An area comprising approximately 2500square feet, on the first floor, as
----
outlined in red in "Exhibit A" attached hereto and hereby made a part hereof, of
the Ventura Professional Center, located at 5740 Ralston Street, Suite A in
-
Ventura, CA. The Premises shall also include a nonexclusive right of ingress and
egress across the land on which the building is located and through the stairs
and common hallways of the building and parking areas. Premises shall include
all fixtures and equipment to be installed by Landlord as herein provided.
1.02 Quiet Enjoyment
- ----------------------
The Landlord covenants and agrees that the Tenant on paying the rent and
performing the covenants contained herein shall and may peaceably and quietly
hold and enjoy the Premises for the term of the Lease.
1.03 Subordination
- -------------------
This Lease shall be subordinate and subject at all times to any mortgage or deed
of trust covering the Premises or which at any time hereafter shall be made, and
to all advances made, or hereafter to be made, upon the security hereof.
1.04 Parking
- -------------
The Tenant shall have the right to unlimited parking in common with others in
the parking area adjoining the building in which the Premises are located until
such time that in the discretion of the Landlord such use would dictate
assignment of space.
ARTICLE 2. - USE
2.01 Permitted Use
- --------------------
The Premises are to be used solely for office purposes and for no other purpose
without the written consent of Landlord.
2.02 Compliance with Regulations of Governmental Authorities
- ------------------------------------------------------------------
Tenant agrees that it will comply with all laws, statutes, rules, orders,
ordinances and/ or regulations issued, or in force (except those requiring
structural alteration not caused by acts of the Tenant), applicable to the
Premises, or the business or profession of Tenant, of the City, County, State,
and Federal goverranents, and of the California Board of Fire Underwriters and
of the Board of Equalization of the State of California.
2.03 Compliance with Regulations of Insurers
- -------------------------------------------------
Tenant agrees at Tenant's sole cost and expense to comply with any and all
requirements of any insurance organization or company so that reasonable public
liability insurance and fire insurance can be maintained covering the building
and appurtenances.
2.04 Prohibited Use
- ---------------------
Tenant will not, without the written consent of the Landlord, either use any
apparatus or device in connection with the Premises which will in any way
increase the amount of electricity, water, or climate control usually furnished
or supplied to the Premises, device for the purpose of using electric current,
water, or climate control.
2.05 Assignment and Subletting
- ---------------------------------
Tenant shall not assign, mortgage, or hypothecate this Lease, or any interest
therein, or permit the use of the Premises by any person or persons other than
that Tenant or sublet the Premises, or any part thereof, without the written
consent of the Landlord. Consent to any such assignment or subletting shall not
operate as a waiver of the necessity for a consent to any subsequent assignment
or subletting, and the terms of such consent shall be binding upon any person
holding by, under, or through Tenant. Landlord's consent will not be
unreasonably withheld.
Any assignment or subletting without such consent shall be void, and shall, at
the option of Landlord, terminate this Lease. This Lease shall not, nor shall
any interest therein be assignable, as to the interest of Tenant, by operation
of law, without the written consent of Landlord. Landlord shall not unreasonably
withhold his written consent to the assignment by the Tenant of Tenant's
interest in the Lease, or the subletting of the Premises or any part thereof to
another person or company of the Premises or any part thereof to another person
or company of the same profession or business as Tenant in good professional
<PAGE>
standing, provided always that such assignment or subletting shall not overcrowd
the Premises or increase the expenses of Landlord and is not in conflict with
the better interests and welfare of the building. In the event that the Premises
are leased to more than one Tenant, this Lease shall automatically transfer to
the survivor or survivors, in the event of death of one Tenant.
2.06 Signs
- -----------
In order that signs will be harmonious the installations of all signs, whether
exterior or interior shall be subject to the prior approval of Landlord and any
applicable governmental authority.
2.07 Rules and Regulations
- -----------------------------
Tenant agrees to observe faithfully, and reasonably comply with, the rules and.
regulations, attached to this Lease as Exhibit "B" and hereby made a part
hereof, and such other rules and regulations, promulgated from time to time by
the Landlord which shall be reasonable, as in the Landlord's judgment are
necessary for the safety, care, and cleanliness of the building or for the
preservation of good order therein. The Landlord shall not be liable to the
Tenant for violation of such rules and regulations by any other Tenant, it's
servants, employees, agents, visitors, or licensees.
ARTICLE 3. - TERM
3.01 Term
- ----------
The term of this Lease shall be for a period not to exceed fourteen (14) full
calendar months, plus the partial month, if any, immediately following
commencement of this Lease as provided below. This Lease shall commence on the
first day of occupancy by Tenant, but in no event later than December 1, 1998
(the "Commencement Date"), and shall terminate on December 31, 1999, provided
that in the event that the Premises are not ready for occupancy by Tenant on
November 1, 1998, Tenant may continue to occupy the premises described in
Tenant's prior lease dated September 15, 1997, under the terms and conditions
setforth herein, and Tenant shall move from those other premises to the Premises
forthwith upon the Premises becoming ready and available to Tenant, and shall
terminate on December 31, 1999. Landlord and Tenant also agree that that certain
Office Lease entered into by Landlord and Tenant for the premises known as 5720
Ralston Street, Suites 310 and 312, Ventura, California (the "Old Premises"), a
copy of which is attached hereto as "Exhibit C" (the "Old Lease"), shall remain
in full force and effect until the Commencement Date of this Lease; provided,
---------
however,that no additional rental shall be due under the Old Lease.
------
3.02 Option to Renew
- -----------------------
Tenant shall have the option to extend the term of this Lease for a single one
(1) year term at the rental rate of One Dollar and Fifty Cents ($1.50) per
square foot, by delivering to the Landlord written notice of the exercise of
said option at least ninety (90) days prior to the expiration of the initial
term as stated in paragraph 3.01.
3.03 Delivery of Possession
- ------------------------------
Liability of Parties -- In the event of the inability of Landlord to deliver
possession of the Premises at the time of the commencement of the term of this
Lease, neither Landlord nor its agents shall be liable for any damage caused
thereby, nor shall this Lease thereby become void or voidable, nor shall the
term herein specified be in any way extended, but in such event Tenant shall not
be liable for any rent until such time as Landlord can deliver possession.
Occupancy -- The Premises shall be considered ready for occupancy, and the term
of this Lease shall commence, thirty (30) working days after the date that
Landlord has notified Tenant in writing that Landlord has substantially
completed all of the work to be done by Landlord pursuant to 6.01.
3.04 Surrender of Premises
- -----------------------------
Termination of Tenancy -- Tenant agrees to surrender the Premises at the
termination of the tenancy herein created, in the same condition as herein
agreed they have been received, reasonable use and wear thereof and damage by
the act of God or by the elements excepted.
3.05 Holding Over
- -------------------
If Tenant holds possession of the Premises after the term of this Lease, Tenant
shall, at the option of the Landlord, to be exercised by Landlord's given
written notice to Tenant and not otherwise, become a Tenant from month to month
upon the terms and conditions herein specified at a monthly rental equal to that
paid by Tenant for the last month of the term of this Lease, payable in advance
in lawful money, and shall continue to be such Tenant until thirty (30) days
after Tenant shall have given to Landlord or Landlord shall have given to Tenant
a written notice of intention to terminate such monthly tenancy. Unless Landlord
shall exercise the option hereby given him. Tenant shall be a Tenant at
sufferance only, whether or not Landlord shall accept any rent from Tenant while
Tenant is so holding over.
3.06 Quitclaim
- ---------------
Upon the expiration or earlier termination of this Lease, Tenant agrees to
deliver a quitclaim deed in favor of Landlord, if Landlord requests release of
its interest in the Premises.
3.07 Operating Enpense Adjustments
- -------------------------------------
INTENTIONALLY DELETED.
<PAGE>
ARTICLE 4. - RENT
4.01 Minimum Monthly Rent
- ----------------------------
Tenant shall pay to Landlord as minimum monthly rent for the initial term of
this lease, as described in paragraph 3.01, without deduction, set-off, prior
notice, or demand, the sum Zero Dollars ($ 0.00), per month in advance on the
----
first day of each month. Minimum monthly rent for the first month or portion of
it shall be paid on the day that Tenant's obligation to pay minimum monthly rent
commences. Minimum monthly rent for any partial month shall be prorated at the
rate of 1/30th of the minimum monthly rent per day.
All rent shall be paid to Landlord at the address to which notices to Landlord
are given. Rent paid more than ten (10) days later shall be subject to a penalty
of six percent (6%) of the rent due.
ARTICLE 5. - TAXES AND UTILITIES
5.01 Taxes
- -----------
Landlord shall pay all taxes and assessments levied upon the property of which
the Premises represent a part of the total area. Tenant shall pay all taxes and
assessments levied against any personal property, trade fixtures, or other
improvements, on the Premises belonging to Tenant.
5.02 Utilities
- ---------------
Landlord agrees to furnish the Premises twenty-four (24) hours per day, seven
(7) days per week, subject to the regulations of the building wherein the
Premises are situated, with a reasonable amount of water and electricity
suitable for the intended use of the Premises, such heat as may be required for
the comfortable occupation of the Premises, janitor service, and elevator
service, which shall mean service either by non-attended automatic elevators or
elevators with attendants at the option of the Landlord, provided Tenant is not
in default hereunder. Landlord, however, shall not be liable for failure to
furnish any of the foregoing when such failure is caused by accidents or
conditions beyond the control of Landlord, or by labor disturbances or labor
disputes, of any character, whether resulting from or caused by acts of Landlord
or otherwise, or repairs, provided that in the case of repairs Landlord gives
Tenant reasonable advance written notice of interruption of such services; nor
shall Landlord be liable under any circumstances for loss of or injury to
property, however occurring, through or in connection with or incidental to the
furnishing of any of the foregoing, nor shall any such failure relieve the
Tenant from the duty to pay the full amount of rent herein reserved, or
constitute or be construed as a constructive or other eviction of Tenant. The
Premises are leased on a twenty-four (24) hours per day, seven (7) days per
week, basis.
ARTICLE 6. - IMPROVEMENTS AND REPAIRS
6.01 Fitting Up
- -----------------
Prior to the commencement of the term, Landlord shall clean carpet, replace
ceiling tiles as necessary, and paint Premises at its sole cost and expense.
6.02 Repairs
- -------------
Tenant shall take good care of the Premises and they shall not be altered,
repaired or changed without the written consent of Landlord. Unless otherwise
provided by written agreement, all alterations, improvements, and changes that
may be required shall be done either by or under the direction and at the cost
of Landlord and shall be the property of Landlord, and shall remain upon and be
surrendered with the Premises, excepting however that, at Landlord's option,
Tenant shall, at his expense, when surrendering the Premises, remove from the
Premises and the building all partitions, counters, railings, etc., installed in
the Premises by or at the cost of Tenant. All damages or injury done to the
Premises by Tenant, or by any person who may be in or upon the Premises with the
consent of Tenant shall be paid for by the Tenant.
6.03 Mechanic's Liens
- -----------------------
The Tenant shall not suffer or permit any mechanic's or materialman's liens to
be filed against the fee of the real property of which the Premises form a part
not against the Tenant's leasehold interest in the Premises. 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 so filed, Landlord, at its election, may pay and satisfy the same and,
in such event, the sums so paid by the Landlord, with interest at the rate of
ten percent (10%) per annum from the date of payment shall be deemed to be
additional rent due and payable by the Tenant at once without notice or demand.
ARTICLE 7. - DESTRUCTION AND CONDEMNATION
7.01 Destruction of Premises by Non- Insured Causes
- ----------------------------------------------------------
Should the building in which the Premises are located be substantially damaged
or destroyed by any cause which is not covered by insurance, such as but not
limited to earthquake, war, riot, and insurrection, Landlord may by written
notice given within ninety (90) days from the happening of such event, cancel
its Lease without obligation other than to refund any rent paid by Tenant but
not used; provided, however,that upon receipt by Tenant of such notice by
-------------------
Landlord of its election to terminate this Lease, Tenant shall have a period of
sixty (60) days to vacate the Premises so long as Tenant continues to pay the
full rental amount as provided by this Lease. The term "substantially" as used
herein shall be taken to mean any damage, the repair of which will cost in
excess of the sum of twenty-five percent (25%) of the original construction cost
of the building.
<PAGE>
7.02 Destruction of Premises by Fire
- -----------------------------------------
Should the building in which the Premises are located be substantially damaged
or destroyed by fire or other cause, either party may cancel this lease as
provided in this Section 7.02.
The term "substantially" as used herein shall be taken to mean any damage the
repair of which will cost in excess of the sum of fifty percent (50%) of the
original construction cost. Either party's notice to the other of its election
to cancel this Lease must be given within (90) days from the date of the fire,
or other insured cause; provided,however, that upon receipt by Tenant of such
---------
notice by Landlord of its election to terminate this Lease, Tenant shall have a
period of sixty (60) days to vacate the Premises so long as Tenant continues to
pay the full rental amount as provided by this Lease. If no notice of
cancellation is given by either party, the Lease shall remain in full force and
effect as written, and Landlord agrees to use due diligence to rebuild the
Premises to a similar condition as existed prior to the fire. If the Premises
are rendered wholly untenantable during the period of repair, the rent shall be
abated until the Premises are ready for occupancy. If the Premises are rendered
partially untenantable, the rent shall be apportioned according to the space
that is still usable by the Tenant during the course of reconstruction. If the
Landlord should elect to cancel the Lease under this cause, it shall refund any
unearned rent as of the date of the destruction. See Addendum.
7.03 Condemnation
- ------------------
If the whole or any part of the Premises shall be taken or condemned by an
competent authority under power of eminent domain for a public or quasi-public
use or purpose, then, at Landlord's option to be exercised by written notice to
be given by Landlord to Tenant, the term hereby granted shall cease from the
time when possession of the part so taken shall be required for such public or
quasi-public use or purpose, and without an apportionment of the award, Tenant
hereby assigning to Landlord all right and claim to the award. The current rent,
however, in such case shall be apportioned.
ARTICLE 8. - INDEMNITY
8.01 No Liabilily of Landlord
- ---------------------------------
Landlord shall not be liable to Tenant for any injury or damage that may result
to any person or property by or from any cause whatsoever, and without limiting
the generality of the foregoing, whether caused by water leakage or any
character from the room, walls, basement, or other portion of the Premises, or
caused by gas, fire, oil, electricity, or any cause whatsoever, in on or about
the Premises or any apart thereof.
8.02 Indemnification of Landlord
- -----------------------------------
Tenant and Landlord agrees to hold each other harmless from and defend against
any and all claims or liability for any injury or damage to any person or
property whatsoever, (1) occurring in, on or about the Premises or any part
thereof: and (2) occurring in, on or about any facilities (including, without
prejudice to the generality of the term "facilities," elevators, stairways,
passageways, or hallways) the use of which Tenant may have in conjunction with
other tenants of the building, when such injury or damage shall be caused in
part of in whole by the act, negligence or fault of, or omission of any duty
with respect to the same by Tenant, his agents, servants, or employees.
8.03 Liabilily Insurance Provided by Tenant
- ------------------------------------------------
Liability Insurance in the amount of One Million Dollars ($1,000,000.00) is to
be provided by Tenant. Landlord should be named as additional insured and
certificate of the policy should be delivered to the Landlord.
ARTICLE 9 - DEFAULT
9.01 Acts Constituting a Default.
- -------------------------------------
Any and all of the following actions shall, upon notice by Landlord to Tenant
and following expiration of a reasonable period within which Tenant may cure
such default, constitute a default of this Lease:
1. Use of the Premises for any purpose other than as authorized in this
Lease; or
2. Other sums owing when due; or
3. Abandonment or vacation of Tenant from the Premises; or
4. Assignment of the Premises by Tenant, either voluntary or by operation of
law, whether by judgment, executions, death, or any other means,
without the consent of Landlord; or
5. The filing by Tenant or any other person of a voluntary or involuntary
petition in bankruptcy or an arrangement by or against Tenant; the
adjudication of Tenant as a bankrupt or insolvent; the appointment of a
receiver appointed at the instance or request of Landlord; the general
or any other assignment by Tenant for the benefit of this creditors; or
6. A default in the performance of any terms, covenants, and conditions
herein contained; or
7. The inability of Tenant to perform any of the terms, covenants, or
conditions herein by him to be kept or performed.
9.02 Remedies Upon Default
- -----------------------------
In the event of a default of this Lease, and in addition to all other rights and
remedies Landlord may have at law, Landlord shall have the option to do any or
all of the following:
1. Re-entry - Immediately re-enter and remove all persons and property from the
Premises, storing said personal property in a public warehouse or elsewhere at
the cost of, and for the account of, the Tenant. In such instance, the Lease
will be terminated, and Landlord will be entitled otherwise to recover all
damages allowable under the law or this Lease.
<PAGE>
2. Collection of Rent -- As it becomes due hereunder, or to enforce, by suit or
otherwise, any other term or provision hereof on the part Tenant required to be
kept or perform, it being specifically agreed that all unpaid sums shall bear
interest at the highest legal rate from the due date thereof until paid.
3. Termination of Lease -- Termination of this Lease, in which even Tenant
agrees to immediately surrender possessions of the Premises, and to pay to
Landlord, in addition to any other remedy Landlord may have, all damages
Landlord may incur by reason of his default, including the cost of recovering
the Premises.
4. Measure of Damages -- The damages Landlord may recover include 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 from the
same period that Tenant proves could be reasonably avoided.
9.03 Removal of Property
- ---- ---------------------
INTENTIONALLY DELETED.
9.04 Waiver of Damages
- ---- -------------------
INTENTIONALLY DELETED.
9.05 Waiver of Breach
- ---- ------------------
Landlord's failure to take full advantage of any default or breach of covenant
the part of Tenant shall not be , or construed as a waiver thereof, nor shall
any custom or practice which may grow up between the parties in the course of
administrating this instrument be construed to waive or to lessen the right of
Landlord to insist upon the performance by Tenant of any tern, covenant, or
condition hereof, or to exercise any rights given him on account of any such
default. A waiver of a particular breach, or default, shall not be deemed to be
a waiver of the same or any other subsequent breach or default. The acceptance
of rent hereunder shall not be, or be construed to be, a waiver of any term,
covenant, or condition of this Lease.
9.06 Demand for Rent
- -----------------------
In the event that Tenant shall be in default in the payment of any rents
provided for in this Lease, Tenant waives the making by Landlord of any demand
for rent prior to the commencement of any action in ejectment or to obtain
possession of the Premises.
9.07 Cumulative Remedies
- --------------------------
The foregoing remedies of Landlord shall not be exclusive, but shall be
cumulative and in addition to all remedies now or hereafter allowed by law or
elsewhere provided.
9.08 Landlord Curing Default
- -------------------------------
Upon fifteen (15) days prior written notice to the Tenant by the Landlord, or a
time period during which Tenant could reasonably be expected to cure the default
in question after such notice, it is agreed that the Landlord may cure any
default by the Tenant hereunder and, if necessary, may enter upon the Premises
for such purpose, and in such event the cost thereof to Landlord shall be deemed
additional rent payable by the Tenant, which shall become immediately due and
payable. Furthermore, Landlord has the right to act immediately if Landlord
believes it necessary.
ARTICLE 10 - INSPECTION AND NOTICES
10. 1 Inspection
- ------------------
Tenant will permit landlord with reasonable notice provided it is not an
emergency and its agents to enter into and upon the Premises at all reasonable
times for the purpose of inspecting the same, or for the purpose of protecting
owners reversions, or to make alterations or additions to the Premises or to any
other portion of the building in which the Premises are situated, or for
maintaining any service provided by Landlord to Tenant hereunder, including
window cleaning and janitor service if provided, without any rebate of rent to
Tenant for any loss of occupancy or quiet enjoyment of the Premises, or damage,
injury, or inconvenience thereby occasioned, and will permit Landlord at any
time within thirty (30) days prior to the expiration of this Lease to bring upon
the Premises for purposed of inspection of display, prospective tenants hereof.
10.2 Notices
- -------------
Any notice, demand or communication under, or in connection with, this lease may
be served upon Landlord by personal service, or by mailing the same by
registered mail, and/or certified mail in the United States Post Office,
postage prepaid, and return receipt requested, and directed to Landlord at the
below stated address and may likewise be served on Tenant by personal
service or by so mailing the same addressed to Tenant at the below stated
address or the Premises. Either Landlord or Tenant may change such address by
notifying the other party in writing as to such new address as Tenant or
Landlord may desire used and which address shall continue as the address until
further written notice.
LANDLORD NOTICES: TENANT NOTICES:
Ingomar Properties, LLC Virtual Source, Inc.
DBA: Ventura Professional Center 5740 Ralston, Suite A
5700 Ralston Street, Suite 101 Ventura, California 93003
Ventura, CA 93003
<PAGE>
ARTICLE 11. - GENERAL PROVISIONS
11. 01 Covenants
- ------------------
It is mutually agreed that the letting hereunder is made upon and subject to the
terms, covenants, and conditions of this Lease and that Tenant covenants as a
material part of the consideration for this Lease, to keep and perform each and
all of said terms, covenants, and conditions by him be kept or performed, and
that this Lease is made upon the condition of such performance.
11.02 Provisions Deemed Covenants and Conditions
- -----------------------------------------------------
The parties hereto agree that all the material provisions hereof are to be
construed as covenants and conditions as through the words importing such
covenants and conditions were used in each instance and that all of the
provisions hereof shall bind and inure to the benefits of the parties hereto and
their respective heirs, legal representatives, successors, and assigns.
11.03 Time of Essence
- ------------------------
Time is of the essence in the performance of each provision of this Lease.
11.04 Cumulative Remedies
- ---------------------------
The specified remedies to which Landlord or Tenant may resort under the terms of
this Lease are cumulative and not intended to be exclusive of any other remedies
afforded by Law. The waiver of the performance or any covenant, term, or
condition of this Lease by Landlord or Tenant shall not be construed as a waiver
of any subsequent breach of the same covenant, term, or condition.
11.05 Attorney's Fees
- -----------------------
Should either part hereto institute any legal action to enforce any provision
hereof, the prevailing party in such action shall be entitled to receive from
the losing party such amount as the court may adjudge to be reasonable
attorney's fees.
11.06 Interest on Money Due
- -------------------------------
Any sum accruing to Landlord or Tenant under the provisions of this Lease which
shall not be paid when due shall be interest at the rate of eighteen percent
(18%) per annum, or at the maximum rate permitted by law, from the date the
original same was due.
11.07 Invalidity
- -----------------
If any term, covenant, condition, or provision of this Lease is held by a court
of competent jurisdiction to be invalid, void, or enforceable, the remainder of
the provisions hereof shall remain in full force and effect and shall in no way
be affected, impaired, or invalidated thereby.
11.08 Agency
- -------------
Nothing contained in this Lease shall be deemed or construed by the parties
hereto or by a third person or create the relationship of principal and agent or
of partnership or of joint venture or of any other association other than
Landlord and Tenant.
11.09 Extensions
- -----------------
All references to the term of this Lease shall include any extensions of such
term.
11. 10 Captions
- -----------------
The captions of articles of this Lease are for reference only and are not to be
construed in any way as a part of this Lease.
11. 11 Binding Effect, Counterparts
- ---------------------------------------
This Lease shall not be binding and in effect until a counterpart hereof has
been executed and delivered by the parties each to the other.
11. 12 Execution
- ------------------
The parties have executed this Lease at the place and on the dates specified
immediately after their respective signatures.
Tenant:
LANDLORD:INGONIAR PROPERTIES, LLC
Signature: /s/ Fred S. Griffith Date: 10/27/98
----------------------- ---------------
FRED S. GRIFFITH
Senior Vice president, Real Estate
Tenant: VIRTUAL SOURCE, INC.
Signature:
ROBERT C. MCSHIRLEY
Senior Vice President, Real Estate
<PAGE>
EXHIBIT B
Rules & Regulations
Directory
- ---------
The bulletin board or directory will be provided exclusively for the display of
the name and location of Tenant only; and Landlord reserves the right to exclude
any other names therefrom, and also to charge Tenant for each and every name, in
addition to the name of Tenant, placed by it upon such bulletin board of
directory.
Landlord, at its expense, shall provide an identification sign for the Tenant to
be placed in the lobby of the first floor and an additional identification sign
in the lobby of the floor on which the Premises are located. Tenant shall
purchase a matching sign to be used to identify the Premises, the cost of which
is estimated to be Thirty Dollars ($30.00).
Locks and Keys
- ----------------
No additional locks shall be placed upon any doors of the Premises, and Tenant
agrees not to have any duplicate keys made without the consent of Landlord. If
more than two (2)keys for any door lock are desired, the additional number shall
-------
be paid for by Tenant. Upon termination of this Lease Tenant shall surrender all
keys.
Wiring
- ------
When wiring of any kind is introduced it must be connected as directed by
Landlord, and no boring or cutting for wires will be allowed except with the
mutual agreement. The location of telephones, call boxes, and other office
equipment affixed to the Premises shall be prescribed by mutual agreement.
Plumbing
- --------
The washbowls, water closets, and urinals shall not be used for any purpose
other than those for which they were constructed.
Halls and Stairways
- ---------------------
The entries, passages, stairways, and elevators shall not be obstructed by
Tenant, or used for any other purpose than ingress or egress to and from their
respective offices. Tenant shall not bring into or keep within building any
animal or vehicle.
Obstructing Light
- ------------------
Tenant shall not allow anything to be placed against or near the glass in the
partitions or in the doors between the Premises and in the halls or corridors.
The doors between the Premises and the corridors of the building shall at all
times, except when in actual use for ingress or egress, be kept closed.
Movina Furniture
- -----------------
No furniture, freight, or equipment of any kind shall be brought into or removed
from the building without the consent of Landlord or Landlord's agent; and all
moving of same, into or out of building, by Tenants, shall be done at such times
and in such manner as Landlord shall designate. Landlord shall have the right to
prescribe the weight, size, and position of all safes and other heavy property
brought into the building, and also the times and manner of moving the loss or
damage to any such safe or property from any cause; but all damage done to the
building by moving or maintaining any such safe or property shall be repaired at
the expense of Tenant.
Janitor Service
- ----------------
Tenant shall not employ any person or persons other than the janitor of Landlord
for the purpose of cleaning the Premises, unless otherwise agreed. Landlord
shall be in no way responsible for any loss of or damage to Property from the
Premises, however occurring.
Violations By Other Tenant
- -----------------------------
Landlord is not responsible to any Tenant for the nonobservance or violations of
the rules and regulations by any other Tenant.
Rooms Used In Common
- -----------------------
Rooms used in common by Tenants shall be subject to such regulations as are
posted therein.
Landlord's Office And Employees
- ----------------------------------
The requirements of Tenant will be attended to only upon application at the
office of the building. Employees of Landlord shall not perform any work or do
anything outside of their regular duties unless under special instructions from
the office, and no employees will admit any person (e.g. Tenant or otherwise) to
any office without specific instructions from the office of the building.
Removal Of Persons
- --------------------
Landlord reserves the right to exclude or expel from the building any person
who, in the judgment of Landlord, is intoxicated, or under the influence of
liquor or drugs, or who shall in any manner do any act in violation of any of
the rules and regulations of the building.
Closing Precautions
- --------------------
Tenant shall see that the windows, transoms, and doors of the Premises are
closed and securely locked before leaving the building and must observe strict
care not to leave windows open when it rains and Tenant shall exercise
extraordinary care and caution that all water faucets or water apparatus are
entirely shut off before Tenant or Tenant's employees leave the building and
that all electricity, gas, or air shall likewise be carefully shut off when not
in use.
Locking of Entrance Doors
- ----------------------------
Landlord reserves the right to close and keep locked all entrance and exit doors
of the building during such hours as Landlord may deem to be advisable for the
adequate protection of the property; provided, however, that Tenant shall be
-------- --------
provided with keys to allow Tenant access twenty-four (24) hours per day, seven
(7) days per week.
Entry After Closing
- ---------------------
All Tenants, their employees, or other persons entering or leaving the building
at any time when it is so locked may be required to sign the building register
when so doing, and the watchman in charge may refuse to admit to the building,
while it is so locked, Tenant or any of Tenant's employees, or any other person,
without a pass previously arranged, or other satisfactory identification showing
his right or access to the building at such time. Landlord assumes no
responsibility and shall not be liable for any damage resulting from any error
in regard to any such pass or identification, or from the admission of any
unauthorized person to the building.
Carpeting
- ---------
Carpeting shall be protected from excessive wear caused by desks, chairs or
other items by the use of chair mats or other suitable devices.
<PAGE>
EXHIBIT "'C"
Old Lease
THIS PAGE INTENTIONALLY LEFT BLANK
OFFICE LEASE
THIS LEASE is entered into between INGOMAR LIMITED PARTNERSHIP, hereinafter
referred to as "Landlord", and Virtual
Source____________________________________________________hereinafter referred
to as "Tenant".
ARTICLE 1. PREMISES
1.01 PREMISES.
Landlord hereby leases to Tenant, and Tenant hereby hires and takes from
Landlord, for the term, at the rental and upon the conditions hereinafter set
forth, those certain Premises, hereinafter referred to as the "Premises",
described as follows:
An area comprising approximately 3374 square feet on the third floor, as
outlined in red in Exhibit A attached hereto and hereby made a part hereof, of
the Ventura Professional Center, located at 5720 Ralston Street, Suite 310 and
Suite 312, Ventura, California. The Premises shall also include a nonexclusive
right of ingress and egress across the land on which the building is located and
through the stairs and common hallways of the building and parking areas.
Premises shall include all fixtures and equipment to be installed by Landlord as
herein provided.
1.02 QUIET ENJOYMENT.
The Landlord covenants and agrees that the Tenant on paying the rent and
performing the covenants contained herein shall and may peaceably and quietly
hold and enjoy the Premises for the term of the Lease.
1.03 SUBORDINATION.
This Lease shall be subordinate and subject at all times to any mortgage or deed
of trust covering the Premises or which at any time hereafter shall be made, and
to all advances made, or hereafter to be made, upon the security hereof.
1.04 PARKING.
The tenant shall have the right to unlimited parking in common with others in
the parking area adjoining the building in which the Premises are located until
such time that in the discretion of Landlord such use would dictate assignment
of space.
ARTICLE 2. USE
2.01 PERMITTED USE.
The Premises are to be used solely for office purposes and for no other purpose
without the written consent of Landlord.
2.02 COMPLIANCE WITH REGULATIONS OF GOVERNMENTAL AUTHORITIES.
Tenant agrees that it will comply with all laws, statutes, rules, orders,
ordinances and/or regulations issued, or in force (except those requiring
structural alteration not caused by acts of the Tenant), applicable to the
Premises, or the business or profession of Tenant, of the City, County, State,
and Federal governments, and of the California Board of Fire Underwriters and of
the Board of Equalization of the State of California.
2.03 COMPLIANCE WITH REGULATIONS OF INSURERS.
Tenant agrees at Tenant's sole cost and expense to comply with any and all
requirements of any insurance organization or company so that reasonable public
liability insurance and fire insurance can be maintained covering the building
and appurtenances.
2.04 PROHIBITED USE.
Tenant will not, without the written consent of the Landlord, either use any
apparatus or device in connection with the Premises which will in any way
increase the amount of electricity, water, or climate control usually furnished
or supplied to the Premises, device for the purpose of using electric current,
water or climate control.
2.05 ASSIGNMENT AND SUBLETTING.
Tenant shall not assign, mortgage, or hypothecate this Lease, or any interest
therein, or permit the use of the Premises by any person or persons other than
that Tenant or sublet the Premises, or any part thereof, without the written
consent of Landlord. Consent to any such assignment or subletting shall not
operate as a waiver of the necessity for a consent to any subsequent assignment
or subletting, and the terms of such consent shall be binding upon any person
holding by, under, or through Tenant. Landlord's consent will not be
unreasonably withheld.
Any assignment or subletting without such consent shall be void, and shall, at
the option of Landlord, terminate this Lease. This Lease shall not, nor shall
any interest therein be assignable, as to the interest of Tenant, by operation
of law, without the written consent of Landlord. Landlord shall not unreasonably
withhold his written consent to the assignment by the Tenant of Tenant's
interest in the Lease, or the subletting of the Premises or any part thereof to
another person or company of the Premises or any part thereof to another person
or company of the same profession or business as Tenant in good professional
<PAGE>
standing, provided always that such assignment or subletting shall not overcrowd
the Premises or increase the expenses of Landlord and is not in conflict with
the better interests and welfare of the building. In the event that the Premises
are leased to more than one Tenant, this Lease shall automatically transfer to
the survivor or survivors, in the event of death of one Tenant.
2.06 SIGNS.
In order that signs will be harmonious the installations of all signs, whether
exterior or interior shall be~ subject to the prior approval of Landlord and any
applicable governmental authority.
2.07 RULES AND REGULATIONS.
Tenant agrees to observe faithfully, and comply strictly with, the rules and
regulations, attached to this Lease as Exhibit B and hereby made a part hereof,
and such other rules and regulations, promulgated from time to time by the
Landlord which shall be reasonable, as in the Landlord's judgment are necessary
for the safety, care, and cleanliness of the building or for the preservation of
good order therein. The Landlord shall not be liable to the Tenant for violation
of such rules and regulations by any other tenant, its servants, employees,
agents, visitors, or licensees.
ARTICLE 3. TERM
3.01 TERM.
The term of this Lease shall be for a period of Twelve (12) full calendar
months, plus the partial month, if any, immediately following commencement of
this Lease as provided below.
3.02 DELIVERY OF POSSESSION.
A. LIABILITY OF PARTIES.
In the event of the inability of Landlord to deliver possession of the Premises
at the time of the commencement of the term of this Lease, neither Landlord nor
its agents shall be liable for any damage caused thereby, nor shall this Lease
thereby become void or voidable, nor shall the term herein specified be in any
way extended, but in such event Tenant shall not be liable for any rent until
such time as Landlord can deliver possession.
B. OCCUPANCY.
The Premises shall be considered ready for occupancy, and the term of this Lease
shall commence, seven (7) working days after the date that Landlord has notified
Tenant in writing that Landlord has substantially completed all of the work to
be done by Landlord pursuant to 6.01.
3.03 SURRENDER OF PREMISES.
A. ON TERMINATION OF TENANCY.
Tenant agrees to surrender the Premises at the termination of the tenancy herein
created, in the same condition as herein agreed they have been received,
reasonable use and wear thereof and damage by the act of God or by the elements
excepted.
3.04 HOLDING OVER
If Tenant holds possession of the Premises after the term of this Lease, Tenant
shall, at the option of the Landlord, to be exercised by Landlord's given
written notice to Tenant and not otherwise, become a Tenant from month to month
upon the terms and conditions herein specified at a monthly rental equal to that
paid by Tenant for the last month of the term of this Lease, payable in advance
in lawful money, and shall continue to be such Tenant until thirty (30) days
after Tenant shall have given to Landlord or Landlord shall have given to Tenant
a written notice of intention to terminate such monthly tenancy. Unless Landlord
shall exercise the option hereby given him. Tenant shall be a tenant at
sufferance only, whether or not Landlord shall accept any rent from Tenant while
Tenant is so holding over.
3.05 QUITCLAIM.
Upon the expiration or earlier termination of this Lease, Tenant agrees to
deliver a quitclaim deed in favor of Landlord, if Landlord requests release of
its interest in the Premises.
3.06 OPERATING EXPENSE ADJUSTMENTS.
Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent,
Lessee's Share, as hereinafter defined, of the amount by which all Operating
Expenses, as hereinafter defined, for each Comparison Year exceeds the amount of
all Operating Expenses for the Base Year, such excess being hereinafter referred
to as the "Operating Expense Increase", in accordance with the following
provisions.
A. "Lessee's Share" is defined, for purposes of this Lease, as the percentage of
.96 which percentage has been determined by dividing the approximate square
footage of the Premises by the total approximate square footage of the rentable
space contained in the Office Building Project. It is understood and agreed that
the square footage figures are size of the Premises or a change in the space
available for lease in the Office Building Project.
B. "Base Year" is defined as the calendar year in which the Lease term
commences.
<PAGE>
C. "Comparison Year" is defined as each calendar year during the term of this
Lease subsequent to the Base Year; provided, however, Lessee shall have no
obligation to pay a share of the Operating Expense Increase applicable to the
first twelve (12) months of the Lease Term (other than such as are mandated by a
governmental authority, as to which governmental authority, as to which
government mandated expenses Lessee shall pay Lessee's Share, notwithstanding
they occur during the first twelve (12) months). Lessee's Share of the Operating
Expenses Increase for the first and last Comparison Year of the Lease Term shall
be prorated according to that portion of such Comparison Year as to which Lessee
is responsible for a share of such increase.
D. "Operating Expenses" is defined, for purposes of this Lease to include
all costs, if any, incurred by Lessor in the exercise of its reasonable
discretion.
ARTICLE 4. RENT
4.01 MINIMUM MONTHLY RENT. SEE ADENDUM
Tenant shall pay to Landlord as minimum monthly rent, without deduction,
set-off, prior notice, or demand, the sum of $2,625.00 which sum is subject to
possible adjustment as provided in paragraph 4.03 per month in advance on the
first day of each month, commencing 10/15/97 or on the date when Tenant takes
possession of the Premises, whichever date is earlier, and continuing during the
term.
Minimum monthly rent for the first month or portion of it shall be paid on the
day
that Tenant's obligation to pay minimum monthly rent commences. Minimum
monthly rent for any partial month shall be prorated at the rate of 1/30th of
the
minimum monthly rent per day.
All rent shall be paid to Landlord at the address to which notices to Landlord
are given. Rent paid more than ten (10) days later shall be subject to a penalty
of six percent (6%) of the rent due.
4.02 DEPOSITS.
As a guarantee to Landlord of the faithful performance of the terms and
conditions herein contained, provided that upon fulfillment of all said
conditions the deposit shall be returned to Tenant at the end of the term of
this Lease.
4.03 PERIODIC COST OF LIVING ADJUSTMENT.
The minimum monthly rent provided for at paragraph 4.01 shall be subject to
adjustment at the commencement of the second year of the term and each year
thereafter ("the adjustment date") as follows:
The base for computing the adjustment is the Consumer Price Index of the Bureau
of Labor Statistics of the U.S Department of Labor, Los Angeles - Long Beach,
All Items - Series A (1967 = 100), 1978 Revision, Urban Wage Earners and
Clerical Workers, which is published for the month nearest the date of the
commencement of the term ("Beginning Index"). If the Index published nearest the
adjustment date ("Extension Index") has increased over the Beginning Index, the
minimum monthly rent for the following year increased over the Beginning Index,
the minimum monthly rent for the following year (until the next rent adjustment)
shall be set by multiplying the minimum monthly rent set forth in Paragraph 4.01
by a fraction, the numerator of which is the Extension Index and the denominator
of which is the Beginning Index. In no case shall the minimum monthly rent be
less than the minimum monthly rent set forth in Paragraph 4.01. On adjustment of
the minimum monthly rent as provided in this Lease, the parties shall
immediately execute an amendment of the Lease stating the new minimum monthly
rent.
If the Index is changed so that the base year differs from that used as of the
date immediately preceding the month in which the term commences, the Index
shall be converted in accordance with the conversion factor published by the
United States Department of Labor, Bureau of Labor Statistics. If the Index is
discontinued or revised during the term, such other government index or
computation with which it is replaced shall be used in order to obtain
substantially the same result as would be obtained if the Index had not been
discontinued or revised.
ARTICLE 5. TAXES AND UTILITIES
5.01 TAXES.
Landlord shall pay all taxes and assessments levied upon the property of which
the Premises represent a part of the total area. Tenant shall pay all taxes and
assessments levied against any personal property, trade fixtures, or other
improvements, on the Premises belonging to Tenant.
5.02 UTILITIES.
Landlord agrees to furnish the Premises during reasonable hours, subject to the
regulations of the building wherein the Premises are situated, with a reasonable
amount of water and electricity suitable for the intended use of the Premises,
such heat as may be required for the comfortable occupation of the Premises,
janitor service, and elevator service, which shall mean service either by
non-attended automatic elevators or elevators with attendants at the option of
the Landlord, provided Tenant is not in default hereunder. Landlord, however,
shall not be liable for failure to furnish any of the foregoing when such
failure is caused by accidents or conditions beyond the control of Landlord, or
by repairs, labor disturbances or labor disputes, of any character, whether
resulting from or caused by acts of Landlord or otherwise; nor shall Landlord be
liable under any circumstances for loss of or injury to property, however
occurring, through or in connection with or incidental to the furnishing of any
of the foregoing, nor shall any such failure relieve the Tenant from the duty to
pay the full amount of rent herein reserved, or constitute or be construed as a
constructive or other eviction of Tenant. This building is leased on a normal
business hours basis defined as 7:00 a.m. to 6:00 p.m. Hours not within this
time frame are not normal business hours.
<PAGE>
ARTICLE 6. IMPROVEMENTS AND REPAIRS
6.01 FITTING UP.
Prior to the commencement of the term, Landlord shall clean carpet, replaces
ceiling tiles as necessary, and paint Suite 310 at its sole cost and expense.
6.02 REPAIRS.
Tenant has examined and inspected and knows the condition of the Premises and
every part thereof and has received the same in good order and repair and
accepts the same in their present condition. Tenant shall take good care of the
Premises and they shall not be altered, repaired or changed without the written
consent of Landlord. Unless otherwise provided by written agreement, all
alterations, improvements, and changes that may be required shall be done either
by or under the direction of Landlord, but at the cost of Tenant and shall be
the property of Landlord, and shall remain upon and be surrendered with the
Premises, excepting however that, at Landlord's option, Tenant shall, at his
expense, when surrendering the Premises, remove from the Premises and the
building all partitions, counters, railings, etc., installed in the Premises by
or at the cost of Tenant. All damages or injury done to the Premises by Tenant,
or by any person who may be in or upon the Premises with the consent of Tenant
shall be paid for by the Tenant.
6.03 MECHANIC'S LIENS.
The Tenant shall not suffer or permit any mechanic's or materialman's liens to
be filed against the fee of the real property of which the Premises form a part
not against the Tenant's leasehold interest in the Premises. 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 so filed, Landlord, at its election, may pay and satisfy the same and,
in such event, the sums so paid-by the Landlord, with interest at the rate of
ten percent (10%) per annum from the date of payment shall be deemed to be
additional rent due and payable by the Tenant at once without notice or demand.
ARTICLE 7. DESTRUCTION AND CONDEMNATION
7.01 DESTRUCTION OF PREMISES BY NON-INSURED CAUSES.
Should the building in which the Premises are located be substantially damaged
or destroyed by any cause which is not covered by insurance, such.as but not
limited to earthquake, war, riot, and insurrection, Landlord may by written
notice given within ninety (90) days from the happening of such event, cancel
its Lease without obligation other than to refund any rent paid by Tenant but
not used. The term " substantially" as used herein shall be taken to mean any
damage, the repair of which will cost in excess of the sum of twenty-five
percent (25%) of the original construction cost of the building.
7.02 DESTRUCTION OF PREMISES BY FIRE.
Should the building in which the Premises are located be substantially damaged
or destroyed by fire or other insured cause, this Lease may be canceled as
mutually agreed upon.
The term "substantially" as used herein shall be taken to mean any damage the
repair of which will cost in excess of the sum of fifty percent (50%) of the
original construction cost. The Landlord's notice of cancellation must be given
to Tenant within ninety (90) days from the date of the fire, or other insured
cause. If no notice of cancellation is given by Landlord, the lease shall remain
in full force and effect as written, and Landlord agrees to use due diligence to
rebuild the Premises to a similar condition as existed prior to the fire. If the
Premises are rendered wholly untenantable during the period of repair, the rent
shall be abated until the Premises are ready for occupancy. If the Premises are
rendered partially untenantable, the rent shall be apportioned according to the
space that is still usable by the Tenant during the course of reconstruction. If
the Landlord should elect to cancel the Lease under this cause, it shall refund
any unearned rent as of the date of the destruction.
See Addendum.
7.03 CONDEMNATION.
If the whole or any part of the Premises shall be taken or condemned by an
competent authority under power of eminent domain for a public or quasi-public
use or purpose, then, at Landlord's option to be exercised by written notice to
be given by Landlord to Tenant, the term hereby granted shall cease from the
time when possession of the part so taken shall be required for such public or
quasi-public use or purpose, and without an apportionment of the award, Tenant
hereby assigning to Landlord all right and claim to the award. The current rent,
however, in such case shall be apportioned.
ARTICLE 8. INDEMNITY
8.01 NO LIABILITY OF LANDLORD.
Landlord shall not be liable to Tenant for an injury or damage that may result
to any person or property by or from any cause whatsoever, and without limiting
the generality of the foregoing, whether caused by water leakage or any
character from the room, walls, basement, or other portion of the Premises, or
caused by gas, fire, oil, electricity, or any cause whatsoever, in on or about
the Premises or any part thereof.
8.02 INDEMNIFICATION OF LANDLORD.
Tenant and Landlord agrees to hold each other harmless from and defend against
any and all claims or liability for any injury or damage to any person or
property whatsoever, (1) occurring in, on or about the Premises or any part
thereof; and (2) occurring in, on or about any facilities (including, without
prejudice to the generality of the term "facilities," elevators, stairways,
<PAGE>
passageways, or hallways) the use of which Tenant may have in conjunction with
other tenants of the building, when such injury or damage shall be caused in
part of in whole by the act, negligence or fault of, or omission of any duty
with respect to the same by Tenant, his agents, servants, or employees.
8.03 LIABILITY INSURANCE PROVIDED BY TENANT.
Liability Insurance in the amount of One Million Dollars ($1,000,000.00) is to
be provided by Tenant. Landlord should be named as additional insured and
certificate of the policy should be delivered to the Landlord.
ARTICLE 9. DEFAULT
9.01 ACTS CONSTITUTING A DEFAULT.
Any and all of the following actions shall constitute a default of this Lease:
A. Use of the Premises for any purpose other than as authorized in this
Lease; or
B. Other sums owing when due; or
C. Abandonment or vacation of Tenant from the Premises; or
D. Assignment of the Premises by Tenant, either voluntary or by operation of
law, whether by judgment, executions, death, or any other means, without the
consent of Landlord; or
E. The filing by Tenant or any other person of a voluntary or involuntary
petition in bankruptcy or an arrangement by or against Tenant; the adjudication
of Tenant as a bankrupt or insolvent; the appointment of a receiver appointed at
the instance or request of Landlord; the general or any other assignment by
Tenant for the benefit of this creditors; or
F. A default in the performance of any of the terms, covenants, and
conditions
herein contained; or
G. The inability of Tenant to perform any of the terms, covenants, or
conditions
herein by him to be kept or performed. See Addendum
9.02 REMEDIES UPON DEFAULT.
In the event of a default of this Lease, and in addition to all other rights and
remedies Landlord may have at law, Landlord shall have the option to do any or
all of the following:
A. REENTRY.
Immediately reenter and remove all persons and property from the Premises,
storing said personal property in a public warehouse or elsewhere at the cost
of, and for the account of, the Tenant. In such instance, the Lease will be
terminated, and Landlord will be entitled otherwise to recover all damages
allowable under the law or this Lease.
B. COLLECTION OF RENT.
As it becomes due hereunder, or to enforce, by suit or otherwise, any other term
or provision hereof on the part Tenant required to be kept or perform, it being
specifically agreed that all unpaid sums shall bear interest at the highest
legal rate from the due date thereof until paid.
C. TERMINATION OF LEASE.
Terminate this Lease, in which even Tenant agrees to immediately surrender
possession of the Premises, and to pay to Landlord, in addition to any other
remedy Landlord may have, all damages Landlord may incur by reason of his
default, including the cost of recovering the Premises.
D. MEASURE OF DAMAGES.
The damages Landlord may recover include 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 from the same period that Tenant
proves could be reasonably avoided.
9.05 WAIVER OF BREACH.
Landlord's failure to take advantage of any default or breach of covenant on the
part of Tenant shall not be, or be construed as a waiver thereof, nor shall any
custom or practice which may grow up between the parties in the course of
administrating this instrument be construed to waive or to lessen the right of
Landlord to insist upon the performance by Tenant of any term, covenant, or
condition hereof, or to exercise any rights given him on account of any such
default. A waiver of a particular breach, or default, shall not be deemed to be
a waiver of the same or any other subsequent breach or default. The acceptance
of rent hereunder shall not be, or be construed to be, a waiver of any term,
covenant, or condition of this Lease.
9.06 DEMAND FOR RENT.
In the event that Tenant shall be in default in the payment of any rents
provided for in this Lease, Tenant waives the making by Landlord of any demand
for rent prior to the commencement of any action in ejectment or to obtain
possession of the Premises.
<PAGE>
9.07 CUMULATIVE REMEDIES.
The foregoing remedies of Landlord shall not be exclusive, but shall be
cumulative and in addition to all remedies now or hereafter allowed by law or
elsewhere provided.
9.08 LANDLORD CURING DEFAULT.
Upon five (5) days prior written notice to the Tenant by the Landlord, it is
agreed that the Landlord may cure any default by the Tenant hereunder and, if
necessary, may enter upon the Premises for such purpose, and in such event the
cost thereof to Landlord shall be deemed additional rent payable by the Tenant,
which shall become immediately due and payable. Furthermore, Landlord has the
right to act immediately if Landlord believes it necessary.
ARTICLE 10. INSPECTION AND NOTICES
10. 1 INSPECTION.
Tenant will permit Landlord with reasonable notice provided it is not an
emergency and its agents to enter into and upon the Premises at all reasonable
times for the purpose of inspecting the same, or for the purpose of protecting
owners reversions, or to make alterations or additions to the Premises or to any
other portion of the building in which the Premises are situated, or for
maintaining any service provided by Landlord to Tenant hereunder, including
window cleaning and janitor service, without any rebate of rent to Tenant for
any loss of occupancy or quiet enjoyment of the Premises, or damage, injury, or
inconvenience thereby occasioned, and will permit Landlord at any time within
thirty (30) days prior to the expiration of this Lease to bring upon the
Premises for purposed of inspection of display, prospective tenants hereof.
10.2 NOTICES.
Any notice, demand or communication under, or in connection with, this lease may
be served upon Landlord by personal service, or by mailing the same by
registered mail, and/or certified mail in the United States Post Office, postage
prepaid, and return receipt requested, and directed to Landlord at:
CDE Property Management
(dba Ventura Professional Center)
302 N. Lantana Street, Suite 41
Camarillo, CA 93010, - - and may likewise be served on Tenant by personal
service or by so mailing the same addressed to Tenant at:
5720 Ralston Suite 312
- -------------------------
Ventura Ca. 93003
- -------------------
or the Premises. Either Landlord or Tenant may change such address by notifying
the other party in writing as to such new address as Tenant or Landlord may
desire used and which address shall continue as the address until further
written notice.
ARTICLE 11. GENERAL PROVISIONS
11.01 COVENANTS.
It is mutually agreed that the letting hereunder is made upon and subject to the
terms, covenants, and conditions of this Lease and that Tenant covenants as a
material part of the consideration for this Lease, to keep and perform each and
all of said terms, covenants, and conditions by him be kept or performed, and
that this Lease is made upon the condition of such performance.
11.02 PROVISIONS DEEMED COVENANTS AND CONDITIONS.
The parties hereto agree that all the provisions hereof are to be construed as
covenants and conditions as through the words importing such covenants and
conditions were used in each instance and that all of the provisions hereof
shall bind and inure to the benefits of the parties hereto and their respective
heirs, legal representatives, successors, and assigns.
11.03 TIME OF ESSENCE.
Time is of the essence in the performance of each provision of this Lease.
11.04 CUMULATIVE REMEDIES.
The specified remedies to which Landlord or Tenant may resort under the terms of
this Lease are cumulative and not intended to be exclusive of any other remedies
afforded by Law. The waiver of the performance or any covenant, term, or
condition of this Lease by Landlord or Tenant shall not be construed as a waiver
of any subsequent breach of the same covenant, term, or condition.
11.05 ATTORNEY'S FEES.
Should either part hereto institute any legal action to enforce any provision
hereof, the prevailing party in such action shall be entitled to receive from
the losing party such amount as the court may adjudge to be reasonable
attorney's fees.
11.06 INTEREST ON MONEY DUE.
Any sum accruing to Landlord or Tenant under the provisions of this Lease which
shall not be paid when due shall be interest at the rate of 18% per annum, or at
the maximum rate permitted by law, from the date the original same was due.
<PAGE>
11.07 INVALIDITY.
If any term, covenant, condition, or provision of this Lease is held by a court
of competent jurisdiction to be invalid, void, or enforceable, the remainder of
the provisions hereof shall remain in full force and effect and shall in no way
be affected, impaired, or invalidated thereby.
11.08 AGENCY.
Nothing contained in this Lease shall be deemed or construed by the parties
hereto or by an third person or create the relationship of principal and agent
or of partnership or of joint venture or of any other association other than
Landlord and Tenant.
11.09 EXTENSIONS.
All references to the term of this Lease shall include any extensions of such
term.
11.10 CAPTIONS.
The captions of articles of this Lease are for reference only and are not to be
construed in any way as a part of this Lease.
11.11 BINDING EFFECT; COUNTERPARTS.
This Lease shall not be binding and in effect until a counterpart hereof has
been executed and delivered by the parties each to the other.
11.12 EXECUTION.
The parties have executed this Lease at the place and on the dates specified
immediately above their respective signatures.
TENANT:
BY: /s/ Robert C. McShirley
ROBERT C. MCSHIRLEY
LANDLORD
BY: /s/ Fred S. Griffith
FRED S. GRIFFITH
<PAGE>
EXHIBIT "B"
RULES & REGULATIONS
-------------------
DIRECTORY
---------
The bulletin board or directory will be provided exclusively for the display of
the name and location of Tenant only; and Landlord reserves the right to exclude
any other names therefrom, and also to charge Tenant for each and every name, in
addition to the name of Tenant, placed by it upon such bulletin board of
directory.
Landlord, at its expense, shall provide an identification sign for the Tenant to
be placed in the lobby of the first floor and an additional identification sign
in the lobby of the floor on which the Premises are located. Tenant shall
purchase a matching sign to be used to identify the Premises, the cost of which
is estimated to be $30.00
-----
LOCKS AND KEYS
--------------
No additional locks shall be placed upon any doors of the Premises, and Tenant
agrees not to have any duplicate keys made without the consent of Landlord. If
more than 2keys for any door lock are desired, the additional number shall be
-
paid for by Tenant. Upon termination of this Lease Tenant shall surrender all
keys.
WIRING
------
When wiring of any kind is introduced it must be connected as directed by
Landlord, and no boring or cutting for wires will be allowed except with the
mutual agreement. The location of telephones, call boxes, and other office
equipment affixed to the Premises shall be prescribed by mutual agreement.
PLUMBING
--------
The washbowls, water closets, and urinals shall not be used for any purpose
other than those for which they were constructed.
HALLS AND STAIRWAYS
-------------------
The entries, passages, stairways, and elevators shall not be obstructed by
Tenant, or used for any other purpose than ingress or egress to and from their
respective offices. Tenant shall not bring into or keep within building any
animal or vehicle.
OBSTRUCTING LIGHT
-----------------
Tenant shall not allow anything to be placed against or near the glass in the
partitions or in the doors between the Premises and in the halls or corridors.
The doors between the Premises and the corridors of the building shall at all
times, except when in actual use for ingress or egress, be kept closed.
MOVING FURNITURE
----------------
No furniture, freight, or equipment of any kind shall be brought into or removed
from the building without the consent of Landlord or Landlord's agent; and all
moving of same, into or out of building, by Tenants, shall be done at such times
and in such manner as Landlord shall designate. Landlord shall have the right to
prescribe the weight, size, and position of all safes and other heavy property
brought into the building, and also the times and manner of moving the loss or
damage to any such safe or property from any cause; but all damage done to the
building by moving or maintaining any such safe or property shall be repaired at
the expense of Tenant.
JANITOR SERVICE
---------------
Tenant shall not employ any person or persons other than the janitor of Landlord
for the purpose of cleaning the Premises, unless otherwise agreed. Landlord
shall be in no way responsible for any loss of or damage to Property from the
Premises, however occurring.
VIOLATIONS BY OTHER TENANT
--------------------------
Landlord is not responsible to any Tenant for the nonobservance or violations of
the rules and regulations by any other Tenant.
ROOMS USED IN COMMON
--------------------
Rooms used in common by Tenants shall be subject to such regulations as are
posted therein.
LANDLORD'S OFFICE AND EMPLOYEES
-------------------------------
The requirements of Tenant will be attended to only upon application at the
office of the building. Employees of Landlord shall not perform any work or do
anything outside of heir regular duties unless under special instructions from
the office, and no employees will admit any person (e.g. Tenant or otherwise) to
any office without specific instructions from the office of the building
REMOVAL OF PERSONS
- --------------------
Landlord reserves the right to exclude or expel from the building any person
who, in the judgment of Landlord, is intoxicated, or under the influence of
liquor or drugs, or who shall in any manner do any act in violation of any of
the rules and regulations of the building.
<PAGE>
CLOSING PRECAUTIONS
- --------------------
Tenant shall see that the windows, transoms, and doors of the Premises are
closed and securely locked before leaving the building and must observe strict
care not to leave windows open when it rains and Tenant shall exercise
extraordinary care and caution that all water faucets or water apparatus are
entirely shut off before Tenant or Tenant's employees leave the building and
that all electricity, gas, or air shall likewise be carefully shut off, so as to
prevent waste or damage and for any default or carelessness Tenant shall make
good all injuries sustained by other Tenants or occupants of the building or
Landlord.
LOCKING OF ENTRANCE DOORS
- ----------------------------
Landlord reserves the right to close and keep locked all entrance and exit doors
of the building during such hours as Landlord may deem to be advisable for the
adequate protection of the property.
ENTRY AFTER CLOSING
- ---------------------
All Tenants, their employees, or other persons entering or leaving the building
at any time when it is so locked may be required to sign the building register
when so doing, and the watchman in charge may refuse to admit to the building,
while it is so locked, Tenant or any of Tenant's employees, or any other person,
without a pass previously arranged, or other satisfactory identification showing
his right or access to the building at such time. Landlord assumes no
responsibility and shall not be liable for any damage resulting from any error
in regard to any such pass or identification, or from -the admission of any
unauthorized person to the building.
CARPETING
- ---------
Carpeting shall be protected from excessive wear caused by desks, chairs or
other items by the use of chair mats or other suitable devices.
Addendum to Lease dated September 15, 1997
By and between Ingomar Limited Partnership (Landlord) and Virtual Source
(Tenant).
4.01 MINIMUM MONTHLY RENT: MODIFICATION.
Tenant shall pay to Landlord upon execution of lease the amount of
$31,500.00 which is prepaid rent for the lease term of 9/23/97 through 9/22/98.
7.02 DESTRUCTION OF PREMISES BY FIRE: MODIFICATION.
Should the building in which the Premises are located is substantially damaged
or destroyed by fire or other insurance cause and lease is canceled on tenant
can only occupy half the space the tenants advance rent shall be prorated and
return to the tenant.
9.01 ACTS CONSTITUTING A DEFAULT: MODIFICATION.
Landlord shall provide a written 15 business day advance notice to tenant before
any circumstance or event can become a default as defined.
12. OPTION TO EXTEND:
Tenant shall have option to extend lease for additional one year under same
terms and conditions except advance rent shall be $32,500.00 Tenant shall notify
Landlord in writing at least 90 days before lease ends.
_____________________________________ _____________________________________
Landlord Tenant
<PAGE>
EXHIBIT 10.3
LEASE
RAZORE LAND COMPANY, LANDLORD
INTERACTIVE BUYERS NETWORK INTERNATIONAL, LTD., TENANT
DATED October 11, 1999
LEASE
TABLE OF CONTENTS
1 BASIC LEASE TERMS
2. PREMISES
3. TERM
3.1 Commerce
3.2 Expire
4. TENANT IMPROVEMENTS; EARLY POSSESSION, DELAYED DELIVERY OF POSSESSION
4.1 Tenant Improvements
4.2 Early Occupancy
4.3 Landlord Delay
4.4 Tenant Delay
5. RENT
5.1 Rent
5.2 Manner of Payment
5.3 Rent Commencement PREPAID RENT AND SECURITY DEPOSIT
6. PREPAID RENT AND SECURITY DEPOSIT
6.1 Deposit
6.2 Use of Deposit to Cure
6.3 Return of Security Deposit
6.4 Treatment as Security Deposit
6.5 Landlord's Obligation Regarding Deposit
7. USE OF PREMISES
7.1 Use
7.2 Prohibited Uses
7.3 No Nuisance
7.4 Telecommunications Providers
8. ADDITIONAL RENT FOR OPERATING EXPENSES
8.1 Tenant Payment
8.2 Tenant's Share
8.3 Definitions
8.4 Determination of Operating Expenses
8.5 Reconciliation
8.6 Upon Lease Termination
8.7 Landlord Rights
9. MAINTENANCE AND REPAIR RESPONSIBILITY
9.1 Maintenance Obligations
9.2 No Obligation For Alteration
9.3 Tenant Waiver
10. COMMON AREAS
10.1 Use of Common Areas
10.2 Definition of Common Areas
11. UTILITIES AND SERVICES
11.1 Furnishing of Utilities and Services
11.2 Additional Services
11.3 After Hours
11.4 Separate Meters
11.5 Failure
12. LIMITS ON LANDLORD'S LIABILITY
12.1 Circumstances Beyond Control
12.2 Unreasonable Period of Failure
12.3 Tenant Caused
12.4 No Abatement of Rent
12.5 No Interference
13. ALTERATIONS AND ADDITIONS BY TENANT; LIENS AND INSOLVENCY
13.1 Alterations and Additions by Tenant
13.2 Liens and Insolvency .
14. INSURANCE; INDEMNITY
14.1 Tenant Waiver
14.2 Indemnity
14.3 Landlord's Responsibility
14.4 Tenant's insurance
14.5 Policies
14.6 Landlord's Insurance
14.7 Proceeds
14.8 Waiver of Subrogation
14.9 Notification of Accidents
15. DESTRUCTION
15.1 Election to Restore
15.2 Rent Abatement
15.3 Repairs to Tenant Installations
15.4 No Compensation
16. CONDEMNATION
16.1 Termination of Lease
16.2 Election of Termination
16.3 Reduction of Rent
16.4 Award
16.5 Landlord Authority
17. ASSIGNMENT AND SUBLETTING
17.1 Landlord Consent Required
17.2 Deemed Assignment
17.3 Recapture
17.4 Additional Requirements
17.5 Assignment with Bankruptcy
17.6 Sale
17.7 Binding
18. DEFAULT
18.1 Definition of Default
18.2 Tenant Notification
18.3 Landlord Default
18.4 Rental Concession
19. REMEDIES IN DEFAULT
19.1 Landlord Remedies
19.2 Tenant Payment of Costs
19.3 Termination
19.4 No Termination
19.5 Landlord Election to Make Tenant Advances
20. ACCESS
21. SURRENDER OF PREMISES; HOLD-OVER TENANCY
21.1 Surrender of Premises
21.2 Hold-Over Tenancy
22. COMPLIANCE WITH LAW
23. RULES AND REGULATIONS
24. PARKING
24. ESTOPPEL CERTIFICATES
26. SUBORDINATION
27. REMOVAL OF PROPERTY
28. PERSONAL PROPERTY TAXES
29. NOTICES
30. CONDITION OF PREMISES
31. HAZARDOUS SUBSTANCES
31.1 Tenant Obligations
31.2 Tenant Indemnity
31.3 Landlord Inspection
31.4 Survival
32. SIGNS
33. GENERAL PROVISIONS
33.1 Attorneys' Fees
33.2 Governing Law; Venue
33.3 Cumulative Remedies
33.4 Exhibits; Addenda
33.5 Interpretation
33.6 Joint Obligation
33.7 Keys
33.8 Late Charges; Interest
33.9 Light, Air, and View
33.10 Measurements
33.11 Name
33.12 Prior Agreements, Amendments
33.13 Recordation
33.14 Liability
33.15 Severability
33.16 Time
33.17 Waiver
33.18 No Waste
33.19 Force Majeure
33.20 Quiet Enjoyment
33.21 Building Planning
34. AUTHORITY OF TENANT
34.1 Tenant as Corporation
34.2 Tenant as Partnership or LLC
35. FINANCIAL STATEMENTS
36. COMMISSIONS
Exhibits to this Lease:
Exhibit A-1 Premises
Exhibit A-2 Legal Description of Property
<PAGE>
LEASE
LEASE, dated SEPTEMBER 28, 1999, between RAZORE LAND COMPANY, a Washington
corporation ("Landlord"), and INTERACTIVE BUYERS NETWORK INTERNATIONAL, LTD., a
Nevada Corporation
("Tenant").
1. Basic Lease Terms,This Section sets forth certain basic terms of this
--------------------
Lease for reference purposes. This Section is to be read in conjunction with the
other provisions of this Lease; provided,
however. to the extent of any inconsistency between this Section and the other
provisions of this Lease, this Section shall control.
Leased Premises (See #2)
Operating Expenses (See #8)
Business Park QUADRANT PARKSIDE CENTER Tenant's Share 6.61 % of property
Initial Additonal Rent
Building Name Building Three 13) $2,400.83/Month
Address 18939 - 120t" Avenue NE Parking (See #24)
Suite 111 2.8/1000 unreserved parking spaces
Bothell, WA 98011
Brokers (see #36)
Rentable SQ. Ft. approximately 6,700 rsf For Tenant
Windermere Real Estate, Inc.
Final square footage measurements shall be made
For Landlord Colliers International
In accordance with BOMA standards.
Rent; Prepaid Sent; Security Deposit Addresses for Notices (See #29)
(See #5 and #6)
Landlord;
Elase Monthly Rent Razore, Land Company
Month 1 - 12 $8,375.00/Month
Months 13 - 24 $8,654.17/Month C/o Quadrant/KMS Management Services
Months 25 - 36 $8,933.33/Month 728 134th Street SW, Suite 209
Everett, WA 98204
Prepaid Rent $8,375.00, First Month Rent Tel: 425-741-2828
Fax: 425-741-3838
Security Deposit $53,599.98 Attn: Alicia A. Shaw
(See 1A.1)
Tenant:
Term (See 1A.2 and #3) Interactive Buyers Network International, LTD
18939 - 120th Avenue NE. Suite 111
Commencement Date November 1, 1999 Bothell, WA 98011
Rent Commencement Date November 1, 1999 Attn: Dennis McQuilliams
Expiraflon Date October 31, 2002 Tel:
Length of Term Three (3) years Fax:
Permitted Use
General office use.
<PAGE>
EXHIBIT I
1A. Special Lease Terms. The following additional lease terms shall
apply. To the extent of any inconsistency between this Section 1A and the other
provisions of the Lease, this Section 1A shall control.
1A.1 Security Deposit. Tenant shall provide Landlord with a security
deposit equal to the last six (6) months rent due upon execution of the Lease
document. The security deposit shall be in the form of a Certificate of Deposit
in the amount of $44,666.65 and cash deposit in the amount of $8,933.33. The
Certificate of Deposit shall in the name of the Tenant and shall be kept in
trust by the Tenants bank. The Tenants bank shall provide an assignment to the
Landlord that will allow and comply with the Security Deposit sections of this
Lease. The Tenant shall submit the Certificate of Deposit assignment and the
cash deposit upon execution of the Lease. The Landlord shall release any claim
to the Certificate of Deposit to the Tenants bank upon expiration of the Lease,
subject to the terms of the Lease as respects the Security Deposit.
1A.3 Commencement Date. The Lease Commencement Date and Rent
Commencement date shall be subject to Section 1, and shall not be dependent upon
completion of scheduled tenant improvements. Furthermore, Tenant shall have the
right to access the premises approximately fourteen (14) days prior to the
scheduled commencement date for the purpose of installation of cabling and other
pre-occupancy and related items, including use of the premises for materials
storage and trade show preparations. This prior access shall not imply
commencement of the Lease and/or Rent as set forth in the Lease Agreement.
1A.3 Condition of Premises. Landlord shall repair all items identified
and agree to by the Landlord's agent as specified during a pre-possession
inspection by the Tenant and Landlords agent.
1A.4 Landlord shall not allow access to the Premises by other parties unless
accompanied by and agent of the Landlord except during the construction process.
This provision shall remain in effect until the demising wall separating the
Tenants area from the rest of the building is completed.
1A.7 Section 7.1 shall be amended to allow Tenant to terminate the lease,
without recourse by Landlord, if a Zoning law, existing or as changed, prohibits
Tenant from conduction its existing business at the Premises.
2. Premises. Landlord agrees to lease to Tenant and Tenant agrees to
lease from Landlord the Premises described on Exhibit A-1 and consisting of
approximately the square feet designated in Section 1. The Premises are a part
of the Building, located on the real property described on Exhibit A-2
("Property").
3. Term
3.1 Commence. The term of this Lease ("Term") shall commence on the
Commencement Date set forth in Section 1, subject to Section 4.
3.2 Expire. The Term shall expire on the Expiration Date set forth in
Section 1, unless sooner terminated or extended as provided in this Lease.
4. Tenant Improvements; Early Possession; Delayed Delivery of Possesion
4.1 Tenant Improvements. Landlord shall provide a new demising wall
separating the balance of the space. Demising wall shall be installed promptly
upon receipt of the building permit, which is deemed to occur after Tenant
occupancy. Landlord shall also deliver the premises in good condition and
repair. Please see Exhibit A-1 for a detailed space plan.
4.2 Early Occupancy. If Landlord permits Tenant to occupy the Premises
prior to the Commencement Date set forth in Section 1, the Commencement Date and
Rent Commencement Date shall be such date of occupancy. Tenant's occupancy prior
to the originally scheduled Commencement Date shall be subject to all the
provisions of this Lease and shall not advance the Expiration Date.
4.3 Intentionally Omitted.
4.4 Tenant Delay. If Tenant causes any delay in Landlord's completion of
the Premises, thereby delaying Tenant's occupancy of the Premises beyond the
Commencement Date set forth in Section 1, then Landlord may at its option
require Tenant to commence payment of Rent on the Rent Commencement Date set
forth in Section 1 notwithstanding such delay in delivery of possession.
5. Rent.
5.1 Rent. Tenant shall pay to Landlord the Base Monthly Rent specified
in Section I and the Additional Rent as set forth in Section 8 and elsewhere in
this Lease (the Base Monthly Rent and the Additional Rent are collectively
referred to as "Rent7). Rent shall be paid in advance, on or before the first
day of each calendar month of the Lease Term.
5.2 Manner of Payment. Rent shall be paid without prior notice, demand,
set off, counterclaim, deduction or defense and, except as otherwise expressly
provided in this Lease, without abatement or suspension. AJI Rent shall be paid
to Landlord at the address for notices set forth in Section 1, in lawful money
of the United States of America, or to such other person or at such other place
as Landlord may from time to time designate in writing.
<PAGE>
5.3 Rent Commencement. Payment of Rent shall begin on the Rent
Commencement Date set forth in Section 1, subject to Section 4. Rent for any
period during the Lease term that is for less than one month shall be prorated
for the actual number of days in such period.
6. Prepaid Rent and Security Deposit.
6.1 Deposit. Upon execution of this Lease, Tenant shall pay to Landlord
the Prepaid Rent and Security Deposit set forth in Section 1 (the Prepaid Rent
and the Security Deposit collectively, "Deposit').
6.2 Use of Deposit to Cure. Landlord shall have the right to all or any
part of the Deposit to cure any Default by Tenant under this Lease or to
compensate Landlord for any damage sustained by it resulting from such Default.
In the event of any such application of the Deposit, Tenant shall, on demand,
immediately pay to Landlord the amount necessary to replenish the Deposit to the
amount set forth in Section 1.
6.3 Return of Security Deposit. If Tenant is not in Default at the
expiration or termination of this Lease, Landlord shall return the remaining
Security Deposit to Tenant, less any amounts necessary to return the Premises to
their original condition, reasonable wear and tear excepted.
6.4 Treatment as Security Deposit. In the event this Lease is terminated
before the end of the Term for any reason, any Rent paid for any period after
the date of such termination shall be treated as an addition to the Security
Deposit.
6.5 Landlord's Obligation Regarding Deposit. Landlord's obligations with
respect to the Security Deposit are those of a debtor and not a trustee.
Landlord may maintain the security deposit separate from Landlord's general
funds or may commingle the Security Deposit with other funds of Landlord. No
interest shall accrue for Tenant on the Deposit.
7. Use of Premises.
7.1 Use. Tenant shall use the Premises only for the purpose set forth in
Section 1. The Premises may not be used for any other purpose without Landlord's
written consent. Landlord represents to Tenant that the purpose set forth in
Section 1 is permitted as of the date hereof under the applicable laws,
regulations and codes governing zoning, land use and similar matters affecting
the Building and the Property (collectively, the "Zoning Laws"). Any changes in
the Zoning Laws or any changes in Tenant's use of the Premises that are not
permitted under the Zoning Laws will not be a basis for terminating this Lease,
for abating or offsetting Rent or for otherwise seeking damages, unless said
changes in the Zoning Laws are initiated by the Landlord and prevents the Tenant
from conducting its existing business.
7.2 Prohibited Uses. Tenant shall not do or permit anything to be done
in or about the Premises or bring or keep anything therein which will in any way
increase the cost of or affect any fire or other insurance upon the Building or
any part thereof or any of its contents, or cause cancellation of any insurance
policy covering the Building or any part thereof or any of its contents.
7.3 No Nuisance. Tenant shall not do or permit anything to be done in or
about the Premises that will obstruct or interfere with the rights of other
tenants or occupants of the Building or Business Park or injure them or their
property, or use or allow the Premises to be used for any unlawful purpose or in
any way constituting a nuisance. Tenant shall not, without the prior written
consent of Landlord, use any apparatus, machinery or device in or about the
Premises which will cause any substantial noise or vibration. Tenant shall not
place any boxes, cartons or other rubbish in the corridors or other Common Areas
(defined in Section 10), Building, Property or Business Park. Tenant shall use
due care in the use of the Premises and of the Common Areas (defined in Section
10), Building Property or Business Park, and shall not neglect or misuse water
fixtures, electric lights and heating and air-conditioning apparatus.
7.4 Telecommunications Providers. Tenant acknowledges that any provision
of telecommunications, data transmission and office automation services,
equipment and systems by a third party provider, its agents, affiliates and
successors, that has a right, whether exclusive or not, to provide such services
to the Premises, Building or Business Park (each a "Provider") is entirely
separate and distinct from this Lease and that Landlord has no duty of
performance concerning the provision of services by a Provider. Tenant hereby
agrees to look solely to the Provider for any failure in the provision of
services provided by such Provider.
8. Additional Rent for Operating Expenses.
8.1 Tenant Payment. Tenant shall pay, as Additional Rent, Tenant's
Share, as set forth in Section 1, of all Operating Expenses. Tenant's payment of
Additional Rent shall be made in the same manner as Base Monthly Rent.
8.2 Tenant's Shar . Tenant's Share shall be the percentage of all Operating
Expenses for the Building set forth in Section 1 as determined by Landlord,
based upon the percentage that the approximate rentable area of the Premises
set forth in Section 1 bears to the approximate rentable area of the Building.
<PAGE>
8.3 Definitions.
8.3.1 Definition of Operating Expenses. "Operating Expenses" means all
expenses and charges incurred by Landlord in the operation and maintenance of
the Building, Property and Common Areas (as defined in Section 10), as a
first-class facility, including without limitation the following costs by way of
illustration: (i) all real property taxes, assessments and other general or
special charges levied during the Term by any public, governmental or
quasi-governmental authority against the real or personal property included in
the Building or the Property, including without limitation Landlord's personal
property used in the maintenance, repair or operation of the Building or the
Property, or any other tax on the leasing of the Building or on the rents from
the Building (other than any federal, state or local income or franchise tax);
(ii) any and all assessments Landlord must pay for the Building or Property
pursuant to an applicable Declaration of Covenants, Conditions, Restrictions and
Easements for the Business Park identiW in Section 1 ("CC&Rs"), transportation
or any other improvement monitoring or management plan, or any other covenant,
condition or reciprocal easement agreements; (iii) electricity, gas and similar
energy sources, refuse collection, water, sewer and other utilities services for
the Building and the Property; provided, however, to the extent that any such
services are separately metered to Tenant, Tenant shall pay the actual
separately incurred charges; (iv) annual inspection fees, property management
fees paid to independent or affiliated contractors or to Landlord, and legal,
accounting and other professional expenses; (v) janitorial, cleaning, window
washing and refuse removal; (vi) all costs of improvements or alterations to the
Building, Property and Common Areas required by Laws, to save labor, or reduce
Operating Expenses; (vii) all premiums and deductibles for liability, property
damage, casualty, automobile, garage keeper's, rental loss compensation or other
insurance maintained by Landlord for the Building or Property; (viii) the cost
of any capital improvements made to the Property, Building or Common Areas by
Landlord for the replacement of any Building equipment needed to operate the
Building or the Common Areas at the same quality levels as prior to the
replacement; (ix) air conditioning, heating, ventilating, plumbing, electrical
system, elevator maintenance supplies, materials, equipment and tools; (x) the
repair of the air conditioning, heating, ventilating, plumbing, electrical
systems and elevators of the Building; (xi) maintenance costs, including payroll
expenses, rental of personal property used in maintenance and all other upkeep
of parking and Common Areas, including cleaning, snow and ice removal,
landscaping and lighting; (xii) costs and expenses of repairs, resurfacing,
repainting, and similar items, (xiii) costs and expenses associated with
security and monitoring; (xiv) costs incurred in the management of the Building
and Property (including supplies, wages and salaries of employees used in the
management, operation and maintenance thereof and payroll taxes and similar
governmental charges with respect thereto, and Building management office
rental, if any; (xiii) all license and permit fees (xiv) any other expense or
charge whether or not described above that in accordance with generally accepted
accounting and management practices is properly an expense of maintaining,
operating or repairing the Building, Property or Common Areas. Operating
Expenses shall not include depreciation on the Building or equipment therein,
Landlord's executive salaries, real estate brokers' commissions, and costs or
expenses for which Landlord is reimbursed or indemnified, by an insurer,
condemnor, tenant or otherwise. Landlord shall not collect more than 100% of
Operating Expenses and shall not recover any item of cost more than once. If, in
Landlord's reasonable determination, certain Operating Expenses vary in direct
relationship to occupancy of the Building, Tenant's Share of such Operating
Expenses shall be adjusted to reflect that portion of the whole which the
rentable square feet of the Premises bears to the rentable square footage of the
Building, as applicable, which is actually occupied by tenants.
8.3.2 Definition and Treatment of Capital Improvements. As used herein,
Capital Improvement shall mean the replacement of any major component or element
of the Building or Common Areas. The cost of any Capital Improvement included in
Operating Expenses pursuant to this Lease shall be amortized over the useful
life of the Capital Improvement with interest accruing on the unamortized
balance at the prime rate then in effect at the Seattle Head Office of Bank of
America or its successors, or such higher rate as may have been paid by Landlord
on funds borrowed for the purpose of paying for such Capital Improvement.
Subject to Section 12.3, Landlord shall be responsible at its sole cost and
expense for Capital Improvements related to the repair or replacement of the
structural portions of the Building, which structural portions consist of the
foundation, bearing and exterior walls, subflooring, and roof structure and the
cost of such Capital Improvements shall not be included in Operating Expenses.
8.4 Determination of Operating Expenses. Prior to each January 1 of the
Term, Landlordshall furnish Tenant a written statement of the estimated monthly
Tenant's Share of Operating Expenses for the coming calendar year. The estimated
monthly Tenant's Share of Operating Expenses for the period before the first
January 1 after the Commencement Date is set forth in Section 1. Landlord may,
by written notice to Tenant, revise its estimate of Tenant's Share of Operating
Expenses from time to time.
8.5 Reconciliation. Within 90 days after each January 1 during the Term,
or as soon thereafter as practicable, Landlord shall deliver to Tenant a written
statement setting forth the actual Operating Expenses and Tenant's Share thereof
during the preceding calendar year (or portion of such calendar year after the
Commencement Date). To the extent Tenant's Share of such actual Operating
Expenses exceeded the estimated Tenant's Share thereof paid by Tenant, Tenant
shall pay Additional Rent to Landlord within 30 days after receipt of such
statement by Tenant. To the extent Tenant's Share of such actual Operating
Expenses was less than the estimated Tenant's Share thereof paid by Tenant,
Tenant shall receive a credit against its next payable Rent or such amount shall
otherwise be refunded to Tenant as Landlord determines in its sole discretion.
8.6 Upon Lease Termination. If this Lease shall expire or otherwise
terminate other than on a December 31, Landlord may in its discretion make a
special determination of Tenant's Share of actual Operating Expenses for the
partial calendar year ending on the date of such expiration or other
termination, or may defer such determination until its usual reconciliation of
Operating Expenses for the Building for the entire calendar year. The excess
actual Tenant's Share for such partial calendar year shall be paid to Landlord,
or the excess estimated Tenant's Share already paid by Tenant, as the case may
be, shall be paid by Tenant to Landlord or Landlord to Tenant, as the case may
be, within 30 days of such determination.
<PAGE>
8.7 Landlord Rights. Landlord shall have the same rights with respect to
Tenant's nonpayment of Tenant's Share of Operating Expenses as required under
this Lease as it has with respect to any other nonpayment of Rent under this
Lease.
9. Maintenance and Repair Responsibility.
9.1 Maintenance Obligations. Subject to Sections 7.3, 12.3 and 15,
Landlord shall maintain and keep in good condition and repair throughout the
Term the entire Premises , the Building, and the Common Areas in a manner and at
a level of quality that is consistent with comparable buildings in the area (the
"Maintenance Obligations"). Except as otherwise expressly provided in this
Lease, all cost and expenses incurred by Landlord in performing the Maintenance
Obligations shall be considered Operating Expenses.
9.2 No Obligation For Alteration. Alteration. Except as specifically
provided elsewhere in this Lease, Landlord shall have no obligation whatsoever
to alter, remodel, improve, repair, decorate, or paint the Premises or any part
thereof. Tenant affirms that Landlord has made no representations to Tenant
about the condition of the Premises or the Building, except as specifically
herein set forth.
9.3 Tenant Waiver. Tenant waives the right to make repairs at Landlord's
expense under any law, statute, or ordinance now or hereafter in effect.
10. Common Areas.
10.1 Use of Common Areas. Provided Tenant is not in Default under the
Lease and subject to the other terms and conditions of this Lease, Tenant shall
have the right to use the Common Areas on a non-exclusive basis with Landlord,
other tenants in the Building and the Business Park and their respective
officers, employees, guests, invitees and agents. Landlord shall have the right
to establish and enforce reasonable rules and regulations applicable to all
tenants concerning the maintenance, management, use, and operation of the Common
Areas; and to make changes to the Common Areas, including without limitation
changes in the location of lobbies, driveways, entrances, exits, vehicular
parking spaces, parking areas, pedestrian and bicycle trail areas, or the
direction of the flow of traffic.
10.2 Definition of Common Areas. In this Lease, "Common Areas," means
all parts of the Building and related land areas and facilities outside the
Premises and the premises leased or available for lease to other tenants, but
constituting a part of Business Park. Common Areas include, without limitation:
10.2.1 the Building's common entrances, lobbies, restrooms, elevators,
stairway and accessways, loading docks, ramps, drives and platforms and any
passageways and serviceways thereto, and mechanical and electrical systems for
the Building, including without limitation, plumbing, sewage, electrical
systems, pipes conduits, and wires, and appurtenant equipment of the Building,
all to the extent serving the Premises;
10.2.2 the open areas, landscaped areas, sidewalks, pedestrian walkways and
patios, roadways, pedestrian and bicycle trails, driveways, parking areas,
utility systems and facilities, service areas, refuse areas and all other areas
in the Business Park and available for use in common with all tenants, guests
and invitees of the Business Park, located outside the Premises and the premises
leased or available for lease to other tenants in the Business Park.
11. Utilities and Services.
11.1 Furnishing of Utilities and Services. Provided that Tenant is not
in Default under this Lease, Landlord shall cause to be ftimished to the
Premises the following utilities and services, during generally recognized
business hours: (1) electricity for normal lighting and office machines, (ii)
heat and air conditioning required for the comfortable use and occupation of the
Premises; and (iii) janitorial services at the same level and frequency of
service as is standard for other comparable buildings in the area, unless a
schedule for janitorial services is attached hereto, in which case Landlord
shall provide janitorial services in accordance with such schedule
(collectively, the "Service Obligations").
11.2 Additional Services. The provision and use of such utilities and
services shall be in accordance with any applicable rules and regulations under
this Lease. If Tenant requires or utilizes more water or electrical power than
is considered reasonable or normal by Landlord, Landlord may at its option
require Tenant to pay, as Additional Rent, the cost, as fairly determined by
Landlord, incurred in such extraordinary usage. In addition, Landlord may
install separate meters in accordance with Section 11.4.
11.3 After Hours. At Tenant's request, Landlord shall furnish, at
Tenant's expense, heat and air conditioning outside of generally recognized
business hours, at rates to be established from time to time by Landlord, and to
be paid by Tenant as billed by Landlord.
11.4 Separate Meters. To the extent that the Premises are separately
metered or submetered for Tenant's use of any utilities or services, Tenant
shall pay for such use in the same manner as Rent, or shall pay the cost thereof
directly to the service provider, and in either event such charges shall
constitute Additional Rent hereunder.
11.5 Failure. In the event of any failure or interruption of such
utilities and services, Landlord shall diligently attempt to resume service
promptly. Tenant shall not be entitled to any abatement or reduction of Rent by
reason of any failure or interruption of utilities or services, no eviction of
Tenant shall result from any such failure or interruption, and Tenant shall not
be relieved from the performance of any obligation in this Lease because of such
failure or interruption.
<PAGE>
12. Limits on Landlord's Liability. Landlord's liability in respect of
its Maintenance Obligations and Service Obligation is subject to the
following limitations:
12.1 Circumstances Beyond Control. Landlord shall not be liable for any
failure of Maintenance Obligations or Service Obligations when such failure is
caused by (i) strikes, lockouts or other labor disturbance or labor dispute of
any character, (ii) governmental regulation, moratorium or other governmental
action, (iii) inability despite the exercise of reasonable diligence to obtain
electricity, water or fuel from the providers thereof, (iv) acts of God or (v)
any other cause beyond Landlord's reasonable control.
12.2 Unreasonable Period of Failure. Subject to Section 12.1,
Landlord shall not be liable for any failure of Maintenance Obligations or
Service Obligations, unless such failure shall persist for an unreasonable time
after written notice of the need of such repairs or maintenance or of the
interruption of services is given to Landlord by Tenant.
12.3 Tenant Caused. If maintenance and repairs to the Premises, Building
or Common Areas are caused in part or in whole by the act, neglect, fault, or
omission of any duty by Tenant, its agents, servants, employees, or invitees,
Tenant shall pay to Landlord the costs of such maintenance and repairs.
12.4 No Abatement of Rent. Except as specifically provided in Sections
15 and 16, there shall be no abatement of Rent in any circumstance under this
Lease.
12.5 No Interference. Landlord shall not be liable for 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 Property, or the Common Areas, or to fixtures, appurtenances, and equipment
therein, or the failure of Maintenance Obligations or Service Obligations.
Without limiting the generality of this Section 12, in no event shall Landlord
have any liability for consequential damages resulting from any act or omission
of Landlord in respect of its Maintenance Obligations or Service Obligations,
even if Landlord has been advised of the possibility of such consequential
damages.
13. Alterations and Additions by Tenanto Liens and Insolvengy.
13.1 Alterations and Additions by Tenant. With the prior written consent
of Landlord, Tenant may make at its expense additional improvements or
alterations to the Premises. Any repairs or new construction by Tenant shall be
done in conformity with plans and specifications approved by Landlord, by
contractors approved by Landlord, (provided, that Landlord may require that such
work be performed by Landlord's employees or contractor(s) employed by Landlord)
and subject to Landlord's reasonable rules and regulations regarding such
construction. All work performed shall be done lien-free in a workmanlike manner
and shall become the property of Landlord. Landlord may require that Tenant
provide to Landlord, at Tenants expense, a lien and completion bond in an amount
equal to 150% of the estimated cost of any improvements, additions, or
alterations in the Premises. Landlord shall not unreasonably withhold its
consent to Tenant's proposed alterations or improvements if the conditions of
this Section 13 are satisfied. Landlord may require Tenant to remove any
improvements or alterations at the expiration or termination of the Term, such
removal to occur at Tenant's expense; and Tenant shall repair all damage to the
Premises or Building occurring as a result of such removal. In the event Tenant
fails to remove any improvements or alterations as required by Landlord or
repair any damage occurring during such removal, Landlord shall be entitled to
remove any improvements or alterations or make such repairs, at Tenant's
expense, and shall further be entitled to draw upon the Deposit.
13.2 Liens and Insolvency. Tenant shall keep the Premises, Building and
Property free from any liens arising out of any work performed, materials
ordered or obligations incurred by Tenant. Landlord shall have the right at all
reasonable times to post on the Premises any notices which it deems necessary
for its protection from such liens. If such liens are filed unless such liens
are removed or bonded around to Landlord's satisfaction within fourteen (14)
days of Landlord's notice to Tenant, Landlord may, without waiving its rights
and remedies based on such breach by Tenant and without releasing Tenant from
any of its obligations hereunder, cause such liens to be released by any means
it shall deem proper, including payment in satisfaction of the claim giving rise
to such lien. Tenant shall pay to Landlord on demand, any reasonable sum paid by
Landlord to remove such liens, together with interest at the rate specified in
Section 33.8.
14. Insurance Indemnity.
14.1 Tenant Waiver. Landlord shall not be liable to Tenant, and Tenant
hereby waives all claims against Landlord, for injury or damage to any person or
property in or about the Premises, Building, Property or Common Areas by or from
any cause whatsoever, including without limitation any acts or omissions of any
other tenants, licensees or invitees; of the Building.
14.2 Indemnity. Tenant shall indemnify and defend Landlord and hold
Landlord harmless, from and against any *and all loss, cost, damage, liability
and expense (including reasonable aftomeys'fees) whatsoever that may arise out
of or in connection with Tenant's occupation, use or improvement of the
Premises, or that of its employees, agents or contractors, or Tenant's breach of
its obligations under this Lease. To the extent necessary to fully indemnify
Landlord from claims made by Tenant or its employees, this indemnity constitutes
a waiver of Tenant's immunity under the Washington Industrial Insurance Act, RCW
Title 51. This indemnity shall survive the expiration or termination of the
Term.
<PAGE>
14.3 Landlord's Responsibility. The exculpation, release and indemnity
provisions of Sections 14.1 and 14.2 shall not apply to the extent the subject
claims thereunder were caused by Landlord's gross negligence or willful
misconduct. However, in no event shall Landlord be liable to Tenant for
consequential damages.
14.4 Tenant's Insurance. Tenant shall procure and maintain throughout the
Term at Tenant's expense, the following insurance:
14.4.1 Comprehensive general public liability insurance, insuring Tenant
against liability arising out of the Lease and the use, occupancy, or
maintenance of the Premises and all areas appurtenant thereto. Such insurance
shall be in the amount of not less than $2,000,000 combined single limit for
injury to or death of one or more persons in an occurrence, and for damage to
tangible property (including loss of use) in an occurrence. Such policy shall
insure the operations of independent contractors and contractual liability
(covering the indemnity in Section 14.2) and shall: (i) name Landlord as an
additional insured, and (ii) provide that it is primary and noncontributing with
any insurance in force or on behalf of Landlord.
14.4.2 Standard form property insurance insuring against the perils of fire,
extended coverage, vandalism, malicious mischief, special extended coverage
("All Risk") and sprinkler leakage. This insurance policy shall be upon all
personal property for which Tenant is legally liable or that was installed at
Tenant's expense, and that is located in the Building or Premises, including
without limitation all Tenant's furnishings, fixtures, furniture, fittings, and
equipment and all improvements to the Premises installed by Tenant, in an amount
not less than 90% of the full replacement cost thereof. In the event of a
dispute as to the amount of full replacement cost, the decision of Landlord or
any mortgagees of Landlord shall be conclusive. Landlord recommends such policy
shall also include business interruption coverage, covering direct and indirect
loss of Tenant's earnings attributable to Tenant's inability to use fully or
obtain access to the Premises or Building, in an amount as will properly
reimburse Tenant. Such policy shall name Landlord and any mortgagees of Landlord
as insured parties, as their respective interests may appear.
14.4.3 Workman's Compensation and Employer's Liability Insurance (as
required by state law).
14.4.4 Any other form or forms of insurance as Tenant or Landlord or any
mortgagees of Landlord may reasonably require from time to time in form, in
amounts and for insurance risks against which a prudent tenant would protect
itself.
14.5 Policies All policies of insurance to be obtained by Tenant
hereunder shall be in a form approved under the Washington Insurance Laws, which
shall be acceptable to Landlord and shall be issued by insurance companies
holding a General Policyholder Rating of "A7 and a Financial Rating of "X" or
better in the most current issue of Best's Insurance Guide. Tenant shall provide
Landlord with certificates of such insurance. No such policy shall be cancelable
or reducible in coverage except after 30 days' prior written notice to Landlord.
Tenant shall, within ten days prior to 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.
14.6 Landlord's Insurance. Landlord shall maintain liability and
casualty insurance for the Building and Property adequate in Landlord's judgment
to cover (with deductibles deemed appropriate by Landlord) the risks customarily
insured against by owners of properties similar to the Building.
14.7 Proceeds. The proceeds of any insurance policies maintained by or
for the benefit of Landlord shall belong to and be paid over to Landlord. Any
interest or right of Tenant in any such proceeds shall be subject to Landlord's
interest and right in such proceeds.
14.8 Waiver of Subrogation. Anything in this Lease to the contrary
notwithstanding, Tenant and Landlord each waives its entire right of recovery,
claims, actions, or causes of action against the other for loss or damage to the
Premises, Building, or Property or any personal property of such party therein
that is caused by or incident to the perils covered by normal extended coverage
clauses of standard fire insurance policies carried by the waiving party and in
force at the time of damage or loss. Tenant and Landlord each waives any right
of subrogation it may have against the other party to the extent of recovery
under any such insurance, and shall cause each insurance policy obtained by it
to provide that the insurance company waives all right to recovery by way of
subrogation against the other party in connection with any such loss or damage.
If either Landlord or Tenant is unable to obtain its insurer's permission to
waive any claim against the other party, such party shall promptly notify the
other party of such inability.
14.9 Notification of Accidents. Tenant shall promptly notify Landlord of
any casualty or accident occurring in or about the Premises.
15. Destruction.
15.1 Election to Restore. If the Premises or the Building is destroyed
by fire, earthquake, or other casualty to the extent that they are untenantable
in whole or in part, then Landlord shall have the right but not the obligation
to proceed with reasonable diligence to rebuild and restore the Premises or the
Building or such part thereof. Landlord shall within 30 days after such
destruction or injury notify Tenant whether Landlord intends to rebuild. If
Landlord fails to notify Tenant within such period, then this Lease shall
terminate as of the end of such period.
15.2 Rent Abatement. During the period from destruction or damage until
restoration (or termination of this Lease), Rent shall be abated in the same
ratio as that portion of the Premises which Landlord determines is unfit for
occupancy shall bear to the whole Premises. If damage is due to the fault or
neglect of Tenant or its agents, employees, invitees, or licensees, there shall
be no abatement of Rent.
<PAGE>
15.3. Repairs to Tenant Installations. Landlord shall not be required to
repair any injury or damage by fire or other cause, or to make any repairs or
replacements of any panels, decoration, office fixtures, paintings, floor
covering, or any other improvements to the Premises installed by Tenant.
Instead, if Landlord repairs or rebuilds the Premises under this Section 15,
Tenant shall repair or rebuild such Tenant-installed improvements and other
items of property
15.4 No Compensation. Tenant shall not be entitled to any compensation
or damages from Landlord for loss of the use of the whole or any part of the
Premises, the property of Tenant, or any inconvenience or annoyance occasioned
by such - damage, repair, reconstruction, or restoration.
16. Condemnation.
16.1 Termination of Lease. If all or part of the Premises are taken
under power of eminent domain, or sold under the threat of the exercise of said
power, this Lease shall terminate as to the part so taken as of the date the
condemning authority takes possession.
16.2 Election of Termination. If more than 25% of the floor area of
Premises is taken by condemnation, Landlord or Tenant may, by written notice to
the other within ten days after notice of such taking, terminate this Lease as
to the remainder of the Premises as of the date the condemning authority takes
possession.
16.3 Reduction of Rent. If Landlord or Tenant does not so terminate,
this Lease shall remain in effect as to such remainder, except that the Rent
shall be reduced in the proportion that the rentable floor area taken bears to
the original rentable total floor area. However, if circumstances make abatement
based on floor area unreasonable, the Rent shall abate by a reasonable amount to
be determined by Landlord. In the event that neither Landlord nor Tenant elects
to terminate this Lease, Landlord's responsibility to restore the remainder of
the Premises shall be limited to the amount of any condemnation award allocable
to the Premises, as determined by Landlord.
16.4 Award. Any award for the taking of all or part of the Premises
under the power of eminent domain, including payment made under threat of the
exercise of such power, shall be the property of Landlord, whether made as
compensation for diminution in value of the leasehold or for the taking of the
fee or as severance damages. Tenant shall only be entitled to such compensation
as may be separately awarded or recoverable by Tenant in Tenant's own right for
the loss of or damage to improvements to the Premises installed by Tenant, for
Tenant's trade fixtures and removable personal property and for Tenant's
relocation or moving expenses. Landlord shall not be liable to Tenant for the
loss of the use of all or any part of the Premises taken by condemnation.
16.5 Landlord Authority . Landlord shall have the exclusive authority to
grant possession and use to the condemning authority and to negotiate and settle
all issues of just compensation or, in the alternative, to conduct litigation
concerning such issues; provided, however, that Landlord shall not enter into
any settlement of any separate award that may be made to Tenant as described in
Section 16.4 without Tenant's prior approval of such settlement, which approval
shall not be unreasonably withheld.
17. Assignment and Subletting.
17.1 Landlord Consent Required. Tenant shall not assign this Lease, or
sublet the Premises or any part thereof, either by operation of law or
otherwise, or permit any other party to occupy all or any part of the Premises,
without first obtaining the written consent of Landlord. Tenant shall propose
such assignment or sublease by written notice to Landlord, and such notice shall
specify an effective date which shall be the first day of a calendar month and
shall be not less than 60 days after the date of such notice. This Lease shall
not be assignable by operation of law. Tenant shall further provide to Landlord
other information and creditworthiness materials concerning any proposed
assignee or sublessee as is requested by Landlord. Landlord's consent to a
proposed assignment or sublease may be withheld or granted in Landlord's
absolute discretion, but shall not be unreasonably withheld if no apparent risk
to Landlord exists.
17.2 Intentionally omitted.
17.3 Recapture. In the alternative to consenting to a proposed
assignment or sublease, Landlord shall have the right to recapture the Premises,
or applicable portion thereof. Landlord may exercise such right by notice to
Tenant within 20 days after receipt of Tenant's notice. Such recapture shall
terminate this Lease as to the applicable portion of the Premises effective on
the effective date proposed in Tenant's notice.
17.4 Additional Requirements. If Landlord elects not to recapture and
thereafter elects to gives its consent to the proposed assignment or sublease,
(I) Landlord may charge Tenant a reasonable sum to reimburse Landlord for legal
and administrative costs incurred in connection with such consent; (ii) in the
event of a sublease, Landlord and Tenant shall share equally in any rent, less
any associated fees paid, and other proceeds paid to Tenant in excess of the
Rent to be paid to Landlord under this Lease; and (iii) in the event of an
assignment or a sublease, Tenant shall remain liable to Landlord for the
performance of all of Tenant's obligations under this Lease.
17.5 Assignment with Bankrup . If this Lease is assigned pursuant to the
provisions of the Revised Bankruptcy Act, I I U.S.C. Section 101 et seq., any
and all consideration paid or payable in connection with such assignment shall
be Landlord's exclusive property and paid or delivered to Landlord, and shall
not constitute the property of tenant or tenant's estate in bankruptcy. Any
person or entity to whom the Lease is assigned pursuant to the Revised
Bankruptcy Act shall be deemed automatically to have assumed all of Tenant's
obligations under this Lease.
<PAGE>
17.6 Sale. In the event of any sale of the Building or Property, or any
assignment of this Lease by Landlord, Landlord shall be relieved of all
liability under this Lease arising out of any act, occurrence, or omission
occurring after sale or assignment; and the purchaser or assignee at such sale
or assignment or any subsequent sale or assignment of Lease, the Property, or
Building, shall be deemed without any further agreement to have assumed all of
the obligations of the Landlord under this Lease accruing after the date of such
sale or assignment.
17.7 Binding. Subject to the provisions of this Section 17, this Lease
shall be binding upon and inure to the benefit of the parties, their heirs,
successors and assigns.
18. Defaul .
18.1 Definition of Default. The occurrence of any one or more of the
following events shall constitute a material default and breach of the Lease by
Tenant ("Default"):
18.1.1 vacation or abandonment of all or any portion of the Premises;
18.1.2 failure by Tenant to make any payment required as and when due, where
such failure shall continue after three days' written notice from Landlord;
18.1.3 failure by Tenant to observe or perform any of the covenants,
conditions, or provisions of this Lease, other than the making of any payment,
where such failure shall continue after 30 days' written notice from Landlord;
or
18.1.4 (i) the making by Tenant of any general assignment or general
arrangement for the benefit of creditors; (ii) the filing by or against Tenant
of a petition in bankruptcy, including reorganization or arrangement, unless, in
the case of a petition filed against Tenant, the same is dismissed within 30
days; (iii) the appointment of a trustee or receiver to take possession of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease; (iv) the seizure by any department of any government or
any officer thereof of the business or property of Tenant; and (v) adjudication
that Tenant is bankrupt.
18.1.5 Notwithstanding anything herein to the contrary, if Landlord serves
Tenant with three (3) default notices in any twelve-(1 2) month period, Landlord
shall have the right to terminate this Lease without providing Tenant with any
cure period.
18.2 Tenant Notification. Tenant shall notify Landlord promptly of any
Default by Tenant (or event or occurrence which, with the passage of time, the
giving of notice, or both, would become a Default) that by its nature is not
necessarily known to Landlord.
18.3 Landlord Default. Landlord shall be in default if it fails to
observe or perform any of the covenants, conditions, or provisions of this
Lease, where such failure shall continue after 30 days' written notice from
Tenant; provided, however, that if the nature of Landlord's obligation is such
that more than 30 days are required for performance, Landlord shall not be in
default if Landlord commences performance within 30 days after Tenant's notice
and thereafter completes such performance diligently and within a reasonable
time. Tenant shall copy Landlord's lender with any such notice of default, if
Tenant has been provided with the name and address of any such lender. In no
event shall a default by Landlord under this Lease give rise to any right of
Tenant to terminate this Lease or withhold or offset the payment of Base Monthly
Rent or Additional Rent. The obligations of Tenant to pay Base Monthly Rent and
Additional Rent shall continue unaffected in all events unless suspended or
terminated pursuant to an express provision of this Lease.
18.4 Rental Concession. If Tenant was not obligated to pay Base Monthly
Rent or Additional Rent for any period of time after the Commencement Date
("Rental Concession"), any such Rental Concession shall be canceled if Tenant is
in Default at any time during the Term. In the event of such cancellation,
Tenant shall be obligated to pay Base Monthly Rent and/or Additional Rent, as
the case may be, as though there were no Rental Concession in the Lease, and
Tenant shall promptly on demand refund to Landlord the amount of any Rental
Concession already taken, without regard to whether this Lease is terminated by
Landlord as a result of Tenant's Default.
19. Remedies in Default.
19.1 Landlord Remedies. In the event of any Default by Tenant, Landlord
may, at any time without waiving or limiting any other right or remedy, do any
one or more of the following: (i) re-enter and take possession of the Premises
without terminating this Lease, or (ii) terminate this Lease, and (iii) pursue
any remedy allowed by law or equity.
19.2 Tenant Payment of Costs. Whether Landlord has elected to terminate
this Lease or not, Tenant agrees to pay Landlord the cost of recovering
possession of the Premises, the expenses of reletting, and any other costs or
damages arising out of Tenant's Default, including without limitation the costs
of removing persons and property from the Premises, the costs of preparing or
altering the Premises for reletting, broker's commissions, and attorneys' fees.
19.3 Termination. In the event Landlord elects to terminate this Lease,
Landlord shall be additionally entitled to recover from Tenant: (i) the award by
a court having jurisdiction thereof of the amount by which the unpaid rent and
other charges and adjustments called for herein for the balance of the term
after the time of such award exceeds the amount of such loss for the same period
that Tenant proves could be reasonably avoided and (ii) that portion of any
leasing commission and Tenant Improvements costs paid by Landlord applicable to
the unexpired term of the Lease.
<PAGE>
19.4 No Termination. No re-entry or taking possession of the Premises by
Landlord pursuant to this Section 19, or acceptance of Tenant's keys to or
surrender of the Premises shall be construed as an election to terminate this
Lease unless a written notice of such intention is given to Tenant.
Notwithstanding any reentry or termination, the liability of Tenant for the Rent
shall continue for the balance of the Term, and Tenant shall make good to
Landlord any deficiency arising from reletting the Premises at a lesser rent
than the Rent provided for in this Lease. Tenant shall pay such deficiency each
month as the amount thereof is ascertained by Landlord.
19.5 Landlord Election to Make Tenant Advances. If Tenant shall fail to
pay any sum of money owed to any party other than Landlord, for which Tenant is
liable under this Lease, or if Tenant shall fail to perform any other act on its
part to be performed hereunder, and such failure continues for a period of ten
days after notice thereof by Landlord, Landlord may, without waiving or
releasing Tenant from its obligations or waiving or releasing any rights that
Landlord may have, make any such payment or perform any other act to be made or
performed by Tenant. All sums so paid by Landlord and all necessary incidental
costs, together with interest thereon at the rate established in Section 33.8,
from the date of such payment by Landlord, shall be deemed Additional Rent and
shall be paid to Landlord on demand.
20. Access. Tenant shall permit Landlord to enter the Premises at all
reasonable times for the purpose of inspecting, altering, and repairing the
Premises and the Building and ascertaining compliance with the provisions of
this Lease by Tenant. The existence or exercise of such right of access shall
not be construed as imposing any obligation on Landlord to inspect, discover or
correct or repair any condition in the Premises or the Building. Landlord may
also show the Premises to prospective purchasers or tenants at reasonable times,
provided that Landlord shall not materially interfere with Tenant's business
operation.
21. Surrender of Premises; Hold-Over Tenancy
21.1 Surrender of Premises. Upon the expiration or sooner termination of
this Lease, Tenant shall surrender the Premises and all the additions and
alterations thereto, and leave the Premises broom clean and in good order and
condition and repair, excluding ordinary wear and tear.
21.2 Hold-Over Tenancy . If without execution of a new Lease or written
extension Tenant shall hold over after the expiration or termination of the
Term, with Landlord's written consent, Tenant shall be deemed to be occupying
the Premises as a Tenant from month to month, which tenancy may be terminated as
provided by law, unless the parties agree otherwise at the time of Landlord's
consent. If Tenant shall hold over after expiration or termination of the Term
without Landlord's written consent, the Base Monthly Rent payable shall be 200%
of the Base Monthly Rent payable in the last month prior to expiration or
termination of the Term, and Tenant shall continue to pay Additional Rent.
During any such tenancy, Tenant shall continue to be bound by all of the terms,
covenants, and conditions of this Lease, insofar as applicable.
22. Compliance with Law. Tenant shall not use the Premises or permit
anything to be done in or about the Premises which will in any way conflict with
any applicable law, statute, ordinance, or governmental rule or regulation, now
or hereafter in force ("Laws"). Tenant shall at its sole cost and expense
promptly comply with all Laws, including without limitation the Americans with
Disabilities Act, and with the requirements of any board of fire insurance
underwriters or other similar bodies now or hereafter constituted, relating to,
or affecting the use or occupancy of the Premises. The judgment of any court of
competent jurisdiction, or the admission of Tenant in any action, whether
Landlord be a party thereto or not, that Tenant has violated any Laws, shall be
conclusive of the fact as between Landlord and Tenant.
23. Rules and Regulations. Tenant shall faithfully observe and comply
with the rules and regulations that Landlord shall from time to time promulgate
and with the CC&Rs and any other restrictive covenants and obligations created
by private contracts which affect the use and operation of the Premises,
Building Common Areas or Business Park, now or hereafter in force. All such
rules and regulations shall be nondiscriminatory and reasonable and shall be
uniformly and consistently enforced against all tenants in the Building.
Additions and modifications to rules and regulations shall be binding on Tenant
upon delivery of a copy of them to Tenant. Landlord shall not be responsible to
Tenant for the nonperformance of any rules or regulations by any other tenants
or occupants of the Building.
24. Parking. Tenant shall have the right to use, on a first-come, first
served basis, in common with other tenants and occupants of the Building and
Business Park, up to the number of parking stalls specified in Section 1,
located within the Building or the Business Park and which shall be available
for use by all tenants of the Business Park, their guests and invitees, but
which may, at Landlord's election, be designated by Landlord, (which designated
parking facilities Landlord may change at any time and from time to time in its
sole discretion), subject to the rules and regulations and any charges that may
be established or altered for such parking facilities from time to time. Tenant
shall comply with any and all private and governmentally imposed parking
restrictions applicable to the Business Park, including without limitation, the
requirements of all designations placed on parking stalls within the Business
Park, such as car pool, visitor and designation for any tenant of the Business
Park.
25. Estoppel Certificates. Tenant shall execute, within ten business
days following Landlord's request, a certificate in such reasonable form as may
be required by Landlord or a prospective purchaser, mortgagee or trust deed
beneficiary, or Landlord's successor after a sale or foreclosure, certifying:
(i) the Commencement Date of this Lease, (ii) that the Lease is unmodified and
in full force and effect, (or if there have been modifications hereto, that this
Lease is in full force and effect, and stating the date and nature of such
modifications); (iii) that there have been no current defaults under this Lease
by either Landlord or Tenant except as specified in Tenant's statement, (iv) the
dates to which the Base Monthly Rent, Additional Rent and other charges have
been paid, and (v) any other information reasonably requested by the requesting
party. Such certificate may be relied upon by Landlord and/or such other
requesting party. Tenant's failure to deliver such statement within such time
shall be conclusive upon Tenant that this Lease is in full force and effect,
without modification except to the extent represented by Landlord, that there
are no uncured defaults in Landlord's performance under this Lease, and that not
more than one month's Rent has been paid in advance. Tenant's failure to deliver
said statement within ten business days of request, shall constitute Tenant's
Default. Tenant's Default shall be defined as per the terms of this Lease,
including the terms associated with the Security Deposit.
<PAGE>
26. Subordination. Tenant agrees that this Lease shall be subordinate to
the lien of any mortgage, deeds of trust, or ground leases now or hereafter
placed against the Property or Building, and to all renewals and modifications,
supplements, consolidations, and extensions thereof. Notwithstanding the
foregoing, Landlord reserves the right, however, to subordinate or cause to be
subordinated any such mortgage, deed of trust or ground lease to this Lease.
Upon a foreclosure or conveyance in lieu of foreclosure under such mortgage or
deed of trust, or a termination of such ground lease, and a demand by Landlord's
successor, Tenant shall attorn to and recognize such successor as Landlord under
this Lease; provided, however, that Landlord shall obtain for the Term of this
Lease what is commonly known as a "nondisturbance" agreement which is intended
to protect Tenant's right to possession under this Lease for so long as Tenant
complies with the terms of this Lease and which shall be in such standard form
and substance as the lender or ground lessor at that time typically provides to
comparable tenants. Landlord shall use reasonable efforts to obtain
modifications to such standard nondisturbance agreements as Tenant may
reasonably request. Tenant shall execute and deliver on request and in the form
requested by Landlord, any instruments reasonably necessary or appropriate to
evidence, effect or confirm such subordination.
27. Removal of Property. On expiration or other termination of this
Lease, Tenant shall remove (i) all personal property of Tenant on the Premises,
including without limitation all Tenant's furnishings, fixtures, furnitute,
- -fittings, cabling, wiring and equipment; (ii) all improvements to the Premises
installed by or at the expense of Tenant other than such improvements as have
become the property of Landlord under Section 13; and (iii) at Landlord's
request, all non-standard or specialty improvements made to the Premises by
Landlord or Tenant. Tenant shall repair or reimburse Landlord for the cost of
repairing any damage to the Premises resulting from the installation or removal
of such property of Tenant. All property of Tenant remaining on the Premises
after reentry or termination of this Lease shall conclusively be deemed
abandoned and may be removed by Landlord. The cost of removal of such property
shall be reimbursed by Tenant to Landlord upon demand, including, but not
limited to court costs, reasonable attorneys' fees and storage and disposal
charges relating to such property. Landlord may store such property of Tenant in
any place selected by Landlord, including but not limited to a public warehouse,
at the expense and risk of the owner thereof, with the right to sell such stored
property without notice to Tenant. The proceeds of such sale shall be applied
first to the cost of such sale, second to the payment of the cost of removal and
storage, if any, and third to the payment of any other amounts that may then be
due from Tenant to Landlord under this Lease, and any balance shall be paid to
Tenant.
28. Personal Propert y Taxes. Tenant shall pay prior to delinquency all
personal property taxes payable with respect to all property of Tenant located
on the Premises or the Building and promptly upon request of Landlord shall
provide satisfactory evidence of such payment. "Personal property taxes" under
this Section 28 shall include all property taxes assessed against the property
of Tenant, whether assessed as real or personal property.
29. Notices. All notices under this Lease shall be in writing. Notices
shall be effective (i) when mailed by certified mail, return receipt requested
(ii) when personally delivered, or (iii) when sent by fax, in each case to the
address or fax number of the receiving party set forth in Section 1. Either
party may change its address and fax number for notices by notice to the other
from time to time.
30. Condition of Premises. By taking possession of the Premises, Tenant
accepts the Premises as being in good, sanitary order, condition and repair, and
further accepts all aspects of the Premises, Building, Property and Business
Park in their present condition, AS IS, including latent defects, without any
representations or warranties, express or implied, from Landlord.
31. Hazardous Substances.
31.1 Tenant Obligations. Tenant shall not, without first obtaining
Landlord's prior written approval, generate, release, store, deposit, transport,
or dispose of (collectively "Release") any hazardous substances, sewage,
petroleum products, hazardous materials, toxic substances or any pollutants or
substances, defined as hazardous or toxic in applicable federal, state and local
laws and regulations ("Hazardous Substances") in, on or about the Premises. In
the event, and only in the event, Landlord approves such Release of Hazardous
Substances on the Premises, such Release shall occur safely and in compliance
with all applicable federal, state, and local laws and regulations.
31.2 Tenant Indemnity. Tenant shall indemnify and defend Landlord, and
hold Landlord harmless, from and against any and all claims, liabilities,
losses, damages, cleanup costs, and expenses (including reasonable attorneys'
fees) arising out of or in any way relating to the Release by Tenant or any of
its agents, representatives, employees or invitees, or the presence of any
Hazardous Substances in, on or about the Premises occurring as a result of or in
connection with Tenant's use or occupancy of the Premises at any time after the
Commencement Date.
31.3 Landlord Inspection. Landlord shall have the right from time to
time to enter the Premises, Building and Property and inspect the same for the
presence of Hazardous Substances and compliance with the provisions of this
Section 31 and inspect the Premises, Building and Property. Landlord may cause
tests to be performed for Hazardous Substances on the Premises from time to
time. Tenant shall bear the cost of the first such test in any calendar year and
any other such test that occurs upon a reasonable suspicion by Landlord that
there may be Hazardous Substances in the Premises in violation of Tenant's
obligations under this Lease.
<PAGE>
31.4 Survival. The provisions of this Section 31 shall survive the
expiratiori or termination of this Lease with respect to any occurrences during
the Term.
32. Signs. Tenant shall not place upon or install in windows or other
openings or exterior sides of doors or walls of the Premises any symbols,
drapes, or other materials without the written consent of Landlord. Tenant shall
observe and comply with the requirements of all Laws applicable to signage.
33. General Provisions.
33.1 Attorneys' Fees. In the event Landlord reasonably requires the
services of any attorney in connection with any Default or violation by Tenant
of the terms of this Lease or the exercise by Landlord of its remedies for any
Default by Tenant under this lease, or a request by Tenant for Landlord's waiver
of any terms of this Lease or extension of time to perform or pay any obligation
of Tenant under this Lease, Tenant shall promptly on demand reimburse Landlord
for its reasonable attorneys' fees incurred in such instance. In the event of
any litigation, arbitration or other proceeding (including proceedings in
bankruptcy and probate and on appeal) brought to enforce or interpret or other
wise arising under this Lease, the substantially prevailing party therein shall
be entitled to the award of its reasonable attorneys' fees, witness fees, and
court costs incurred therein and in preparation therefor.
33.2 Governing Law; Venue. This Lease shall be governed by and construed
in accordance with the laws of the State of Washington and venue for all
disputes shall be in King County, Washington.
33.3 Cumulative Remedies. No remedy or election under this Lease shall
be deemed exclusive but shall, wherever possible, be cumulative with all other
remedies at law or in equity.
33.4 Exhibits; Addenda. Exhibits and Addenda, if any, affixed to this
Lease are a part of and incorporated into this Lease.
33.5 Interpretation. This Lease has been submitted to the scrutiny of
all parties hereto and their counsel, if desired, and shall be given a fair and
reasonable interpretation in accordance with the words hereof, without
consideration or weight being given to its having been drafted by any party
hereto or its counsel.
33.6 Joint Obligation. If there is more than one Tenant under this
Lease, the obligations hereunder imposed upon Tenants shall be joint and
several.
33.7 Keys. Upon expiration or termination of this Lease, Tenant shall
surrender all keys to the Premises to Landlord at the place then fixed for
payment of Rent and shall inform Landlord of all combination locks, safes, and
vaults, if any, in the Premises.
33.8 Late Charges; Interest. Late payment by Tenant to Landlord of Rent
or other sums due under this Lease will cause Landlord to incur costs not
contemplated by this Lease, the exact amount of which would be difficult and
impractical to ascertain. Such costs include without limitation processing and
accounting charges and late charges which may be imposed on Landlord by the
terms of any mortgage or trust deed covering the Premises. Accordingly, Tenant
shall pay to Landlord as Additional Rent a late charge equal to five percent of
such installment as liquidated damages for such late payment, other than for
time value damages. A $50.00 charge will be paid by Tenant to Landlord for each
returned check. In addition, any Rent or other sums due under this Lease to
Landlord that is not paid when due shall bear interest at the rate per annum of
two percent over the prime rate in effect at Bank of America d/b/a Seattle-First
National Bank, Seattle Head Office, on the day such Rent or other sum was due,
which interest shall constitute Additional Rent under this Lease. The existence
or payment of charges and interest under this Section shall not cure or limit
Landlord's remedies for any Default by Tenant under this Lease.
33.9 Light. Air. and View. Landlord does not guarantee the continued
present status of light, air, or view in, to or from the Premises.
33.10 Measurement . All measurements of the Premises stated in this
Lease, even if approximations, shall govern and control over any actual
measurement of the Premises and reflect the inclusion of a load factor for the
Building. The Rent provided in this Lease and Tenant's Share shall not be
modified or changed by reason of any measurement or re-measurement of the
Premises that may occur after the date of this Lease, and is agreed by Landlord
and Tenant to constitute the negotiated rent for the Premises. The foregoing
shall not be deemed to modify any obligation of Landlord to construct the
Premises in accordance with the Work Letter.
33.11 Name. Tenant shall not use the name of the Building or Business
Park for any purpose other than as an address of the business conducted by the
Tenant in the Premises. The name of the Building or Business Park may at any
time be changed by Landlord.
33.12 Prior Agreements; Amendments This Lease is the full, final
and complete expression of the agreements of the parties with respect to any
matter covered or mentioned in this Lease, and no prior agreements or
understandings, promises or representations, oral or otherwise, pertaining to
any such matters shall be effective for any purpose. No provision of this Lease
may be amended or added to except by an agreement in writing signed by the
parties or their respective successors in interest. This Lease shall not be
effective or binding on any party until fully executed by both parties hereto.
<PAGE>
33.13 Recordation. Tenant shall not record this Lease or a short form
memorandum of this Lease without the prior written consent of Landlord.
33.14 Liability. Tenant agrees to look only to the equity of Landlord in
the Building and Property and not to Landlord personally with respect to any
obligations or payments due or which may become due from Landlord hereunder, and
no other property or assets of Landlord or any partners, officers, directors, of
Landlord shall be personally liable in connection with this Lease
33.15 Severability . That any provision of this Lease is invalid, void,
or illegal shall in no way affect, impair, or invalidate any other provision of
this Lease and such other provision shall remain in full force and effect.
33.16 Time. Time is of the essence of this Lease and each of its
provisions.
33.17 Waiver. No provision of this Lease shall be deemed to have been
waived by Landlord unless such waiver is in writing signed by Landlord's duly
authorized representatives. The waiver by either party of any provision of this
Lease shall not be deemed to be a waiver of such provision or any provision, in
any subsequent instance. The acceptance of rent by Landlord shall not be deemed
to be a waiver of any preceeding Default or breach by tenant under this Lease,
whether known or unknown to Landlord, other than the failure of the tenant to
pay particular rent so accepted.
33.18 No Waste. Tenant shall not commit or suffer to be committed any
waste, damage or nuisance upon the Premises.
33.19 Force Majeure. If either party shall be prevented or delayed from
punctuality performing any obligation or satisfying any condition under this
Lease, other than the payment of Rent or other sums due hereunder, by any
strike, lockout, labor dispute, inability to obtain labor or materials or
reasonable substitutes therefor, acts of God, governmental restriction,
regulation or control, enemy or hostile governmental action, civil commotion,
insurrection, sabotage, fire or other casualty, or any condition beyond the
reasonable control of such party, then the time to perform such obligation or
satisfy such condition shall be extended by the delay cause by such event. If
either party shall, as a result of any such event, be unable to exercise any
right or option within any time limit provided therefor in this Lease, such time
limit shall be deemed extended for a period equal to the duration of the delay
caused by such event.
33.20 Quiet Enjoyment. Provided Tenant observes its obligations under
this lease, its quiet enjoyment of the premises throughout the Term shall not be
disturbed.
33.21 Building Planning In the event Landlord requires the premises for
use in conjunction with another suite or for other reasons connected with the
Building planning program, upon notifying the tenant in writing, Landlord shall
have the right to move tenant to other space in the building of which the
Premises form a part, at Landlord's sole cost and expense, and the terms and
conditions of the original Lease shall remain in full force and effect, save and
excepting that a revised Exhibit A shall become part of the Lease and shall
reflect the location of the new space and Section 1 of this lease shall be
amended to include and state all correct data as to the new space. However, if
new space does not meet with Tenant's approval, Tenant shall have the right to
cancel this Lease upon giving Landlord thirty (30) days' notice within ten (10)
days of receipt of Landlord's notification. If Tenant cancels this lease
pursuant to the Section, Tenant shall vacate the Building and Premises within
ninety (90) days of delivery to Landlord of the notice of cancellation.
34. Authority of Tenant
34.1 Tenant as Corporation. If Tenant is a corporation, each individual
executing this Lease on behalf of Tenant represents and warrants the (s)he is
duly authorized by all necessary action of the directors of Tenant to execute
and deliver this Lease on behalf of Tenant, and that this Lease is binding upon
Tenant in accordance with its terms.
34.2 Tenant as Partnership or LLC. If Tenant is a partnership or limited
liability company, each individual executing this Lease on behalf of Tenant
represents and warrants that (s)he is duly authorized in accordance with
Tenant's partnership agreement or limited liability company agreement by all
necessary action of the partners or members or managers of Tenant to execute and
deliver this Lease on behalf of Tenant, and, and that this Lease is binding upon
Tenant in accordance with its terms.
35. Financial Statements. Tenant shall furnish to Landlord from time to
time, within 30 days of request, Tenant's most recent financial statements,
including at a minimum a balance sheet, income statement and statement of
changes in financial condition, or the equivalent, dated as of and for a period
ending not more than one quarter prior to the date of delivery. Such statements
shall be in the form furnished to Tenant's principal lender and/or to Tenant's
shareholders or other owners, but at a rninimum shall be reviewed or compiled by
an independent certified public accountant. Tenant shall accompany such
statements with a certificate of its chief financial officer that the statements
fairly present the financial condition and results of operations of Tenant as of
and for the period ending on the date of such statements. Landlord shall not
request financial statements under this Section more than once each calendar
year.
<PAGE>
36. Commissions. Any commissions payable as a result of the execution
of this Lease shall be paid pursuant to a Separate commission contract. Each
party represents and warrants to the other that it has not had dealings with any
real estate broker other than the Broker identified in Section 1, agent or
salesperson with respect to this Lease that would cause the other party to have
any liability for any commissions or other compensation to such broker, agent or
salesperson, and that no such broker, agent or salesperson has asserted any
claim or right to any such commission or other compensation. Such representing
party shall defend and indemnify the other party and hold the other party
harmless from and against any and all loss, cost. liability, damage and expense
(including reasonable attorneys' fees) whatsoever that may arise out of the
breach of such representation and warranty.
EXECUTED the day and year above written.
LANDLORD:
RAZORE LAND COMPANY
By: /s/ Jim Sepic
Title: Manager
TENANT:
By: /s/ Dennis McQuilliams
Title: Vice president and Chief Technology Officer
<PAGE>
EXHIBIT A-1
Floor Plan of Property
EXHIBIT A-2
LEGAL DESCRIPTION
A portion of the following described property:
Lots 24 and 25 of Quadrant Business Park - Bothell as recorded under Volume 131,
Pages 87-91, King County Auditor. Portion of Sections 4, 5, and 9, Township 26
North, Range 5 East, W.M., Recording Certificate No. 8508061034, and all areas
of common use and benefit in Quadrant Business Park -Bothell.
<PAGE>
Exhibit 21.1
Subsidiaries
1. Wpg.Net, Inc., a Washington corporation
2. Virtual Source, Inc., a Nevada corporation
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors
Vsource, Inc. (formerly Internactive
Buyers Network International, Ltd.):
As independent auditors, we hereby consent to the incorporation of our
report on the financial statements of Interactive Buyer Network International
Ltd. dated May 15, 1999 except for Note 10 to the financial statements which is
as of September 3, 1999, in this Form 10-KSB by reference to the Company's
registration statement on Form 10SB previously filed with the Securities and
Exchange Commission (SEC File No. 000-26563).
/s/ Lucas, Horsfall, Murphy & Pindroh, LLP
Lucas, Horsfall, Murphy & Pindroh, LLP
Pasadena, California
May 10, 2000
<PAGE>
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